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VECTURA (LSE: VEC).

An industry-leading inhaled airways disease-focused business with uniquely integrated formulation, device and development capabilities. Our vision is to transform patients' lives through enhanced inhaled drug delivery. Our strategy is to maximise the value of our differentiated inhaled formulation, device and development capabilities through partnering complex inhaled generics and the enhanced delivery of existing molecules.

https://www.vectura.com/who-we-are

VECTURA

LSE: VEC

H1 2019

10 September 2019

Chippenham, UK - 10 September 2019: Vectura Group plc (LSE: VEC) ("Vectura" or "the Group") announces its unaudited Interim Results for the six months ended 30 June 2019.

Commenting on the Interim Results, Paul Fry, Interim Chief Executive Officer and Chief Financial Officer of Vectura, said:

"Vectura has had a strong first half in 2019, with the year as a whole tracking to guidance. Following the shift in focus we announced in July, we are now executing on our strategy to build a leading inhaled CDMO business. With our continued confidence in the outlook for Vectura, we have also announced today an increase in our proposed capital return to shareholders from [pounds sterling]50 million to [pounds sterling]60 million."

Business highlights

Total revenue of [pounds sterling]91.7m, +14.8%

* Product supply revenue up 42.9% to [pounds sterling]54.3m, driven by 45.8% growth in flutiform[R] product supply chain revenues to [pounds sterling]48.4m

* As expected, royalty and other marketed revenue down 16.5% to [pounds sterling]30.3m, following Q3 2018 expiry of EXPAREL[R] patents and a one-off milestone recognised in the prior period

* Development revenue up 26.8% to [pounds sterling]7.1m, including EU filing milestone of $2.5m for QVM149

* Gross profit declined by 1.3% compared to the prior period, impacted by normalisation of flutiform[R] supply chain margins and reduction in royalty and other marketed revenue

* R&D costs of [pounds sterling]24.5m reduced 9.9% versus prior period

* Adjusted EBITDA of [pounds sterling]25.1m, up 10.6% versus the prior period

* Operating loss of [pounds sterling]14.1m down from a loss of [pounds sterling]30.2m in the prior period, as a result a lower charge for amortisation of intangible assets

* Strong liquidity maintained with closing cash and cash equivalents of [pounds sterling]105.9m

* Awarded $89.7m in damages by trial jury for the infringement of the relevant asserted claim of Vectura's US patent by US sales of three of GlaxoSmithKline's (GSK) Ellipta[R] products for the period from August 2016 through December 2018. Outcome of post-trial applications from both sides awaited. GSK has the right to appeal

* VR315 (US) progressing as planned, submission of the CRL response expected Q4 2019

Board updates

* James Ward-Lilley stepped down from the Board and his position as Chief Executive Officer on 30 June 2019

* Dr Kevin Matthews appointed as an Independent Non-Executive Director on 29 March 2019

Post period updates

* Capital returns - Given the Group's focus on organic growth, with lower risk R&D spend supported by partners, the Board has today announced a proposed special dividend of approximately [pounds sterling]40m to be accompanied by a share consolidation, both subject to shareholder approval, with a [pounds sterling]10m on-market share buyback to commence following the share consolidation. The Board also intends to undertake a further on-market [pounds sterling]10m buyback, to be announced in due course after the completion of the first tranche.

* VR647 programme - Whilst partnering discussions continue, given developments in the status and timing of these discussions post the balance sheet date and in consideration of the Group's R&D investment priorities announced in July 2019, the Board concluded on 9 September 2019, that it was appropriate to impair the intangible asset in full, resulting in an impairment charge in H2 2019 of [pounds sterling]8.2m offset by the release of deferred tax liabilities of [pounds sterling]2.2m.

Summary guidance and outlook

Vectura made a positive start to trading in 2019, and given the Group's visibility of flutiform[R] product supply volumes for the rest of 2019, the Group expects this strong performance to continue into the second half of the year. The Group maintains its financial guidance and outlook expectations for 2019.

Operational Review

Revenue growth from partnered In-market products driven by flutiform[R] product supply

The Group reported revenue of [pounds sterling]91.7m for the six-months ended 30 June 2019. As expected, royalty and other marketed revenues declined following EXPAREL[R] patent expiry in Q3 2018 and one-off sales milestones in the prior period. However, overall revenue grew by 14.8%, driven by strong performance from flutiform[R] product supply.

* flutiform[R] (Mundipharma, Europe and Rest of world (excl. North America) / Kyorin, Japan) for the treatment of asthma

* flutiform[R] continues to perform well in the competitive asthma ICS/LABA market ex US, generating total in-market sales of [euro]123.6m (constant exchange rates'CER') during H1 2019, up 12.2% in value (CER) and up 15.2% in volume compared to the prior period.

* In a competitive and genericised European ICS/LABA market which declined by 3.5% in value (CER) compared to the prior period, flutiform[R] in-market sales grew by 2.0% (CER) with 3.6% volume growth.

* flutiform[R] sales grew by 13.9% (CER) in the less mature and non-genericised Japanese market, contributing to royalty revenue of [pounds sterling]3.0m, an increase of 11.1% compared to the prior period. Volumes grew 16.9% compared to H1 2018.

* flutiform[R] remains at an early stage of its lifecycle in rest of world territories and has continued to grow strongly , with in-market sales of [euro]14.6m (CER) up 74.7% compared to H1 2018. (2)

* Growth in flutiform[R] product supply revenues reflects the fact that H1 2018 product supply revenues had not fully normalised following partner stock management in 2017. From a lower comparative base, increased in-market volumes, alongside partner supply chain management, flutiform[R] contributed product supply revenues to Vectura of [pounds sterling]48.4m, a 45.8% increase versus the prior period (H1 2018: [pounds sterling]33.2m).

Ultibro[R] Breezhaler[R], Seebri[R] Breezhaler[R] Utibron[TM] Neohaler[R] Inhalation Powder and Seebri[TM] Neohaler[R] (Novartis/Sunovion, US) for the treatment of COPD

* Ultibro[R] Breezhaler[R] continues its class-leadership of the dual bronchodilator LAMA/LABA class (ex. US) with overall in-market sales growth of 2.5% (CER) compared to the prior period, despite increased competition.

* Vectura recognised royalties of [pounds sterling]6.6m in respect of sales of Ultibro[R] Breezhaler[R] (H1 2018: [pounds sterling]6.5m)

* Seebri[R] Breezhaler[R] in-market sales declined by 10% to $76.1 m (CER) and Vectura recognised royalties of [pounds sterling]1.7m in respect of sales of this product (H1 2018: [pounds sterling]2.0m)

Partnered development portfolio

* VR315 (US), partnered with Hikma: Generic Advair[R] programme for the treatment of asthma and COPD

* Hikma anticipates being able to submit data to the US Food and Drug Administration (FDA) during 2019 to support its regulatory application, enabling a potential US launch in 2020

VR354, partnered with Hikma: Generic Breo[R] Ellipta[R] programme for the treatment of asthma and COPD

* Continued strong growth of this franchise supports the longer-term potential for the range of Ellipta[R] AB-rated substitutable generics that Vectura is developing in partnership with Hikma

* Work on the development of generic Breo[R] Ellipta[R] is progressing in-line with management's expectations

VR506 (US), partnered with Hikma: Generic fluticasone propionate for the treatment of asthma

* Reflecting portfolio prioritisation of other key generic programmes partnered with Hikma, including VR730, Hikma and Vectura have mutually agreed to terminate development of the VR506 programme

VR2081 (US), partnered with Sandoz: Undisclosed generic pMDI programme for the treatment of asthma and COPD

* Development is ongoing, building on recent encouraging pharmacokinetics (PK) data for VR2081

VR632 (EU), partnered with Sandoz: Generic ICS/LABA combination for the treatment of asthma and COPD

* Post-period update: VR632 was launched in Europe during July 2019

* Marketed by Sandoz as Airbufo[R] Forspiro[R], this product utilises Vectura's GyroPLUS[R] device and reflects the Group's ability to combine device technology with formulation expertise to develop a treatment that meets European bioequivalence requirements

QVM149 (Europe & ROW), partnered with Novartis: LAMA/LABA/ICS for the treatment of asthma

* As announced on 24 May 2019, Vectura has recognised milestone revenue of $2.5m, which was received post period, following the acceptance of a Marketing Authorisation Application (MAA) made by Novartis to the EU Regulatory Authorities for the regulatory approval of QVM149

* EU launch expected in FY2020, subject to regulatory approval

* Vectura will receive a $5m milestone upon approval of the product in Europe and a low-single digit royalty upon net sales

Pre-partnered development portfolio

* Vectura enhanced therapies pipeline - The Group has made good progress with three Vectura enhanced non-budesonide projects using the Group's nebulised platform

* In-line with the Group's R&D investment priorities announced in July 2019, from the end of FY2019, the Group will not make further investments in pre-partnered assets in the absence of a partner

Corporate update

Strategic focus and R&D investment priorities

The global contract development and manufacturing organisation (CDMO) market is large and growing at an annual growth rate of c. 7%. This growth rate slightly outpaces the growth of the pharmaceutical sector as a whole, reflecting the ongoing shift towards increased outsourcing.[3]

Within the inhaled therapies market, there are over three hundred inhaled assets in development globally[4], both respiratory and non-respiratory, that are well matched to our capabilities. Of this total, approximately 70% are in the pre-Phase II stage of developments where Vectura can support a partner to achieve the right formulation and device combination for clinical development and ultimate commercialisation. For inhaled therapies, approximately 30-35% of projects are currently outsourced, and this proportion is expected to grow to 40-45% over the next five years.[5]

Vectura has a proven track record of successful partnering and is well positioned to capture value within this market by leveraging its core capabilities in inhaled drug delivery solutions across a larger number of partnership arrangements. The Group is seeking to build a pipeline of potential partnering opportunities with feasibility work on two new molecular entities having already commenced during H2 2019.

Post period, in July 2019, Vectura confirmed that it will focus on securing new partner contracts for the development of inhaled therapies, including novel and generic molecules. The Group will move towards a development services model, seeking to grow development service revenues to reduce the Group's dependence on contingent milestones.

The Group's R&D investment priorities will be clearly aligned to this partnering focus and the Board expects a progressive reduction in R&D. Future increases in R&D investment will be associated with new partnering deals.

Return of capital

In light of the Group's reducing R&D risk profile, future cash generation expectations and strong cash balance, in July 2019, the Board announced its intention to return approximately [pounds sterling]50m to shareholders. Reflecting shareholder feedback, the Group today announced that the total value to be returned will be increased to [pounds sterling]60m, as set out below.

The Board has proposed a special dividend of approximately [pounds sterling]40 million in aggregate, representing six pence per ordinary share, to be accompanied by a consolidation of the Company's ordinary share capital. Subject to shareholder approval at a General Meeting to be held on 10 October, it is expected that the special dividend will become payable to shareholders on 25 October 2019.

In addition, the Group has entered into arrangements with J.P. Morgan Securities to execute a [pounds sterling]10m on-market buyback of shares, to commence following the share consolidation. The Board also intends to undertake a further on-market [pounds sterling]10m buyback, to be announced in due course after the completion of the first tranche.

The Board recognises that considerable financial upsides remain in the outlook for the Group, and, in the absence of future inorganic growth opportunities, it intends to make additional future 'special' returns of excess capital arising from operations or from material one-off events, by the most appropriate mechanism.

GSK Litigation

On 7 May 2019, Vectura confirmed that following a jury trial in the United States District Court for the District of Delaware, the relevant asserted claim of its US patent was found valid and infringed by US sales of three of GlaxoSmithKline's (GSK's) Ellipta products. The jury awarded Vectura $89.7m in damages for the period from August 2016 through December 2018, based on a calculation of 3% of US sales of these products. The jury also found that GSK's infringement was wilful and, in addition to filing a claim for damages for the period from January 2019 to expiry of the patent in June 2021, Vectura has therefore applied for further damages for wilful infringement. A ruling on these additional applications as well as post-trial applications filed by GSK to overturn or reduce the jury decision is awaited, expected in September 2019.

Board changes

The Board was pleased to announce the appointment of Dr Kevin Matthews as an Independent Non-Executive Director of the Company with effect from the 29 March 2019.

Kevin has highly relevant experience from senior management roles in the chemical, technology and pharmaceutical sectors, alongside significant strategy and business management expertise. His experience in current and previous Non-Executive Director and advisory roles will also be valuable to the Board.

On 10 June 2019, Vectura announced that James Ward-Lilley would be stepping down from the Board and his position as Chief Executive Officer with effect from 30 June 2019. Paul Fry, Chief Financial Officer, has assumed the role of CEO in an interim capacity whilst a search for a new CEO is being carried out.

Brexit

The Group has closely reviewed the potential risks associated with Brexit. The Board believes Vectura has undertaken a robust approach to ensuring any impact within the Group's control is mitigated as far as possible.

Mitigating activities have included continued close working with our supply chain network and partners, establishing a new EU legal entity and transferring our notified regulatory body for our device assets.

Guidance and outlook

The Group is now primarily focused on organic growth through securing further partnership contracts, with lower risk R&D spend supported by partners.

Given the Group's visibility of flutiform[R] product supply volumes for the rest of 2019, the Group expects the strong performance of flutiform[R] to continue into the second half of the year.

The Group maintains its financial guidance and outlook expectations for a sustained performance in 2019, following a strong 2018. The Group expects overall revenue growth to be offset at the gross profit level by the loss of EXPAREL[R] revenues and the normalisation of the flutiform[R] product supply gross margin.

R&D guidance for the current year remains unchanged at [pounds sterling]45m to [pounds sterling]55m.

Revenue growth of 14.8% reflects strong growth from product supply revenues, flutiform[R] in-market demand and partner supply chain management resulted in product supply revenues of [pounds sterling]48.4m, a 45.8% increase on the prior period, flutiform[R] product supply delivered a gross margin of 34.5% contributing [pounds sterling]16.7m to gross profit (H1 2018: 38.9% gross margin, [pounds sterling]12.9m gross profit).

Overall gross profit declined by 1.3% as the increased contribution from flutiform[R] product supply was offset by the loss of EXPAREL[R] revenues following patent expiry in 2018 and the recognition of a milestone in the prior period as part of an agreement with Sandoz regarding revised territory rights for AirFluSal[R] Forspiro[R]. These two items together totalled [pounds sterling]5.8m in the prior period.

R&D costs declined 9.9% due mainly to the reduction in clinical costs associated with VR475 and this decline was offset by higher corporate costs which include CEO severance costs. The Group's operating loss was significantly reduced versus the prior period as a result of lower amortisation charges. Adjusted EBITDA, which is a measure of underlying performance, increased by 10.6% to [pounds sterling]25.1 m (H1 2018: [pounds sterling]22.7m).

1.1 Product supply revenue

The Group generates significant revenues from the supply of finished or semi-finished products, largely manufactured by third party suppliers, to commercial distribution partners. The costs incurred to deliver these revenues are reported under Cost of sales. These revenues grew by 42.9% in H1 2019, driven by strong volume demand from partners for flutiform[R].

flutiform[R]

Revenue from the supply of finished flutiform[R] products to Mundipharma (Europe and Rest of World) and Kyorin (Japan) represented 52.8% (H1 2018: 41.6%) of the Group's total reported revenue, flutiform[R] in-market sales grew 12.2% on a constant exchange rate 'CER' basis, compared to the prior period, with volume growth of 15.2%[7].

Growth in flutiform[R] product supply revenues reflects the fact that H1 2018 product supply revenues had not fully normalised following partner stock management in 2017 (H1 2018: [pounds sterling]33.2m). From a lower comparative base, increased in-market volumes, alongside partner supply chain management, contributed to product supply revenues to Vectura of [pounds sterling]48.4m, a 45.8% increase versus the prior period.

Given the Group's visibility of flutiform[R] product supply volumes for the rest of 2019, the strong performance of flutiform[R] is expected to continue into the second half of the year.

flutiform[R] gross profit margin was down 4.4 percentage points compared to H1 2018 as the prior period benefited from the release of a [pounds sterling]1.1 m supplier provision. Despite market price reductions in Japan in April 2018, which impacted the Group's supply prices in H1 2019, the gross margin earned for product supply sales, excluding one-off items, was 34.5% (H1 2018: 35.5%), in line with guidance.

The Group also earns royalties on flutiform[R] sales made by Kyorin in Japan. Including these royalties, total revenues for flutiform[R] were [pounds sterling]51.4m (H1 2018: [pounds sterling]35.9m).

Other inhaled products

Vectura also earns revenue from the supply of devices to partners including the GyroHaler[R] device to Sandoz for the AirFluSal[R] Forspiro[R] product and the FOX[R] device to Bayer for use in their BreelibTM product. In total this revenue stream contributed [pounds sterling]2.0m, an increase of 42.9% compared to the prior period.

Other non-inhaled products

The Group's oral manufacturing facility in Lyon, France generates product supply revenues from sales of oral tablets to partners. In H1 2019, product supply revenues from Lyon were [pounds sterling]3.9m, a 14.7% increase compared to the prior period (H1 2018:[pounds sterling]3.4m).

The operational focus of the Lyon site continues to be on improving profitability by replacing steady volume declines in mature and off-patent products, with growing new manufacturing volumes, supply revenues and associated development fees through new agreements. Four new such agreements were signed during H1 2019 (H1 2018: one).

Some of the products manufactured at the Lyon site also earn the Group royalties, reported separately.

1.2 Royalty and other marketed revenues

The Group also generates revenues from products marketed by partners which incorporate Vectura's intellectual property. These revenues typically comprise royalties, share of sales arrangements or sales-based milestones, reflecting financial returns from historic R&D investments in partnered programmes. These revenues are earned without further material costs being incurred by the Group.

Vectura revenues for Ultibro[R] and Seebri[R] Breezhaler[R] are derived from a royalty percentage of net sales reported by Novartis. Royalties from Ultibro[R] Breezhaler[R] increased by 1.5% in H1 2019 (-4.5% CER) while royalties from Seebri[R] Breezhaler[R] declined by 15.0% (-20.1% CER).

GSK's Ellipta[R] products continue to grow and Vectura has recognised the maximum annual royalty of [pounds sterling]9.0 million during H1 2019. The technology licensed to GSK is covered by granted patents with an earliest expiry date for one of the granted patent families in major markets of November 2019.

flutiform[R] royalties for Europe and most of the RoW territories are subject to the terms of the agreement with Mundipharma which limits the aggregate amount of royalties that can be earned by Vectura where royalties and product supply exceed 35% of Mundipharma's net sales. As a result of this cap, royalties from Mundipharma were nil in H1 2019 (H1 2018:[pounds sterling]0.2m).

Strong in-market performance by Kyorin drove value and volume growth in Japan, up 13.9% (CER) and 16.9% respectively2. As a result royalties from Japan grew by 20.0% (CER +14.2%), to [pounds sterling]3.0m (H1 2018: [pounds sterling]2.5m), offsetting the reduction in Mundipharma royalties.

Non-inhaled royalties comprise royalties earned on oral and other non-inhaled products which benefit from the Group's historical intellectual property. Many of these products are manufactured at the Group's production facility in Lyon.

Total other royalties continued a downward trend as products move towards the end of their lifecycle. This underlying decline was partially offset by strong RAYOS[R] royalty growth, up 25.6% to [pounds sterling]4.9m, due to continued promotional activity. The Licence Agreement for RAYOS[R]/LODOTRA[R] was amended with effect from 1 January 2019 and Vectura is now eligible for a minimum $8.0m annual royalty for RAYOS[R] for the calendar years 2019 to 2022.

The Group did not receive any share of net sales of EXPAREL[R] revenue in H1 2019, a reduction of [pounds sterling]3.4m, following expiry in September 2018 of the last expiring patent listed in the relevant agreement with Pacira. The Group remains eligible to receive a non-patent dependent $32m sales milestone when twelve-month net sales of EXPAREL[R] reach $500m on a cash received basis. Current analyst consensus estimates are that Pacira will reach $500m annual net sales towards the end of 2022.

Other marketed revenues include a [pounds sterling]1.3m milestone received on the anniversary of the first European launch of BreelibTM. Under the terms of its agreement with Bayer, Vectura is eligible to receive a further [euro]2.75m in milestones spread over the next four years, paid annually, and an additional [euro]0.5m following commercial launch in Turkey.

In H1 2018, the Group also recognised revenues of [pounds sterling]2.4m during the period as part of an agreement with Sandoz regarding revised territory rights for AirFluSal[R] Forspiro[R].

1.3 Development revenues

The Group also earns revenue from agreements with partners which draw on Vectura's device, formulation and development capabilities to deliver commercially attractive inhalation products. Under these agreements, during the development phase Vectura typically receives a series of cash flows in consideration for a variety of activities, which may comprise an upfront fee as consideration for the licence to access intellectual property, milestone payments for specific clinical or other development-based outcomes, or fees billed directly for work performed. Together these revenues have been categorised as Development revenues. Revenues are recognised when contractual performance obligations are deemed to have been met, with the profile of these revenues varying by programme and over time.

Development revenues for new agreements will increasingly be derived from fees billed directly for work performed, rather than milestones payments which are contingent on specific clinical or development-based outcomes. The Group will continue to earn licence fees and royalties where partners have accessed Vectura intellectual property.

Costs to deliver these revenues are reported under Research and Development (R&D) expenditure in the consolidated income statement and tend to be incurred on a more consistent basis over the life of the programme.

These agreements may also include sales-based royalties and commercial milestones post-launch. The economics of each partner agreement is structured differently in terms of the timing and mix of payments.

QVM149

In May 2019, Vectura recognised a $2.5m milestone under an exclusive licensing agreement with Novartis AG following EU Regulatory Authorities acceptance of a valid Marketing Authorisation Application (MAA) made by Novartis for its QVM149 product.

Vectura is due to receive a further milestone payment of $5.0 million on European regulatory approval of the product and thereafter royalties on net sales from launch.

Generic Ellipta[R] portfolio

In November 2018, Vectura signed a global development and commercialisation agreement with Hikma for the development of an AB-rated substitutable drug-device combination of generic versions of the GSK Ellipta[R] portfolio. Upon signing of the deal, Vectura received an upfront cash payment of $15m ([pounds sterling]11.4m). Of this total, [pounds sterling]6.6m was recognised in H2 2018. In H1 2019, a further [pounds sterling]1.6m of this milestone has been recognised in respect of development services. The remaining income from the upfront payment of [pounds sterling]3.2m is expected to be recognised over the next one and a half years.

flutiform[R] K-haler[R] development

These revenues relate to fees charged for further development work related to the flutiform[R] breath-activated k-haler[R], launched in September 2018.

VR2081 (Sandoz)

A $5.0m upfront milestone from Sandoz was received in 2017 and a further $1.0m was received in February 2019, relating to the VR2081 programme. The Group deems that these milestones, plus the final contractual development milestone, are highly probable and therefore are being recognised as development work progresses on a percentage completion basis. Revenues recognised from ongoing development work are expected to be in the range of [pounds sterling]1.0m - [pounds sterling]2.0m in 2019.

Other inhaled development services

Other inhaled development services of [pounds sterling]0.8m declined compared to the prior period as a result of milestone revenues received in H1 2018 and lower revenues recognised from other generics programmes partnered with Hikma. The prior period included a [pounds sterling]0.3m milestone following approval of VR632 in Europe in May 2018.

Other non-inhaled development services

The Group earned [pounds sterling]0.7m in 2019 (H1 2018: [pounds sterling]0.8m) from the provision of development services related to products which are or will be manufactured at its oral tablet production facility in Lyon, France. The decrease is the result of timing of work completed, with an improved performance expected in H2 2019.

2. Research and Development (R&D) expenses

The Group's R&D expenditure has been presented under two distinct categories:

a) Partnered - this category represents R&D expenditure funded by partners to progress the agreed contracted programmes. This expenditure is principally funded by Development revenues earned from the partner, which may be contingent upon the achievement of certain future milestones;

b) Pre-Partnered - this category of R&D spend reflects investments funded by the Group on programmes yet to be partnered, as well as investments in its own innovative proprietary technology platforms. These investments are the basis for generating future partnering and licencing revenue opportunities.

Partnered R&D

Partnered R&D expenditure in H1 2019 represented 48% of total R&D expenditure (H1 2018: 37%). Within this total, 73% of the Group's partnered R&D spend was focused on generic programmes (H1 2018: 65%) reflecting the Group's investment in key pipeline programmes, including the generic Ellipta[R] portfolio programmes and VR2081.

Pre-partnered R&D

Pre-partnered R&D expenditure in H1 2019 represented 52% of total R&D expenditure (H1 2018: 63%). Expenditure on pre-partnered programmes included investment in the VR647 programme, the three new pipeline projects announced in 2018 and proprietary platform technology, which will create future licensing opportunities.

As previously indicated, the Group continues to seek to partner VR647 for Phase III during 2019.

R&D guidance for 2019 remains unchanged at [pounds sterling]45m - [pounds sterling]55m.

3. Other operating expenditure and income

Other operating expenditure comprises a [pounds sterling]1.6m non-cash charge for share-based compensation (H1 2018: [pounds sterling]1.3m)as well as corporate, administrative and selling and marketing costs of [pounds sterling]6.8m (H1 2018: [pounds sterling]5.3m).

The increase in corporate, administrative, and marketing costs is driven by the accrual of costs relating to the departure of Vectura's CEO at the end of June as well as consultancy costs.

4. Amortisation

The Group recognised a [pounds sterling]30.5m charge for amortisation and impairment of intangible assets, compared to [pounds sterling]45.2m in the prior period. The lower charge in H1 2019 is largely the result of the full impairment of the VR475 intangible asset in H2 2018 following confirmation that the Phase III study did not meet its primary endpoint. In addition, the EXPAREL[R] intangible was fully amortised in 2018, further reducing the carrying value of intangible assets to be amortised. This is partially offset by accelerated amortisation of the GSK Ellipta[R] intangible in 2019 following the [pounds sterling]9.0m annual royalty cap being reached ahead of the earliest expiry date for one of the granted patent families in major markets of November 2019. Following revised contractual terms agreed in 2019, the useful economic life of the other marketed products intangible has increased reducing the amortisation charge in H1 2019.

5. Exceptional items

Exceptional items of [pounds sterling]2.6m in H1 2019 (H1 2018: [pounds sterling]3.8m) include [pounds sterling]2.2m from proceedings against GSK from enforcement of Vectura's patents in respect of the Ellipta[R] products.

On 3 May 2019, following a jury trial in the US District Court for the District of Delaware, the jury found that the relevant asserted claim of the Company's US patent 8303991 was valid and infringed by US sales of three of GSK's Ellipta[R] products. The jury awarded the Group $89.7m in damages for the period from August 2016 through December 2018, based on a calculation of 3% of US sales of these products. A further amount will be determined by the judge for the period from January 2019 to expiry of the patent in June 2021.

The jury also found that GSK's infringement was wilful and, based on that finding, the Group has filed applications seeking enhanced damages. The outcome of this and post-trial applications filed by GSK seeking to reduce or overturn the jury's decision is awaited.

GSK has the right to appeal if they are not successful in their post-trial applications to the judge to overturn or reduce the jury's decision. If GSK were successful in the appeal, it could reverse the decision. Accordingly, at this stage no income or receivable has been accrued as, if GSK launch an appeal, no amounts will be received until the appeal process is finalised in the Group's favour (or some other relevant outcome is reached). The result of any appeal process, if launched and pursued to a final decision, is expected in late 2020.

Exceptional items in the prior period, included a [pounds sterling]1.2m provision for redundancies related to the closure of the Group's operational site in Gauting, Germany. This provision assumes the redundancy payments are made at the end of the closure period, in June 2021, and is discounted at one percent. A further [pounds sterling]0.1m has been recognised in the current period relating to share-based payments specifically for retention of staff during the closure period.

To ensure consistency with the Annual Report and Accounts 2018, the H1 2018 comparatives have been re-presented such that exceptional items have reduced and R&D expenses have increased by [pounds sterling]1.9m. See note 5 of the condensed consolidated financial statements for further details.

6. Adjusted EBITDA

Adjusted EBITDA is a non-statutory measure that demonstrates the Group's underlying performance, excluding exceptional items and material non-cash accounting charges, as shown below. It is used by the Board, the Executive Leadership Team and investors to monitor the Group's performance over time.

As shown in note 7 to the condensed consolidated financial statements, adjusted EBITDA is calculated by adjusting the statutory reported operating loss for non-cash items such as depreciation, amortisation and share-based compensation and for items that are exceptional in nature and do not represent the underlying trends of business performance.

Adjusted EBITDA of [pounds sterling]25.1m increased by [pounds sterling]2.4m compared to the prior period as a result of a reduction in R&D expenses and growth in product supply gross profit, offset by a reduction in royalties and other marketed revenues. Expenses have been largely flat versus the prior period, with reductions in R&D offset by one-off increases in corporate costs. Prior period R&D expenditure was impacted by a re-presentation, refer to section 5 above for more details.

7. Net finance income/expense

Net finance income of [pounds sterling]0.7m in H1 2019 is [pounds sterling]0.3m higher than H1 2018 due to a lower interest expense and higher foreign exchange gains.

8. Loss before tax

The Group's statutory loss before tax of [pounds sterling]13.4m has reduced by 55.2% from [pounds sterling]29.9m in H1 2018 largely as the result of a [pounds sterling]14.7m decrease in amortisation and impairment of intangible asset charges.

9. Taxation

The Group's effective tax rate ("ETR") is a 1.5% credit (H1 2018: 21.7% credit). The reduction in the credit arises from a lower deferred tax credit driven by a decrease in amortisation and impairment charges as explained above and the partial de-recognition of deferred tax assets.

10. Loss per share

Despite adjusted EBITDA remaining broadly flat, the loss per share has reduced from 3.5p to 2.0p largely due to lower amortisation and exceptional charges.

11. Foreign exchange exposure

The Group receives revenue and incurs expenses in a number of foreign currencies and, as such, movements in foreign exchange rates can materially impact the Group's financial results. Had foreign currency rates in H1 2019 remained constant with those of H1 2018, the Group's reported adjusted EBITDA would have been approximately [pounds sterling]1.0m lower.

As an indication, a 5% strengthening or weakening of sterling against the Euro, US Dollar and Swiss Franc would have had an impact of between -[pounds sterling]1.7m to +[pounds sterling]1.9m on the Group's adjusted EBITDA in H1 2019.

Balance Sheet

Goodwill

The increase of [pounds sterling]0.4m in goodwill to [pounds sterling]163.8m at 30 June 2019 arises from foreign exchange gains upon revaluation of goodwill denominated in foreign currencies, primarily the Swiss Franc.

Intangible assets

The carrying value of intangible assets at 30 June 2019 of [pounds sterling]191.6m has decreased by [pounds sterling]28.3m during the period. This is due to amortisation of [pounds sterling]30.5m partially offset by foreign exchange gains of [pounds sterling]1.2m upon revaluation of intangibles denominated in foreign currencies, primarily the Swiss Franc, and [pounds sterling]1.0m of software additions.

Property, plant and equipment

The net book value of property, plant and equipment is [pounds sterling]59.8m, [pounds sterling]2.0m higher than at 31 December 2018. Additions of [pounds sterling]6.6m, which include [pounds sterling]3.3m relating to the recognition of right-to-use assets following the adoption of IFRS16, plus foreign exchange gains of [pounds sterling]0.3m are partially offset by a transfer to inventories of [pounds sterling]0.4m and depreciation of [pounds sterling]4.5m.

Inventory

Inventory is [pounds sterling]0.8m lower with approximately 90% of the [pounds sterling]25.9m carrying value at 30 June 2019 attributable to flutiform[R]. The reduction in inventories is driven by higher than planned demand in 2019 only partially offset by a foreign exchange uplift.

Swiss defined benefit retirement liability

The Swiss defined benefit retirement liability has increased by [pounds sterling]0.8m to [pounds sterling]3.9m (31 December 2018 [pounds sterling]3.1m) due to a decrease in the discount rate used to value the defined benefit obligation.

Cash and liquidity

Vectura continues to maintain strong liquidity with cash and cash equivalents of [pounds sterling]105.9m, a decrease of [pounds sterling]2.3m versus 31 December 2018.

Cash generated from operating activities was [pounds sterling]3.2m in 2019 (H1 2018: [pounds sterling]5.5m). The reduction in cash conversion was impacted by higher exceptional cash outflows and timing differences between cash received and revenue recognition, as shown in the table below. In addition, in H1 2019, the Group incurred material cash outflows for liabilities recognised on the balance sheet as at 31 December 2018 including the settlement of non-recurring liabilities relating to the cessation of the VR475 programme.

The Group received research and development tax credits of [pounds sterling]2.4m (2018: nil), which were partially offset by scheduled corporation tax payments relating to its US and Swiss operations of [pounds sterling]1.6m (2018: [pounds sterling]5.0m).

Net cash outflows from capital expenditure were [pounds sterling]5.2m, [pounds sterling]0.7m lower than 2018. These included investments in manufacturing equipment for the Lyon site, as well as investment in the Group's laboratories and platform technologies.

The Group has access to a [pounds sterling]50.0m multicurrency revolving credit facility with Barclays Bank PLC and HSBC Bank PLC. This facility expires in August 2021 and remains undrawn.

The Board have today announced a proposed [pounds sterling]40m special dividend, to be accompanied by a share consolidation, both subject to shareholder approval. The special dividend is expected to become payable to shareholders on 25 October 2019. In addition, the Group will undertake a [pounds sterling]10m on-market share buyback to commence following the share consolidation. The Board also intends to undertake a further on-market [pounds sterling]10m buyback, to be announced in due course after the completion of the first tranche.

Post balance sheet events

Whilst partnering discussions continue, given developments in the status and timing of these discussions post the balance sheet date and in consideration of the Group's R&D investment priorities announced in July 2019, the Board now considers that there is a low probability that the value of the VR647 intangible asset will be realised. Accordingly, the Board concluded on 9 September 2019, that it was appropriate to impair the intangible asset in full, resulting in an impairment charge in H2 2019 of [pounds sterling]8.2m offset by the release of deferred tax liabilities of [pounds sterling]2.2m.

Risks and uncertainties

There has been no significant changes to either the risk management and internal control processes and policies or the principal business risks and uncertainties compared to those set out on pages 42 to 49 of the Annual Report and Accounts 2018.

The only exception is in respect of the principal risk titled "Failure or delay in partnering VR647 for Phase III development". Whilst partnering discussions continue, given developments in the status and timing of these discussions post the balance sheet date and in consideration of the Group's R&D investment priorities announced in July 2019, the Board now considers that there is a low probability that the value of the VR647 intangible asset will be realised. Accordingly, the Board concluded on 9 September 2019, that it was appropriate to impair the intangible asset in full, resulting in an impairment charge in H2 2019 of [pounds sterling]8.2m offset by the release of deferred tax liabilities of [pounds sterling]2.2m. As such, this risk has been removed from the Group's principal risks.

The Group continues to monitor closely the evolving events concerning the UK's exit from the European Union.

The principal risks and uncertainties affecting the Group are:

Brexit related

* Supply chain disruption in the short-term from the UK exiting the EU in the event of a "hard Brexit".

* Adverse regulatory changes resulting in higher operating costs over the short, medium and longer term

Non-Brexit related

* Supply chain disruption

* Failure to launch VR315 in a competitive timeframe

* Partner failure

* Failure or delay in achieving development milestones required to advance the product pipeline

* Failure to effectively scale up the manufacture of the Group's nebulised platforms for partnering

* Changes in the regulatory, operating or pricing environment

* Failure to attract or retain talent / key personnel

* Failure to protect intellectual property

The accompanying notes form an integral part of these condensed consolidated financial statements.

1. General information

Vectura Group plc (the "Company") is a public limited company incorporated and domiciled in the United Kingdom. These condensed consolidated interim financial statements ('interim financial statements') as at and for the six months ended 30 June 2019 comprise the Company and its subsidiaries (together 'the Group'). The Group's operations and principal activities are described in the Annual Report and Accounts 2018. The "Group" is defined as the Company, its subsidiaries and equity-accounted associates.

These interim financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting". They do not contain all of the information which International Financial Reporting Standards ("IFRS") would require for a complete set of annual financial statements, and should be read in conjunction with the consolidated financial statements for the Group for the year ended 31 December 2018.

The Group has initially adopted IFRS 16 Leases from 1 January 2019 as explained in note 13. Additionally, IFRIC 23 Uncertainty over income tax treatments became mandatory for use in year, as explained in note 6. A number of other new standards are effective from 1 January 2019 but they do not have a material effect on the Group's financial statements. Therefore, all other accounting policies, and methods of computation, applied by the Group in these condensed consolidated interim financial statements are the same as those applied in its consolidated financial statements for the year ended 31 December 2018, unless specified.

Selected explanatory notes are included to explain events and transactions that are significant to the understanding of the changes in the Group's financial position and performance since the last annual financial statements. Refer to basis of preparation at note 12.

2. Judgements and estimates

In preparing these interim financial statements, management has made judgements and estimates that affect the application of accounting policies and the reported figures. Actual results may differ from these estimates. The significant judgements, estimates and assumptions made in preparing these condensed consolidated financial statements were the same as those described in the last annual financial statements, except for the new significant estimates related to Brexit and the Swiss tax reform as follows:

Brexit

On 29 March 2017, the UK government invoked Article 50 of the Treaty of Lisbon, notifying the European Council of its intention to withdraw from the EU. The initial two-year timeframe for the UK and EU to reach an agreement on the withdrawal and the future UK and EU relationship has been extended. At this stage, there is significant uncertainty about the withdrawal process, its timeframe and the outcome of the negotiations about the future arrangements. Management has determined the impact of this uncertainty on the carrying amounts of assets and liabilities in these interim financial statements and no impairment triggers relating to Brexit have been identified. Refer to note 8.

Swiss Tax Reform

On 19 May 2019, the Federal Act on Tax Reform and AHV Financing (TRAF) was approved in Switzerland following a public referendum. The act will come into force on 1 January 2020 and is relevant to the Group's principal Swiss trading company and Swiss holding company based in the Cantons of Basel-landshaft and Zug.

Despite the passing of the federal legislation, the process for full enactment at cantonal level remains ongoing and the legislation has not yet been substantively enacted for IFRS purposes. Nonetheless, given the abolishment of cantonal tax privileges for holding and mixed status companies, the Group has assessed the expected taxes to be paid following the reliefs being withdrawn. Management's has applied the future target tax rate where the historic tax rate is no longer achievable as a result of their withdrawal.

3. Revenue

In the six months to 30 June 2019, the Group recognised a Breelib[R] anniversary milestone of [pounds sterling]1.3m (2018: [pounds sterling]1.3m) within royalties and other marketed revenues, development revenue milestones of [pounds sterling]1.9m (2018: [pounds sterling]0.3m) for QVM149 for the Novartis EU acceptance of the marketing authorisation application and [pounds sterling]0.4m (2018: nil) for the final payment due on termination of the Clinical Supply and Option Agreement with Ablynx NV.

Development revenues include [pounds sterling]4.7m (2018: [pounds sterling]5.1m) for completed development service obligations and [pounds sterling]2.4m (2018: [pounds sterling]0.5m) for deferred income released on partially completed development service obligations. A detailed analysis of revenue is provided in the Finance Review.

4. Research and development expenses

Partnered research and development expenditure represents expenditure funded by partners to progress agreed contracted programmes. Pre-partnered research and development expenditure reflects investments funded by the Group on programmes yet to be partnered, as well as investments in the Group's own innovative proprietary technology platforms.

5. Exceptional items

Exceptional items are presented whenever significant expenses are incurred or income is received as a result of events considered to be outside the normal course of business, where the unusual nature and expected infrequency merits separate presentation to assist comparisons with previous years.

Legal fees of [pounds sterling]2.2m (30 June 2018: [pounds sterling]2.3m) relate to legal proceedings against GSK from enforcement of Vectura's patents in respect of the Ellipta[R] products.

On 3 May 2019, following a jury trial in the US District Court for the District of Delaware, the jury found that the relevant asserted claim of the Company's US patent 8303991 was valid and infringed by US sales of three of GSK's Ellipta[R] products. The jury awarded the Group $89.7m in damages for the period from August 2016 through December 2018, based on a calculation of 3% of US sales of these products. A further amount will be determined by the judge for the period from January 2019 to expiry of the patent in June 2021.

The jury also found that GSK's infringement was wilful and, based on that finding, the Group has filed applications seeking enhanced damages. The outcome of this and post-trial applications filed by GSK seeking to reduce or overturn the jury's decision is awaited. GSK has the right to appeal if they are not successful in their post-trial applications to the judge to overturn or reduce the jury's decision. If GSK were successful in the appeal, it could reverse the decision. Accordingly, at this stage, no income has been accrued as, if GSK launch an appeal, no amounts will be received until the appeal process is finalised in the Group's favour (or some other relevant outcome is reached). The result of any appeal process, if launched and pursued to a final decision, is expected in late 2020.

A [pounds sterling]1.2m provision was recognised in the six months to 30 June 2018 for redundancies related to the closure of the Group's operational site in Gauting, Germany. This provision assumes the redundancy payments are made at the end of the closure period, in June 2021, and is discounted at one percent. A further [pounds sterling]0.1m has been recognised in the current period relating to share-based payments specifically for the retention of staff during the closure period.

Other exceptional items of [pounds sterling]0.3m relate to share based payment charges for retention shares granted to key members of management considered critical to the integration process. In the prior year, other exceptional items consist of [pounds sterling]0.6m share based payment charges, [pounds sterling]0.3m of redundancy and other costs from initiatives to streamline ways of working and enhance productivity, [pounds sterling]0.4m of costs relating to restructuring of the Group's oral manufacturing site in Lyon, offset by a [pounds sterling]1.0m accruals credit release.

*Re-presentation between research and development costs and exceptional items

To ensure consistency with the Annual Report and Accounts 2018, a [pounds sterling]1.0m credit for the release of accruals, previously recorded in R&D expenses, is now presented within exceptional items and redundancy costs of [pounds sterling]0.9m, previously presented in exceptional items, are now presented within R&D expenses. The net impact of these reclassifications has been to reduce exceptional items and increase R&D expenses in the comparative period by [pounds sterling]1.9m.

6. Taxation

The Group's effective tax rate is a 1.5% credit (30 June 2018: 21.7% credit) on the Group's loss before taxation. The decrease in the tax credit is driven by the partial de-recognition of deferred tax assets on non-trade losses, and the increased impact from current year losses not recognised for deferred tax.

A taxation credit of [pounds sterling]0.2m (30 June 2018: [pounds sterling]6.5m credit) has been recognised in the condensed consolidated income statement. This represents the net effect of a current tax expense in the Group's Swiss operations offset by deferred tax credits on the amortisation of acquisition accounting fair value adjustments.

Management continues to monitor Swiss tax reform that is currently proceeding through Cantonal legislative procedures and is anticipated to conclude during the second half of 2019. Until the Cantonal legislative procedures have completed the tax rate adjustments are not substantively enacted for the purposes of IAS12.

The Group recognises deferred tax on unrealised foreign exchange gains on permanent funding of the Group's Swiss subsidiaries. Following approval through public referendum, the Federal Acton Tax Reform and AHV

Financing (TRAF) removed certain tax beneficial statuses from 1 January 2019. Consequently, the tax rate at which the unrealised foreign exchange gains had been expected to reverse can no longer be achieved. To reflect this, the deferred tax liability has been calculated at the canton of Zug's published future target tax rate of 12.02% (2018: 7.83%) resulting in a [pounds sterling]2.6m deferred tax charge recognised in other comprehensive income. No other deferred tax assets or liabilities are impacted by the removal of the beneficial tax statuses.

IFRIC 23 Uncertainty over income tax treatments

On 1 January 2019, IFRIC 23, which addresses the accounting for taxation when the local tax treatment involves uncertainty, became mandatory for use in accordance with EU-IFRS. As explained in note 34 of the Group's Annual Report and Accounts 2018, the adoption of this guidance at the start of 2019 had no impact on the Group, which means that there are no transitional disclosures required.

7. Adjusted EBITDA

Adjusted EBITDA is a non-statutory measure that demonstrates the Group's underlying performance, excluding exceptional items and material non-cash accounting charges, as shown below. It is used by the Board, the Executive Leadership Team and investors to monitor the Group's performance over time.

The Group has adopted IFRS 16 for the first time from 1 January 2019. In applying IFRS 16, in place of operating lease expenses for the Group's UK properties, the Group recognises depreciation and interest costs. During the six months to 30 June 2019, in relation to those leases, the Group recognised [pounds sterling]0.4m of depreciation charges and [pounds sterling]0.1m of interest costs.

8. Goodwill and other intangible assets

Goodwill at 30 June 2019 is [pounds sterling]163.8m (31 December 2018: [pounds sterling]163.4m). The movement in the current period relates to foreign exchange. No impairment triggers have been identified in relation to goodwill.

The net assets of each CGU have not significantly changed since the impairment test as at 31 December 2018, with the exception of a further six months' amortisation of [pounds sterling]30.5m. Management has determined that the likelihood of any goodwill impairment is remote and in accordance with IAS 36, has not deemed it necessary to update the year-end impairment assessments.

In July 2019, the Group confirmed that it will continue to focus on securing new partner contracts for the development of inhaled therapies, including novel and generic molecules. The Group will move towards a development services model, where a smaller proportion of overall contract value is delivered through contingent milestones. At present this change in strategy is not anticipated to have any incremental impact on the carrying value of goodwill.

The net book value of other intangible assets at 30 June 2019 is [pounds sterling]191.6m (31 December 2018: [pounds sterling]219.9m). The decrease in the carrying value of intangible assets of [pounds sterling]28.3m primarily relates to the amortisation charge of [pounds sterling]30.5m, offset by foreign exchange movements and software additions.

The most significant assets within intangible assets are flutiform[R], marketed oral products recognised on the Skyepharma merger in June 2016, and smart nebuliser-based technology separately acquired through the Activaero transaction on 13 March 2014, primarily used by the VR647 (US) development programme.

For the purposes of interim impairment testing, the Group assesses whether any impairment triggers have arisen in the period. Following clarification of the development pathway with the US FDA in May 2019, the forecast for VR647 was revised to reflect a later launch date. This change in forecast triggered an impairment review. The VR647 impairment model was updated for the latest available information and assumptions. The recoverable amount of this programme is dependent on the assumption that third party financing of phase III costs will be secured. No impairment arises to the [pounds sterling]8.8m carrying value as at 30 June 2019 (2018: [pounds sterling]10.5m) as long as this financing assumption is maintained. Subsequent to the reporting date, the carrying value of the intangible was fully impaired, as detailed in note 16.

During the period, the GSK Ellipta[R] technology license intangible was fully amortised with charges of [pounds sterling]6.7m (2018: [pounds sterling]3.5m) reducing the carrying value to nil (2018: [pounds sterling]6.7m). This intangible was previously being amortised to the earliest patent expiry in November 2019 and accelerated by [pounds sterling]3.2m, to be fully amortised, to reflect achievement of the maximum annual royalty capped at [pounds sterling]9.0 million during H1 2019.

The 2018 Annual Report and Accounts considers the possible impacts on the Swiss CGU and the flutiform[R] intangible from the severe downside scenario of the UK exiting the EU on 29 March 2019 without a transition period (a "hard Brexit"). Although the date for the UK exiting the EU has been delayed to 31 October 2019, the sensitivities as disclosed in notes 14 and 15 of the 2018 Annual Report and Accounts are still considered reasonably possible.

Finance lease liabilities of [pounds sterling]4.5m were initially recognised upon adoption of IFRS 16 on 1 January 2019. As at 30 June 2019, these liabilities are [pounds sterling]4.2m, of which [pounds sterling]3.3m are denominated in Sterling and relate to the expected term remaining on UK property site leases discounted at between 2-3%. The remaining finance lease liability of [pounds sterling]0.9m is denominated in Swiss Francs and relates to an onerous lease in Switzerland. This was previously classified as a provision. Property mortgages are denominated in Swiss Francs and accrue interest at 1.3% under the effective interest method. Refer to note 13.

10. Movements in equity shares

Redeemable preference shares of 34,000 at [pounds sterling]1 par value have no associated voting, dividend or coupon rights but are eligible to be repaid before any distribution to shareholders; the shares can be repaid by the Group at any time.

On 17 July 2019, the Group announced proposals to return [pounds sterling]50 million of capital to ordinary shareholders following the publication of these Interim results. Refer to note 16.

Basis of preparation

This is the first set of the Group's financial statements where IFRS 16 has been applied. All other accounting policies, and methods of computation, applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements for the year ended 31 December 2018, unless specified.

The Group is managed on the basis of a single reportable segment under IFRS 8, being development and supply of pharmaceutical products. Whilst there is evidence that demand for on-market inhaled products is greater in winter months, revenues have not been historically distorted for the seasonality of product supply and royalties.

The Group's consolidated comparative figures for the year ended 31 December 2018 do not constitute the Company's individual statutory accounts for that financial year. Statutory accounts for the year ended 31 December 2018, prepared in accordance with IFRS as adopted by the EU ("Adopted IFRSs") and as issued by the International Accounting Standards Board, have been reported on by the Group's auditor, KPMG LLP, and delivered to the Registrar of Companies.

The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 of the Companies Act 2006.

Vectura meets its day-to-day working capital requirements through its on-hand cash resources and available bank facilities. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that it is able to operate without the need to use its current facilities for the foreseeable future. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements.

13. New accounting standards - IFRS 16 Leases

The Group has initially adopted IFRS 16 from 1 January 2019. Historically, the Group has only entered into material leases relating to commercial properties at its operating sites in the UK.

Previously, under IAS 17, leases were classified as operating leases with annual rental and service charges recognised in the consolidated income statement on an accruals basis over the lease terms and no assets were recognised on the balance sheet. However, IFRS 16 introduced a single, on-balance sheet model for lessees and, as a result, the Group has recognised right-of-use assets representing its rights to use these assets and lease liabilities representing its obligations to make lease payments.

Identification of leases

The definition of a lease under IFRS 16 has only been applied to contracts entered into or changed on or after 1 January 2019. On transition, the practical expedient to grandfather the assessment of which transactions are leases has been taken such that IFRS 16 has only been applied to contracts previously identified as leases. Contracts not considered as leases under IAS 17 have not been reassessed.

The Group has identified leases for the Group's premises located at Chippenham, Cambridge Science Park and Grosvenor Gardens, London, which were previously considered operating leases. Additionally, the Group's onerous contract provision for a lease in Switzerland has been reclassified to finance lease liabilities under IFRS 16.

The modified retrospective approach to transition

The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 January 2019 and comparative information is not restated.

Lease liabilities are initially measured at the present value of the remaining lease payments, discounted at an applicable incremental borrowing rate, which has been obtained from a financial institution privy to the facts, circumstances, location, security and term of each lease liability. This incremental borrowing rate is in the range of 2-3%.

Right to use assets are be measured at an amount equal to the lease liability, except where there is considered to be a significant difference between the lease liability and the asset value calculated as though IFRS 16 had always been applied.

Practical expedients on transition

The Group has used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

* Used the transitional discount rate as if it had always applied in the past

* Used hindsight when determining the lease term which previously contained renewal options

* Excluded initial direct costs from measuring the right-of-use asset at the date of initial application

* Adjusted the right-of-use assets by the amount of IAS 37 onerous contract provisions immediately before the date of initial application, as an alternative to an impairment review

In respect of the six month rolling lease arrangement in Germany, the Group has utilised the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term on the transition date. Therefore, the cost of this lease will continue to be charged to the consolidated income statement as rent on an accruals basis.

Related-party transactions

On 21 June 2019, Vectura Group pic, the parent entity, sold its investment in a subsidiary, Vectura Group Investments Limited, to a fellow subsidiary Vectura Group Services Limited. The transaction was performed at [pounds sterling]147.6m book value in accordance with s845 of the Companies Act 2006 and settled one-third for cash and two-thirds for a loan receivable. On disposal of the investment in Vectura Group Investments Limited, associated Group merger reserves of [pounds sterling]125.1m were released to retained earnings, one-third being considered realised and two-thirds considered unrealised until such time in the future that the debtor is repaid.

On 30 June 2019, Vectura's CEO James Ward-Lilley stepped down and left the Group. Remuneration related to his services and departure will be provided in the Remuneration Report within the 2019 Annual Report.

Post Balance sheet events

These condensed consolidated financial statements have not been adjusted for the following significant events arising after the reporting period.

Capital returns to shareholders

On 17 July 2019, the Group announced planned capital returns to shareholders. The proposed distributions comprise a [pounds sterling]40.0m special dividend and a [pounds sterling]10.0m share buyback to commence in Q4 2019, subject to shareholder approval. A further [pounds sterling]10.0m buyback is planned to commence in H1 2020.

Update on VR647

Whilst partnering engagement is ongoing, given developments in the status and timing of these discussions post the balance sheet date and in consideration of the Group's R&D investment priorities announced in July 2019, the Board consider that there is a low probability that the value of the VR647 intangible asset will be realised. Accordingly, the Board concluded on 9 September 2019, that it was appropriate to impair the intangible asset in full resulting in an impairment charge in H2 2019 of [pounds sterling]8.2m offset by the release of deferred tax liabilities of [pounds sterling]2.2m.

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