Ensifentrine (RPL554) is a first-in-class, inhaled, dual inhibitor of the enzymes phosphodiesterase 3 and 4 for the treatment of respiratory diseases. Verona is currently developing three formulations of ensifentrine for the treatment of COPD: nebulized, dry powder inhaler (DPI), and pressurized metered-dose inhaler (pMDI). Phase 2 studies of nebulized ensifentrine in patients with moderate-to-severe COPD have demonstrated significant and clinically meaningful improvements in both lung function and COPD symptoms, including breathlessness. Nebulized ensifentrine also has shown further improved lung function and reduced lung volumes in patients taking standard of care, short- and long-acting bronchodilator therapy, including maximum bronchodilator treatment with dual/triple therapy (LABA/LAMA +/- ICS). Nebulized ensifentrine is currently in a Phase 2b clinical study evaluating its effect as an add-on to treatment with a long-acting bronchodilator in patients with moderate-to-severe COPD, which is expected to be completed around year-end 2019. Verona Pharma reported positive results from its Phase 2 study of the DPI formulation of ensifentrine in August 2019. Its pMDI formulation is currently being evaluated in a Phase 2 study, with single dose data expected in the first quarter of 2020 and final data around the middle of 2020. Ensifentrine has potential applications in cystic fibrosis, asthma and other respiratory diseases. It has been well tolerated in clinical trials involving a total of around 850 people to date.

This press release, operational review, outlook and financial review contain forward-looking statements. All statements contained in this press release, operational review, outlook and financial review that do not relate to matters of historical fact should be considered forward-looking statements, including, but not limited to, statements regarding the design of clinical trials and the timing of clinical trials, trial results and an End of Phase 2 meeting with the FDA, ensifentrine as the first novel class of bronchodilator in over 40 years and the first therapy for the treatment of respiratory diseases that combines bronchodilator and anti-inflammatory activities in one compound, the efficacy of ensifentrine as a bronchodilator, ensifentrine's symptom benefit to all COPD patients, the progressive improvement in the post-hoc analysis of the data from the four-week Phase 2b study suggesting an anti-inflammatory benefit, the value of ensifentrine for COPD patients on dual or triple therapy or on maximum standard-of-care therapy, the number of COPD patients in the United States and China, the market opportunity for ensifentrine, the number of COPD patients who use inhalers for maintenance therapy, the expansion of the market for ensifentrine in a DPI or pMDI formulation and the size of such market, estimates of medical costs for COPD and it becoming the third leading cause of death worldwide by 2030, our goal to become a leading fully integrated biopharmaceutical company, the treatment potential for ensifentrine in asthma, cystic fibrosis and other respiratory disease, and strategic collaborations and their value.

These forward-looking statements are based on management's current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from our expectations expressed or implied by the forward-looking statements, including, but not limited to, the following: our limited operating history; our need for additional funding to complete development and commercialization of ensifentrine, which may not be available and which may force us to delay, reduce or eliminate our development or commercialization efforts; the reliance of our business on the success of ensifentrine, our only product candidate under development; economic, political, regulatory and other risks involved with international operations; the lengthy and expensive process of clinical drug development, which has an uncertain outcome; serious adverse, undesirable or unacceptable side effects associated with ensifentrine, which could adversely affect our ability to develop or commercialize ensifentrine; potential delays in enrolling patients, which could adversely affect our research and development efforts; we may not be successful in developing ensifentrine for multiple indications; our ability to obtain approval for and commercialize ensifentrine in multiple major pharmaceutical markets; misconduct or other improper activities by our employees, consultants, principal investigators, and third-party service providers; the loss of any key personnel and our ability to recruit replacement personnel, material differences between our "top-line" data and final data; our reliance on third parties, including clinical investigators, manufacturers and suppliers, and the risks related to these parties' ability to successfully develop and commercialize ensifentrine; and lawsuits related to patents covering ensifentrine and the potential for our patents to be found invalid or unenforceable.

These and other important factors under the caption "Risk Factors" in our Annual Report on Form 20-F filed with the Securities and Exchange Commission ("SEC") on March 19, 2019, and our other reports filed with the SEC, could cause actual results to differ materially from those indicated by the forward-looking statements made in this press release, operational review, outlook and financial review. Any such forward-looking statements represent management's estimates as of the date of this press release, operational review, outlook and financial review. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release, operational review, outlook and financial review.

Verona Pharma is a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapies for the treatment of respiratory diseases with significant unmet medical needs. Verona Pharma's product candidate, ensifentrine, has the potential to be the first novel class of bronchodilator in over 40 years, and the first therapy for the treatment of respiratory diseases that combines bronchodilator and anti-inflammatory activities in one compound.

We intend to address the significant unmet medical need in moderate to severe COPD patients who remain symptomatic despite treatment with dual bronchodilators (LAMA and LABA) or triple therapy (with the addition of ICS). Our market research shows that nebulized delivery is the preferred route of administration for more severe COPD patients, especially in the U.S., where out of approximately three million COPD patients treated with dual/ triple inhaled therapy (LAMA/ LABA +/- ICS), about 1.2 million remain uncontrolled, experiencing symptoms that impair quality of life. These patients urgently need better treatments.

We are initially developing nebulized ensifentrine for the maintenance treatment of COPD. In our clinical trials we have observed that ensifentrine improves lung function in COPD patients when used either as a stand-alone treatment or as an add-on to treatment with single and dual bronchodilators. We believe that the addition of nebulized ensifentrine to symptomatic COPD patients already treated with standard-of-care medicines represents a very significant market opportunity.

In May 2019 we initiated a Phase 2b dose-ranging study evaluating nebulized ensifentrine as an add-on to treatment with a long-acting bronchodilator in patients with moderate-to-severe COPD. The four-week, randomized, double-blind, placebo-controlled dose-ranging trial is designed to evaluate the safety and efficacy of nebulized ensifentrine as an add-on to inhaled tiotropium, a LAMA commonly used to treat COPD, and to establish the dosing regimen for a potential Phase 3 program in COPD.

The post-hoc analysis of data from the 4-week Phase 2b (2018) study of ensifentrine as a maintenance treatment for COPD, published in May 2019 at the ATS 2019 International Conference, showed a significant and clinically meaningful improvement in symptom scores, measured using the E-RS scale. This was also observed among patients who did not show a large improvement in lung function to standard beta₂-agonist bronchodilator treatment ('non-reversible' patients, who comprise the majority of COPD patients). Therefore we believe ensifentrine may offer a significant symptom benefit to all COPD patients, given that the symptom improvement we have observed is not necessarily linked to improvement in lung function. We also believe that the progressive improvement in symptoms over the four-week period observed in the post-hoc analysis suggests an anti-inflammatory benefit that would be additional to that of standard treatment with LAMA or LABA bronchodilator therapy.

In January 2019, we reported top-line data from a 3-day Phase 2 cross-over trial that enrolled 79 patients to investigate the efficacy and safety of two different doses (1.5 mg and 6.0 mg, twice daily) of nebulized ensifentrine on top of an inhaled LAMA/LABA therapy, tiotropium/olodaterol (Stiolto® Respimat®), for COPD maintenance treatment. Each patient received both doses and placebo during the three treatment periods and about 30% of patients also used stable inhaled corticosteroid (ICS) therapy throughout the study.

The average improvement in peak FEV₁ on the morning of day 3 with the 1.5 mg dose was observed to be 46 mL, which was not statistically significant, so the primary endpoint of the study was not met.  However, the average improvement in FEV₁ over the first 4 hours was 50 mL which was statistically significant (p<0.05). Also, the average improvement in FEV₁ over 24 hours was statistically significant (p<0.05). A post-hoc analysis showed that more than 40% of patients reported an improvement in peak FEV₁ of more than 100 mL, which we believe suggests that a significant number of COPD patients on dual or triple therapy could derive a substantial benefit from adding ensifentrine to their therapy. Importantly, in this and several other clinical trials, ensifentrine produced clinically relevant and statistically significant improvements in air trapping (residual volume), both on its own as well as when administered on top of single or dual bronchodilator treatment. We believe this may translate into further symptom improvement in these patients already on maximum standard-of-care therapy.

In August 2019, we reported top-line data from our study to evaluate the ensifentrine DPI formulation in patients with moderate-to-severe COPD over one week of twice-daily treatment. The trial met all its primary and secondary lung function endpoints. The magnitude of improvement in lung function and duration of action were both clinically meaningful and highly statistically significant and the data support twice daily dosing of ensifentrine delivered in DPI format for the treatment of COPD.

We intend to become a leading fully integrated biopharmaceutical company, focused on the treatment of respiratory diseases with significant unmet medical needs. Our initial focus, the nebulized formulation of ensifentrine, addresses a clear unmet medical need in moderate-to-severe COPD patients who remain symptomatic despite treatment with dual bronchodilators (LAMA and LABA) or triple therapy (with ICS added). We believe that this is a very large market opportunity in the US and also in China. In the US, we intend to pursue this market opportunity with a targeted sales force.

Following completion of the Phase 2b dose-ranging study evaluating nebulized ensifentrine as an add-on to treatment with inhaled tiotropium a long acting bronchodilator in patients with moderate-to-severe COPD, we expect to proceed to an End of Phase 2 meeting with the FDA in the first half of 2020. We expect to commence its Phase 3 clinical program with nebulized ensifentrine for the maintenance treatment of COPD in 2020, subject to the FDA's authorization to proceed. We are also developing ensifentrine for other respiratory diseases including CF and asthma.

After  the positive data from the Phase 2 DPI trial in patients with moderate-to-severe COPD, which was reported in August, and the successful development of the pMDI formulation of ensifentrine last year, which is currently being studied in an ongoing Phase 2 pMDI trial, again in patients with moderate-to-severe COPD, we believe these formulations could open up a much larger patient population to ensifentrine treatment. In the US, our market research suggests that about 5.5 million moderate-to-severe COPD patients currently use either DPI or pMDI devices for administering their COPD therapies. This market was valued at approximately $9 billion in 2018.

We have strengthened and expanded our management team and board of directors during the year, adding further expertise. The Company has extensive experience in respiratory product development and commercialization, including from members of our management who were involved in the development and/or marketing of commercial products such as Symbicort, Daliresp/Daxas, Flutiform, Advair, Breo Ellipta and Anoro Ellipta, and thus is favorably positioned for the late-stage development of ensifentrine.

Research and development costs were £27.8 million for the nine months ended September 30, 2019, compared to £13.6 million for the nine months ended September 30, 2018, an increase of £14.2 million. The increase was predominantly attributable to a £13.4 million increase in clinical trial expenses relating to four clinical trials (ongoing or in preparation) of ensifentrine in the nine months ended September 30, 2019, including a four-week 400 patient clinical trial, compared to three trials in the nine months ended September 30, 2018. Salary costs increased by £1.0 million reflecting the expansion of the clinical team.

Finance income was £3.3 million for the nine months ended September 30, 2019, and £1.8 million for the nine months ended September 30, 2018. The increase in finance income was primarily due to a decrease in the fair value of the warrant liability of £2.1 million, because of a decline in the Company's share price, compared to an increase in the liability in the nine month period ended September 30, 2018 (which is recorded as a finance expense). In the prior period, there was a foreign exchange gain on cash and short term investments of £1.2 million, compared to a gain of £0.6 million for the nine months ended September 30, 2019.

Taxation for the nine months ended September 30, 2019, amounted to a credit of £6.0 million compared to a credit of £3.0 million for the nine months ended September 30, 2018, an increase of £3.0 million. The credits are obtained at a rate of 14.5% of 230% of our qualifying research and development expenditure. The increase in the credit amount was attributable to our increased expenditure on research and development, compared to the prior period, and a change in the mix of recoverable spend.

Net cash used in operating activities increased to £24.5 million for the nine months ended September 30, 2019, from £13.1 million for the nine months ended September 30, 2018. This was principally due to an increase in operating costs driven by higher research and development costs, as well as differences in the timing of supplier payments. During the nine months ended September 30, 2019, the Company received an R&D tax credit of £4.4 million in respect of its 2018 tax credit on qualifying research and development expenditure, compared to a receipt of £5.0 million received during the nine months ended September 30, 2018, in respect of the 2017 tax credit.

Net cash generated from investing activities predominantly reflects the net movement of cash being placed on deposit for more than three months and such deposits maturing. Deposits of more than three months are disclosed as short term investments, separately from cash. The increase in net cash generated in investing activities to £38.5 million for the nine months ended September 30, 2019, from £8.6 million for the nine months ended September 30, 2018 was due to the net movement of funds from short term investments to cash being greater during the nine months ended September 30, 2019.

Research and development costs were £12.0 million for the three months ended September 30, 2019, compared to £5.3 million for the three months ended September 30, 2018, an increase of £6.7 million. The increase was predominantly attributable to a £6.4 million increase in clinical trial expenses relating to three clinical trials of ensifentrine in the three months ended September 30, 2019 compared to two trials in the three months ended September 30, 2018. The majority of the trial costs related to a Phase 2b four week study in approximately 400 patients. Salary costs increased by £0.5 million reflecting the expansion of the clinical team.

Finance income was £1.2 million for the three months ended September 30, 2019, and £3.3 million for the three months ended September 30, 2018. Finance income in the three months ended September 30, 2019 comprised £0.4 million in relation to the decrease in the fair value of the warrant liability, due to a fall in the Company's share price, compared to a £2.6 million decrease in the prior period, together with a £0.7 million foreign exchange gain on cash and short term investments in the three months ended September 30, 2019 compared to a £0.5 million gain in the prior period.

These unaudited condensed interim financial statements were authorized for issue by the Company's board of directors (the "Directors") on November 6, 2019. There have been no changes, other than the adoption of IFRS 16, to the accounting policies as contained in the annual consolidated financial statements as of and for the year ended December 31, 2018, which have been prepared in accordance with international financial reporting standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

The interim condensed consolidated financial statements have been prepared on a going-concern basis. Management, having reviewed the future operating costs of the business in conjunction with cash and short term investments held as of September 30, 2019, believes the Group has sufficient resources to fund planned research and development activities, including the initiation of Phase 3 trials, until September 30, 2020. The Group will need to raise additional funds in order to continue its activities at this point.

The Group continues to seek additional funding through public or private financing, license agreements, debt finance, collaboration agreements and other arrangements. While Management has reasonable expectations that the Group will obtain the required finance, there is no guarantee that the Group will be successful securing additional finance on acceptable terms, or at all. Raising sufficient funds to fund planned research and development activities, including Phase 3 trials, is likely to be dependent on continuing to report positive data from clinical trials in a timely manner.

IFRS 16 ‘Leases' is effective for accounting periods beginning on or after January 1, 2019, and replaces IAS 17 ‘Leases'. It eliminates the classification of leases as either operating leases or finance leases and, instead, introduces a single lessee accounting model. The adoption of IFRS 16 resulted in the Group recognizing lease liabilities within current liabilities, and corresponding ‘right-of-use' assets for the arrangements within property plant and equipment that were previously classified as operating leases.

The Group's principal lease arrangements are for office buildings. The Group has adopted IFRS 16 retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at January 1, 2019. The standard permits a choice on initial adoption, on a lease-by-lease basis, to measure the right-of-use asset at either its carrying amount as if IFRS 16 had been applied since the commencement of the lease, or an amount equal to the lease liability, adjusted for any accrued or prepaid lease payments. The Group has elected to measure the right-of-use asset at its carrying value as if IFRS 16 had been applied since the commencement of the lease, with the result of a £20 thousand reduction in opening total accumulated losses.

• the use of a single discount rate of 8% to a portfolio of leases with reasonably similar characteristics;
• accounting for operating leases with a remaining lease term of less than 12 months as at January 1, 2019, as short-term leases;
• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and
• excluding initial direct costs from the initial measurement of the right-of-use asset.

The Group is applying IFRS 16's low-value and short-term exemptions. The adoption of IFRS 16 has had no impact on the Group's net cash flows, although a presentation change has been reflected in 2019 whereby cash outflows of £296 thousand are now presented as financing, instead of operating. There is a decrease of £34 thousand in general and administrative costs as depreciation of the right of use asset is less than the lease costs and a £30 thousand increase in finance expense from the presentation of a portion of lease costs as interest costs. There is no significant impact on overall loss before tax and loss per share.

The Group's activities expose it to a variety of financial risks: market risk (including foreign currency risk), cash flow and fair value interest rate risk, credit risk and liquidity risk. The condensed consolidated interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and they should be read in conjunction with the Group's annual financial statements for the year ended December 31, 2018.

The Company notes that after the reduction in its share price since December 31, 2018, at various points in the three months to March 31, 2019, the market value of the Company was less than its net book value. The Company therefore carried out an impairment review as at March 31, 2019. From market research management assessed, among other inputs, potential patient numbers from likely physician prescribing patterns, price points, the time from possible launch to peak sales, script rejection, attrition rates and probability of success. Management also carried out a sensitivity analysis on key assumptions and assessed that a reasonable change in these assumptions would not lead to the value in use falling below net book value. Consequently, management determined that the Company's value in use exceeded the carrying value of the Company's assets and that no impairment was required.

At various other points in the nine months to September 30, 2019, the market value of the Company was less than its net book value. Consequently, management re-performed the impairment review as at September 30, 2019, and identified no changes to market conditions, the competitive landscape, market research insights or other factors that would change its conclusions. Consequently, management determined that the Company's value in use exceeded the carrying value of the Company's assets and that no impairment was required.

The tax credit for the nine month period ended September 30, 2019, amounts to £6.0 million and consists of the estimated research and development tax credit receivable on qualifying expenditure incurred during the nine month period ended September 30, 2019 for an amount of £6.1 million less a tax expense of £35 thousand related to the US operations (nine month period ended September 30, 2018: £3.0 million tax credit, comprising £3.0 million for research and development tax credit, less £35 thousand expense for tax on US operations).

The tax credit for the three month period ended September 30, 2019, amounts to £2.6 million, and consists of the estimated research and development tax credit receivable on qualifying expenditure incurred during the three month period ended September 30, 2019 for an amount of £2.6 million less a tax expense of £16 thousand related to the US operations (three month period ended September 30, 2018: £1.1 million tax credit, comprising £1.1 million for research and development tax credit, plus tax credit £28 thousand expense for tax on US operations).

For the nine months ended September 30, 2019, the basic loss per share of 23.3p (September 30, 2018: loss of 16.1p) is calculated by dividing the loss for the nine months ended September 30, 2019 by the weighted average number of ordinary shares in issue of 105,326,638 during the nine months ended September 30, 2019 (September 30, 2018: 105,038,800). Since the Group has reported a net loss, diluted loss per ordinary share is equal to basic loss per ordinary share.

Pursuant to the July 2016 placement the Company issued 31,115,926 units to new and existing investors at the placing price of £1.4365 per unit, each of which was comprised of one ordinary share and one warrant. The warrant holders can subscribe for 0.4 of an ordinary share at a per share exercise price of 120% of the placing price (£1.7238). The warrant holders can opt for a cashless exercise of their warrants by choosing to exchange the warrants held for a reduced number of warrants exercisable at nil consideration. The reduced number of warrants is calculated based on a formula considering the share price and the exercise price of the shares. The warrants were therefore classified as a derivative financial liability, since their exercise might result in a variable number of shares to be issued. The warrants expire on May 2, 2022.

The value of the assumed contingent obligation as of September 30, 2019, amounted to £1,096 thousand (December 31, 2018: £996 thousand). The increase in value of the assumed contingent obligation during the nine months ended September 30, 2019, amounted to £100 thousand (nine months ended September 30, 2018: £87 thousand) and the unwinding of the discount on the liability was recorded in finance expense. Periodic re-measurement is triggered by changes in the probability of success. The discount percentage applied is 12%.  In 2018 and the nine months ended September 30, 2019, there were no events that triggered remeasurement.

The options and RSUs granted during the nine months ended September 30, 2019, were awarded under the Company's 2017 Incentive Plan with total fair values estimated using the Black Scholes option pricing model of £1.9 million. The cost is amortized over the vesting period of the options and the RSUs on a straight-line basis. The following assumptions were used for the Black‑Scholes valuation of share options and RSUs granted in the nine months ended September 30, 2019.

We maintain our books and records in pounds sterling and we prepare our financial statements in accordance with IFRS, as issued by the IASB. We report our results in pounds sterling. For the convenience of the reader we have translated pound sterling amounts in the tables below as of September 30, 2019, and for the three and nine month periods ended September 30, 2019 into US dollars at the noon buying rate of the Federal Reserve Bank of New York on September 30, 2019, which was £1.00 to $1.2305. These translations should not be considered representations that any such amounts have been, could have been or could be converted into US dollars at that or any other exchange rate as of that or any other date.