3 April 2006

Preliminary results for the year end

West Malling, UK--Phoqus Group plc (PQS: London Stock Exchange) ("Phoqus" or the "Group") today announces its inaugural preliminary results for the year ended 31 December 2005.

Operational Highlights

• IPO on AIM in November, raising £10m
• Built portfolio of collaborations including three of the top five pharmaceutical companies
• First human clinical trial successfully completed in Q1 2006, with Chronocort
• Completion of construction of commercial manufacturing equipment

Financial Highlights

• Turnover £0.3 million (2004 £0.3 million)
• Cash balance £6.5 million (2004 £1.0 million)
• Operating loss £6.0 million (2004 £6.8 million)

Dr. Andy Jones, Chief Executive Officer of Phoqus, said:

"We are very pleased with the progress achieved at Phoqus in 2005. The Company's flotation on AIM raised valuable additional capital and has helped to raise its profile within the pharmaceutical industry.

"We have continued to make good progress towards commercial operation by expanding our portfolio of collaborations, through the success of our first human clinical study and completion of construction of the commercial manufacturing equipment.

"Interest in the oral drug delivery sector remains strong as companies seek to differentiate and extend the lifecycle of their products and Phoqus is well placed to take advantage of this trend.

"During 2006, we aim to increase the number of collaborative feasibility partnerships and convert existing projects into full scale development programmes. We also plan to continue our internal product development program by out-licensing rights to Chronocort and commencing development of a new product. We look forward to the future with confidence."

Enquiries:
Phoqus Group plc
Dr. Andy Jones, Chief Executive Officer - Tel: 01732 870227
Dr. Peter Johnson, Chief Financial Officer - Tel: 01732 870227 

Financial Dynamics
Sarah MacLeod/John Gilbert - Tel: 020 7831 3113

A presentation for analysts will be held at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 10:30am today.
www.phoqus.com

Operational Review
2005 was a transformational year for Phoqus. We have undergone a major transition from being a privately-owned company to a public company quoted on AIM. We have continued to expand our portfolio of collaborations with leading pharmaceutical companies and we have taken our first internal product into a Phase I clinical trial in human volunteers. The completion of construction of our commercial scale manufacturing equipment means that we are now well positioned to operate at full commercial scale.

Phoqus uses unique and patented electrostatic coating technology to create a range of novel drug delivery systems for tablets and medical devices. Our highly differentiated technology offers the pharmaceutical industry a wide range of applications enabling product life cycle extensions, brand distinction and greater flexibility in dosing active drugs providing drug release, safety and compliance benefits. We aim to commercialise the products through collaborations with large pharmaceutical companies in return for development, manufacturing and licence fees.

In November 2005, Phoqus was admitted to trading on AIM, raising £10m before expenses. We have used £2m of the proceeds to pay down a trade loan from Cardinal Health. The loan was repaid ahead of the due date resulting in a net saving on interest of approximately £0.1m. We are using the rest of the proceeds to fund our research and development activities, including the initial development of our own improved formulations of selected products, and increase the number of feasibility and development collaborations with pharmaceutical companies.

We have built a portfolio of collaborations for tablet-based drug delivery systems with leading players in the pharmaceutical market - among our clients are three of the top five global pharmaceutical companies. Existing collaborations are making progress on the path to commercialisation and we also continue to be successful in expanding our portfolio of collaborations for tablet coating with new companies. We have signed four new collaborations for feasibility studies since IPO.

Phoqus is also developing the coating technology in other sectors which offer potential for good returns. In December 2005 we announced a collaboration agreement with a world leading healthcare company to evaluate the application of our coating technology to medical devices, as well as a collaboration agreement with Unilever to investigate its use in the consumer detergent sector.

A growing component of our business strategy will be to fund, from our internal resources, the development of improved formulations of certain products which will be taken forward into early stage clinical trials by Phoqus. Our first such product, Chronocort, is a modified release formulation of hydrocortisone to treat adrenal insufficiency, which is being developed in collaboration with Diurnal Limited (a subsidiary of Biofusion plc) and addresses an unsatisfied need in an annual worldwide market worth in excess of £75 million. A first Phase I clinical trial in human volunteers commenced in December 2005 and has now been successfully completed. The trial showed that Chronocort released drug and generated blood levels of hydrocortisone that mimics the natural hormone levels in healthy individuals. Additionally, Chronocort showed a clear in-vitro - in-vivo correlation and no adverse effects were reported. The product has already been granted Orphan Medicinal Product designation in the EU which provides for fast track regulatory approval and a period of 10 years' marketing exclusivity from approval. We are now actively engaged in discussions with potential pharmaceutical partners regarding completion of development and commercialisation. We expect to commence development of a second internal product later in 2006.

The construction and factory acceptance testing of our commercial manufacturing equipment was completed in October 2005. The commercial manufacturing process and equipment have been designed to meet the stringent demands of the pharmaceutical sector for precision and consistency, and at the same time be highly competitive in cost of operation. The manufacturing equipment has now been moved to the Schorndorf (near Stuttgart, Germany) facility of Cardinal Health, our global contract manufacturing partner, and is currently undergoing final installation and validation. The equipment and facility are expected to be ready for commercial operation in the second half of 2006, as scheduled.

Throughout the year we have recruited experienced new staff in business and product development to ensure we continue to be successful in gaining and delivering new business. We will continue to look for opportunities to develop and strengthen our staff and board to fit the changing needs of the Company.

All this progress would not have been possible without the co-operation of our staff and we thank them for their support and their on-going dedication to Phoqus. Equally important in this period has been the support from our original venture capital and new institutional shareholders.

Financial Review
Results
In the 12 months to 31 December 2005, the Group's turnover was £0.3m (2004: £0.3m) which was derived mainly from fees arising from collaborations with pharmaceutical companies.

The operating loss of £6.0m (2004: £6.8m) included research and development expenses which qualify for additional tax allowances from the Inland Revenue, amounting to £2.5m (2004: £2.6m). Other research and development expenditure amounted to £1.9m (2004: £2.5m).

The £1.2m expenditure associated with the placing has been charged against share premium and is not included in the operating loss.

Interest receivable includes £1.1m, being the reversal of accrued dividends in respect of 'A' preferred ordinary shares classified as financial liabilities in the 2004 accounts. The interest payable in 2004 includes the £1.1m charge accruing dividend payable on the 'A' preferred ordinary shares. The holders of the shares formally waived their dividend rights as part of the share capital restructuring prior to placing on AIM.

Taxation includes a Research and Development tax credit for £0.6m (2004: £0.6m). The loss per share at 17.3p (2004: 46.7p) was based on the weighted average number of ordinary shares adjusted retrospectively for the restructuring and bonus issues during 2005 in accordance with FRS 22 'Earnings per share'.

Financial position and cashflow
The IPO in November 2005 generated £10m before placing expenses through the placing of 7.1m ordinary shares. Prior to that in January 2005, the Company raised £1.5m through a second tranche of venture funding.

During 2005, the Group entered into a sale and leaseback finance agreement for certain plant and machinery assets which raised £1.5m to be paid back over three years.

The Group's net cash outflow before management of liquid resources and financing in the 12 months ended 31 December 2005 was £5.1m (2004: £5.9m), the reduction being due mainly to lower operating costs offset by higher capital expenditure (mainly a laboratory scale version of the commercial manufacturing equipment being commissioned in Stuttgart, Germany).

All surplus cash is kept on deposit in accordance with the Company's policy to maximise returns on low risk cash or cash-equivalent investments that safeguard the principal whilst ensuring that cash resources are available to fund the Group's operations when required.

At 31 December 2005 the Group had cash and short term deposits of £6.5m. This was after repayment of the £2m trade loan from Cardinal Health which was repaid ahead of the due date resulting in a net saving on interest of approximately £0.1m.

International Financial Reporting Standards (IFRS)
The AIM currently intends to mandate International Financial Reporting Standards for all companies for financial periods commencing on or after 1 January 2007. Therefore Phoqus will prepare interim financial statements under IFRS for the 6 months ending 30 June 2007.

Given that comparative information for the period beginning 1 January 2006 will be required, consideration has begun as to the impact of IFRS so that the procedures are put in place to ensure the necessary data will be available.

The following areas that could have a material impact on the Group's financial statements have been identified (this summary is not intended to be comprehensive and further differences may arise as a result of our ongoing review):

• Capitalisation of Research and Development expenditure compulsory if criteria met;
• Share and share option based payments result in profit and loss account charge; and
• Short-term employee benefits.

Post balance sheet events
Warrants exercised after the year end resulted in the Company receiving a total of approximately £300,000.

Outlook
In the coming months we intend to continue the commercialisation of our oral drug delivery technology as we seek to convert feasibility agreements into full scale development programmes and continue with our business development activities to attract new industrial partners. The validation of our manufacturing plant will provide the platform for full scale development and commercialisation and strengthens our proposition to pharmaceutical companies. The advancement of our internal development candidate and results of the Phase I trial should lead to a licensing agreement before the end of the year and we intend to start the development of a second internal development candidate during the year. These events combined offer considerable potential and we look forward to the future with confidence.

PHOQUS GROUP PLC

Consolidated Profit and Loss Account for the year ended 31 December 2005

All revenue and expenses shown above were generated from continuing operations.

The Group has no recognised gains or losses for the financial year other than those disclosed above.

The comparative figures for the year to 31 December 2004 have been restated to reflect the Group’s adoption of FRS 25 on 1 January 2005 (note 1).

PHOQUS GROUP PLC

Consolidated Balance Sheet at 31 December 2005

PHOQUS GROUP PLC

Consolidated Cash Flow Statement for the year ended December 2005

Notes to the preliminary announcement

1.         Basis of preparation

These financial statements have been prepared in accordance with the accounting policies set out in the annual report of the Group for the year ended 31 December 2004 except as noted below.

The figures shown for the year to 31 December 2005 represent abridged financial statements which are not the Company’s statutory accounts and have not as yet been delivered to the Registrar of Companies.In preparing the financial statements for the current year, the Group has adopted FRS 22 (IAS 33) ‘Earnings per Share’ and FRS 25 (IAS 32) ‘Financial Instruments: Disclosure and Presentation’.The adoption of these standards has resulted in a change in accounting policy for financial instruments. The comparative figures for the year to 31 December 2004 have been restated to reflect the Group’s adoption of FRS 25 on 1 January 2005.

The report of the auditors was unqualified but was modified concerning the fundamental uncertainty as to the Group’s medium – term viability until its technology is commercially successful and is capable of revenue generation. The report did not contain a statement under s237 (2) or (3) of the Companies Act 1985.

2.         Turnover

The Directors have assessed that substantially all of the Group’s operations and therefore their losses and net assets for all years by geographical destination relate to continuing activities in the United Kingdom.

The Directors also believe that the Group’s turnover (by origin), losses and net assets are substantially all related to continuing activities performed in the UK.

The Directors have assessed that substantially all of the Group’s operations relate to the principal activity of the development and commercialisation of the electrostatic deposition technology for the manufacture of tablets with tailored appearance and medical properties for the pharmaceutical industry. The Directors therefore believe that all turnover, losses and net assets relate to continuing activities performed in the Group’s principal activity as stated above.

3.         Other operating expenses

4.                   Tax on loss on ordinary activities

The Group has taken advantage of the Research and Development corporation tax credits introduced in the Finance Act 2000 whereby the Group may surrender corporation tax losses incurred on research and development expenditure for a corporation tax refund.

5.         Loss per share

The calculation of basic earnings per ordinary share is based on losses of £4,505,000 (2004 - £7,562,000) and on 26,049,034 (2004 – 16,177,132) ordinary shares, being the weighted number of shares adjusted retrospectively for restructuring and bonus issues during 2005. In accordance with FRS 22 (IAS 33) ‘Earnings per share’ the Group has applied retrospective adjustments to the loss per share calculation as a result of the share capital reorganisation.

The Share Options and Warrants are not dilutive since if they were exercised they would reduce the loss per share as the Group is loss making.

6.         Share premium account and reserves

* At 31 December 2004 the statutory share premium of £12,004,000 was included within financial liabilities. At 31 December 2005 the statutory share premium was £19,048,000.

7.             Reconciliation of operating loss to net cash outflow from operating activities