Wednesday, February 20, 2008

Vernalis Assets, Anyone?

Get 'em while they're hot. Just don't go near Frova, though. When owner Vernalis received a non-approval letter from FDA last September to extend this triptan’s label into menstrual-associated migraine (MAM), the writing was pretty much on the wall for the UK group.

A victim of FDA’s by-now notorious jitters, particularly when it comes to primary-care pills? Perhaps. After all, the agency had acknowledged that long-term safety wasn’t the issue. Even so, it was unlikely even with the additional label that this under-performing, un-distinguished drug would have much chance of success against its better-established, larger competitors—some of whose triptans are being used off-label for menstrual associated migraines anyway.

So Vernalis was arguably at fault too, for relying too heavily on current and future Frova revenues to support its pipeline. Sure, others bought the story: Vernalis found a new US partner for the drug in Endo in 2004, after co-developer Elan pulled out—wisely, as it turns out. (Plus, of course, it’s well known that UK and European investors, when there’s a revenue-generating drug around, are virtually blind to any pipeline assets, however valuable—that’s in part why Vernalis’ shares have fallen 90% since the non-approvable.)

But Vernalis also in 2004 took a $50 million loan from Endo to buy out Elan, offset-able on MAM approval. That debt has since grown to $56 million—the other reason for the share-tank.

This loan—repayable in August 2009—was about to push Vernalis into administration, perhaps as early as the middle of this year. The company narrowly escaped that by today announcing a settlement with Endo and a restructuring—complete with asset-divestment, staff cuts of over 50% (mostly corporate) and closure of Canadian development operations.

So what’s up for grabs? Vernalis’ other marketed drug, Parkinson’s disease treatment Apokyn (to which it acquired US rights in 2005 from Mylan), and its US commercial operations. Be quick, though, because “detailed discussions” are already ongoing.

There will be more. Vernalis’ restructuring is turning it from a commercially-focused organization into one that takes its assets to proof-of-concept (POC) only. Sound familiar? Because it is--Vernalis is now forced to partner its assets since it is selling its downstream operations, but elsewhere, the ‘to POC only’ model is an increasingly popular first choice for newer start-ups. Think Synosia, Flexion or the UK’s Summit PLC, and read this.

So if anyone’s after a clinical stage CNS asset (see the PR for the list of candidates) you know where to go. And there’s no CEO to prevent you buying out the whole group, either—Simon Sturge stepped aside. So whether you want to take over development of the remaining assets (less likely) or, as one analyst suggests, come in, eliminate the cash burn but make good use of offsetting Vernalis’ several hundred million pounds’ worth of tax losses (or part of them, anyway—much more likely), then you also know where to go.

And no, there’s no loan duty: Endo accepted just $7 million (£3.6 million) in cash and Vernalis’ foregoing future US royalties on Frova until sales exceed $85 million (not exactly a huge punishment: they were just $38 million in the first nine months of 2007). The US spec pharma “could have been more hard-nosed” and forced Vernalis into a full payment, says one analyst. But with problems (and a recently-departed CEO) of its own, Endo likely didn’t want to spoil its reputation among potential future partners.

We already knew UK biotech was in a sorry state. 2007 was an annus horribilis according to Piper Jaffrey senior research analyst Sam Fazeli. 2008 may be even more horribilis. With raising money impossible, and IPOs a long-forgotten art, those biotechs that aren’t, like Ardana and Cenes, already up for sale soon could be, since many have less than a year’s cash. The credit crunch, talk of global recession, and high risks across all sectors are compounding the usual complaints: annoying pre-emption rules, insufficient analyst coverage, too few specialist investors, generalists’ attention turned elsewhere.

Vernalis’ sorry story won’t exactly lure those investors back. Its predecessor companies, including Cerebrus, RiboTargets, British Biotech (remember them?) and Ionix collectively raised hundreds of millions in private and public equity over the years. Yet, with Vernalis’ shares now worth 8p each, as the analyst points out, “there’s not much to show for it.”

The fully-integrated biotech model isn't dead in Europe--it's just happening ex-UK (think Actelion and, perhaps shortly, Basilea). The lesson from Vernalis is that if you're going to go commercial, you need a decent asset, some luck, and to be across the Channel.

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