Vernalis Buys Back Migraine Drug's EU Royalties

For a small drug, Frova (frovatriptan) sure has had a busy couple of years. After it failed the entrance exam for a menstrual migraine label in the US late in 2007, Frova pushed its parent, UK biotech Vernalis, close to the edge of bankruptcy. (Frova's original parent, until 1994: SmithKline Beecham).

Fortunately, the likes of financiers Paul Capital Healthcare were to hand, willing to pony up emergency cash in exchange for future royalties on Frova in the regular migraine indication. Vernalis' April 2008 deal with Paul Capital brought the biotech a €18.4 million life-line, in the form of a loan, to be re-paid along with hefty interest with 90% of the Frova royalties that Vernalis was receiving from European commercialization partner Menarini.

After a good deal more asset-selling and cost-slashing, Vernalis staggered back to life. Ex-Acambis CEO Ian Garland took the reins in late 2008, creating a new management team around him.

So today, a more confident, nearly-back-on-its-feet Vernalis has agreed to pay Paul $32.57 million (£21 million) to regain 100% of those Frova royalties and wipe the debt off its books. Vernalis is seeking the funds to pay Paul off via a placing and open offer, designed to raise about £28.5 million after expenses. (The royalties would have gradually come back to Vernalis, according to a sales-linked formula, but not for another 3-4 years, and only if sales reached a certain level.)

Paul Capital, of course, has done well out of Vernalis' troubles. For starters, it charged a cheeky 42% or so interest on its initial loan--over which troubled Vernalis, with no option at the time of raising money from the disgruntled capital markets, would have had little negotiating power. Second, the financing group has nearly doubled its money in under two years--an ultra-fast return which likely helped the deal meet Paul's required internal return hurdle. "Paul Capital was under no obligation to do the [second] deal," explains Vernalis' CFO David Mackney, "and initially they didn't want to," he adds.

But Vernalis' new management didn't want, either, to miss out on the growth of one of its assets--Frova's sales were up 15% in 2009, to €32.4 million. And the last thing it needed, as a cash-burning biotech, was heavy debt on its books (although as Mackney admits, Vernalis wouldn't likely exist today if it wasn't for that initial Paul transaction). This deal, with the placing, eliminates Vernalis' debt, reduces its cash burn (since it doesn't have to hand money over to Paul anymore) and extends its cash runway beyond 2012, potentially for as long as four years.

As for dilution: who cares? This is a company starting from scratch, whose original investors have already lost out, but whose newer backers may have something to gain, if all goes to plan. Besides, UK pre-emption laws mean existing shareholders can avoid dilution if they want by putting up more money; Vernalis' existing major shareholder, Invesco, has agreed to increase its holding to up to 46% of issued share capital by subscribing to two thirds of the offer.

Vernalis plans to use most of the remainder of the placing proceeds (about £7, by our calculation) to invest in its own pipeline and/or to seize in-licensing or acquisition opportunities. Such a move would reduce the firm's cash runway, sure. But although having an enormous runway is a nice story, particularly amid the rest of the UK's rather shaky biotech sector, it's not really the point of the business, is it?

image by flickrer Artysmokes used under a creative commons license