Vernalis: Rising From the Dead?

Maybe that's over-egging things a bit. But shares in the down-trodden UK biotech, which hit the rocks when marketed frovatriptan (Frova) failed to get a specific US approval for menstrual-related migraine, are creeping back up. And today's oncology research agreement with GlaxoSmithKline will probably help.

The deal provides Vernalis with $3 million up front cash, the same again as an equity purchase, and further potential payments of "in excess of $200 million" (yeah, you know they get carried away with the 'if-all-goes-according-to-plan scenarios') and, maybe, double-digit royalties one day. For this, Vernalis will do drug discovery against an undisclosed target using its structure-based-drug design technologies. (The target is one that both Vernalis and GSK had been working on previously, according to CEO Ian Garland.) If and when an IND emerges, GSK will have 90 days to decide whether or not to exercise its option to license the compound (s) and take on development and commercialization.

Yes, you spotted it--another option-based deal from GSK, option-dealmakers extraordinaire.

"The deal is structured as a risk-sharing agreement," says the release. Amid today's flurry of option-based deals, where risk is often heavily skewed toward the biotech partner, our first reaction was "you bet": Vernalis takes all the early risk, with some pocket money, and GSK may--or may not--choose to take on later risk.

But this deal is in fact a little more biotech-friendly than that. According to Garland, GSK will pay further pre-IND milestones of "more than $6 million", and the Big Pharma is also committed to doing the IND-enabling studies too (whatever they think of it at that point).

All of which helps Vernalis in its aim to fund most, if not all of its research activities. "Research either gets cut, or it pays for itself," Garland summed up to the IN VIVO Blog earlier this year. He says that this deal, plus two earlier alliances with Servier (the latest from May 2009), provide Vernalis with a two-year runway, to about mid-2011. That's assuming, rather conservatively perhaps, that the biotech receives no further GSK milestones.

Garland's hardly going to take undue risks with shareholders money, though--not after what many of them have been through already. Vernalis had become one of the UK's flagships, having acquired (among several) that other fallen hero of the sector, British Biotech, back in 2003. Our back-of-the-envelope calculation suggests and Vernalis and its predecessors had raised at least half a billion dollars prior to the Frova-related crash.

"It's unfortunate that shareholders lost a lot of money," Garland said in an interview in the Spring. "But this isn't British Biotech anymore; I'm not trying to make marimastat work." (Marimastat was the over-hyped BB cancer drug that ultimately failed, bringing the company down with it.)

What Garland is trying to do is as much as possible with Vernalis' residual assets (US commercial operations and marketed drug Apokyn were sold to Ipsen in a 2008 fire-sale; US Frova sales were also given away as part of a restructuring to settle debts and dues), taking advantage of the fact that basically, the only way is up.

When Garland took over as CEO of the downtrodden group back in December 2008 (having previously run vaccines group Acambis, sold in 2008 to Sanofi Aventis for £276 million) "we had a zero value starting point," he said. But he also believed "the negative has been overdone," and that starting again from scratch, with a very low valuation (Vernalis' market cap fell to £10m at one point; it's now just below £48m), provided "an entry point for [investors] to get on the elevator on the ground floor," he said.

For new investors, (or those willing to buy in some more) the elevator's on its way up. Vernalis is a leaner business, with a narrower focus on a few mid-stage projects. These include a Phase IIb neuropathic pain candidate, a Phase I candidate in inflammation, and late-research/pre-clinical compounds in pain and cancer. Meanwhile Biogen Idec will pay Vernalis a milestone if its licensed Phase II Parkinson's compound progresses to Phase III, and Novartis might owe small milestones linked to two Phase I cancer projects.

There are signs of life at Vernalis, then, but this is the company that can least afford to over-promise. Among Garland's 2011 goals are "to get back on our feet and re-establish credibility."

image from flickr user thebigdurian used under a creative commons license.

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.