Coughing up for cough coup: Vernalis pulls it off again
This article was originally published in Scrip
The remarkable thing about the UK firm Vernalis is how many times it has in its various incarnations been able to extract cash from shareholders without having delivered on its promises. This time, says CEO Ian Garland, is the last time. It has just announced a £68.5 million placing and open offer in which it has convinced both new and existing investors of the wisdom of establishing a North American commercial infrastructure through which to channel extended-release liquid prescription cough and cold products from its new partner, Tris Pharma.
At first glance, the deal and associated fundraising is perplexing. Why would a company with a pipeline of partnered and in-house CNS and cancer products and a number of revenue-generating drug discovery deals with big pharma suddenly decide to set up in the business of selling cough and cold remedies? Why would the backers of a firm whose roots include numerous cash-sapping biotech ventures (the most notorious of which was British Biotech) decide to provide such a sizeable sum to a firm whose market capitalisation was less than £19 million the day before the transactions were announced? Nevertheless, the faith of the investors was reflected in the company's share price, which shot up by nearly 30% to more than 25 pence in morning trading on 10 February.
Despite the obvious incongruity of Vernalis's original business with this new venture, Mr Garland said the deal was not opportunistic but had been solicited by Vernalis after the firm had evaluated "a range of opportunities" which it measured against three principal criteria. Vernalis had been looking for lower risk, later stage opportunities to in-license or acquire which would enable it to continue funding its structure and fragment-based drug design activities (which are also financed through collaborations with the likes of Genentech, Lundbeck, GSK and Servier) and its pipeline of drugs in development. "We didn't think we'd find an obvious fit with our pipeline and in fact we don't want to market our pipeline products," Mr Garland told Scrip: indeed, the plan is to continue seeking partners for products after proof of concept.
For this reason, establishing a commercial presence in oncology or CNS was not among the three criteria. Instead the firm was looking for products with sufficient validation, with a technology that offered sufficient barriers to entry for potential competitors, and in a market that offered sufficient potential to "transform us into a profitable speciality pharma company", explained Mr Garland.
The deal eventually signed with Tris Pharma ticks all of those boxes, he noted. Tris Pharma's technology is validated: it has already got FDA approval for a generic version of the long-acting liquid antihistamine/cough suppressant Tussionex (chlorpheniramine plus hydrocodone). The validation of its technology platform sits alongside the fact that the products it is developing are based on existing products with well-established safety and efficacy profiles, meaning that to gain approval the Tris products will need to prove bio-equivalence rather than efficacy.
The barriers to entry are nevertheless high: to date extended-release liquid formulations of cough/cold products have proved tricky, and to Mr Garland's knowledge only Tris and UCB, which now owns the original technology, have cracked it, and apart from one firm with a generic version of Tussionex which was filed with the FDA before Tris's but is not yet approved, he is not aware of other development work in this space. UCB does not appear to be pursuing further development, he noted.
The market potential is large, meanwhile, Mr Garland believes. The prescription cough/cold remedy is divided into seven main segments, comprising the two narcotics hydrocodone and codeine, the two antitussives dextromethorphan and benzonatate, together with combinations of the first three with other products such as antihistamines, expectorants, anticholinergics and decongestants. Tussionex and its generic counterpart are the only long-acting liquid product and represent around 8% of the total market, and Vernalis will not be addressing this segment. However, this leaves a market of around $1.8 billion to go after, Mr Garland told Scrip. Long-acting products offer improved convenience and compliance compared with current immediate release drugs, maintain the firms.
A fourth key attribute in the deal is that Mr Garland already knows a fair bit about the market in question. Tussionex is now a UCB product, but it came by the drug through its acquisition of Celltech Pharmaceuticals, where he was once president and COO.
The deal with Tris gives Vernalis access to up to six products following a $5 million upfront payment. Tris will fund and develop them up to NDA status, with Vernalis paying milestones upon proof of concept, filing and approval (total milestones for each product range from $12-14 million). Vernalis will acquire the products for commercialisation in North America, with the first NDA filing envisaged in 12-24 months (and launch around a year after that).
Upon product launch, Vernalis will probably need a sales force of around 120-200 reps, said Mr Garland. He believes that the fact that Tussionex receives around 85% formulary coverage at an average prescription price of $60, with a market of $200-215 million, indicates the commercial potential of Tris's products.
Vernalis's firm placing and open offer is being made at an offer price of 20 pence per share, representing a premium of 2.6 % above the 19.5 pence closing price on 9 February. It has raised £10 million through a firm placing with certain institutional investors, with an additional placing and open offer raising a further £58.5 million offering qualifying shareholders the chance to subscribe to new shares pro rata based on their existing shareholders and further institutional investors receiving the placing shares subject to the take-up of the offer to existing shareholders.
'the big one'
The support and enthusiasm for this new venture was evidenced by the "premium price, high sum and new shareholders", said Mr Garland. He described the transaction as "the big one" that could mean that Vernalis will never again have to come back to its investors for more cash. "If the cough-cold business can become profitable, then we could become an old-fashioned company paying dividends," he suggested.
While Mr Garland admitted that divesting the earlier-stage, higher-risk activities was "an option", it is not the current game plan of the company. He re-iterated the importance of Vernalis's existing pipeline and discovery collaborations, and cited Shire as an example of a company that had been able to build up a revenue stream then "go back into higher risk" activities. "We'd be daft to dump the pipeline: we have great collaborations and candidates," he added.
The CEO, who joined Vernalis around three years ago, made clear that he had "never come on board with a view to making back the losses" historically run up by Vernalis and its predecessor firms. However, along with his commitment to deliver value on investments in its current reincarnation, he pointed out that "we have £600 million of tax losses in the business which could shelter future profits". Sinking millions of pounds into risky biotech concepts only to boost the profits of a cough medicine seller many years later was probably not what the original investors had in mind, but at least they may finally see some kind of a return...one day.