Vernalis Hunts For An In-Licensing Deal Or Acquisition In CNS/Oncology

Analysts believe Vernalis now is in a "fairly secure" cash position to license or acquire an earlier-stage compound.

One month after regaining rights to its Frova migraine drug, UK biotech Vernalis is pursuing licensing deals and acquisitions, with an emphasis on central nervous system and oncology compounds, Chief Executive Ian Garland told investors during a year-end earnings call on April 12.

Garland would not say what type of CNS and oncology compounds the biotech is hoping to add to its pipeline, however. Piper Jaffray and Edison Investment Research analysts said in interviews that they expect Vernalis to pursue compounds in neurology versus neuropsychology in CNS. Cancer, though, is a more difficult area to narrow down, they said.

"I think they might pursue something more in the niche neurology space," Piper Jaffray analyst Sam Fazeli said, mentioning Parkinson's disease as a possible target.

Should Vernalis decide on an acquisition, which would likely involve a Phase II candidate, the biotech would choose a company with clinical-stage assets that are not yet partnered, Garland said. "We think acquiring a company, which has only programs that are partnered or early stage -perhaps we could better achieve the same outcome by in-licensing earlier stage programs ourselves."

Analysts also said they believe the biotech now is in a "fairly secure" cash position to in-license or acquire an early-stage compound, though this was not always the case.

About three years ago, Vernalis nearly went bankrupt after Frova (frovatriptan) failed to win U.S. labeling for menstrual migraines, and Paul Capital Healthcare bailed the biotech out with a life-saving loan in exchange for future royalties on Frova. Vernalis reached a turning point in March, when it raised about $45 million, which it used mainly to regain full royalty rights to Frova for $32.6 million. Menarini is Vernalis' European commercialization partner for the drug, whereby Vernalis receives about 25 percent of sales under the agreement.

Frova sales rose 15 percent year-over-year in 2009 to about $44 million. "Menarini is targeting further growth in sales of frovatriptan and therefore, further growth in royalties to us from new country launches over the coming years. Just as a reminder, the royalty rate on this program is 25.25 percent. So we're entitled to just over one-quarter of the sales and we retain now all of that," Garland said.

Rebuilding Vernalis

In March, execs also mentioned plans to seek out-licensing deals or acquisitions to further bolster their pipeline. They also said the rest of the money raised would be used to eliminate debt, reduce its cash burn and extend Vernalis' financial runway beyond 2012 (Also see "Business News In Brief" - Pink Sheet, 15 Feb, 2010.).

But 2012 is not far off and during the call, Singer Capital Markets analyst Shawn Manning pointed out that Vernalis' pipeline "would benefit by something a bit later stage."

"I think we're being realistic about the ability for us to in-license a later stage program where it's likely to be a very competitive process for a program that's attractive to us. So we think it is more likely to come from acquisition," Garland told investors. "The strengths we think we bring to the table that perhaps distinguish us from other companies is the strength of our financial position (and) the cash runway that we have."

Vernalis also has the advantage of seeking out an acquisition or licensing deal at a time when there are a number of biotechs across Europe that have had product failures and, as a result, may offer an attractive price, Fazeli said.

"Vernalis has the opportunity to find products that are attractive, but may be under other people's radars," Fazeli said, adding that the biotech also will benefit from the experience its management team brings to the table when it comes to M&A.

Since signing on as Vernalis' CEO in late 2008, Garland has aimed to rebuild Vernalis' value through partnering deals backed by its research platforms. Last August, the biotech inked an option deal with GlaxoSmithKline to pursue an oncology target. The company has an oncology collaboration in place with Novartis as well as a separate oncology partnership with France's privately held Servier (Also see "Oncology Target Option Deal With GSK Helps Vernalis Hit Comeback Trail" - Pink Sheet, 6 Aug, 2009.).

[This story was updated April 13 to correct the spelling of Sam Fazeli's name.]

-Carlene Olsen ([email protected])