EP Vantage Interview - Vernalis seeks stability in cough market

It is not every day that a dilutive fundraising by a small-cap biotech generates a one-third rise in share price, but it helps when the equity sale is accompanied by a deal investors see as necessary and potentially transformative. So it was when Vernalis sold £68.5m ($109.1m) in shares to support a licensing deal with privately held US company Tris Pharma to break into the long-acting cough and cold market.

Whilst it might be surprising that there would be such interest in supporting a deal focusing on such a competitive and genericised market, chief executive Ian Garland tells EP Vantage the strategy is to capitalise on Tris’ extended release formulation technology to reduce regulatory risk and carve new niches in the cough and cold marketplace. Successful launch of products through the partnership would help the UK company advance its own pipeline of oncology and neurology products without having to continually tap investors.

“It was particularly apparent that the marketplace in 2008 had changed dramatically for developmental stage companies that historically relied on frequent cash calls to invest in high-risk assets,” Mr Garland says. “That model may still work in the US market. That does not work here where the investors are typically generalists.

“To create a sustainable business that does not rely upon frequent cash calls to the public or investors we need to have a revenue stream,” he says. “It was finding an opportunity that had a low-risk, relatively rapid path to market with a substantial upside and an attractive competitive environment.”

Opportunity knocks

It is hoped the Tris partnership will offer that opportunity. Under the agreement Vernalis is paying $5m upfront to Tris to develop up to six extended release prescription products using the New Jersey group’s LiquiXR technology for the cough and cold market. The intention is to make use of the 505(b)(2) regulatory pathway, which would allow Tris to rely on findings of bioequivalence to marketed products – thus shortening the approval process.

Mr Garland says Vernalis’ partner has already started active development on three products, with an NDA filing targeted in 12 to 24 months – as they will be filed as NDAs it will follow a normal approval pathway, meaning they could be ready for launch a year after filing. The exact molecules that Tris is working on will not be disclosed until regulatory documents are released publicly.

The two partners believe the cough and cold market remains a fertile field for long-acting formulations: about 35 million prescriptions are written a year, and with the exception of hydrocodone-based cough suppressant Tussionex all are immediate release products. The narcotic products hydrocodone and codeine, and the non-narcotics dextromethomorphan and benzonatate comprise nearly all prescriptions written for coughs, giving the partners an array of single and multiple-agent molecules to which they can add extended release technologies.
Mr Garland, who was US chief executive of Tussionex owner Celltech before it was acquired by UCB, believes the cough market offers a rich opportunity.

“(Tussionex) is a product that achieved $215m in peak sales. It achieved that with a relatively small proportion of the overall cough/cold market; in fact I think its market share was 8-9% of prescriptions,” Mr Garland says. “It proved to be incredibly promotionally responsive because it had a clear advantage over a multiple-times-a-day immediate release equivalent.

“The marketplace has not changed in the last decade because the technical barrier to producing extended release liquids has been a difficult one for people to crack,” he says. “Only in the last couple of years has Tris demonstrated its ability to release new extended release formulations.”

Bridging a patent cliff

Should they succeed, it will be an opportunity for Vernalis to replace revenue that the group will lose when migraine product Frova loses patent protection in 2015. Vernalis received royalty and supply payments of £12m from Menarini in Europe – payments from US rights holder Endo only kick in when sales exceed $85m, part of a restructuring of the partnership to allow Vernalis to pay off a $56m debt.

The company acknowledges that the Frova income underpins its R&D and corporate activities, which is why a deal to generate near-term income was essential – without the royalty stream, Vernalis becomes a development-stage company again in 2015. The looming expiry had eroded investor faith – shares had declined steadily from a peak of £1.04 in September 2009 to the 19p range in late 2011 and early this year, before spiking on news of the Tris deal. The promise of new products on the market potentially in mid-2014 certainly gives investors hope.

There is potential for income beyond the Tris deal. A partnership with Cell Therapeutics on blood-cancer drug tosedostat has the potential to start paying royalties if phase III work in myelodysplastic syndrome beginning this year succeeds and the compound receives regulatory approval. Meanwhile, a partnership with Novartis on AUY922 could pay milestones on initiation of phase III trials, filing and approval; Mr Garland says the Swiss partner is becoming increasingly optimistic about its potential.

What Vernalis will pay for is focused development of two candidates: Fatty acid amide hydrolase (FAAH) inhibitor V158866, which Mr Garland says has shown early proof of concept in phase I sufficient to consider moving forward in pain and potentially MS; and V81444, an adenosine A2A receptor antagonist that could return phase I results by mid-year in Parkinson’s disease.

The remaining pipeline has been parked for partnering purposes, which also will be the aim with both V158866 and V81444 once sufficient data has been compiled over the next 24 months. The focused development has resulted in an acceleration of cash burn: from £4.4m in 2010 to £6m in 2011.

Vernalis has come a long way from a company that was hemorrhaging cash and was forced to sack much of its staff, restructure operations and sell off its main revenue stream in order to stay afloat (Vernalis restructuring could lead to sale,February 20, 2008).It has staked its future expansion plans on Tris' ability to develop commercially successful cough products; new revenue will be needed if the Tris partnership turns out to be a dry well.

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