21 March 2003 Vernalis Group plc Preliminary Results for the year ended 31 December 2002
Vernalis Group plc (LSE: VER), a biopharmaceutical company specialising in CNS disorders and obesity, today announces its preliminary results for the year to 31 December 2002.
Second half highlights
Frovatriptan:
Positive results from a Phase IIIb study in the prophylaxis (prevention) of menstrually associated migraine
First European launch, in Germany, in November 2002 - market share of triptan unit sales reached 4.5% after only 13 weeks
US prescriptions continue to grow following launch in June 2002
Sexual dysfunction - patient recruitment completed in Phase II study - on track to review results in H2 2003
Parkinson's disease - pre-clinical development underway with lead compound
Obesity - working towards identification of a new lead development compound in collaboration with Roche
Financials:
25% reduction in headcount and rationalisation of R&D portfolio in Q4 2002 to achieve annualised internal cost savings in excess of £3 million
£9 million in cash and short-term investments at 31 December 2002
Sources of funding and strategic options under active consideration
Management
Robert Mansfield has, with effect from today, resigned as Chief Executive Officer and as a Director of Vernalis Group plc. The Company intends to seek a successor. In the meantime Peter Worrall, Finance Director, will assume overall responsibility for day to day operational matters.
George Kennedy, Chairman, commented 'Robert Mansfield has today announced his decision to stand down from the Board and as Chief Executive Officer, a position he has held since 1992. We are extremely grateful to Robert for his leadership of the Company during the last ten years and particularly for the crucial role that he played in the development and commercialisation of frovatriptan. He has also been instrumental in establishing a strong international reputation for Vernalis within the biopharmaceutical arena.'
Prospects
Following the US and German launches of frovatriptan in June and November 2002 respectively, we have now started to receive a regular quarterly income from royalties on US sales, and, in the case of Europe, sales revenues from the supply of finished frovatriptan product to Menarini. We expect our revenues from frovatriptan to grow as it becomes more established in the marketplace and is rolled out in further European markets.
From 2003 we expect to realise annualised internal savings in excess of £3m as a result of the cost reduction measures that we implemented in 2002. Together with increasing revenues from frovatriptan, this should result in a progressive reduction in the Company's net cash outflows. Our target continues to be the achievement of positive operating cashflow and sustainable profitability by the end of 2004.
In the interim period the Company anticipates a shortfall in working capital prior to the receipt of a $15 million US sales-related milestone from Elan. The key factor in the timing of receipt of the milestone payment from Elan will be the rate of growth of frovatriptan sales, the trigger point for the payment being the end of the first twelve-month period in which net sales of frovatriptan in the North American market exceed $100 million.
In our Interim Report in September 2002, we stated that we would continue to explore various sources of financing but that we had no plans to undertake a public equity offering. At that time we were already considering approaches from a number of sources to provide additional working capital to the Company through alternative financial structures, but our Board of Directors subsequently concluded that the terms available would not be in the best long-term interests of our shareholders.
The Directors are continuing to discuss funding options, including an equity offering, with the Company's leading shareholders. Alternative sources of funding may include further collaborations with partners and could include the sale of part of the Company's future royalties from frovatriptan. Until additional funding has been put in place, the Company will take steps to defer further research and development spend and conserve cash. In addition the Board intends to explore other strategic options.
Overview
In the second half of 2002 Vernalis has built on the considerable achievements of the first six months of the year. Prescription data for frovatriptan continues to show encouraging growth in the key US market, with a market share now of approximately two percent. In November we announced the first European launch of frovatriptan, in Germany, and according to recent IMS Health Inc. ('IMS Health') data, frovatriptan has increased its share of triptan units sold in Germany to 4.5 percent after 13 weeks on the market. Although early sales trends for a new product are not necessarily predictive of its ultimate performance in the marketplace and should therefore be treated with some caution, these figures nevertheless give us confidence on the outlook for frovatriptan in Germany and other European markets.
In the second half, against the backdrop of difficult conditions in the financial markets, we announced further measures to reduce the Company's burn rate. These included increasing our focus on key programmes and rationalising our portfolio to terminate or put on hold a number of earlier stage programmes. We also reduced the Company's headcount by 35, representing approximately 25% of the workforce. Together with the steps we had already taken to reduce expenditure earlier in 2002, we expect to achieve annualised internal cost savings of at least £3 million from 2003.
Maximising the value of frovatriptan will continue to be our highest priority. This includes working with Menarini to facilitate the roll-out of frovatriptan in other European markets. Additional studies will be required to enable our marketing partners to apply for a label extension that would allow the drug to be prescribed for the prophylaxis (prevention) of menstrually associated migraine, a condition that affects more than 50% of female migraineurs.
Portfolio Review
Frovatriptan
2002 has witnessed a number of important milestones in the Company's evolution as a product company, with the approval of frovatriptan in 15 European Union countries, followed by its launch as an acute treatment for migraine both in the United States and in its first European country, Germany. In the United States, frovatriptan had achieved a market share of approximately two percent for the triptan class of drugs eight months following launch, according to prescription data generated by the market research organisation IMS Health. In Germany, after 13 weeks on the market, frovatriptan's market share of units sold had increased to 4.5 percent of the triptan class, also based on IMS Health data.
In the United States the product is being co-promoted by Elan and UCB under the trademark FrovaTM, with sales forces detailing both to neurologists and to primary care physicians.
In Germany, frovatriptan is being marketed by Berlin Chemie, the German affiliate of our European licensee Menarini. Menarini has also recently launched the drug in Ireland, and it is currently preparing for further European launches starting in the second quarter of 2003. We anticipate that the product will have been launched in most of the major European markets by the end of 2003.
In the third quarter of 2002, we announced positive headline results from a multi-centre US clinical trial exploring frovatriptan's potential use in the prophylaxis (prevention) of menstrually associated migraine. This is a common form of migraine suffered by women, which occurs at or around the time of menstruation. It is estimated that over 50 percent of female migraineurs report menstruation as one of the triggers for their migraine attacks. Reports indicate that menstrually associated migraines tend to last longer than other migraines, and are more debilitating, generally more resistant to treatment, and more likely to recur after an initial response to treatment.
Our study, a double-blind, placebo-controlled, crossover design, was conducted at 36 clinics in the US and involved over 500 menstrual migraine sufferers. Patients were evaluated over three menstrual cycles over the course of which each patient received all three dose regimens - placebo, 2.5mg frovatriptan
once daily and 2.5mg frovatriptan twice daily. During each cycle they took the treatment for a total of six days commencing two days before the predicted onset of their headache.
The headline results showed that both dose levels of frovatriptan were highly effective in reducing the incidence, severity and duration of menstrually associated migraines compared to placebo. By the intention to treat analysis half the patients were completely headache-free during the six-day period when they took 2.5mg frovatriptan twice daily and around 40 percent when they took 2.5mg frovatriptan once daily, compared to only 26 percent when they took
placebo. The improvement in headache free rates were highly statistically significant for both dose regimens compared to placebo (p<0.0001).
The full results of the study are due to be presented at a meeting of the American Academy of Neurology in the United States at the beginning of April 2003, followed by publications in key scientific and clinical journals.
Additional studies will be required to enable Elan and Menarini to apply for US and European regulatory approval for the use of frovatriptan in the prophylaxis
of menstrually associated migraine. We believe that the requirements to submit applications to extend European product licenses will be broadly similar to
those in the United States.
No drugs of the triptan class are currently approved for prophylactic use in menstrually associated migraine. If the positive outcome of the initial study is reproduced in further studies and an extension to the product license
successfully obtained, we believe that it would give frovatriptan a competitive advantage that could enable our marketing partners to significantly increase frovatriptan's market share.
VML 670 - Sexual dysfunction
There is increasing interest in new treatments for sexual dysfunction. In our programme with VML 670 we are currently targeting a specific male and female patient population whose sexual dysfunction has arisen as a direct result of drugs that they take to treat depression.
The most widely prescribed class of anti-depressant drugs are known as SSRIs (selective serotonin re-uptake inhibitors). They work by increasing circulating levels of serotonin (5-HT), a chemical produced in the brain that affects mood. According to published studies, a significant proportion of patients taking SSRIs, between 30 percent and 40 percent, experience some form of sexual dysfunction as a side effect of the treatment. This may manifest itself in a
number of ways, including loss of sexual desire, erectile dysfunction or an inability to achieve an orgasm.
Studies have shown that SSRIs reduce the activity of one particular type of receptor for serotonin, the so-called 5-HT1A receptor, which is known to be involved in the mediation of sexual behaviour. The hypothesis we are exploring is that VML 670, which has potent and selective activity at 5-HT1A receptors, can re-activate these receptors and so restore normal sexual function.
Our programme has made good progress throughout the year. In the first half we successfully completed a Phase I programme that included single and multiple dose studies in healthy volunteers as well as a study to confirm that there are no adverse consequences from the co-administration of VML 670 and a commonly prescribed SSRI anti-depressant. We subsequently started a multi-centre, double-blind, placebo-controlled Phase IIa trial with VML 670 in approximately 240 male and female patients taking either of the two most commonly prescribed SSRIs. Recruitment for the study, which we are running at 40 centres in the UK, is now complete. We remain on track to review the preliminary results with our partner, Lilly Corporation, in the second half of 2003.
Adenosine A2A antagonist programme
In our adenosine programme we are targeting two different clinical indications, Parkinson's disease and depression.
Parkinson's Disease
Parkinson's disease is a debilitating and progressive movement disorder that affects approximately one percent of the population over the age of 65 years. Common symptoms include stiffening of the muscles and difficulty in initiating movement. Sufferers may also develop a tremor or shaking. The primary cause of the problems of co-ordination and movement in Parkinsonian patients is nerve degeneration and cell death in the brain, leading to the loss of dopamine, a chemical produced in the brain that is involved in the control of voluntary movement.
Most conventional therapies for Parkinson's disease are based on dopamine replacement. Although generally effective in the short-term, these treatments can have severe, or even disabling, side effects and their effectiveness tends to decrease over time. In addition, current therapies that target dopamine do not slow down or stop progression of Parkinson's disease.
Adenosine is another brain chemical that also plays an important role in motor co-ordination and movement control. A subtype of adenosine receptor, the adenosine A2A receptor, is found in high density in the part of the brain responsible for motor function, where it appears to direct the activity of other neurotransmitter mechanisms, including dopamine mechanisms, that are dysfunctional in Parkinson's disease. We believe that by using selective adenosine A2A receptor antagonists to restore the imbalance of the other neurotransmitters caused by the loss of dopamine, we may be able to provide a novel approach to treat the symptoms of Parkinson's disease and to slow or stop the progression of the disease.
During 2002 we selected our first lead development candidate for Parkinson's disease, VR 2006. We are currently carrying out a series of pre-clinical studies that are required to establish the safety profile of the drug before the regulatory authorities will allow us to commence clinical trials.
Depression and anxiety
Depression is the leading cause of disability worldwide. In the United States, the world's largest market for pharmaceutical products, it is estimated that depressive disorders affect approximately 17 million people, and nearly twice as many women (12 percent) as men (7 percent) are affected by a depressive disorder each year.
In May 2002 we were very pleased to announce a new strategic collaboration with Roche to research and develop A2A antagonists as anti-depressants. This followed pre-clinical research by Vernalis, Roche and a number of other companies suggesting that adenosine receptors, and specifically the adenosine A2A receptor subtype, may be a novel target for a completely new class of anti-depressant drugs. In our own programme we have already synthesised selective adenosine A2A receptor antagonists that show activity in pre-clinical models of depression.
Under the terms of the agreement, Roche has an option to license worldwide rights to develop, manufacture and market product candidates coming out of our research programme for the treatment of depression and anxiety, which is exercisable up to the end of Phase I studies. On each anniversary of the option grant, Roche has to pay the Company an option renewal fee in order to extend its option for a further year, and we also have the potential to receive milestone payments for compounds that move into development. If Roche exercises its option, the two companies would pool their respective intellectual property and would establish a joint research programme under which Roche would fund our research costs. Roche would also then undertake and fund all development work. We would potentially receive a series of development and post-approval milestone payments totalling up to $80 million on product candidates from the joint programme, whether arising from Vernalis or Roche intellectual property, as well as substantial royalties on future product sales.
5-HT2C agonist programme - Obesity
Over the last ten years there has been a dramatic rise in the prevalence of obesity, particularly in first world countries. Obesity in the United States has reached epidemic proportions, with approximately 100 million people, over one-third of the total population, now considered by the National Institutes of Health to be overweight or obese. This figure is projected to exceed 50 percent within the next 25 years. In European countries the corresponding figure is lower, approximately 20 percent, but the rate of increase in prevalence is showing a similar trend to that of the United States.
The important role of the 5-HT2C receptor in controlling eating and satiety was a ground-breaking discovery by our own scientists in 1997. In obesity, this control mechanism may not work effectively and may lead to excess food consumption, which the body stores as fat. Compounds that activate this receptor can help to promote the feeling of satiety and control the urge to eat
to excess. Our programme is focused on developing novel and highly selective 5-HT2C receptor agonists as drugs to improve weight loss.
Our 5-HT2C programme has been the subject of a joint research and development collaboration with Roche since December 1999. Roche's continued commitment to the programme was clearly evidenced by a new agreement that we signed with Roche in February 2002. The new agreement extends the original collaboration and includes significantly improved commercial terms for Vernalis, with further research funding, potential milestone payments from Roche now doubled to around $60 million, and royalties rising to as high as 15% on successfully marketed compounds. Roche will continue to undertake and fund all development work.
The first clinical development candidate from this programme entered Phase I clinical trials in May 2002, triggering a milestone payment to Vernalis. We and Roche subsequently took the decision, in July, to withdraw this compound from the Phase I trials, when the early pharmacokinetic data in man revealed unexpectedly high levels of a metabolite of the drug in the bloodstream. Although there were no resultant side effects, the data did not meet our stringent criteria for progression into Phase II.
While this was undoubtedly a setback, it is not unusual for drugs to be discontinued in Phase I. Recognising the critical importance of safety in the treatment of obesity, the intention has always been to take several compounds into Phase I trials in order to go forward with a drug with the best possible profile. We currently anticipate a new development candidate being selected in the second half of 2003.
Financial Review
The consolidated loss after tax for the year was £16.08 million, compared with a loss of £9.89 million for 2001. Turnover for the first time included royalty income from US sales of frovatriptan and sale of product for the European market for frovatriptan, following the drug's successful launches in the United States and Germany.
Profit and loss account
The Company recognised revenues of £5.9 million in 2002, compared to £13.8 million in 2001. Revenues recognised in 2002 included £2.6 million from Roche relating to the Company's obesity programme, comprising research funding and a milestone payment on entry into Phase I, £0.3 million from Menarini for the supply of finished product for European markets and £3.0 million from Elan, made up of £2.3 of milestone income and £0.7 million from royalties on US sales
of frovatriptan. Revenues recognised in 2001 included milestone income of £10.3 million from Elan following FDA approval of frovatriptan in the United States.
Total 2002 revenues from Elan amounted to £11.9 million, comprising royalties of £0.7 million on US sales of frovatriptan, a milestone payment of £3.7 million following the US launch of frovatriptan, and an amount of £7.5 million arising as a result of the waiver by Elan of a loan to the Company of $10 million plus accrued interest. The loan waiver was one element of a general restructuring of the Company's license agreement with Elan at the time of Elan's appointment of UCB to co-promote frovatriptan in the United States in which revised royalty rates and milestone payments were agreed and the Company undertook to carry out additional Phase IV studies at its expense. Under the
Company's accounting policy on revenue recognition adopted in 2001, and in keeping with best practice in the industry, £8.9 million has been deferred out of the total Elan revenues of £11.9 million. The deferred income will be recognised as the related expenditure is incurred.
Research and development expenditure decreased by 12% to £18.0 million in 2002 from £20.4 million in 2001. Expenditure in the second half amounted to £7.2 million, a decrease of 33% compared to the first half.
Expenditure on development projects decreased by £1.4 million to £8.4 million, from £9.8 million in 2001. Frovatriptan expenditure fell in 2002 following the completion of the European mutual recognition process in January 2002, and the completion during the year of two Phase IIIb / Phase IV studies, the first in
the use of frovatriptan as an acute treatment early in a migraine attack, and the second in the prophylaxis of menstrually associated migraine. This reduction was partially offset by increased expenditure on VML 670, primarily due to the commencement of the Phase II study in SSRI-induced sexual dysfunction, and on VR 2006, the lead development candidate in the Company's Parkinson's disease project, due to the commencement of the manufacturing scale up and the pre-clinical development programme.
Discovery research costs also decreased by 9% to £9.6 million in 2002 from £ 10.6 million in 2001 principally due to cost saving measures implemented during
the year, including the rationalisation of the Company's research and development portfolio and the consequent reduction in research headcount from 86 to 61 in the fourth quarter.
Administrative expenditure excluding goodwill amortisation increased to £4.4 million in 2002 from £3.2 million in 2001, due to a number of factors,
including: a significant increase in annual insurance premiums, including an initial premium to purchase product liability insurance for frovatriptan in anticipation of its launch in the United States and Europe; an increase in property rental costs for the Company's Winnersh premises following a five-year rent review in May 2002; redundancy costs relating to a reduction in staff levels arising from the rationalisation programme in fourth quarter 2002; and an increase in professional fees.
Amortisation of intangible assets includes amortisation of £1.8 million of goodwill arising on the acquisition of Cerebrus (2001: £1.8 million). This is being amortised on a straight-line basis over a five-year period from December 1999, the date of acquisition. The remaining £0.8 million (2001: £Nil) relates to the amortisation of the capitalised payments of £17.2 million ($25 million) conditionally due to GlaxoSmithKline (GSK) to buy out royalties due to GSK on sales of frovatriptan. This amount is being amortised over the life of the frovatriptan patents on a straight-line basis from the date of first launch of
frovatriptan, June 2002.
Interest receivable net of interest payable increased to £1.6 million in 2002 from £0.2 million in 2001. This was predominantly due to the inclusion of an unrealised exchange gain of £1.5 million on the retranslation of dollar denominated amounts due to GSK relating to agreed future payments to buy out all royalties originally due to GSK on sales of frovatriptan.
The tax on loss on ordinary activities of £2.0 million (2001: £1.3 million) represents amounts that we expect to receive from the Inland Revenue under current legislation on research and development tax credits for small and medium-size companies.
Balance Sheet
Tangible fixed assets decreased to £1.7 million (2001: £2.4 million). Capital expenditure during the year amounted to £0.4 million (2001: £1.1 million) comprising £0.1 million on laboratory equipment, £0.1 million on computer equipment and £0.2 million on leasehold improvements, fixtures and fittings.
Cash and short-term investments at 31 December 2002 amounted to £9.1 million, compared to £18.0 million at 31 December 2001, and £20.3 million at 30 June 2002. The net cash outflow from operating activities was £14.0 million (2001: £8.4 million), which was offset primarily by the proceeds of a new £7 million convertible loan from Roche. The loan is convertible into ordinary shares at a conversion price of 329 pence per share, and if not converted, is repayable in 2007.
Creditors falling due within one year fell by £4.9 million to £11.3 million, principally reflecting the waiver of the $10 million loan from Elan plus accrued interest, and a reduction in trade creditors of £0.7 million. The 2002 figure includes deferred income of £2.3 million from Elan that the Company expects to recognise during 2003.
Creditors due after one year has increased by £2.0 million to £16.1 million, reflecting deferred income of £6.7 million arising in 2002 that the Company expects to recognise in 2004 and beyond, offset by a reduction of £4.4 million in the non-current element of the payments due to GSK... |
