BioWorld International Correspondent

LONDON - UK biotechnology reached the end of an era last week with the announcement that British Biotech plc will take over Vernalis plc in an agreed-to £48 million (US$79.7 million) deal, ditching the British Biotech moniker and closing the company's facility in Oxford.

The move comes just three months after British Biotech took over RiboTargets Holdings plc in a deal that valued privately held RiboTargets at £24 million, and shareholders are promised more merger and acquisition activity to come.

At the time of the RiboTargets merger, British Biotech said it would change its name, and now it plans not only to take on the Vernalis name but also to move its headquarters to Vernalis' facility in Winnersh.

The new Vernalis will have cash of £48.4 million, and a market capitalization of £90.9 million, a far cry from British Biotech's peak valuation of £2 billion. British Biotech is offering 0.861 new British Biotech shares for every Vernalis share. Based on British Biotech's closing price of 64 pence July 2, that values each Vernalis share at 55 pence, and puts a total value of £48 million on the company.

Since January, Vernalis had seen its valuation slip from £43.7 million to £17.8 million, at the end of June. Vernalis shares rose 20 percent to 50 pence in the course of last week, pushing its market capitalization up to £21.5 million, while British Biotech shares slipped 8 percent to 60 pence.

Once the merger is complete, the combined Vernalis will be owned 47 percent by British Biotech shareholders and 53 percent by Vernalis shareholders. British Biotech has acceptances from shareholders representing 44.5 percent of Vernalis.

The merged company will be headed by Simon Sturge, former CEO of RiboTargets, with Peter Fellner, ex-CEO of Celltech Group plc and the prime mover behind the consolidation of the UK sector, as executive chairman. His final act at Celltech was to snatch Oxford GlycoSciences Group plc from under the nose of proposed merger partner Cambridge Antibody Technology Group plc.

British Biotech, formed in 1986, was a trailblazer for UK biotechnology, turning to the U.S. to go public at a time when the listing rules made it impossible for biotechnology companies to float on the London Stock Exchange.

By 1996 the company's lead products, Zacutex, for the treatment of acute pancreatitis, and marimastat, an oral cancer treatment, had advanced to late-stage trials, and British Biotech began investing heavily in manufacturing and marketing infrastructure. A rights issue in July 1996 raised £143 million.

But things began to unravel in February 1998 when Zacutex failed to get European approval. By May 1998 the founding CEO, Keith McCullagh, was forced to agree to step down, following accusations from Andrew Millar, the clinical research director, that the company had released overly optimistic information about clinical trials and that the plan to market its own drugs was commercially unrealistic.

A restructuring followed, but since then British Biotech has had several other product failures and has in effect done little more than eat into its cash pile. News of the Vernalis merger came as British Biotech reported a loss for the year ended April 30 of £17.5 million, up from a loss of £17.2 million the prior year.

Commenting on the proposed merger with Vernalis, Fellner said it will "enhance greatly our ability to create significant value for shareholders in the future." Shareholders are promised cash savings of £6.5 million per annum, with headcount falling from 204 to about 130.

On the face of it there is little synergy between the companies, with British Biotech specializing in oncology and inflammation and Vernalis in central nervous system diseases. The new Vernalis will have one marketed product, frovatriptan, for the treatment of migraine, but beyond that there is no immediate prospect of further approvals, with three products in Phase II, two in Phase I and two in preclinical development.

However, a milestone payment of $15 million is due from U.S. marketing partner Elan Corp. plc, of Dublin, Ireland, when U.S. sales of frovatriptan reach $100 million per annum, and the merger means there now is sufficient funding to pursue an extension of frovatriptan's labeling to take in menstrual migraine.

There are collaborations with F. Hoffmann-La Roche Ltd. in obesity, Eli Lilly and Co. in sexual dysfunction and Serono SA in inflammation. A portfolio review is planned and further partnerships will be "a key strategic objective."