Editor

Take a marketed drug - an antibiotic, say. One that physicians are nervous about over-prescribing, lest resistance arise. One with no patent protection and modest sales, in the range of $40 million per year. One targeted to a condition for which some other, longer-established oral antibiotic is already treating about 90 percent of the cases. One that the drug's owner hasn't even bothered to promote.

Buy all the U.S. rights to that drug, paying $116 million. Agree to big royalties. Then tell the world you're going to use sales of your new antibiotic to fund all of your clinical projects and make your company "cash-flow balanced or positive" by 2006.

Nuts?

It might seem so, but that's what ViroPharma Inc. disclosed last week. And company officials were able to explain the underlying logic in a way the marketplace apparently liked.

The antibiotic is Vancocin (vancomycin hydrochloride), the only approved oral antibiotic for enterocolitis (inflammation) caused by Staphylococcus aureus, including methicillin-resistant strains, and antibiotic-associated pseudomembranous colitis caused by Clostridium difficile.

ViroPharma is paying Eli Lilly and Co. $116 million - $53.5 million from existing reserves and $62.5 million in gross proceeds from issuing senior secured bridge notes due October 2005 and warrants to purchase shares of ViroPharma common stock. The deal is expected to close on or about Nov. 18.

C. difficile-related conditions have been steadily rising for the past two decades, noted Colin Broom, ViroPharma's chief scientific officer, and about 90 percent of patients are treated with metronidazole (Flagyl, from Aventis Pharmaceuticals Inc.), approved by the FDA in 1963.

Vancomycin was first developed as an injectable and hit the market in 1958, but the oral form didn't show up until 1986. Lilly quit manufacturing the injectable and liquid forms in 2002, leaving the oral version known as Vancocin Pulvules, which ViroPharma soon will call its own.

"The guidelines [about antibiotic use] were written 10 years ago, when there was concern that the more Vancocin you use, the more resistance you get," Broom said, adding that he believes those concerns are overblown and pointing out that Vancocin works better because it's "targeted specifically to this disease," i.e., C. difficile-related trouble. What's more, unlike Flagyl, Vancocin is not absorbed orally but in the gut so it works directly in the place where the bug resides.

ViroPharma plans to educate physicians about such matters. "We don't have to increase the use of Vancocin very much to increase sales substantially," Broom said. "As we head into infection season, who knows what's going to happen with the shortage of flu vaccine? We expect to see an uptick" in Vancocin sales, he said.

They're already upticking on a regular basis, which is another backstage aspect of the story. Lilly sold $40 million of Vancocin last year "with zero promotion," said ViroPharma's CEO Michel de Rosen, but surpassing that number by far this year seems inevitable since sales at the half-year mark already had reached $28 million - still with no promotion.

In July of this year, a paper in the Canadian Medical Association Journal said treatment with oral vancomycin therapy "should be reserved for patients who have contraindications or intolerance to metronidazole or who fail to respond to first-line therapy," but physicians seem to like the drug.

"We're on a nice trend," said Josh Tarnoff, ViroPharma's vice president of commercial operations. "If you look at the growth in Vancocin in the last 10 years, and take out the supply issues Lilly had in 2002-2003, you'll see a roughly 10 percent growth per year."

This summer, Canada suffered a particularly bad outbreak of C. difficile disease, which the journal called "the most important cause of nosocomial [i.e., hospital-related] diarrhea in adults." The bacterium was blamed for 100 deaths in a single Quebec hospital, and scores of other fatal cases were reported.

"Even the severity appears to be increasing," Broom said. "We seem to now have some more virulent organisms than in the past." Scientists looking into the Quebec outbreak said the bug apparently had mutated into a strain that was more contagious and deadly, especially for elderly patients who've been given antibiotics for some other condition.

No generic challenger for Vancocin has stepped up to the plate, nor is one likely to appear, Broom said. Manufacturing is tricky and the nature of the drug requires more than bioequivalency studies to pass FDA muster. Generic-drug firms would rather turn their efforts to easier marks.

The royalty structure in the deal with Lilly provides the pharmaceutical company with 50 percent of sales between $44 million and $65 million in 2005, with a maximum payment of $10.5 million, and 35 percent of sales from 2006 to 2011. On any new formulation, ViroPharma would pay an 8 percent royalty.

"We see the royalty as in fact a win-win clause," de Rosen said. "If it happens, it means the product sales are robust and doing well, and we're happy to share that upside with Lilly."

ViroPharma had been sorting through potentially lucrative compounds as a way to fund its development pipeline after making what de Rosen called "a few simple changes" at the company. Those included terminating its discovery team in January, which took staff numbers down from 135 employees to 35, and out-licensing rights to its pleconaril for the common cold to Schering-Plough Corp. (which had been the subject of a deal with Aventis Pharmaceuticals Inc. before the drug encountered difficulties with the FDA).

Officials wanted to focus more on drug development activities in viral diseases, including cytomegalovirus and hepatitis C, and get a drug like Vancocin to help fund their progress. In Phase II trials ViroPharma has maribavir, an antiviral compound for cytomegalovirus licensed a year ago from GlaxoSmithKline plc, of London. For hepatitis C, a drug partnered with Wyeth and tagged HCV-086 is in clinical proof-of-concept studies, and an investigational new drug application for an unnamed second-generation product is scheduled to be filed by the end of the year.

De Rosen said he was confident that the cash from Vancocin sales will be enough to fund operations through 2006 and take ViroPharma to a solid financial position.

"On the one hand this product is very well known," he said. "But there are quite a few doctors who don't know it as well as they should."