West Coast Editor

Continuing its march toward cash-positive status, ViroPharma Inc. is buying from Eli Lilly and Co. all U.S. rights to Vancocin products for $116 million, slightly more than half of which will be paid by way of a private debt offering, and company officials said revenue from the antibiotic is expected to fund all of its development activities from this point forward.

Exton, Pa.-based ViroPharma's stock (NASDAQ:VPHM) closed Tuesday at $2.21, up 13 cents.

Michel de Rosen, CEO of ViroPharma, acknowledged that Indianapolis-based Lilly sold $40 million of the product known as Vancocin Pulvules last year, but in 2004, sales - which have been growing by about 10 percent annually - are up significantly, totaling about $28 million already in the first half.

"This is a product that got no promotion for 11 years," he told BioWorld Today. "It saves lives, and when doctors need it they use it," de Rosen said, adding that some bidders were said to have offered Lilly more than $116 million.

Vancocin (vancomycin hydrochloride) is 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.

Colin Broom, ViroPharma's chief scientific officer, noted that about 90 percent of the C. difficile patients are treated with metronidazole (Flagyl, from Bridgewater, N.J.-based Aventis Pharmaceuticals Inc.), approved by the FDA in 1963. Concerns about the development of resistance to Vancocin have kept it in reserve for more severely affected patients.

"Those concerns are probably overestimated, quite frankly," he told BioWorld Today, and guidelines are about a decade old. "We don't have to increase the use of Vancocin very much to increase sales substantially." And the incidence of C. difficile-related conditions is growing, thanks in part to the aging population and the use of broad-spectrum antibiotics that can bring it on.

Under the terms of the deal, which includes royalty payments and is expected to close Nov. 18, ViroPharma gets rights to related Vancocin products, as well. Royalties will be 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.

First developed as an injectable, Vancocin hit the market in 1958, followed by the capsule in 1986. Lilly stopped manufacturing the injectable and liquid forms in 2002, and Vancocin lost its patent protection in 1988, though no generic versions are available.

"It's not an easy manufacturing process," Broom said. "There's a lot of technical know-how that goes into it." Plus, the drug is not orally absorbed, so it cannot simply be copied and tested in a bioequivalency study.

"You'd have to do a clinical study," Broom said. "We're now talking about a Phase III comparative study. I'm not saying [generic competition] will never occur, but we don't foresee it."

Josh Tarnoff, ViroPharma's vice president of commercial operations, said the company will be investigating ways to supplement the growth trend of Vancocin.

"One of the things we do plan to look at is retrospective databases [and see] if we can demonstrate that in certain subsets of the population, those who are compromised and frail, if they indeed respond better to Vancocin earlier in the treatment and might be able to get out of the hospital sooner," he said.

ViroPharma's up-front payment in the deal will consist of $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 senior notes and warrants will be automatically exchanged for $62.5 million of 6 percent senior secured convertible notes due October 2009, once stockholders approve issuing the convertible notes.

The company last made news in August when it out-licensed rights to pleconaril for the common cold to Schering-Plough Corp., of Kenilworth, N.J., which had been the subject of a deal with Aventis Pharmaceuticals until the drug met problems with the FDA. (See BioWorld Today, Aug. 24, 2004.)

A more jarring headline came during the first part of the year, when ViroPharma "did something quite unpleasant," de Rosen said, terminating its discovery team and going from 135 employees to 35. The idea was to focus more on drug development activities in viral diseases including cytomegalovirus and hepatitis. (See BioWorld Today, Jan. 21, 2004.)

"People saw that and we said, Stay tuned, we want to become commercial as soon as we find the right way to do it,'" he said, adding that ViroPharma sorted through "dozens and dozens" of opportunities before coming upon the perfect fit: Vancocin.

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