LONDON - Peptide Therapeutics Group plc is spinning out its drug discovery activities as a separate company to cut costs and avoid the need for further equity funding.

The company has #22 million cash (US$36.3 million) and is spending #1.1 million net per month. CEO John Brown said the move and other cost savings will cut the burn rate to #700,000 per month. "As well as reducing Peptide's ongoing cash burn, the proposed spin-out should also unlock the potential value within the drug discovery activities," he said.

The CEO of the new company will be Nick Higgins, who is currently commercial director of Peptide, which is based in Cambridge. He told BioWorld International, "We need another month to get the business plan finalized and then we will look for funding. The aim is to raise between #10 and #12 million, which will be sufficient to last for three years."

The company will have 33 employees, and plans to operate from Peptide's premises for its first three years. Sixteen employees who work on the drug discovery side of the business will be laid off, leaving Peptide with a staff of 40.

While this is a route to raising further funding without diluting the interests of the existing shareholders, it will reduce Peptide's assets. "The problem is that in the eyes of the City [analysts] these assets have no value at the moment," Higgins said. "We have something which is burning cash and not generating any perceived value, so the share price is not coming up."

Peptide will retain a minority interest in the new entity and Higgins said if shareholder reaction to the plan was negative, the company would consider writing in a buy-back option.

The as-yet unnamed company will consist of Peptide's existing drug discovery programs, technologies and intellectual property. These include projects to develop protease inhibitors; the RAPiD protease inhibitor drug discovery technology, for which current collaborators include Novartis and Eli Lilly; and CASKaID, a protein kinase inhibitor technology. Peptide may retain the right to license back products.

"This will be a business focused on rational drug design," Higgins said. "We will be taking targets and delivering robust leads for others to take to the clinic."

The spin-out will allow Peptide to concentrate on its vaccines programs, seven of which are in clinical trials. The company says that once the split is complete it will change its name to reflect the concentration on vaccines.

Peptide aims to further bolster its cash position by selling a manufacturing facility it acquired when it bought the U.S. company, OraVax Inc. The facility in Canton, Mass., has never been used, though it is fully fitted and ready for use.

The company also said it amended its marketing agreement with Medeva plc for the yellow fever vaccine, Arilvax, to give Peptide 100 percent rights in the U.S. Arilvax is about to enter a pivotal Phase III trial, and Peptide expects to file a biologics license application in the U.S. in the second quarter of 2000. Medeva was to have funded the trial and license application, but under the new agreement they will be funded by Peptide. The vaccine, which is already on the market in the UK, will be manufactured by Medeva.

Medeva has declined to take up its option with Peptide on a single-dose oral typhoid vaccine that completed Phase II in January 1999. Peptide is looking for a new partner for that product and for its vaccine to prevent hay fever caused by rye grass allergy. SmithKline Beecham plc has not taken up its option to license the product, which was tested in a 70-patient, double-blind, randomized, placebo-controlled Phase II study. The grass pollen levels have been exceptionally high in the UK this year and Peptide said this should enable a clear clinical effect of the tolerizing peptide.