Shares in small-cap pharma stock Vernalis (LSE: VER) were sliding c.15% on Tuesday after the company reported worse than expected revenue figures for the half-year to December.
Overall group sales for the period fell to £5.6m, down from £6.1m. This sales decline was eclipsed by a near 30% increase in sales and marketing costs to a £13.3m, from £10.8m in the year-ago period.
As a result, the company’s operating loss increased from £10.9m to £16.9m. The cost of sales for the period was only £1m, giving a gross margin of 82% before sales costs, R&D, and admin expenditure. Including £4.8m of finance income and an income tax credit of £1.1m, Vernalis’ net loss for the period ending 31 December 2016 was £11m, £800,000 worse than last year’s loss of £10.2m. At the end of the period, the company had £74m in the bank.
Look to the pipeline
Even thought Vernalis’ headline loss looks disappointing like all pharmaceutical companies, it’s hard to value the business without taking into account its treatment pipeline and products already on the market.
The company’s current leading product is Frovatripan, a migraine headache treatment. Unfortunately, royalties from the sale of this product are on the decline as cheaper generic alternatives are edging their way into the market. Royalties from Frovatripan decreased by 7% during the half year to December 31. For the half, royalties from this treatment accounted for just under a third of overall group sales. One of the treatments management hopes will replace Frovatripan is Tuzistra XR, a flu drug.
Increased promotion of this treatment is entirely responsible for the higher marketing costs booked by Vernalis during the last six months of 2016. The increased investment appears to be paying off with prescriptions for the drug growing sixfold to 11,586 year-on-year. However, reported revenues only increased by £200,000 to £0.8m, despite spending an extra £2.5m on marketing.
Alongside these two key treatments. Vernalis is currently participating in five research collaborations and recently received a one-off payment of $3m from partner Corvus as a treatment collaboration reached a key milestone.
Still, despite the company’s pipeline, City analysts don’t expect Vernalis to report a profit anytime soon.
Hefty losses
Over the next 12 months, the progress of the business’s new treatments through its product pipeline will be in the spotlight and analysts will be looking to see how the roll out of Tuzistra goes. Revenue is expected to hit £16m for the year ending 30 June 2017 before rising to £40m for the year after. The company is projected to report a loss for the next few years.
The one redeeming quality is Vernalis’ cash balance of £74m, but with losses projected to come in at -£38m for the 2017 fiscal year and -£23m for the following year, this cash cushion might not last for long.
Overall, it does not look as if Vernalis could become the next Shire.