ResVerlogix: A Biotech on the Block

Shares of the cholesterol-drug developer have soared on hopes it will be bought by Big Pharma—will any bite?

by Alex Halperin

During the recent BIO CEO & Investor Conference in New York , you couldn't throw a gene sequencer across the lobby of the Waldorf Astoria without hitting the chief executive of a company with strong science and no profits. It's little wonder that when confronted by the long, costly, and risky drug development process, some small startups are hoping to be acquired by a major player and cash in. Then they can worry about the tedious business of getting drugs approved. And Big Pharma may be warming to the idea.

An early acquisition is the plan for Donald McCaffrey, CEO of ResVerlogix, a Calgary-based pharmaceutical company. The startup's early-stage cholesterol drug has electrified investors even before clinical trials on humans have begun. A tiny company from a city better known for its energy sector, ResVerlogix might seem like an unlikely candidate for such an early acquisition. But investors have flocked to the shares, pushing up their value more than 400% in the last six months. Last week alone, shares rocketed up 22.9% to close at 27.40 (Canadian) on the Toronto Stock Exchange.

The belle of this ball is RVX-208, a small-molecule drug that has raised levels of the drug target Apolipoprotein A1 (Apo A1) in animals including monkeys and rodents. Apo A1 is a drug target that's a component of high-density lipoprotein (HDL), sometimes called "good cholesterol," which at high levels has been shown to reduce the risk of cardiovascular disease. ResVerlogix believes RVX-208 could reverse symptoms of atherosclerosis, a stiffening of the arteries that can lead to heart attacks and strokes.

McCaffrey says RVX-208 is at least five years from Food & Drug Administration approval and trials could take years longer. And they may not be successful.

Revenue Generator

So why are investors' hearts pounding now? The answer lies in where revenues are concentrated in the pharmaceutical industry. Cholesterol drugs generate some of the largest sales in the industry. Lipitor, Pfizer's (PFE) $12 billion cholesterol drug, is the world's best-selling pharmaceutical. But with its patent expiration looming in 2010, Pfizer needs to find new sources of revenue.

Looking to continue its cholesterol franchise, Pfizer was developing torcetrapib, a drug intended to raise HDL levels. But it had to halt late-stage trials Dec. 2 after more test subjects taking torcetrapib in combination with Lipitor died than those taking Lipitor alone. The announcement that Pfizer would stop the trials prompted the world's largest drugmaker's stock to plummet 10.6% Dec. 4, erasing more than $21 billion in market value in one day.

ResVerlogix aims to fill that space. A buyout for even a small fraction of $21 billion would be a pretty good payday for ResVerlogix, a company with 32 employees and a $537 million market cap, and of course, no sales or profits.

Hungry Pipelines

Indeed, thin pipelines at Big Pharmas have sent them hunting for earlier-stage companies. Successful midstage trials can raise a company's asking price, while a less proven outfit can sell for a relative song. On Oct. 30, Merck (MRK) announced plans to scoop up Sirna Therapeutics for more than $1 billion (see BusinessWeek.com, 10/31/06, "Merck's Big Play in RNA"). Sirna did not have a late-stage product candidate, but it works with RNA interference, a Nobel Prize-winning innovation. It's thought to have wide-ranging potential, but it has yet to translate into a marketed drug.

In December, the British drug giant GlaxoSmithKline (GSK) said it would acquire the preclinical-stage drug-discovery outfit Domantis for £230 million (then, $454 million). Domantis has programs in several areas including oncology and asthma. Since cholesterol drugs are among the world's best sellers, McCaffrey boasts that ResVerlogix could sell for considerably more.