British Biotech has agreed a merger with RiboTargets in what could be the first of several acquisitions.

The company is adding momentum to consolidation within the UK, recently kick-started by Cambridge Antibody Technology takeover bid for Oxford GlycoSciences.

Meanwhile, Vernalis one of the few UK biotech companies with a marketed product is now facing a financial crisis and could be the next to face consolidation.

British Biotech's proposed £26 million merger with privately-owned RiboTargets would create a company with a market capitalisation of £53 million and cash reserves of £44 million.

British Biotech was once the UK sector's leading light, but after years of R&D problems is in desperate need of a boost to its finances and pipeline.

Dr Peter Fellner, Chairman of British Biotech, said the merger was "The first step in repositioning British Biotech as a competitive commercial biotechnology company," which would create a platform for future consolidation. "Through multiple steps we will end up with a company that is compelling," he said.

The deal is anticipated to close by 23 April and will give British Biotech just over 50% ownership of the company.

Analysts remained uncertain of the new company prospects. "There is no question Peter Fellner is doing the right thing by moving [British Biotech] on, but the resulting company is not a very enticing investment opportunity at the moment," Sam Fazeli, analyst at Nomura, told the Financial Times. "The next deal will be much more difficult."

British Biotech acquisition plans place Dr Fellner at the centre of UK consolidation. He succeeded Dr Eliot Goldstein as Chairman in December with a remit to take the company through mergers and acquisitions. He is also Chief Executive of Celltech, which is attempting to trump CAT purchase of OGS.

Simon Sturge, Chief Executive of RiboTargets and proposed Chief Executive of the new company, said: "The combination of RiboTargets and British Biotech will create a biotechnology company with a substantial discovery and development expertise and a sound financial base. The merger creates a platform for growth which will deliver significant cost savings and position the merged group to participate in the further consolidation of the biotech sector."

The companies anticipated cost savings of around £6.4 million a year. British Biotech will also transfer 17 research staff to German biotech Evotec OAI, which will, in return, provide research services to the company.

RiboTargets, which specialises in structure-based drug discovery, was founded in 1997 from a spin out from the Medical Research Council laboratory of medical biology. Mr Sturge was previously head of Celltech's biologics division, where he first met Dr Fellner.

The next target could be Vernalis, whose stock price fell by 64% following Chief Executive Dr Robert Mansfield's admission that the company faces a cash flow crisis, and may have to ask shareholders for emergency funding.

Dr Mansfield has now quit the company, with Finance Director Peter Worrall taking control until a successor is found.

The company recorded pre-tax losses of £18.1 million last year compared with £11.2 million in 2001 and had just £9 million in net cash at the end of 2002. Revenues were significantly down at £5.9 million, compared with £13.8 million the year before. Cost reduction measures implemented last year are expected to lead to cost-savings of £3 million this year.

Vernalis joined the exclusive club of UK biotech companies with its own product on the market, migraine treatment frovatriptan, launched earlier this year in the US (as Frova) and Europe (as Migard).

But the costs of launching the drug will not begin to be re-couped until US net sales of the drug exceed $100 million in a twelve-month period, when marketing partners Elan will pay a $15 million milestone. This is not expected before 2004, leaving the company in dire need of cash, and vulnerable to a takeover.

Vernalis says it is now in discussions with shareholders about funding options, which include an equity offering, collaborations with partners and possible part sale of frovatriptan royalties.

pharmafocus@pharmafile.co.uk