Verona Pharma attracts investment from Caligan, with potential for increased worth.

Company: Verona Pharma (VRNA)

Verona Pharma is a biopharmaceutical company that focuses on developing and commercializing therapies for respiratory diseases with unmet medical needs. Its product candidate, ensifentrine, is an inhaled medication that acts as both a bronchodilator and an anti-inflammatory agent in a single compound. Ensifentrine is currently in Phase 3 clinical trials for the treatment of chronic obstructive pulmonary disease, asthma, and cystic fibrosis. The company is developing ensifentrine in three formulations, including nebulizer, dry powder inhaler, and pressurized metered-dose inhaler. Verona Pharma was founded in 2005 and is headquartered in London.

Stock Market Value: ~$3.16B ($38.58 per share)

Activist: Caligan Partners LP

Ownership: n/a

Average Cost: n/a

Caligan Partners, founded by former Carlyle Group managing director David Johnson, invests in a focused portfolio of small and midcap life sciences companies using activism as a tool to unlock value. The firm targets companies with differentiated intellectual property and durable assets that have underperformed their peers and will take board seats when it believes it can add value. Caligan's approach to biopharma investing is unique, as it looks for first-in-class and best-in-class therapies, downside protection, good management teams, and opportunities where the firm can add value. Caligan works constructively with boards and management but is not afraid to engage in a proxy fight if necessary.

What's happening

Verona Pharma announced on Oct. 22 that Caligan had invested in the company.

Behind the scenes

Verona Pharma is a biopharmaceutical company that focuses on developing and commercializing therapies for respiratory diseases with unmet medical needs. Its current product candidate and potential value creator is ensifentrine, an inhaled and dual inhibitor that acts as both a bronchodilator and an anti-inflammatory agent. Ohtuvayre, the commercial name of ensifentrine, was recently approved by the FDA for maintenance treatment of chronic obstructive pulmonary disease (COPD) on June 26. Prior to this approval, the stock was trading in the mid-single digits and at essentially cash value. With the commercial launch of Ohtuvayre, Verona's first-ever marketed product, scheduled for the third quarter of 2024, the stock has soared. However, Caligan believes there is still a lot more value to be realized.

COPD, commonly referred to as "smoker's lung," is the third leading cause of death worldwide, affecting over 380 million patients globally. This condition poses a significant challenge not only for our healthcare systems but also for patients, who often face high healthcare costs associated with COPD management. In the U.S. alone, over $24 billion in healthcare costs are associated with COPD management. A successful drug like Ohtuvayre could not only increase the life expectancies of COPD patients but also lower costs for both healthcare providers and patients. Currently, there are over 8.6 million U.S. COPD patients, with over 4 million remaining symptomatic despite treatment from the current commercial therapies.

Verona is currently on track to fill a significant gap in the market with strong Phase III data showing a significant increase in lung function and a reduction in exacerbations with minimal side effects. This supporting data and the number of unsuccessfully treated patients in the current market suggest that Verona could achieve a 20% patient share for Ohtuvayre. If Verona can get 10% patient share, this could translate into $4.5 billion of revenue for Ohtuvayre. However, the story gets even more exciting with potential indication expansion for utilizing Ohtuvayre for non-cystic fibrosis bronchiectasis ("NCFB"), a progressive inflammatory disease that causes permanent lung damage with no current approved therapies and whose symptoms mimic COPD. With a greater than 1 million patient population, this could be a huge avenue for expansion for Ohtuvayre if it were to get approved as an NCFB treatment. The only other potential player in the NCFB market is biopharma peer Insmed's drug brensocatib. The drug had mediocre success, showing a 21% rate of reduction in exacerbations

Caligan's Verona position was announced last month, with the stock trading at $33.40 per share or a $2.5 billion enterprise value. If it achieves a 10% patient share for COPD and $4.5 billion of peak revenue, it will be trading at half of its peak revenue. Mergers and acquisitions for similar companies are typically done at 3-4 times peak revenue, which would give Verona a price of $115 per share. If Ohtuvayre successfully completes trials for NCFB and gains traction with patients like Insmed, Caligan believes that Verona Pharma could be worth 7 times its current valuation, or $218 per share.

Caligan, a healthcare-focused investor, has had a successful track record. In October 2023, Caligan announced an activist position in MorphoSys AG, a biopharma company with a Phase III drug set to commercialize in Q4 of 2023. At the time, the stock was trading at 26.08 euros a share. After successfully commercializing its star drug pelabresib, MorphoSys was sold to Novartis in February 2024 for 2.7 billion euros or 68 euros per share. Caligan learned from that experience that if a drug can improve the standard of care for patients, it will be valuable. In an industry with $140 billion coming off patent relatively soon, larger pharma companies need to do acquisitions, and those deals are usually in the $1 billion to $10 billion range. Both of those points bode very well for Verona, Caligan's largest position in its portfolio.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.