Brit Bio eyes Vernalis bid after chief is ousted

British Biotech, the former star of the UK biotech sector, is considering a bid for its rival Vernalis, whose shares plunged yesterday after the company admitted it had run out of money.

British Biotech unveiled its long-awaited £46m merger with RiboTargets – and immediately said it planned a second acquisition within six months.

Peter Fellner, the British Biotech chairman, said he had identified a dozen public and private UK drug developers as potential targets, while sources said Vernalis's share price collapse would have moved it up to the top of the list.

Robert Mansfield, the chief executive of Vernalis since 1992, quit yesterday with a £270,000 pay-off after being forced to admit that the company may have to tap shareholders for an emergency bail-out.

Vernalis is one of the few UK biotech companies to have successfully developed and launched a drug, in its case a migraine treatment called Frovatriptan. But the company said royalties and milestone payments related to Frovatriptan would not come in time to compensate for increasing overheads. Mr Mansfield had planned to raise money by selling rights to future Frovatriptan royalties, but he was vetoed by the chairman, George Kennedy.

One fund manager who sold his Vernalis stake in September said "the management has clearly been in denial for a while, and events have finally caught up with them". Vernalis shares lost almost two-thirds of their value yesterday, falling 67.5p to 37.5p.

Mr Fellner was brought in to head British Biotech in December with a brief to slash costs and use the company as a consolidation vehicle. Investors said Vernalis would be attractive because it has a royalty stream and is also trialling drugs for impotence, Parkinson's disease and obesity.

Mr Fellner's first deal was the takeover of RiboTargets, a private drug discovery company backed by the venture capitalists 3i, Apax Partners and JP Morgan Private Equity. They have accepted British Biotech shares that value RiboTargets below the level of its last fundraising – a rare acceptance of financial reality by venture capitalists often accused of holding up consolidation because biotech valuations have collapsed since 2000.

The group will cut its combined workforce from 177 to 110 within six months and sell British Biotech's old research laboratories in Oxford. British Biotech shares climbed 0.5p to 4.12p.

Mr Fellner said RiboTargets technology would yield at least one new drug a year that could be tested on humans, augmenting British Biotech's own meagre pipeline of four products.