UPDATE 3-Ambrilia gets creditor protection after cash crunch

* Says cash in hand inadequate to meet obligations

* Says no restructuring plan yet

* Stock plunges as much as 71 percent (Adds court protection. In U.S. dollars unless noted)

By Susan Taylor

OTTAWA, July 31 (Reuters) - Cash-strapped Canadian biotech company Ambrilia Biopharma Inc AMB.TO said on Friday it has insufficient funds to meet current obligations and has obtained creditor protection in a Quebec court.

The bankruptcy caps a string of cost-cutting moves as Ambrilia scrambled to stay afloat.

Ambrilia once had a promising future, with a 2006 licensing deal for its HIV/AIDS drug with biotech heavyweight Merck & Co (MRK.N) that was worth up to $239 million.

But Merck put development on hold in July 2008, pending further evaluation and by December, Ambrilia was asking for arbitration, saying that Merck had not met its obligations.

In a settlement last month, Merck agreed to pay Ambrilia $2 million and royalty payments over 10 years.

Meanwhile, Ambrilia faced a shortage of cash.

The company, focused on treatments for viral diseases and cancer, said in September 2008 that it had less than 12 months worth of cash and was chopping 33 percent of its staff as it set a divestment strategy.

In recent months, the Montreal-based company sold its experimental prostate cancer drug and shut down a Phase III study on a treatment for a pituitary gland disorder. Earlier this week, both the chief executive and chief financial officer were fired.

Ambrilia's interim chief executive, Richard La Rue, was not immediately available for comment.

The company's plight highlights the challenges facing small Canadian health-care sector companies.

ACCESS TO CAPITAL DIFFICULT

"Our analysis... at the end of the year indicated that more than half of the companies in the health care sector had less than one year of cash," Paradigm Capital biotech analyst Claude Camire said.

"So, therefore, companies needed to be creative about finding solutions, because accessing the capital markets was getting more difficult. It is still the case."

There are about 180 companies in Canada's health care sector, ranging from lab services to medical technology, and just 10 percent of those have a market capitalization of more than C$200 million ($185 million), Camire said.

Fewer than 10 percent generate any revenues from their products and less than 5 percent are profitable and sustain operations through product sales, the analyst said.

"If they're not at the stage where they're close to generating revenue, it creates additional pressure to look for alternative sources of funds than just accessing the capital market," Camire said.

While market conditions have been favorable for merger and acquisition activity, Canada has seen few deals.

"It's been a challenge for Canadian companies because they usually try to merge based on science and I think it's been more difficult to marry the chemistry in many cases," Camire said.

Montreal-based Ambrilia and subsidiary Cellpep Pharma Inc do not yet have a restructuring plan, but said bankruptcy trustee Raymond Chabot Inc will help develop and file a reorganization, compromise, or arrangement with creditors and stakeholders.

At the close of the first quarter, Ambrilia's deficit stood at C$146 million and the company said it would likely breach debt covenants in the second quarter.

As of March 31, its cash had dwindled to C$3.24 million from C$8.33 million at the end of December.

Ambrilia shares fell as much as 71 percent to 3.5 Canadian cents in opening trade on the Toronto Stock Exchange on Friday before closing at 4.5 Canadian cents, a 62.5 percent decline. ($1=$1.08 Canadian) (Reporting by Susan Taylor, with additional reporting by Amit Kumar in Bangalore; editing by Peter Galloway)