CombinatoRx finds that reversing is the way forward

CombinatoRx, the Cambridge Massachusetts-based biotechnology firm that had been trading below cash, this week found a saviour in the form of private biotech Neuromed Pharmaceuticals, which will be reversing into the group to create a hopefully reinvigorated company with both cash and products.

In May, EP Vantage speculated that after CombinatoRx announced positive results for its phase II diabetes drug the struggling company might find itself the subject of a takeover deal from a very brave suitor (Diabetes trial results make life sweeter for CombinatoRx, May 27, 2009). While Neuromed may not have been the first company to spring to mind, the deal between the two is nicely symbiotic. Neuromed gains a listing and access to CombinatoRx’s drug combination technology, and in return CombinatoRx gets access to a company with experience of regulators, launching products and also striking good licensing deals.

Approval key to structure

Under the terms of the merger agreement CombinatoRx is set to issue 36 million new shares to Neuromed, giving Neuromed voting rights to approximately 50% of the new company, which will continue to be called CombinatoRx and still trade on the NASDAQ. The combination is expected to give them enough cash to take the company through until 2012.

What Neuromed brings to the party is Exalgo, a once-daily orally treatment for severe pain, which was recently licensed to Mallinckrodt, a subsidiary of Covidien, for an upfront fee of $15m, $16m towards development costs and up to $40m in milestone payments, as well as tiered royalties. If all goes to plan and the drug is approved then the newly formed company should get off to a good start in life.

But the merger has an interesting clause with the final ownership structure hinging on the eventual approval date of Exalgo, which has a PDUFA date of November 22. If the drug gets approval by the end of the this year then CombinatoRx's stake in the company falls to 30%, but if there is a delay in the approval process then CombinatoRx’s share increases on a sliding scale that could eventually give it 70%, if in the unlikely event Exalgo is not approved by December 2010.

The structure ensures that Neuromed, which was the original developer of the drug and is in effect bailing out CombinatoRx, does not hand over the upside to Exalgo approval cheaply. Earlier this year CombinatoRx was forced to cut about two thirds of its staff and slash R&D budgets following a string of clinical failures including psoriasis drug CRX-191 and eczema drug  CRX-197. 

Reversing the way forward

But while this reverse takeover structure is more interesting than many in the market, it reflects the growing number of companies which are turning to this transaction route, either to get their hands on failing companies’ cash or as a way of to achieve a relatively cheap and painless stock market listing.

An analysis by EP Vantage shows that, including CombinatoRx and Neuromed, there have already been eight reverse mergers this year, a figure that surpasses the number of similar transactions for the whole of 2008.

While the majority of deals have been done by smaller companies, which have experienced some sort of clinical set back, the biggest reverse merger that has happened to date was the $41.1bn tie up between Schering Plough and Merck & Co (Merck succumbs to urge to mega-merge, March 9, 2009).

The unconventional structure, which in reality is a takeover by Merck, leaves Schering-Plough as a listed entity in order to protect Schering’s key rheumatoid arthritis antibodies, Remicade and  golimumab, licensed from Johnson & Johnson’s biotech subsidiary Centocor, the rights to which would be jeopardised by any change of control.

For other companies the reverse merger has been a way for them and their products to survive. In February, GPC Biotech submerged itself in Agennix following the failure in late 2007 of its prostate cancer drug satraplatin, to create a new company focused on oncology (GPC hoping to reverse out of trouble, February 18, 2009).

Pharmexa faced the same choices as GPC after its lead product, GV1001, a pancreatic cancer vaccine, failed in late-stage clinical trials, leaving the group without the money to continue development of the rest of its earlier stage pipeline. Its rescuer came in the form of Affitech, a private company with growth ambitions that could not be fulfilled without a public listing (Affitech continues reverse merger trend, March 4, 2009).

With credit still hard to come by and depressed share prices meaning that equity fundraising is not an option for many smaller companies, the market is likely to see more of these kind of deals. CombinatoRx’s tie up with Neuromed is one more reverse takeover that will make 2009 a record year for such transactions.