On July 1, 2009, CombinatoRx (CRXX) agreed to merge with Neuromed Pharmaceuticals, Inc., a privately-held biopharmaceutical company based in Canada.

As per the terms of the all-stock deal, CombinatoRx will issue approximately 36 million new shares to Neuromed shareholders.  Initially, each party will own about 50% of the merged entity. The ownership stake will then be adjusted on the basis of the approvability status of Exalgo, a product currently under U.S. FDA review.

Exalgo is a once-daily extended release formulation of hydromorphone, which has been developed for the treatment of chronic to severe pain. Neuromed recently sold U.S. rights to Exalgo to Mallinckrodt, a subsidiary of Covidien (COV).   

The U.S. opioid market represents a significant commercial opportunity. Although several opioid products (including generics) are available, the market is large and growing. Currently, no long-acting form of hydromorphone is available in the U.S. This should help Exalgo gain share once approved (FDA action date: November 22, 2009). Exalgo is already approved in Europe under the brand name Jurnista.

The merger deal makes sense for CombinatoRx. The company has been going through tough times ever since its lead pipeline candidate, Synavive, failed to meet the primary endpoint in a phase IIb study. CombinatoRx faced another setback when a second phase II candidate, CRx-197, delivered indeterminate results.

Since then, CombinatoRx has been working on saving resources by cutting down its workforce drastically. The company has also been on the lookout for out-licensing and partnership opportunities for its pipeline.

With this merger, CombinatoRx will be transforming itself from a mid-to-early stage company to a late-stage biotech company. Besides Exalgo, other pipeline candidates at the new company will include mid-stage programs like Synavive, CRx-401, Prednisporin and early-stage programs like the CombinatoRx B-cell malignancy program, CRx-601 for Parkinson’s disease and the Neuromed Ion channel inhibitor program. CombinatoRx also has an alliance with Novartis (NVS) for the discovery of novel anti-cancer combinations.

The combined company’s funds should be enough to finance operations into 2012. Potential milestone and royalty payments from Mallinckrodt on Exalgo should help boost the company’s financial position. We maintain our Hold rating on CombinatoRx with a price target of $1.00. The merger is scheduled to close in the fourth quarter of 2009.

Read the full analyst report on “CRXX”
Read the full analyst report on “COV”
Read the full analyst report on “NVS”
Zacks Investment Research

Last 5 posts by Zacks Market Commentaries

• CNP & FPL Ink Pipeline Deal - Analyst Blog - November 20th, 2009
• Buffett Borrows for Rail Acquisition - Analyst Blog - November 20th, 2009
• Stone Energy Outdoes Estimates - Analyst Blog - November 20th, 2009
• Smucker's Beats, Raises Guidance - Analyst Blog - November 20th, 2009
• GameStop Meets Expectations - Analyst Blog - November 20th, 2009