Assistant Managing Editor

A year and a half after partnering on a Duchenne's muscular dystrophy drug, AVI BioPharma Inc. and privately held Ercole Biotech Inc. are merging their operations.

The deal calls for Portland, Ore.-based AVI to issue up to $7.5 million in common stock, valued at $1.32 per share, and to assume $1.5 million in Ercole liabilities. Expected to close by March 21, the merger will create a combined firm with a product flow based on directed RNA alternative splicing that "few other companies will be able to rival," AVI's CEO Leslie Hudson said in a conference call.

The two firms have been working together since 2006 and in May signed a cross-licensing deal to team AVI's ESPRIT (Exon-Skipping Pre-RNA Interference Technology) with Ercole's Splice Switching Oligonucleotide approach for a compound in Duchenne's muscular dystrophy, a common form of muscular dystrophy affecting boys and young men and linked to abnormalities in the dystrophin gene. Terms of that deal included AVI issuing common shares to Ercole in exchange for shares of Ercole's Series A-2 preferred stock. (See BioWorld Today, May 3, 2007.)

Since then, the companies continued to advance AVI-4658, which began a proof-of-concept trial in December. That drug, designed to skip exon 51 of the dystrophin gene and treat DMD patients with certain types of mutations impairing dystrophin function, previously gained orphan drug designation in the U.S.

The partnership helped advance the DMD program and also gave both companies a chance to see what the other had to offer in terms of intellectual property in the area of directed alternative RNA splicing. AVI already had a morpholino chemistry platform, which is used to modify splicing of RNA, and direct delivery technology, so "it's not surprising the [Ercole's technology] really caught our attention," Hudson said.

That technology, alternative RNA splicing, refers to a therapeutic approach aimed at correcting genetic mutations in situ and potentially restoring protein function in diseases such as DMD. And, for its part, Ercole had been seeking ways to broaden its offering as well.

"We've been looking at how to build a preeminent RNA splicing program," said Clayton Duncan, chairman of the Research Triangle Park, N.C.-based firm.

"We figured out that we really needed complementary science" but were "leery about joining forces with someone without knowing them well. So we're very excited to become part of AVI," he said.

In addition to Ercole's technology, the deal also brings AVI rights to an early stage tumor necrosis factor (TNF) receptor 2 program. Hudson described that compound as an "Enbrel-like opportunity" that is "very compelling to us," referring to Amgen Inc.'s blockbuster TNF-alpha blocker that recorded sales of $3.2 billion in 2007.

The TNFR2 program was "a big value driver in this merger," Hudson said, adding that AVI hoped to move forward as soon as possible getting the drug into the clinic.

AVI's pipeline also includes several programs stemming from its Neugene antisense technology. The company has compounds for cardiovascular restenosis in stent and coronary artery bypass graft procedures in Phase II testing and has developed a preclinical antiviral portfolio targeting single-stranded RNA viruses, such as Marburg and Ebola.

The company, which reported a net loss of $4.1 million, or 7 cents per share, had about $25.1 million in cash and investments as of Dec. 31.

Shares of AVI (NASDAQ:AVII) closed at $1.38 Thursday, down 1 cent.