Assistant Managing Editor

(Editor's Note: This is the first of two articles on one of the tactics biotech companies are employing to access capital and the public markets - reverse mergers. The second article will appear in Monday's issue.)

With the initial public offering window effectively closed to biotechs - and the tightening of purse strings among wary venture investors - private companies with late-stage products continue to be forced into seeking exit alternatives in the form of mergers and acquisitions.

Some have found profitable acquisition opportunities, such as Rockville, Md.-based CoGenesys Inc., a 2006 spinout of Human Genome Sciences Inc., which agreed to be acquired in January by Jerusalem-based Teva Pharmaceutical Industries Ltd. for $400 million. But companies can't count on that kind of straight-out M&A deal, and many of those have ended up going the often less successful reverse merger route to add capital and gain access to the public markets.

Reverse mergers definitely are becoming more common, Randy Guggenheimer, managing director at Burrill & Co. in New York, said during a panel session at the Georgia Life Sciences Summit meeting in Atlanta. "A lot of the companies we've talked to are thinking more about that than IPOs," he added.

The latest reverse merger involves privately held ARCA Biopharma Inc. agreeing to combine its operations with Nuvelo Inc., a publicly traded firm in San Carlos, Calif., that had $76 million in cash as of June 30 but no near-term products following the failure of its clot-busting candidate alfimeprase earlier this year. The deal, expected to close late this year or early next year, brings to the forefront ARCA's heart failure drug, bucindolol, which is pending FDA review after a new drug application was accepted this week.

Had ARCA reached that NDA milestone only a few years ago, the company probably would have sought an IPO, and likely would have succeeded going that route - though, undoubtedly bringing in less money than hoped, as the case has been for nearly all firms that have priced initial offerings over the past few years.

'Strategic Synergy' in ARCA, Nuvelo Deal

Uniting with Nuvelo brings "financial resources, the people and the pipeline for building a leading cardiovascular company," ARCA President and CEO Richard Brewer said during a conference call.

"We're all aware that a number of transactions of this type have had trouble sustaining or gaining value longer term," he added. But, in this case, "a strategic synergy exists" and that's something that "hasn't necessarily permeated" some of the other reverse merger deals.

Under the terms, Nuvelo will issue new shares of its common stock to ARCA stockholders, with ARCA stockholders expected to own, or have the right to own, 67 percent of the merged company. Nuvelo stockholders would retain the remaining 33 percent.

The combined company would be renamed ARCA Biopharma - with a new ticker on Nasdaq - and would be headed by Brewer and the rest of ARCA's executive staff, with some board positions retained by Nuvelo executives, including Chairman and CEO Ted Love. Its pipeline would lead with ARCA's bucindolol (proposed trade name Gencaro), which is expected to gain approval in mid-2009 as a genetically targeted beta-blocker and vasodilating agent for heart failure.

ARCA licensed commercial rights to bucindolol from CPEC LLC, a joint venture between Incara Pharmaceuticals Corp. (now Aeolus Pharmaceuticals Inc.) and Indevus Pharmaceuticals Inc. Incara had discontinued development of the drug in heart failure after a failed Phase III study, but scientists at ARCA and the University of Colorado re-examined the data and discovered a genetic marker correlating to patients who fail to respond to therapy. If approved, bucindolol is expected to be marketed with a companion genetic test.

The deal "allows us to transform ourselves into a late-stage company," said Nuvelo's Love.

Shares of Nuvelo (NASDAQ:NUVO) gained 2 cents Thursday to close at 42 cents.

The firm's stock had been trading above $2 before it decided to terminate its alfimeprase program in March, when even a higher dosage of the direct-acting fibrinolytic drug failed to demonstrate competitive improvement in restored catheter function compared to standard of care in a Phase II trial. The company cut 40 jobs after discontinuing that program. (See BioWorld Today, March 19, 2008.)

Without alfimeprase, the firm retained only an early stage pipeline. That includes a promising aptamer candidate, NU172, which is designed to directly inhibit thrombin's ability to stimulate blood clot formation during medical procedures, while offering a better safety profile than current standard-of-care treatments heparin and protamine.

In a recently completed Phase Ib proof-of-concept study, results showed that the compound rapidly produced and maintained anticoagulation with a rapid return toward baseline after the infusion ended.

Under the newly combined firm, NU172 is targeted to be the long-term growth driver.

Following the transaction's close, the combined company's cash is expected to be sufficient to fund operations at least through 2009, including a potential FDA advisory meeting in the first half of next year to review the bucindolol application.

ARCA, founded in 2002, last raised money in a $18 million Series B round in June 2007.

(Coming Monday: When a reverse merger is the right move.)