Wall Street wasn't jumping up and down, but officials at Akebia Therapeutics Inc. and Keryx Biopharmaceuticals Inc. celebrated the synergy between the two firms in chronic kidney disease (CKD) as they agreed to an all-stock merger that would create a new entity under Akebia's name.

The combo firm would have an implied pro forma equity value of about $1.3 billion, assuming full conversion of Keryx's outstanding convertible notes, based on the Wednesday closing prices of both companies. Shares of Akebia (NASDAQ:AKBA) closed Thursday at $9.36, down $1.02, or 9.8 percent, and Keryx (NASDAQ:KERX) stock ended at $3.63, down 85 cents, or 19 percent. Jefferies analyst Michael Yee, who covers CKD competitor Fibrogen Inc., of San Francisco, called the merger "odd, given that Akebia is currently enrolling its phase III anemia treatment program" and has delayed the phase III data until 2020, "putting the merged company [one to two] years behind Fibrogen, in our view," he wrote in a report.

Under the terms, Boston-based Keryx's shareholders will receive 0.37433 common shares of Cambridge, Mass.-based Akebia for each share of Keryx they own. The exchange results in implied equity ownership in the new entity of 49.4 percent for Akebia shareholders and 50.6 percent for those owning Keryx stock, on a fully diluted basis. Akebia CEO John Butler will serve in the same role in the new firm, with Keryx to appoint the chairperson of the board. Jason Amello, Akebia's chief financial officer, will serve in the same capacity in the merger-made company.

The Baupost Group LLC, which owns about 21.4 percent of outstanding Keryx common shares prior to any conversion of its convertible notes, has agreed to convert the notes into shares before the deal closes, and has entered a voting agreement in support of the transaction. Muneer Satter, chairperson of Akebia's board, owns about 5.3 percent of that company's outstanding stock, and has agreed to support the deal, too.

Piper Jaffray analyst Christopher Raymond, who covers Akebia, conceded that Keryx was not his firm's first choice for a pairing. "While we understand mergers of equals – especially among smaller, development-stage biotechs – are rarely well received, and this announcement specifically is complicated by the coincident disclosure of a delay to vadadustat's data, we think the combination makes good strategic sense long term. As such, we're urging investors to exercise patience, despite today's negative reaction." The Keryx brand "ain't Tiffany's," he acknowledged in a report. Primary asset Auryxia (ferric citrate) bears a newly expanded label to treat nondialysis iron-deficiency anemia and hyperphosphatemia in dialysis, but "plainly said, this drug has had a bit of a checkered past, as Keryx has cycled through a couple of management teams that have tried to maximize the drug's value proposition. However, script trends have bent decently upward in recent quarters, with the drug beating expectations the last two quarters," Raymond noted.

Akebia's vadadustat is the phase III candidate, an oral hypoxia-inducible factor prolyl hydroxylase inhibitor (HIF-PHI) with the potential to advance the treatment of patients with anemia due to CKD, many of whom are now getting injected erythropoietin-stimulating agents. The companies hope they can, with Auryxia and vadadustat (if it's cleared by U.S. regulators) bring about all-oral treatment for patients with CKD anemia. Dreaming bigger, the new Akebia could offer options to patients across all stages of CKD, including nondialysis-dependent and dialysis-dependent patients.

Jefferies' Yee said that, "from the vantage point of our coverage of Fibrogen, a merger in the middle of phase III development seems odd (we note also that the CEO of Akebia was formerly chairman of the board of the other company), and in our view speaks to Fibrogen's market leadership position and Akebia's market disadvantage. The attempt to make a more broadly focused renal company may aim to bridge some of that gap," he allowed, but among Fibrogen's partners are such heavy hitters as London-based Astrazeneca plc and Astellas Pharma Inc., of Tokyo, both ready to market HIF-PHI candidate roxadustat if the phase III data prove worthy and the FDA gives its blessing, possibly as soon as 2020. Also in play is London-based Glaxosmithkline plc (GSK), which is conducting a phase III program testing its HIF prospect, daprodustat.

A river runs through it

"This is one of those situations where the companies obviously knew each other well," CEO Butler said during a conference call with investors. The cultures and personnel seemed to fit, with "overlapping people who were at Genzyme or other companies together. It was really last December that [then-Keryx CEO] Greg Madison and I first had a conversation about taking a look."

Fibrogen's candidate is "about a year, I think, ahead of us, based on the timelines they've given," while "GSK's product is a bit behind. Some of the differentiation is really in the development program[s]," he added, pointing to roxadustat and citing "some differences in the way [Fibrogen has] designed their nondialysis program, particularly where they are doing a placebo control. They also have shown that they have some drug-drug interactions with statins that we haven't seen with vadadustat."

In any case, in the $7 billion market, "multiple players will have the opportunity to be successful," he said, with room to grow the market even further. "Let's see how the phase III data play out."

With the merger, the main priorities are keeping Auryxia sales up and moving the phase III effort with vadadustat, Butler said. "The two organizations will continue to drive those pieces separately" at their posts "across the river from each other. Integration is always a lot of work, there's no question about that. But in this case, there's so much familiarity between the employee bases, and so much distinction in what each is doing and bringing, that we feel the integration process will be pretty straightforward."

The merger is expected to close by the end of this year, subject to clearance by antitrust authorities and approval by the shareholders of both companies. Evercore Group LLC and J.P. Morgan Securities LLC are serving as financial advisors to Akebia, with Latham & Watkins LLP providing legal advice. MTS Health Partners LP and Perella Weinberg Partners are acting as financial advisors to Keryx, with Goodwin Procter LLP signed up as the legal team.