Proteon Therapeutics Inc.'s inventorying of options after the phase III failure with vonapanitase in chronic kidney disease (CKD) ended in a merger deal with Artara Therapeutics Inc., a startup that has hung its main hat on TARA-002, a therapy for lymphatic malformations (also called lymphangiomas) that has already gained validation by way of a similar product in Japan.

Waltham, Mass.-based Proteon said the agreement brings a $42.5 million financing led by a syndicate of health care investors, and if shareholders bless the arrangement, the combined firm will operate under Artara's name and trade on Nasdaq under the symbol TARA, with Artara CEO Jesse Shefferman at the helm of the new firm.

Proteon has been weighing its prospects since March, when the phase III Patency-2 study failed with vonapanitase in patients with CKD undergoing creation of a radiocephalic fistula for hemodialysis. That study did not meet its co-primary endpoints of fistula use for hemodialysis (p=0.328) and secondary patency (p=0.932). Quarterly results offered in May showed the firm had only $16.8 million in the bank.

Hopes had been high for Patency-2, even after Patency-1 failed. The latter's results showed that treatment with vonapanitase, or recombinant human elastase, was able to improve fistula use for dialysis (p=0.006) and secondary patency (p=0.048) in patients, and those secondary endpoints of Patency-1 became the primary endpoints of Patency-2. Full results from Patency-1, published in January, added encouragement insofar as they detailed the use of the fistula for dialysis at 90 days (38% for vonapanitase patients, 19% for placebo patients, p=0.042); and the median time to initial cannulations (81 days for vonapanitase patients, 114 days for placebo, p=0.381), an indicator for fistula maturation. "Taken together, we believe these results bode well" for Patency-2, Wainwright analyst Swayampakula Ramakanth wrote in a March 18 report. But it was not to be, as findings later in the month revealed.

Others lately have scored wins in CKD, including San Francisco-based Fibrogen Inc., partnered with Astellas Pharma Inc., of Tokyo, which this month gained regulatory approval of roxadustat (branded Evrenzo) in Japan for dialysis-dependent (DD) CKD. The clearance was "expected and largely accounted for in our model, with relatively high probability of success of 90%, and follows approvals in China for DD and pre-dialysis dependent CKD, and adds to our overall confidence that roxadustat is a de-risked commercial product," Leerink analyst Geoffrey Porges wrote in a report.

Proteon's deal with Artara, an enterprise that focuses on rare diseases in structural and connective tissues as well as rare hepatology and metabolic disorders, is an all-stock transaction approved by both boards. Artara's lead program is a follow-on biologic of OK-432 (picibanil), an inactivated Group A streptococcus bacterial preparation approved in Japan for the treatment of lymphangiomas along with several other specialty indications. TARA-002 has gained orphan drug status for lymphangiomas: rare, typically congenital, malformations of the lymphatic vasculature.

Lymphangiomas are benign vascular lesions made of cysts thought to occur due to abnormal development of the lymphatic system. The malformations are categorized into macrocystic, microcystic or combined depending on the size of the cysts; they are also classified in superficial lesions known as lymphangioma circumscriptum, and more deep-seated lesions (cavernous lymphangioma and cystic hygroma), according to the NIH. The cysts are present at birth, although they may be discovered later in life, and most commonly appear in the neck and axilla, but they also occur in the mouth, arm, mediastinum, lung, leg, abdomen and viscera. Some may appear as a tiny blue or red spot while others are massive and affect an entire arm or leg.

OK-432, for its part, has been tested in dozens of additional indications through investigator-sponsored studies around the world, the company said, and Artara plans to conduct preliminary probes into a number of them after pushing the lymphangiomas program forward. About a year ago, developer Chugai Pharmaceutical Co. Ltd., of Tokyo – which in 2009 had temporarily suspended the global development of OK-432, and started a humanitarian aid program to provide treatment free of charge to patients of lymphangioma at medical institutions in certain countries – decided to suspend further development. The move came "after careful examination of the various factors impacting the global development of OK-432, including an evaluation of changes in the business environment, revisions to the product life cycle, relevant pharmaceutical regulations, and stricter approval criteria," the company said, adding that "continuing to provide products that are no longer in global development does not align with the objective of each relevant country's 'compassionate use system.'"

A conference call with investors was taken up mostly by talk of Artara's pipeline. The firm's second asset, intravenous choline chloride, has turned up good results in a phase IIa study in intestinal failure associated liver disease. The treatment is a phospholipid substrate replacement therapy for choline-deficient patients with hepatic steatosis and cholestasis associated with dependence on long-term parenteral nutrition. It, too, has gained orphan drug status from the FDA.

Under the terms of the merger, on a pro-forma basis after closings of the deal (expected by the end of the year) and the financing, current Proteon stockholders will own about 10% of the combined company, though the actual allocation between the two groups of stockholders is subject to adjustment based on Proteon's net cash prior to the completion.

H.C. Wainwright & Co. is acting as financial advisor to Proteon, and Morgan, Lewis & Bockius LLP is serving as legal counsel to Proteon. Ladenburg Thalmann & Co. Inc. fills the financial advisor role for Artara, and Cooley LLP is counseling Artara in legal matters.

Shares of Proteon (NASDAQ:PRTO) closed Tuesday at 36 cents, up 2 cents.

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