Bone graft substitute maker IsoTis Inc. found a solution to its financial woes: an acquisition by medical device conglomerate Integra LifeSciences Holdings Corp.

Integra offered to pay IsoTis shareholders about $51 million, or $7.25 per share, a premium to Irvine, Calif.-based IsoTis's Monday closing price of $6.88 per share. The transaction would make IsoTis a wholly-owned subsidiary of Integra. Subject to certain conditions and approval by IsoTis's shareholders, the deal is expected to close in the fourth quarter.

Shares of IsoTis (NASDAQ:ISOT) rose 21 cents to close at $7.09 on Tuesday, while shares of Plainsboro, N.J.-based Integra (NASDAQ:IART) fell $2.70 to close at $47.94.

Gerard Carlozzi, Integra's executive vice president and chief operating officer, said in a conference call that the company had been "following the development of IsoTis for eight years, and the transaction structure was finally right for us to do a deal."

The deal comes none too soon for IsoTis, which in its second quarter earnings on Tuesday reported cash, equivalents and restricted cash of just $14.4 million as of June 30. Despite $10.4 million of product revenues during the quarter, net earnings were $37,025, or 1 cent per share.

In its earnings press release, IsoTis recommended that its shareholders approve the acquisition and cautioned that the company will not be able to finance operations past October 2007 without additional funding.

IsoTis tried to raise money earlier this year but was forced to amend its plans when the FDA delayed 510(k) clearance of its Accell product line, questioning whether the bone matrix allografts should be regulated as medical devices. The delay caused the company's shares to lose nearly half their value during a two-month slide. To fund operations, IsoTis secured a $20 million credit facility with Merrill Lynch Capital and Silicon Valley Bank. The terms of the loan require IsoTis to raise net proceeds of $18.6 million in new equity capital by the end of this month or pay Merrill Lynch $7.5 million, but IsoTis said it has been unable to obtain such financing on terms acceptable to the board of directors.

Integra President and CEO Stuart Essig said IsoTis's "biggest constraint has been money" but that the company has "achieved a lot with limited resources." That includes getting Accell back on track under FDA review as a medical device, with a decision expected in a matter of weeks. The 510(k) approval is a closing condition for the acquisition.

In addition to Accell, IsoTis sells two first-generation demineralized bone matrix products, DynaGraft II and OrthoBlast II, as well as a calcium phosphate bone void filler, an intramedullary occlusion product for use in cemented hip arthroplasty, and a bone marrow aspirate kit.

Carlozzi said Integra views IsoTis primarily as a technology acquisition, providing access to tissue regeneration technologies. But IsoTis also has an established sales organization for spine, reconstructive surgery and trauma products, which Integra will utilize to sell its own products. Combined, the companies will have one of the largest orthobiologics sales and service organizations in the U.S.

Concurrent with the signing of the merger agreement, Integra and IsoTis entered a strategic alliance through which Integra will sell IsoTis's DynaGraft II and OrthoBlast II products in the U.S. IsoTis will continue the ongoing elimination of its European facilities, maintaining research and manufacturing operations at its Irvine location.

Integra said it will incur pre-tax charges of $3 million to $5 million related to integrations associated with the acquisition, which it expects to generate annual pre-tax cost savings beginning in 2008 of approximately $9 million to $11 million compared to IsoTis's historical 2006 results.

The IsoTis acquisition is Integra's third this year; it also bought a suite of pain management products from Physician Industries Inc., fiber optic medical headlight systems from LXU Healthcare Inc. and the DenLite illuminated mirror product from Welch Allyn Inc. Last year, Integra bought an orthopedic implant and surgical device business from Kinetikos Medical Inc., surgical and dental hand instruments from Miltex Inc. and minimally invasive neurosurgery and radiation instruments from the Radionics Division of Tyco Healthcare Group LP.

"You should always expect another acquisition from us, it's just a matter of when," Essig said.

Integra also reported second-quarter earnings on Tuesday, with GAAP net income of $9.3 million, or 31 cents per diluted share. Revenues for the quarter were $134.8 million, and cash at June 30 was $120.8 million.