Inhibitex Inc. and FermaVir Pharmaceuticals Inc. plan to merge in a union that pairs one company's cash position with the emerging pipeline in antiviral agents from the other.

The firms entered a definitive agreement under which Inhibitex would issue about $19 million in stock to acquire New York-based FermaVir. Inhibitex, of Alpharetta, Ga., would own about 73 percent of the combined company.

It is offering 0.55 Inhibitex shares, or about 11.44 million shares in total, for each of the 20.8 million outstanding FermaVir shares. The merger of the Inhibitex, which focuses on antibiotics, with FermaVir, which is developing antivirals, is expected to close by the end of July.

Inhibitex's stock (NASDAQ:INHX) fell 1 cent Tuesday to close at $1.65. FermaVir's shares (OTC BB:FMVR) suffered a late drop, falling 27 cents, or 16.9 percent, to close at $1.33. Inhibitex had about 30.3 million shares outstanding as of Dec. 31.

Gene Mack, a biotechnology analyst at HSBC Global Research, said the deal makes good on promises Inhibitex made about a year ago when its lead product, Veronate, failed in a Phase III trial against infections, leaving bare its clinical-stage pipeline. Inhibitex said then it planned to conserve money while looking for collaborative or merger opportunities that would bring in product candidates.

"They needed a development project with a significant upside, and this goes a long way toward fulfilling that goal," Mack told BioWorld Today. "It also didn't eat up their capital, which means they can remain opportunistic with respect to additional programs.

"I think this was a good choice for the price they paid," said Mack, who follows Inhibitex for HSBC. "Inhibitex is getting the company for a discount to its current market value. This gives them access to a drug that could generate in the neighborhood of $400 million for no up-front cash outlay. There is some dilution, but that's to be expected."

What Inhibitex would get, specifically, is the nucleoside analogue FV-100, a compound against herpes zoster infections that is expected to enter Phase I development in the third quarter; and a series of preclinical compounds against human cytomegalovirus, from which a lead candidate is expected to be chosen by the end of the year.

FermaVir, a virtually operated company, reported that on Jan. 31 it was down to about $504,000 in cash. It was founded in December 2004 and went public in August 2005 through a reverse merger with a shell company. It has only three full-time employees, while contracting out research activities.

Inhibitex, meanwhile, reported about $61.4 million in cash and equivalents as of Dec. 31. It has about 30 employees, down from 83 before the Veronate trial failure.

Geoffrey Henson, CEO of FermaVir, told BioWorld Today "there were a couple of good reasons why we wanted to do the deal. No. 1, Inhibitex has a great deal of cash compared to what we have, and the ability to help us use that to develop our products. That's a great benefit to our shareholders. Inhibitex also has a good development team in the anti-infectives area, with people who understand development in the antiviral area."

FermaVir about a year ago was planning to move its CF-1743 compound into clinical development. But tests at the time showed a prodrug, FV-100, was a better clinical candidate due to improved bioavailability and other advantages, Henson said.

The nucleoside analogue in preclinical tests demonstrated 10,000 times more potency than the common antiviral agent acyclovir, Henson said, and also gets into the cells much more quickly - in as few as a couple of minutes vs. more than 24 hours for acyclovir.

Unlike acyclovir, however - and follow-on compounds from its owner, GlaxoSmithKline plc - FV-100 has not shown activity against other herpes-related viruses.

"It has amazing selectivity against varicella zoster infections, the zoster thymidine kinase," Henson said.

Herpes zoster infection, also known as shingles, results from the reactivation of the varicella zoster virus, which can lead to outbreaks of sometimes painful rashes or blisters, as well as post-herpetic neuralgia in some patients. FermaVir said FV-100 not only can inhibit viral replication, but also has the potential to reduce all shingles-related symptoms. The companies estimated there were about 2.5 million cases of shingles each year in the U.S., Europe and Japan.

FermaVir's program in cytomegalovirus, a separate member of the herpes virus group, includes both nucleoside analogues and non-nucleoside analogues.

Russell Plumb, president and CEO of Inhibitex, told BioWorld Today that the deal is "a very meaningful first step in our shift of focus to antivirals from what had been anti-bacterials. It brings to use two very exciting programs and a lot of capabilities. We view this as very synergistic, complementary to what we are doing."

Plumb said Inhibitex is in discussions to add one or two more antiviral programs to its portfolio.

"I think this was the right kind of transaction for Inhibitex to do," Mack said. He said the deal made sense, too, for FermaVir, which needed cash to move its programs forward. Acquiring a later-stage compound or merging with a company with a broader pipeline would have meant Inhibitex would either have to part with some of its cash, or do a much more dilutive deal.

"My sense," Mack said, "is they probably didn't find good value at that [larger] price point. It is difficult right now for any company to find value when hunting for clinical- stage compounds. I think it's hard not to overpay. Inhibitex has been able to engineer a deal that allows them to stay very opportunistic with respect to additional compound partnership opportunities, while also delivering on a promise made to shareholders a year ago that they would work toward putting together a pipeline."

The combined company would be based at Inhibitex's headquarters near Atlanta. Henson would join Inhibitex as vice president of drug development.

As part of the deal, Inhibitex also would assume about 13.9 million FermaVir outstanding warrants and options, which would translate into about 7.6 million shares at the same 0.55 exchange ratio. Of the 13.9 million total, about 2.4 million are options at or out of the money, Plumb said. Of the 11.5 million warrants, the majority are in the money, or exercisable at a discount to the current stock price.

Plumb said if converted in full, FermaVir's stake would increase to about 35 percent, while also bringing in nearly $8 million in proceeds.

Inhibitex has been developing products based on its MSCRAMM, or microbial surface components recognizing adhesive matrix molecules, protein platform.

It suffered a serious setback a year ago when the antibody-based agent Veronate failed to meet its primary endpoint in a 2,017-patient Phase III trial for preventing hospital-associated Staphylococcus aureus infections in premature infants. Its shares that day fell by two-thirds, dropping $4.79 to close at $2.47. (See BioWorld Today, April 4, 2006.)

Inhibitex also had Aurexis, another MSCAMM-based anti-infective, in Phase II trials, where development stalled. Plumb said the company decided after the Veronate failure not to move additional MSCRAMM-based agents forward independently.

Inhibitex entered a deal in January granting 3M Health Care, of St. Paul, Minn., exclusive worldwide rights to use MSCRAMM protein platform for development of certain diagnostic products. Inhibitex was entitled to license fees, research and development support, milestones and royalties. It also licensed out technology to Wyeth, of Madison, N.J., for development of vaccines against S. aureus infections, and has a preclinical deal with Dyax Corp. for development of an antibody against enterococcus infections.

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