Valentis Inc., which began talking of sale or merger options three months ago following negative data from a Phase IIb study of its lead candidate in peripheral arterial disease, has agreed to merge with neighboring firm Urigen N.A.

A definitive agreement was unanimously approved by both boards and is expected to close in the first quarter following a shareholder vote. At that time, publicly held Valentis would incorporate the focus of Urigen, a specialty pharmaceutical company that develops therapies for urological disorders.

Both firms are located in Burlingame, Calif., "literally only three blocks away" from each other, said Joe Markey, vice president of finance and administration for Valentis.

"We looked at a lot of different candidates," he told BioWorld Today. Urigen was "the best match, and they turned out to be right in the same neighborhood."

Valentis' shares (NASDAQ:VLTS) gained 9 cents Friday, or 25.7 percent, to close at 44 cents, the best positive investor reaction the firm has seen since mid-July, when results of a Phase IIb study of VLTS 934 showed that the drug failed to demonstrate statistical significance against placebo in PAD patients. Valentis' stock plunged nearly 80 percent that day, losing $2.63 to close at 69 cents. (See BioWorld Today, July 12, 2006.)

Valentis' president and CEO Benjamin McGraw told investors at that time that the company was considering the sale or merger of its business. Since then, the company agreed to sell certain biomanufacturing rights and intellectual property to Keele, UK-based Cobra Biologics Ltd., and cut 60 percent of its staff. (See BioWorld Today, Aug. 9, 2006.)

"It's one thing to have a plan," Markey said, "but we've executed it."

The next step will be putting out a proxy statement, and then "we expect to get a positive shareholder vote," he added.

Under the terms, holders of Urigen stock will receive shares of Valentis stock so that they end up owning two-thirds of Valentis' outstanding shares. The agreement also calls for Urigen shareholders to receive additional shares in the event that Valentis has less than $1 million in cash or net worth at the time of the closing.

If Valentis has less than $800,000 at closing, Urigen has the option to terminate the merger deal.

As of June 30, the company had a cash position of $4.3 million.

Though much still remains to be worked out, Urigen would, upon completion of the merger, become a wholly owned subsidiary of corporate shell Valentis and would assume Valentis' executive and management positions and most of its board members. It's also likely that some of Valentis' employees will join Urigen's operations, Markey said.

The combined company would continue work on Urigen's product pipeline, which includes its lead product, U101, an intravesical therapy for chronic pelvic pain (CPP). That product is in an ongoing Phase IIb study, with results expected during the fourth quarter.

Urigen also is developing U102, aimed at the symptoms of CPP secondary to pelvic irradiation, as well as U103 for dyspareunia, U301 for acute urethral discomfort and U302 for urethritis.

Astralis Seeking Possible Sale

As another firm that has struggled in the wake of a Phase II miss, Astralis Ltd. said it is unable to continue funding drug development and is considering strategic alternatives, including a sale of its assets.

In its second quarter earnings, released in August, the Fairfield, N.J.-based firm concluded that its liabilities exceeded its reserves, and that without an immediate cash infusion would be forced to shut down operations. The company reported a second-quarter net loss of $403,769, and had a cash balance totaling $55,637 as of June 30.

Astralis said it has been unable to secure sufficient financing during the last six months to sustain its drug development work.

Its last financing occurred in August 2005, when the company pulled in $2 million in private funding to develop a new formulation of its psoriasis product Psoraxine, which in March 2005 missed its primary endpoint in a Phase II trial. (See BioWorld Today, March 15, 2005.)

Astralis' shares (OTC BB:ASTR) fell 1 cent Friday to close at 3 cents.