BioWorld International Correspondent

Modex Therapeutics Ltd. and IsoTis NV agreed to a stock-based merger that would create what the two companies are billing as Europe's top biosurgery company, with a combined pro forma cash position of €92 million, a work force of 173 and a therapeutic focus on orthopedics and skin management.

Technically, the deal is structured as a takeover of IsoTis, of Bilthoven, the Netherlands, by Lausanne, Switzerland-based Modex, but that was largely determined by their plans to stay listed in Switzerland, rather than in the Netherlands, because of the greater concentration of listed health care firms on the Swiss Stock Exchange.

"It is fundamentally a merger without any doubt," said Modex CEO Jacques Essinger, who is scheduled to take the same position in the enlarged company, which will be called IsoTis. That entity would seek a full listing on the Swiss Stock Exchange, whereas Modex is quoted on the Nouveau Marché in Zurich.

Subject to Modex shareholder approval, IsoTis shareholders would be offered 1.4 shares of Modex stock for each share held and would hold around two-thirds of the equity of the enlarged company. The deal values the Dutch firm at approximately €44.5 million, although that is largely notional as both companies are currently valued below their respective cash holdings.

"The main driver for the valuation was cash," Essinger told BioWorld International. As of June 30, IsoTis had €59.7 million, while Modex held €32.5 million.

Modex Chief Operating Officer Jim Hogan will take the same role post-merger, while Pieter Wolters, currently chief financial officer and interim CEO at IsoTis, will become CFO and head of business development at the enlarged entity. IsoTis Chairman Aart Brouwer will also chair the combined company, which will be headquartered in Lausanne. The transaction is expected to close during December.

Essinger said the merger was motivated by the opportunity it offered both companies to improve their respective risk-reward ratios. "The merger by itself does not address the inherent problems the respective companies have," he said. But it will give them both a better chance of success as they will be able to prioritize the most promising development programs across both companies, while achieving synergies in areas such as regulatory functions, clinical development, business development and capital expenditure.

"Modex and IsoTis are taking a pragmatic approach to facing the financial market reality," he said. A major element of this will be to reduce immediately their combined annual cash burn from its current level of €27 million to €21 million by withdrawing funding from certain preclinical programs and seeking alternate development routes for them.

The overarching strategy is to pursue projects that offer near-term revenue opportunities. Both companies already have products on the market. IsoTis has launched CellActive Cartilage, a first-generation tissue-engineered cartilage product, as well as several small medical devices. From the beginning of next year, Modex will receive full reimbursement in Switzerland for its first product, EpiDex, a skin equivalent grown directly from adult stem and precursor cells derived from hair plucked from the patient in a nonsurgical procedure. It is used as an alternative to surgical skin grafts for treatment of chronic skin wounds. An investigational device exemption for U.S. clinical trials is in preparation but the company does not plan to enter the clinic in the U.S. without first securing a partner.

Modex also is developing an allogeneic product for treatment of acute and chronic wounds, which is due to enter a full Phase II trial in the fourth quarter. IsoTis is pioneering the development of autologous bone implants based on cultures of osteoprogenitor cells harvested from patients' own bone marrow.

The enlarged company also would seek late-stage in-licensing or acquisition opportunities, comprising either complementary products in orthopedics or skin management or "snap-on business" in other areas also based on biomaterials, tissue engineering or cell therapy.

"We are not going to be buying development programs," Essinger said.

The deal pushed Modex's share price up from CHF2.35 to CHF2.40 when the deal was announced Monday, while IsoTis fell back from EUR1.95 to EUR1.80 on the EuroNext in Amsterdam.