CyThera Inc. and Arcos BioScience Inc., both privately held biotechnology companies focused on development of cell replacement therapies for the treatment of human degenerative diseases, signed a binding letter to merge.

The companies declined to specify the percentage of ownership CyThera would retain in the merged company, though CEO Lutz Giebel said the new entity would continue to be called CyThera. The merger is expected to be completed later this year.

CyThera and San Mateo, Calif.-based Arcos, a virtual company, collaborated for the past two years on research that led to the creation of nine human embryonic stem cell derivations.

“We felt that the inventions and the patent applications that were filed based on the work of [Arcos Chief Scientific Officer Jeanne Loring] were worthwhile to try to commercialize,” Giebel told BioWorld Today.

But Giebel said patents issued to the Wisconsin Research Alumni Foundation in Madison, Wis., made it “impossible for Arcos to raise money in the U.S.”

“At that point it became clear that you can’t really raise money for a stand-alone human embryonic stem cell company,” he added.

The Wisconsin Research Alumni Foundation told Congress it would provide its human embryonic stem cells to federally funded researchers at a low cost: about $5,000 per line. The organization and its subsidiary have five lines included in President George Bush’s 64 acceptable lines tabbed in August for federal research money. (See BioWorld Today, Nov. 1, 2001.)

Enter CyThera, a company not necessarily in the business of producing human embryonic stem cells, but rather in starting human embryonic stem cells to develop pancreatic islets for transplantation in diabetics. San Diego-based CyThera provided the sole source of economic support to Arcos for the past 18 months, with the understanding that the two companies would eventually merge. The companies have used joint facilities and equipment to carry out their collaborative research.

“We felt there was a good match between the two companies, so that CyThera can utilize the Arcos technology to produce and scale up human embryonic stem cells, but at the same time, keep the focus of the company in the differentiation of the islets,” Giebel said.

“As long as the patent in the U.S. stands, and as long as the University of Wisconsin doesn’t grant commercial licenses, you couldn’t finance a human embryonic stem cell company,” Giebel said. “The real value of all of this is in intellectual property that deals with how do you turn these human embryonic stem cells into various tissues for cell replacement therapy. I think that down the line, within a few years, human embryonic stem cells will be a commodity . . . At CyThera, we recognized this very early on, and that’s why our focus is just on the differentiation.”