CombinatoRx to Combine with Neuromed, CEO Borisy Steps Down

Xconomy Boston — 

[Updated: 5 pm EST]

Big news this morning from CombinatoRx, the developer of treatments based on combinations of known drugs. The Cambridge, MA-based firm (NASDAQ:CRXX) has agreed to a merger with a privately held biotech firm called Neuromed Pharmaceuticals to beef up its product pipeline and grow its cash surplus enough to operate into 2012, according to a press release.

In merging with Vancouver-based Neuromed, CombinatoRx will gain rights to the Canadian firm’s anti-pain drug candidate Exalgo (an oral, extended-release version of the opioid drug hydromorphone.) The FDA is expected to say whether it will allow the pill to be marketed as a treatment for severe and chronic pain by November 22, according to the companies. On the management front, CombinatoRx’ co-founder and CEO Alexis Borisy is stepping down from his executive roles yet will serve as a scientific adviser to the combined company. Christopher Gallen, president and CEO of Neuromed, is slated to become chief executive of the firm. The company is expected to be called CombinatoRx after the merger.

As a result of the merger plan, CombinatoRx has laid off 20 workers or 36 percent of its staff, the company said this afternoon in a regulatory filing. The company expects a one-time charge of $2.6 million to $2.8 million to cover severance expenses and other costs related to the layoffs. [Editor’s note: this paragraph was added to the story to report information in an SEC filing that was made public after this story was initially published.]

The proposed structure of the merger is unusual in that it gives both firms a shot at ending up majority owners of the combined entity. The deal calls for CombinatoRx to issue 36 million shares of common stock to Neuromed shareholders, giving each company’s current shareholders a 50-percent stake in the merged firm. Yet the ownership ratio will change depending on when or if the FDA approves Neuromed’s pain pill. The terms would give Neuromed shareholders a majority stake in the combined company if the drug is approved before October 1, 2010, and CombinatoRx shareholders would become of the majority owners of the firm if the anti-pain drug is approved on or after October 1, 2010, or if it is not approved at all.

The merger is an example of companies combining forces to survive the harsh economic climate. CombinatoRx—which went through a restructuring after its lead drug candidate for osteoarthritis of the knees disappointed in mid-stage clinical trials late last year—is gaining a potential revenue stream from Neuromed’s pain pill. Neuromed recently sold marketing rights to the drug to Mallinckrodt, a subsidiary of Irish medical products giant Covidien, which has promised to pay up to $40 million to Neuromed upon approval of the drug as well as tiered royalties on sales of the product.

The two companies haven’t decided where the combined firm will be headquartered, a CombinatoRx spokeswoman tells Xconomy. The merger is expected to close in the fourth quarter of this year.

Borisy’s severance package includes a lump sum payment of $932,500, two years of free health coverage, and a separate payment of $150,000 as part of a bonus agreement, CombinatoRx said in a regulatory filing.