CombinatoRx in ‘creative’ merger with Canadian firm

In what was billed as a merger of equals, CombinatoRx, which trades on the Nasdaq exchange, agreed to combine with privately held Neuromed Pharmaceuticals Ltd. of Vancouver, British Columbia. The deal will result in the reduction of about 20 more jobs at CombinatoRx.

Ownership stakes in the new company will hinge on the outcome of a US Food and Drug Administration ruling, scheduled for November, on Neuromed’s application for a pain relieving drug called Exalgo. The merger is set to close by the end of the year.

“This is the period of time when one has to survive to succeed,’’ Robert Forrester, who took over yesterday as interim president and chief executive of CombinatoRx, said in an interview. “This merger allows us to do that in a very difficult capital market.’’

CombinatoRx shares shot up to 97 cents when the deal was disclosed, but fell back to close at 80 cents, unchanged for the day. The stock was trading at nearly $4 a share last September, but it tumbled below $1 a share the following month when the company released clinical data showing it had missed a key clinical target.

Forrester said the combined firm will be called CombinatoRx and be based in Cambridge, where the company cut about 80 jobs last year and now has about 55 employees. But when the deal is completed, Neuromed’s chief executive Christopher Gallen, who is based at its drug development site outside Philadelphia, will take over as president and chief executive of the merged company.

CombinatoRx chief executive Alexis Borisy stepped down from his role yesterday when the deal was unveiled, but he will continue to serve as a scientific adviser. Borisy will receive a severance payment of $932,500 and a bonus payment of $150,000, according to a regulatory filing yesterday. A separate filing said CombinatoRx will eliminate another 20 jobs in the merger.

Forrester, the interim president, said he would remain with the new company as chief operating officer when Gallen takes over. He said the company will retain operations in Cambridge, and in Vancouver, and Conshohocken, Pa., where Neuromed has 50 employees, but added that it may further reduce staff at all three sites as they consolidate. “We’ll have to look at the appropriate size for the company,’’ he said. “There could be some rationalization.’’

A key factor in the merger is the recent acquisition of Neuromed’s drug candidate Exalgo by Mallinockrodt Inc., a subsidiary of the Irish-based Covidien PLC, which has US offices in Mansfield. Mallinockrodt will pay Neuromed up to $70 million, which the new CombinatoRx will use to help finance drugs to treat cancer, Parkinson’s disease, pain, epilepsy, and other disorders.

Under the merger deal’s terms, which Forrester described as a “creative structure,’’ CombinatoRx shareowners will own 30 percent of the combined company if Exalgo wins FDA approval by Dec. 31; 40 percent if it wins approval between Jan. 1 and Sept. 30, 2010; 60 percent if it wins approval between Oct. 1, 2010 and Dec. 31, 2010; and 70 percent if the drug isn’t approved by the end of next year.

John L. Sullivan, research director at Leerink Swann LLC, a Boston investment banking firm specializing in healthcare and life sciences, said the structure of the deal is unconventional. “I would call it unusual but rational,’’ Sullivan said. “It reflects the reality that a very large portion of the value is created by this one drug candidate.’’

Robert Weisman can be reached at weisman@globe.com.