South San Francisco-based Novacea announced its merger this week with Transcept Pharmaceuticals. 

The San Francisco Business Times reported on the terms of the deal as follows:

Under terms of the all-stock deal, Novacea . . . . will issue new shares of its common stock to Transcept stockholders, with Transcept stockholders owning 60 percent of the combined company. The newly issued shares will be based on an exchange ratio that will be determined before the transaction closes by early next year. . . . The name of the merged company, which will have cash of $88 million to $92 million, will be changed to Transcept Pharmaceuticals.

What prompted this deal?  According to the In Vivo Blog, it was the failure of Novacea’s new anti-cancer drug Asentar in trials, which left Novacea with a significant amount of cash on hand and no product.  In Vivo Blog reported:

Since November of 2007, when it stopped its pivotal trial of its anti-cancer drug Asentar because more people were dying on the drug than in the control arm, the writing was on the wall for the company. With something like $90 million in cash and marketable securities as of its last 10Q, Novacea was more valuable as a bank and a listing than as a company.

Will the deal prove to be a win-win for both Transcept and Novacea shareholders?

Well, that’s not entirely clear at the moment. 

According to the San Francisco Business Times, the deal is mutually beneficial to both sides, as it gives Novacea shareholders a "life raft" and provides Transcept a manner by which to go public and fund the final stages of its sleeping drug Intermezzo.  In contrast, the In Vivo Blog expresses some doubts on the outcome of the merger, stating as follows: 

 Whether that’s the right thing for investors is another question: analysis from our colleague Chris Morrison shows that the average share price decline for reverse-merged companies was about 40%, worse even than the declines from IPOs or the biotech index in general. . . .

Thus, while the deal may benefit Novacea shareholders in some ways, it may also have some negative consequences for shareholders on both sides of the transaction.  Only time will tell as to whether or not this deal proves to be a good one for both parties.