Ligand Pharmaceuticals is to snap up fellow US firm Pharmacopeia in a deal valued up to $70 million.

Under the terms of the stock-for-stock agreement, Pharmacopeia shareholders will be entitled to a ‘contingent value right’ worth $15 million, while Ligand will issue about 17.5 million shares, or 0.58 shares for each outstanding share of Pharmacopeia. As a result, current Ligand shareholders would own 84% of the combined company.

Given that Ligand ended trading last night at $3.12, the deal implies a price of $1.81 per share for Pharmacopeia, or an equity value $55 million and a premium over its closing price last night of 52%. The deal is expected to close in the first quarter of 2009.

Explaining the rationale behind the merger, Ligand chief executive John Higgins said that “our respective drug discovery platforms are a great marriage of biology and chemistry resources”. The acquisition of Pharmacopeia “will complement and accelerate our product development programmes, strengthen our research capability and increase our potential royalty streams.”

Ligand noted that the merged entity will have “numerous deals” with nine pharmaceutical companies and 15 R&D programmes at various stages of development. More than 20 different therapeutic areas are being pursued “including some of the largest untapped medical markets” such as muscle wasting, chronic obstructive pulmonary disease, thrombocytopenia and asthma.

The firm could pocket over $400 million in potential R&D and milestone payments from existing deals and at time of closing it will have around $90 million in cash. The burn rate next year is expected to be $20 million and the enlarged group will have more than $350 million in potential net operating loss carry-forwards, which should reduce tax liability.

Mr Higgins said that “we are impressed with the quality of Pharmacopeia’s drug partnerships,” with the likes of Schering-Plough, Bristol-Myers Squibb, Wyeth, GlaxoSmithKline, Celgene and Cephalon. He added that by combining the two companies, “we expect to achieve considerable cost savings by consolidating certain administrative and operating functions”, as well as conducting “a rigorous evaluation of our spending priorities”.

Finding a buyer represents a victory for Pharmacopeia which has had to cut its workforce by 50% since May as its stock has slid. The New Jersey-based firm had struggled to find the funds to start a Phase II trial for PS433540 for diabetic nephropathy and was looking at opportunities to partner development of the compound for various indications. In Augist, Pharmacopeia said it was “evaluating various strategic initiatives” and the Ligand link-up seems to have been the best option.