Troubled Novacea is to merge with fellow US firm Transcept Pharmaceuticals in an all-stock deal.

Under the terms of the agreement, Novacea will issue new shares of its common stock to Transcept shareholders, which will mean that the latter will own 60% of the combined company. The deal is expected to close during the fourth quarter or the first quarter of 2009.

Novacea has been struggling since the termination of a Phase III study (ASCENT-2) last November of its investigational prostate cancer drug Asentar, a high-dose oral formulation of calcitriol. Partner Schering-Plough then pulled out of the collaboration this April and Novacea was forced to slash its workforce from 37 to 15.

John Walker, Novacea's chief executive, said that since the termination of the ASCENT-2 study, “our priority has been to identify a merger candidate with a late-stage product opportunity that we believe has the potential to provide meaningful long-term value”. Following “a rigorous due diligence and evaluation process”, the firm came up with Transcept, whose lead product candidate is Intermezzo, which is a formulation of zolpidem, the active ingredient in Sanofi-Aventis’ insomnia blockbuster Ambien, that dissolves under the tongue in two minutes.

Transcept, which is privately-owned but is now going to list on the Nasdaq, plans to submit a New Drug Application with the US Food and Drug Administration before the end of 2008. Chief executive Glenn Oclassen said that the combined companies will have a cash balance of $88-$92 million and these resources will enable the new entity to successfully commercialise Intermezzo. He claimed that the product “is ideally suited to address an unmet need in insomnia – treating middle of the night awakenings on an as-needed basis, at the time they occur”.