NovaCardia Inc., which has a Phase III product for congestive heart failure, is being acquired by Merck & Co. Inc. for $350 million in stock.

Privately held NovaCardia had raised about $88 million in two rounds of financing since it licensed the lead drug candidate, KW-3902 - an adenosine A1 receptor antagonist - in August 2003. The San Diego-based company in March registered to raise up to $86.25 million in an initial public offering. Instead, investors are gaining their exit with $350 million in Merck shares.

"Clearly, we had headed down the IPO pathway," said Randall Woods, president and CEO of NovaCardia. "We intended to do that. But when you get somebody like a Merck who comes along . . . they are a great clinical development company and marketing organization.

"We think this drug has tremendous potential," Woods told BioWorld Today. "We are absolutely delighted a company like Merck will be taking this drug forward."

NovaCardia last month reported encouraging data from a pilot Phase III trial of intravenous KW-3902. In May, it began two pivotal trials named PROTECT 1 and PROTECT 2. The company previously said results from those trials would be expected in mid-2008.

The acquisition is expected to close within 45 days. Shares will be issued at the five-day average price prior to closing. Additional shares will be issued to cover the amount of cash NovaCardia has at closing.

NovaCardia has a second product candidate, K201 (JTV-519), for which Phase II trials were being planned in treating atrial fibrillation. That product was not part of the Merck deal. A new company will be spun out for development of K201.

NovaCardia actually was founded in 2001 but began operations in 2003 after a licensing deal on KW-3902 with Tokyo-based Kyowa Hakko Kogyo Co. Ltd. NovaCardia founder Eckard Weber, chairman of the company and a partner at Domain Associates, identified the opportunity.

Woods said Kyowa Hakko was developing KW-3902 for a cancer indication that became obsolete when another compound was introduced for the condition.

"Eckard has the uncanny ability to identify uses for drugs that other folks have put on the shelves," Woods said. "This is one more example of a drug he said could work, in heart failure."

In return for rights outside Asia, NovaCardia paid Kyowa Hakko $2.4 million in up-front fees. The deal also included up to $19.5 million in potential milestone payments for the first two indications, and royalties on resulting sales. The deal for the second product, K201, was very similar. That license came from the Japanese firm Aetas Pharma Co. Ltd. in September.

Woods said that when investors such as Domain put money in small, focused firms such as the 11-employee NovaCardia, the money goes more directly to "value-creating activities." There isn't a lot of money spent on infrastructure costs, for example, and little money is being spent to keep the doors open when there is a delay or other development setback.

"There's so much flexibility in this model," he said. "It's a great return on your investment."

NovaCardia raised $22 million in its Series A financing round. A Series B round of $48 million was completed in September 2006, while that round was topped off with another $18 million in March in preparation of the IPO effort.

In addition to Domain Associates, NovaCardia's investors include Forward Ventures, Montreux Equity Partners, Versant Ventures, Skyline Ventures and InterWest Partners. Domain owns about 24.9 percent of NovaCardia. The other four VC investors own between 10.4 percent and 15.6 percent of the company. Woods and Weber both own 3.9 percent.

NovaCardia's initial strategy was to continue development of KW-3902 and then create a relatively small sale force for acute-care, hospital-based indications, which would cover the intravenous product. It planned to establish partnerships for ex-U.S. markets, and also for use of the oral formulation in the chronic setting.

NovaCardia said KW-3902 is designed to selectively block the effect of adenosine on the adenosine A1 receptor, resulting in blockade of adenosine-mediated vasoconstriction in the kidney and inhibition of salt and water reabsorption in the proximal tubule of the kidney, thereby maintaining renal function and facilitating diuresis. It said other compounds intended to improve renal function via vasodilator effects have been ineffective because they are not selective to the kidney.

It has completed three placebo-controlled Phase II trials and the pilot Phase III study. In addition to the pivotal trials started in May, NovaCardia said previously that it also intended to initiate two additional Phase III trials this quarter, as well as a Phase II trial of an oral formulation in outpatients with chronic CHF in the second half of 2007.

Preliminary results from the pilot Phase III trial of KW-3902 indicated a strong trend toward efficacy for the 30-mg dose, NovaCardia said. Drug-treated patients experienced a higher rate of improvement in dyspnea, or shortness of breath, vs. placebo, and KW-3902 also enhanced diuresis and mitigated deterioration of renal function, it said.

The PROTECT 1 and 2 trials at worldwide sites both are designed to enroll 600 patients, and both will evaluate the effect on dyspnea, renal function and incidence of worsening heart failure in acute CHF patients with renal impairment undergoing IV diuresis. Another trial that was expected to begin this quarter, the REACH UP study, is designed to evaluate the effect on renal function and heart failure severity in 480 hospitalized CHF patients with moderate to severe renal impairment being treated for fluid overload and who have experienced a documented worsening of renal function. The fourth study is designed to evaluate serial infusion in 375 outpatients with heart failure.

The Phase III program, including the pilot trial, encompasses more than 2,300 patients. In its IPO filing, NovaCardia said the FDA indicated that for approval, at least 1,500 patients must have been administered the IV formulation of KW-3902 at doses that are equal to or above the dose for which it seeks approval. It expects the PROTECT 1 and 2 pivotal trials would support regulatory approval. But it said the FDA also indicated that if the REACH UP trial is successful and one or both of the PROTECT trials are successful, that study could serve as a separate pivotal trial of KW-3902.

Merck's market capitalization is about $115 billion. Its stock (NYSE:MRK) gained $1.66 Wednesday, or 3.2 percent, to close at $53.38.