Cash strapped UK biotech company Xenova is to buy rivals KS Biomedix to create a merged oncology-focused business.

David Oxlade, Chief Executive at Xenova, and his counterpart at KS Biomedix, Dr Stephen Powell, announced the £15 million all-share deal to investors as both companies reported growing losses and dwindling cash reserves.

A merger of two or more oncology-focused UK biotech companies was mooted over a year ago, but has only come about now because of the dwindling funds and in particular the failure of Xenova lead product Tariquidar in May.

Phase III development of the drug has now been suspended but the company is looking at how the drug can be salvaged for further development.

The combined company's brightest hope will be KS Biomedix's TransMID, a treatment for glioma (a family of nervous system cancers) now being readied for phase III trials.

The all-share deal, which is still subject to shareholder approval, is linked to the success of the drug, with the final payment of nearly £6.5million only being paid to KS Biomedix shareholders if the product reaches the EU or US market by 2011.

Shareholders are nevertheless expected to agree to the deal in the absence of any other bidders. Both companies desperately need to cut costs to stay afloat, and estimated one-off savings of £2.7milion and annual savings of £10 million from the merger should provide some breathing space.

Focusing on the potential of the pairing, David Oxlade said the merged company would be able to invest in new drug candidates and the development of existing projects.

"Our objective is to build a profitable, oncology-focused UK biotech company with a sufficiently broad portfolio to manage risk for investors and provide medium term returns to shareholders through successful drug development," he said.

"Our acquisition of KS Biomedix, which adds a product at the phase III development stage and two other clinical programmes to Xenova's existing pipeline of nine drugs in clinical development, is another step along the road to achieving this objective."

The Xenova board indicated that the merger could make it more attractive and provide a good stepping stone to further mergers and acquisitions in the sector, wherever good opportunities arose.

Antisoma, another UK biotech company specialising in cancer could be in a position to acquire the group, having secured its long-term future last year by licensing its entire oncology pipeline to Roche.

Xenova saw its losses grow to just over £8 million for the first half of 2003, as its assets shrank nearly £6 million to £19.4 million. KS Biomedix fared even worse, as losses more than doubled to £33 million for the period as its assets were reduced to just £7.4 million.

Xenova had already embarked on a rationalisation of its R&D programme following the halting of the Tariquidar trials, cutting jobs and focusing on key later stage clinical development programmes.

pharmafocus@pharmafile.co.uk