What happened

Shares of both BioCryst Pharmaceuticals (BCRX -1.56%) and Idera Pharmaceuticals (IDRA) plunged by as much as 12% and 28%, respectively, after the two announced that they were merging their businesses to create a new rare-disease company before the opening bell. The move lower would appear to indicate that Wall Street views this as a merger out of weakness and necessity rather than one of strategic initiative and strength.

So what

According to the early morning press release, the combined company will be led by Vincent Milano, the CEO of Idera, while BioCryst's CEO and Chairman will serve on the board of directors. The terms of the agreement suggest that BioCryst will own 51.6% of the combined company's stock, with Idera's shareholders owning the remaining 48.4%. Of course, shareholders from both companies will have to approve the merger, which is no sure thing given the plunge in share price for both companies following the announcement.

Two businessmen shaking hands.

Image source: Getty Images.

If combined, the duo would have two phase 3 clinical compounds, including BCX7353, a once-daily prophylactic treatment for hereditary angioedema (HAE). HAE is becoming a highly competitive indication, but drug developers have nonetheless been able to maintain strong pricing power. The duo would also have two phase 2 clinical studies, including Idera's IMO-8400 for dermatomyositis.

Additionally, the combination would lead to a company with $243 million in net cash, which would reduce dilutive share offerings and aid in commercial launch efforts. Said Jon Stonehouse, CEO of BioCryst:

Bringing these two companies together accelerates the strategic initiatives of both organizations and immediately forms a substantial and differentiated biotech company serving patients in the rare disease community. Combining our respective pipelines, infrastructures and financial resources should enable the new company to grow faster, deliver for patients more rapidly and ultimately create sustainable shareholder value well beyond what either would achieve separately. 

Now what

There are really two major questions going forward that'll need to be answered. For starters, do the shareholders even want this merger? The share prices of both companies tanked following the news, suggesting possible worries about getting the required votes needed for passage. The mere fact that this merger was proposed suggests that both companies might struggle individually if they tried to commercialize their pipelines.

That brings us to the second point: Can this duo actually capitalize on what's in their pipeline? Two of the four top compounds (both from BioCryst) target HAE, which has an increasing amount of competition. It would also appear that even with the cost-cutting derived from synergies, this combined entity isn't going to be profitable. Neither company was expected to be anywhere near profitability over the next five years, per Wall Street estimates.

My suggestion would be to keep your nose clean of this potentially murky merger for the time being.