Mallinckrodt has agreed to acquire Ocera Therapeutics for up to $117 million, the companies said today, in a deal that would boost the buyer’s pipeline in treatments for orphan and other liver and kidney diseases.

The deal would add to Mallinckrodt’s pipeline Ocera’s Phase II hepatic encephalopathy candidate OCR-002 (ornithine phenylacetate), an ammonia scavenger that failed the Phase II STOP-HE trial earlier this year by missing its primary endpoint.

Ocera acknowledged on January 30 that OCR-002 yielded a statistically insignificant 17-hour reduction over placebo (47 vs. 64 hours) for time to improvement in hepatic encephalopathy symptoms in STOP-HE, which evaluated the safety and efficacy of intravenously administered OCR-002 in resolving neurocognitive symptoms of acute hepatic encephalopathy in hospitalized patients with elevated ammonia.

Investors responded with a stock selloff that sent Ocera shares plunging nearly 71%, to 60 cents a share from $2.05 a share the previous trading day of January 27.

However, Ocera added that the drug produced a significant reduction in circulating ammonia—and that patients at the higher doses of OCR-002 (15 and 20 grams) had faster clinical improvement and greater complete response rates compared to the patients on the lowest dose (10 grams) and those on placebo. The latter outcome, according to Ocera, suggested that some Phase II patients may have been underdosed.

“Mallinckrodt believes that trial design elements, in part, drove the primary outcome and, on acquisition, will invest to establish the optimal dosing regimen prior to initiating a Phase III program,” the companies said in a statement.

To that effect, Mallinckrodt said it will continue talks with the FDA toward confirming a regulatory pathway to approval, with expectations of launching an intravenous formulation of OCR-002 by 2022, and an oral formulation two years later. Ocera is assessing an oral tablet form of OCR-002 in a Phase IIa study in patients with cirrhosis as a chronic use option to maintain remission of hepatic encephalopathy. Results are expected to be published by the end of 2017.

OCR-002’s active ingredients are ornithine and phenylacetic acid. The drug is designed to work by rapidly eliminating ammonia in the bloodstream, excreting it through the kidneys—a more effective and less burdensome method of addressing hepatic encephalopathy than existing treatment options, Ocera says.

$5B to $7B Market Opportunity

As a result, Mallinckrodt and Ocera have estimated a U.S. potential market opportunity of $5 to $7 billion with $2 to $3 billion in acute treatment and $3 to $4 billion for recurrent incidents. Approximately 1.5 to 2 million patients are at risk of hepatic encephalopathy.

OCR-002 has won orphan drug designations from the FDA and European Medicines Agency, as well as the FDA’s Fast Track designation.

“We believe OCR-002 has the potential to help thousands of patients whose hepatic encephalopathy is insufficiently treated by current therapies,” stated Ocera president and CEO Linda S. Grais, M.D. “We're excited by the additional development capability and commercial reach that can be gained by becoming part of Mallinckrodt. With this focus, I'm confident this important treatment can be successfully brought to market.”

Mallinckrodt plans to commence a cash tender offer to purchase all outstanding shares of Ocera common stock for approximately $42 million ($1.52 per share)—plus one Contingent Value Right to receive one or more payments in cash of up to approximately $75 million ($2.58 per share), tied to achieving development and sales milestones.

Should the acquisition close in the fourth quarter as expected, subject to customary closing conditions, Mallinckrodt said its fourth quarter adjusted diluted earnings would shrink by $0.25 to $0.35 annually beginning in 2018.

Investors sent Ocera shares surging to $1.67 as of 9:22 a.m. in premarket trading, up 64% from yesterday’s closing share price of $1.02.

Ocera is Mallinckrodt’s second acquisition of a company in more than two months. In August, Mallinckrodt agreed to acquire neonatal and pediatric drug developer InfaCare Pharmaceutical for up to $425 million, including $80 million upfront.

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