Yesterday, Ligand Pharmaceuticals Inc. (LGND) announced it has agreed to purchase Neurogen (NRGN) for $11 million in stock as well as certain future cash payments based on licensing deals, real estate sales and other milestones.

The deal, which is expected to close by the fourth quarter of this year, has been approved by both company boards. Additionally, Neurogen shareholders, representing approximately 33% of outstanding shares, have already given their nod in favor of the deal.

The terms of the deal require Ligand to issue about 4 million new shares to Neurogen shareholders, which is equivalent to a purchase price of 16 cents per common share of Neurogen. Neurogen stockholders would hold 3% of the combined company.

The transaction will give Ligand shareholders access to Neurogen’s partnership with Merck & Co., Inc. (MRK).

Ligand will also have access to additional pipeline assets and drug discovery resources. Moreover, Neurogen has more than $180 million in net operating loss carry-forwards (NOL) which can be used by Ligand to some extent under the relevant tax laws in the event of the merged entity becoming profitable.

Neurogen stockholders are entitled to receive a $3 million milestone payment in the event of Merck initiating a late-stage study with Neurogen’s VR1 antagonist. Additionally, the shareholders are entitled to receive $4 million if Ligand partners Neurogen’s H3 antagonist program or 50% of net proceeds obtained from the sale of these programs. The compounds are being tested for the treatment of acute and chronic pain.

Neurogen shareholders are further entitled to cash payments on the sale of its real estate and Aplindore program, developed for Parkinson’s disease and Restless Legs Syndrome, within six months of the closing of the transaction.

We believe the transaction will broaden Ligand’s pipeline. Ligand already has partnerships with key pharma and biotech players like Celgene (CELG), Bristol-Myers Squibb (BMY), GlaxoSmithKline (GSK), Schering-Plough (SGP), Pfizer (PFE) and Wyeth Pharmaceuticals (WYE), and the acquisition of Neurogen’s pipeline candidates should help expand its reach further.

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