Capnia Inc. and Essentialis Inc., a privately held clinical-stage pharmaceutical company, plan to merge to create a rare disease therapeutics company.

Under the merger agreement approved by the boards of both companies, Capnia will acquire all the outstanding shares of Essentialis.

The combined organization will advance the development of diazoxide choline controlled release tablet for the treatment of Prader-Willi syndrome, a rare genetic neurobehavioral/metabolic disorder which affects appetite, growth, metabolism, cognitive function and behavior. The drug has also been granted orphan drug designation by the U.S. FDA for the treatment of the disease.

The deal is expected to close during the first quarter of 2017, subject to customary closing conditions, including approval by the stockholders of Capnia.

At closing, Capnia expects to issue common stock at 96 cents per share to a syndicate of new and existing investors for gross proceeds of $8 million. The funds would be used to execute a planned phase 2/3 clinical study evaluating the efficacy and safety of diazoxide choline controlled release tablet. This study is expected to start in the second half of 2017.

The combined company will be headed by Anish Bhatnagar, current CEO of Capnia. David O'Toole, senior vice president and CFO of Capnia, will be the CFO of the combined company. Neil Cowen, president and chief scientific officer of Essentialis, will join the combined company as senior vice president of drug development.

The board of the combined company will comprise nine directors, with six current Capnia directors and three current Essentialis directors.

Capnia also plans to assess alternatives for its legacy products and product candidates, and its portfolio of innovative pulmonary resuscitation solutions for the neonatal market.