The combination of the two companies, which both specialise in inhaled formulated drugs, will benefit from two complementary development pipelines, the ability to offer a range of device and formulation technologies addressing a large and fast growing market sector and a cash pile of £92m (€136m), the firms said.
The two companies are developing treatments for lung diseases such as asthma and looking for ways to make existing medicines more effective through inhalation.
"The combination of the two businesses will create an Enlarged Group with a portfolio of licensed and marketed products, a broader and well balanced pipeline of mid to late stage products in clinical development, and the cash resources to progress development of our lead candidates," said Jack Cashman, chairman of Vectura.
"We believe that the Enlarged Group will have all the constituents in place to become a UK leader in pulmonary product development."
Chippenham, England-based Vectura specialises in the re-formulation of drugs into inhalable medicines using devices including PowderHale and GyroHaler.
These dry powder inhalers (DPIs) have been developed with the aim of providing a number of advantages over competing devices, the company claims.
According to Vectura, benefits include better convenience for patients, more consistent, precise dosing and excellent moisture protection, a key distinctive factor in inhaled drugs which are in a fine powder form.
The company is also currently developing a drug to treat Chronic Obstructive Pulmonary Disease (COPD) for Novartis, Switzerland's biggest drugmaker.
London-based Innovata said in December it was developing an asthma treatment for an unidentified drugmaker.
The market for COPD and asthma treatments is a fast-growing sector - valued globally in excess of €13bn - and expected to double by 2010.
Vectura believes dry powder inhalers are increasingly the first choice for patients with these diseases and will be used to deliver the majority of such drugs sold in the market by 2010.
Both companies said the merger represents an excellent strategic fit.
"Innovata believes size is important for companies in the biotechnology sector and the combination of Vectura and Innovata will result in a leading pulmonary development company with the skills and resources to leverage a pipeline of considerable potential, as well as a broader range of formulation, device and drug delivery capabilities," said Ian Kent, chairman of Innovata.
Under the terms of the deal, which is expected to be complete in January next near, Innovata shareholders will own 46 per cent of the enlarged group while Vectura will own the remaining 54 per cent.