Shares of Pharmacopeia Drug Discovery Inc. jumped 26.3 percent after the company signed a drug discovery deal with Cephalon Inc. that includes a $15 million up-front fee and the potential for double-digit royalties.

The collaboration will focus on moving molecules to proof of concept, with Cephalon responsible for identifying the compounds and Pharmacopeia handling "the bulk of the work in medicinal chemistry and biology," said Les Browne, president and CEO of Princeton, N.J.-based Pharmacopeia.

The $15 million up-front program access fee is a "nice way of improving our cash position, something that's always challenging for a small company," Browne said.

Beyond that, if Cephalon chooses to develop any candidates, Pharmacopeia would be entitled to regulatory and sales milestones, plus up to double-digit royalties, depending on the sales level achieved.

The deal also provides an option "for us to take candidates from the program independently of Cephalon, if they agree, and develop those for our own pipeline," Browne told BioWorld Today. In that case, Pharmacopeia would pay milestones and royalties to Frazer, Pa.-based Cephalon.

Pharmacopeia's stock (NASDAQ:PCOP) gained $1.04 Tuesday to close at $5.

The companies have not specified therapeutic aims of the collaboration, but Cephalon's focus is in oncology and central nervous system diseases, and Browne said, "I fully expect that the bulk, if not all, of the programs" will be in those areas.

That works well, Browne added, "because it gives us a chance to employ our platform to target therapeutic segments outside our own internal focus."

Pharmacopeia is developing an early stage pipeline aimed at immunological and cardiovascular diseases. Its lead program, a dual acting receptor antagonist licensed from Bristol-Myers Squibb Co., is in preclinical development in cardiovascular disease. Three other programs are in the lead optimization stage in transplantation, arthritis and multiple sclerosis and Parkinson's disease.

The company also has a clinical and preclinical pipeline of 12 partnered compounds, including a p38 kinase inhibitor developed with New York-based Bristol-Myers, a small molecule for asthma and allergy partnered with Osaka, Japan-based Daichii Pharmaceutical Co. Ltd., and a compound to treat inflammatory indications in development with Kenilworth, N.J.-based Schering-Plough Corp. All those programs are in Phase I.

The Cephalon collaboration "helps us do two things," Browne said. "We're trying to build a high-value internal portfolio, and we're also working hard to build a runway to finance our own programs into clinical development."

Until recently, most of Pharmacopeia's partnerships involved early drug discovery and screening processes. But as the company's own pipeline has progressed, it began looking at deals at the development stage to "build expertise and forward integrate" the firm, Browne said, "helping us pave the way for clinical development of our own internal programs."

Earlier this year, Pharmacopeia entered a collaboration with London-based GlaxoSmithKline plc to bring molecules to proof of concept in a range of therapeutic areas. GSK has exclusive options to conduct Phase III trials and commercial development, in exchange for $15 million in cash payments to Pharmacopeia, and preclinical and clinical milestone payments of up to $83 million for each drug development program pursued.

Pharmacopeia also would receive double-digit royalties. (See BioWorld Today, March 31, 2006.)

Pharmacopeia reported a net loss of $7.7 million, or 51 cents per share, for the first quarter of 2006. As of March 31, the company had a cash position of $25.6 million.

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