Citing a renewed focus on integrated drug discovery, Discovery Partners International Inc. signed a letter of intent to purchase Heidelberg, Germany-based Biofrontera Discovery GmbH, the natural products drug discovery division of privately held Biofrontera AG.

"We realized the market for outsourcing chemical research is changing," Discovery Partners' chairman and CEO, Riccardo Pigliucci, said during a conference call. He said the company needed to focus on establishing footholds in markets outside the U.S. and offering a comprehensive discovery platform that "delivers compounds with a high likelihood" of reaching clinical development.

"The Biofrontera acquisition is the first step to achieve those goals," he said, adding that Biofrontera, which will be managed as part of Discovery Partners' operations in Basel, Switzerland, will bring aboard diverse libraries of natural compounds, fermentation and isolation of natural products, structural elucidation and medicinal chemistry capabilities.

Terms of the acquisition were not disclosed, though Pigliucci said it will be a cash transaction.

As of Dec. 31, Discovery Partners had $80 million in cash, cash equivalents and short-term investments. The company also reported Tuesday fourth-quarter and year-end earnings, including total revenues of $14.2 million for the quarter, down slightly from the $14.3 million for the fourth quarter of 2003. Net income for the three months ended Dec. 31 was $1.4 million, or 5 cents per share compared to net income of $1.5 million, or 6 cents per share, for the same period in 2003. Net income for the year was $3.9 million, or 15 cents per share, compared to $1.1 million, or 4 cents per share, for the same period in 2003. Analysts has estimated EPS of 5 cents for the quarter and 15 cents for the year.

Revenues totaled about $51.6 million for the year, up from $49.8 million the year before.

The company reported a net profit of $1.4 million for the quarter, marking the sixth straight quarter that Discovery Partners has posted a profit. However, Pigliucci warned that the company temporarily would have to sacrifice profit in order to expand its drug discovery capabilities and extend its services into European markets.

Shares of Discovery Partners (NASDAQ:DPII) lost $1 Tuesday, or 22.2 percent, to close at $3.50.

During 2005, the company expects to invest to refocus the company and absorb Biofrontera's burn rate. Because its efforts have been focused on research and development, Biofrontera is cash-flow negative with a burn rate of about $250,000 per month, Pigliucci said, adding that Discovery Partners plans to reduce that figure after the acquisition is complete.

Discovery Partners now projects a net loss of $2 million to $6 million for 2005.

Pigliucci estimated the company would not return to profitability until 2006. In the meantime, Discovery Partners will "actively pursue potential acquisitions" and collaborations.

"We're aiming at getting bigger deals with a more-comprehensive platform" that covers the range of the discovery process, "from identifying targets to the creation of lead compounds that are ready to be tested," he said.

Headquartered in San Diego, Discovery Partners offers drug discovery products and services, including target characterization, targeted and screening library design and synthesis, high-throughput and high-content screening, lead generation and optimization, gene expression analysis and protein crystallization. The company generates a substantial chunk of its revenue from collaborations for drug discovery services.

Last February, Discovery Partners expanded a multiyear agreement with New York-based Pfizer Inc., initially signed in December 2001, for Discovery Partners to exclusively deliver chemical compounds to Pfizer. The pharmaceuticals company also has access to Discovery Partners' capabilities for preparing and delivering hit follow-up libraries. Between January 2002 and December 2003, Discovery Partners received about $48 million from Pfizer.

Although Pigliucci said revenue projections from the Pfizer deal are uncertain for 2005, the company is expecting an increase in revenues from another contract - that one, with the National Institutes of Health. Under the agreement, Discovery Partners will set up and maintain a small-molecule repository to manage and provide up to 1 million chemical compounds to multiple NIH screening centers as part of the NIH Roadmap project. The estimated funding for the base period - August 2004 through December 2008 - is about $24 million.

The company announced in December a drug discovery and development alliance with Biovitrum AB, of Stockholm, Sweden, to identify small-molecule lead compounds suitable for advancing targets within the metabolic disease area.