OSI Pharmaceuticals Inc. is acquiring substantially all the assets of one of its subsidiaries, Prosidion Ltd., in connection with the latter's purchase of a Phase II diabetes drug and related technology.

OSI's board authorized a $50 million investment in Prosidion, which in addition to the $10 million invested in April, would translate to a 96 percent ownership stake. OSI's further backing allows the subsidiary to move forward with its purchase of a platform of dipeptidyl peptidase IV (DP-IV) technology for $35 million and future milestones. Prosidion also would fund ongoing research and development efforts.

For Melville, N.Y.-based OSI, which traditionally has focused on developing cancer therapies, the move into diabetes is indicative of a long-term strategy to create sustained shareholder value.

"If you look at any number of medium- and large-tiered biotech companies as they grow up, it becomes increasingly essential to have a second disease area to broaden and diversify the business," said Colin Goddard, OSI's CEO and Prosidion's chairman. "And we're fortunate to be able to have prospectively planned for that, and now capitalize on this opportunity to really lay the foundation for a very solid diabetes business."

He noted that OSI's core business would continue to be Tarceva (erlotinib HCl) and the rest of its oncology franchise. The investigational cancer drug, which is the subject of a rolling new drug application, is partnered with Genentech Inc., of South San Francisco, and F. Hoffmann-La Roche Ltd., of Basel, Switzerland, and the partners last week laid out specific manufacturing and sales plans in anticipation of eventual approval.

Oxford, UK-based Prosidion, which OSI established in January 2003 as a vehicle to research its diabetes and obesity assets, agreed to buy the DP-IV technology from Probiodrug AG. In addition to the cash payment, Halle, Germany-based Probiodrug would receive milestone payments based on the successful development of P93/01, a DP-IV inhibitor set to enter Phase II trials for Type II diabetes. Early clinical trials have shown the orally active compound to lower glucose in Type II diabetics.

"What's happened here is a really nice opportunity that we simply couldn't pass up to acquire into Prosidion this molecule and the associated intellectual property estate for DP-IV," Goddard told BioWorld Today. "This is one of the most important and most current targets in diabetes, and is a very nice fit."

The portfolio of medical use patents around the target include issued and pending patents with claims covering DP-IV as a target, and use of combinations of DP-IV inhibitors with other oral anti-diabetes drugs such as Metformin. Inhibition of DP-IV leads to increased activity of glucagon-like peptide-1 (GLP-1), a mediator of blood glucose levels. Inhibitors of DP-IV also have demonstrated significant effects on mean blood glucose and post-prandial blood glucose and HbA 1C levels.

"It's a very competitive area, and all of the big pharmas are in this space," Goddard said. "So there is a lot of tacit validation of the target, and a lot of interest in it, because in essence it becomes a small-molecule approach to GLP-1 modulation, and of course an attractive target as a result of that."

Potentially competing DP-IV inhibitors in development include LAF 237, a Phase III product from Novartis AG, also of Basel, and Phase II candidates from Merck & Co. Inc., of Whitehouse Station, N.J., and Bristol-Myers Squibb Co., of New York.

Several of the pharmaceutical firms have nonexclusive license agreements to Probiodrug's patent estate for their own research, and future potential milestones and royalties arising from that intellectual property also will be transferred to Prosidion as part of the acquisition. Also part of the deal is a three-year funded research agreement in which Prosidion will work with Probiodrug to further develop a P93/01 back-up program and some early leads discovered for a related target, the glucose-dependent insulinotropic peptide receptor.

The transaction also calls for Probiodrug's founders to play a role in the development of the DP-IV technology at Prosidion. Probiodrug's co-CEO, Konrad Glund, will join Prosidion as vice president of corporate development, and Hans-Ulrich Demuth will join Prosidion's scientific advisory board, while continuing as Probiodrug's CEO.

For accounting purposes, OSI expects to book the costs of the acquisition as in-process research and development, and reflect it in its financial statements for this fiscal year. Its investment in Prosidion will be effective upon closing of the transaction, which is estimated to occur later this summer.

"Over the course of the last year, we've invested more money into that subsidiary," Goddard said, "and we've also made some very good progress with our own research programs and have a good chance of two clinical candidates coming out of the Prosidion business early next year."

Its existing programs on track for investigational new drug applications include an activator of glucokinase and an inhibitor of glycogen phosphorylase. Goddard said both targets are important to glucose homeostasis in Type II diabetes.

Beyond Tarceva, OSI's cancer portfolio includes several other clinical candidates. A liposomal product in Phase II, OSI-7904L, is designed to mimic a long-term infusion of 5-FU. Earlier-stage research is focused on a molecule called OSI-930, an internally developed product that is a co-inhibitor of c-Kit and vascular endothelial growth factor.

Two other clinical products were acquired as part of OSI's $32 million purchase of Cell Pathways Inc. last year. A Phase III product, Aptosyn (exisulind), recently missed primary and secondary endpoints in a study with non-small-cell lung cancer patients, and OSI-461 is in Phase I as a second-generation, more potent version of Aptosyn. (See BioWorld Today, Feb. 11, 2003, and June 15, 2004.)

In separate news, OSI called for the full redemption of $160 million worth of outstanding 4 percent convertible subordinated notes due 2009. On Friday, its stock (NASDAQ:OSIP) lost $2 to close at $65.63.