National Editor

In these hard economic times, when you hear anybody in biotechnology say it's "not all about cash," you might suspect the speaker of being na ve or disingenuous. And when such words come out of the straitened genomics sector, they sound even much more suspicious.

Of course it's about the cash, at least partly. But the merger last week of Structural Bioinformatics Inc. and GeneFormatics Inc., which gave the combined proteomics entity at least three years of crucial operating capital, offered more than that - and could represent a way for others in the sector to keep marching toward what investors are clamoring for: drugs in the clinic.

"We get a deeper pipeline with respect to drug discovery" is how Edward Maggio put it, allowing that everything on both sides of the deal remains in the preclinical stage. Maggio, chairman and CEO of SBI, will become CEO of the new company, in which SBI shareholders will be in the slight majority when the deal finishes in late February or early March.

Cash aside, each privately held company fills a need in the other. And the attractions of both have drawn partnerships with Incyte Genomics Inc. and Celera Genomics Group, which can only help the merged firm.

Proteomics-focused SBI has drug discovery programs in diabetes, cancer, inflammation and infectious diseases, thanks to its Genes to Leads technology. David Muth, president and chief operating officer of SBI, who will hold the same positions in the new firm, said its capabilities let SBI "go from gene sequence to the function of the protein and model it, and determine the protein structure. We cover the waterfront, and we can generate hits in as little as 60 days," with an efficiency 1,000 times better than high-throughput screening.

GeneFormatics brings to the deal its Diverse Integrated Automated Methods of Novel Discovery, called DIAMOND, methods that integrate structural and chemoproteomics, analyzing whole genomes at the functional level to discover targets and leads. It has yielded more than 6,000 novel discoveries in human proteins so far.

"They're ahead of us in medicinal chemistry," said John Schmid, chief financial officer of GeneFormatics, who will become secretary and CFO of the new company, but SBI can move even faster with GeneFormatics' "family" approach to whole-genome analysis. That method identifies what Schmid calls "anti-targets," or false leads that might otherwise be wastefully pursued, as well as the promising true targets.

Among GeneFormatics' programs is one in protein tyrosine phosphates (PTP)-1b, which SBI also is exploring for Type II diabetes.

Schmid told BioWorld Financial Watch the purpose of the deal is to answer a question other genomics firms - and other biotechnology firms across the board - need to answer: "How can you have the longest possible [financial] runway, maximize revenues and have your own bona fide discovery programs?"

Together, SBI and GeneFormatics have all three. Maggio noted that "the main molecules are [SBI's]," including a drug candidate against anthrax lethal factor.

"You can be infected [with anthrax] for a period of time, but not until it starts pumping out lethal factor do you have serious problems," he told BioWorld Financial Watch. The compound in development "shuts it off, so the antibiotic can clean up the infection." The anthrax work is funded by the National Institutes of Health.

There's also a program with interleukin-5 in allergies and another in inflammatory conditions, related to tumor necrosis factor antagonists.

In the merged company's bid for a place at the profits table, Maggio said, Muth will be particularly important. He has worked for 25 years in pharmaceuticals, 18 of those at Johnson & Johnson, where he was "involved in three major product franchises, each over $300 million per year" in revenues. He also worked for Nabi Biopharmaceuticals Inc., and has been with SBI for a year and a half.

Revenues for SBI, Muth said, "are in the mid-single digits of millions, and that's a step up from the previous year." The new, cash-richer company (whose name will be changed to reflect its efforts) must still be cautiously strategy-minded for the longer haul, he told BioWorld Financial Watch.

"We've got to manage our resources," Muth said. "The bulk of them are going to the [PTP and anthrax] programs." The former "has a huge, growing market and all the major players participate. Clearly, that's a candidate we will look to partner in 2003."

As for the anthrax drug, "decisions haven't been made, but given that there's a very limited number of customers, it's an opportunity such that SBI is looking at possibly commercializing that ourselves."

In what's been a rough road for genomics lately, SBI and GeneFormatics have found a smooth patch, and Muth is working with the rest of the officers to cover as many miles as possible, as fast as they can.

"Clearly, cash is important, but so is the ability to have a broader product offering to grow these revenues," Muth said. "We have that pipeline and with the cash, we'll be able to execute our business model."

Not only that, he said, but the cash "will afford us the opportunity to be very offensive," and look to buy more capability rather than just scrabble along as many firms find themselves doing. In the Darwinian struggle to advance, SBI/GeneFormatics has an edge, at least for a few years.

Muth's voice betrays neither glee nor sorrow at the bottom-line sorting that continues in the industry, and that SBI/GeneFormatics has escaped and may benefit from.

"A third of all biotech companies have less than one year of cash, and a lot of them are going to slam into the wall," Muth said. "Their technology is going to become available at bargain prices. It s realistic."