National Editor

Whether viewed as a denial of genomics' difficult times or as an indicator of what the hard-pressed sector has begun to require, the merger news from Structural Bioinformatics Inc. and GeneFormatics Inc. is big.

Their agreement to create what they intend to be a proteomics powerhouse - and one that can boast more than three years of cash - has been approved by the boards of both privately held San Diego-based firms and awaits the collective nods of shareholders.

Although cash is hardly the sole reason for the deal, "a very large percentage of biotechs have less than a year of cash right now," noted Edward Maggio, chairman and CEO of SBI, who will become CEO of the new company.

SBI shareholders will be in the majority, he added, but "that's about all the specific detail we've agreed to disclose."

The merger is expected to become final in February or March. Management of the new company, to remain in San Diego, will consist also of David Muth, president and chief operating officer, who now holds those titles with SBI; John Schmid, chief financial officer and secretary (now CFO for GeneFormatics); and Kal Ramnarayan, vice president and chief scientific officer (who now holds the same positions with SBI).

Muth told BioWorld Today SBI revenues "were in the mid-single digits of millions for the past year, and that's a step up from the previous year." With a broader product line and more efficient drug development, the coffers will grow even more, he said.

The new firm will have about 73 employees, Maggio said.

"Both companies have been conducting very carefully planned reductions in the work force, partly by attrition and partly by specific design," he said. The two would have had "in excess of 100 before [reductions began]," and SBI was "right around 75."

Proteomics-based SBI has drug discovery programs focused on diabetes, cancer, inflammation and infectious diseases, using its Genes to Leads technology that, the company said, nets drug leads in as few as 60 days with an efficiency 1,000 times better than high-throughput screening.

Schmid, speaking from the JP Morgan H&Q Healthcare Conference in San Francisco, told BioWorld Today that SBI has "a few more established programs [than GeneFormatics] but for all practical purposes, this was a merger of equals," with SBI's shareholder majority not large.

GeneFormatics deploys what it calls Diverse Integrated Automated Methods of Novel Discovery technology that integrates structural and chemoproteomics to analyze whole genomes at the functional level to discover targets and leads, producing more than 6,000 novel discoveries in human proteins so far.

"GeneFormatics has been successful in identifying targets that have previously been below the radar,'" Maggio said. All development by both firms is in the preclinical stage, but "the main molecules are ours," he added.

SBI's program in protein tyrosine phosphates (PTB)-1b is "an entirely new modality of treating Type II diabetes," which attacks not only blood glucose but also obesity - a condition associated with diabetes but sometimes caused by side effects of existing anti-diabetes drugs, Maggio said.

Schmid said GeneFormatics has a "PTP family' program," using its whole-genome approach, and marrying the SBI and GeneFormatics effort is "exactly what you want," he said. "You want to know the anti-targets' as well as identify other leads and targets."

Regarding other programs, "some will survive [the merger] and some won't, obviously," Schmid said. As for partners on both sides, he said, "There are certainly no conflicts. We both have relationships with Incyte [Genomics Inc., of Palo Alto, Calif.] and Celera [Genomics Group, of Rockville, Md.], and that's positive."

Maggio noted that SBI also has been doing much of the X-ray crystallography for Johnson & Johnson, where Muth, who joined SBI a year and a half ago, spent 18 years working in commercial development.

"We have right from the very beginning adopted this concept of the hybrid business model" even before the phrase was commonly used, Maggio told BioWorld Today, referring to the strategy of using technologies internally and with partners.

He acknowledged the tough straits for genomics lately and the eagerness of some companies to be taken out of the category. SBI and GeneFormatics together will keep pushing drug discovery, he said, and "we'll do something with respect to the name [of the merged company] to reflect that. It hasn't been finalized yet."

Perseus-Soros BioPharmaceutical Fund, of New York, would be the largest shareholder of the combined company. Other investors include New York Life, of New York; Burrill & Co, of San Francisco; Inglewood Ventures, of San Diego; Biotechnology Development Fund (BioAsia), of Palo Alto, Calif.; Deutsche Asset Management, of Munich, Germany; OrbiMed Advisors, of New York; Merrill Lynch, of New York; and the Invesco Global Health Sciences Fund, of Denver.

Schmid called the first day of the bellwether H&Q conference, which began Monday, generally cheerful, although maybe not so much as last year's.

"Last year, everybody was very upbeat after a tough 2001, especially given world events," he said. A look at the conference agenda showed a stronger difference that reflects the economy and the continued winnowing of the industry.

"This conference is probably not going to be as good in deciphering companies of our sort," Schmid said. "They've changed it dramatically. In the past, there would be so many interesting development-stage companies that you wanted to hear their story, but these are few and far between."