Diversa Corp. and Syngenta AG formed a collaboration rooted in pharmaceutical and plant applications, a deal that increases Syngenta's equity position in Diversa to more than 18 percent and includes committed funding from Syngenta of $118 million.

The collaboration, said David Jones, head of plant science at Syngenta, has "three principle elements."

First, the companies will "combine their genomics and enabling platform research activities to form an enhanced program at Diversa," Jones said in a conference call. Secondly, Diversa will use its "unique capability in microbial research" to work for Syngenta in exclusive fields initially for seven years, using $118 million from Syngenta to fuel the research.

And the third element, he said, is that Syngenta's gene sequencing programs (including work done on the rice genome), now located at the Torrey Mesa Research Institute in La Jolla, Calif., will be dispersed to Syngenta Biotechnology Inc., its unit located in Research Triangle Park, N.C. Syngenta expects to employ "half the staff" from TMRI at either Diversa or the unit, and then TMRI will be closed. Jones estimated the moves would save Syngenta $200 million over the seven-year collaboration, "after consideration of the Diversa contract."

Although Syngenta, of Basel, Switzerland, would own all products from the research, the agreement is structured for Diversa, of San Diego, to receive payments for milestones achieved, as well as royalties on product sales.

Diversa focuses on applying genomic technologies to discovery and optimization of products from genes and gene pathways. For Diversa, the agreement "addresses both our primary objective - advancing our pharmaceutical platform - and [accelerates] our product development across all of our markets," said Jay Short, the company's CEO and president.

Diversa will receive an exclusive royalty-free license from Syngenta for gene technology and intellectual property that includes the areas of proteomics, metabolomics, RNA dynamics, fungal technologies and bioinformatics, but in exchange, Diversa has to give up a larger chunk of itself. Diversa will issue 14 percent of its outstanding stock and 3 percent of outstanding warrants to Syngenta. Given that Syngenta already owned 5.4 percent of Diversa, Syngenta's stake in Diversa would grow to "slightly more than 18 percent," Jones said, if and when the transaction closes. The warrants are exercisable at $22 for 10 years, starting in 2008.

Diversa's stock (NASDAQ:DVSA) fell 23 cents Wednesday to close at $11.24.

The transaction is expected to close in 2003 and is subject to Federal Trade Commission approval as well as approval by Diversa shareholders.

The companies have been working together since 1999, when they aligned through their Zymetrics joint venture to focus on developing enhanced animal feed. The venture is expecting its first product launch in 2004.

Syngenta makes its sizable living - its sales in 2001 were about $6.3 billion - in the commercial seed and crop protection markets. For Diversa, it's an avenue for its research that could bear significant financial fruit in the future, but that doesn't mean its therapeutic focus has gone by the wayside.

"New protein therapy projects will be initiated in the collaboration, including an antibody project based on our proprietary antibody platform," Short said. "We will also continue work on several in-process protein therapeutic programs that will be transferred from TMRI to Diversa."

With the added figures from the agreement, Diversa revised financial estimates. The company said it now expects revenues of $32 million in 2002, with a loss of $28 million for the year. But it expects to increase its investment into the pharmaceutical side of its business in 2003, so it estimates a loss in 2003 similar to 2002's. The company had forecasted profitability for the full year of 2004, but with the impact purchase accounting, they now forecast a small loss in 2004.

The seven-year agreement should, if things go well, simply increase the rate that both companies do research - a linchpin of biotechnology.

"We're sure we'll see a marked increase in the rate of product introductions and we'll stay ahead in the rapidly developing field of genomic science," Syngenta's Jones said.