Soon to step out of the shadows, Alethia BioTherapeutics Inc. was created as a spin-off of SignalGene Inc. as part of an agreement reached with Genome Quebec.

With much of its funding to come from Genome Quebec, a Canadian government/industry/academic alliance, Alethia will work to develop molecular targets, compounds and biotherapeutic approaches to treat disorders that in particular affect women. Genome Quebec will contribute C$6.1 million (US$3.9 million) over three years to fund Alethia's operation.

"This is based on expression genomics, so the focus is really to look at evolution of the diseases based on differential patterns of expression of messenger RNA," Alethia Chairman and Chief Operating Officer Mario Filiom said. "Our goal is to identify new therapeutic targets, validate them and be involved in the development of new biotherapeutics."

The new company's creation was born in part of a partnership between Montreal-based SignalGene and Genome Quebec. The transaction concludes SignalGene's role in a program begun in April and funded by Genome Quebec for target discovery related to women's health. The program, a three-year project worth C$10 million, initially will focus on osteoporosis, breast cancer and ovarian cancer.

"This is certainly a very nice way to validate what we do here," Filiom said. "It is very strategic for us in terms of recognition of what we do, in addition to the money they provide."

Alethia's creation is also part of a refocusing effort on the part of SignalGene, which said it would spin off its functional genomics unit into the new company, while focusing its own financial and operational resources on its core business of small-molecule drug discovery and development. SignalGene in March closed its population genetics unit as part of its refocusing effort.

"At last April's shareholders meeting, it was becoming clear that we should focus our resources on programs that would generate shareholder value in the short horizon," SignalGene Chief Financial Officer Doris Belzile said. "In our functional genomics unit, there were interesting programs and the science was very good. SignalGene's intent was to find a solution to have access to the long-term value of this unit without having to finance the operation."

SignalGene will transfer the assets of the functional genomics unit as well as its STAR (Subtractive Transcription-based Amplification of mRNA) technology to Alethia for a consideration of between C$3.5 million and C$4.5 million, payable in common shares of the new company. Prior to closing, an independent third party will determine the final value.

STAR is designed to identify anomalies in the activity of genes involved in the pathological process, leading to a simplified analysis of their role in diseases.

"This has been developed to do subtraction cloning, to trace genes that are differentially expressed but also to be able to pick the ones that are part of the low-abundance transcripts," Filiom said. SignalGene also is transferring biological algorithms to predict accessible sites, as well as methods of RNA amplification and other tangible assets.

In exchange for its support, Genome Quebec gains two seats on Alethia's board as well as consideration payable in participating voting preferred shares of the new company and warrants, exercisable in certain specified circumstances. SignalGene's functional genomics employees will transfer to Alethia and will be granted up to a 10 percent ownership stake.

SignalGene, which will have one seat on Alethia's board, said it expects the transaction to close in early October, adding that it expects the move to generate ongoing annual savings of about $1.4 million. The company will write down an undetermined goodwill amount related to the functional genomics unit, which was acquired as part of a March 2000 purchase.