Deltagen Inc. has targets. What it didn’t have was a drug-discovery engine.

Seeking that, Deltagen is buying Bristol-Myers Squibb Pharma Research Labs LLC for $23.5 million in stock, giving it a small-molecule drug discovery unit that will function as a wholly owned subsidiary in San Diego.

“We’re a target-rich company,” said William Matthews, Deltagen’s CEO. “It was a natural extension to add a drug discovery capability to the work we’ve already done. We were very keen on finding a group like this.”

The group has 70 scientists, including 53 chemists, housed in a 77,000-square-foot facility. Originally known as CombiChem Inc., the San Diego-based group was a publicly traded company until DuPont Pharmaceuticals Co. bought it for about $95 million in cash in 1999. When New York-based Bristol-Myers bought DuPont Pharmaceuticals Co. in October, it got CombiChem, too, renaming it Bristol-Myers Squibb Pharma Research Labs. But Bristol-Myers saw fit to put the unit on the curb, providing Deltagen with a drug-discovery opportunity. (See BioWorld Today, Oct. 7, 1999.)

“[Bristol-Myers Squibb] didn’t want a San Diego satellite,” Matthews said. “But this is an experienced group that has worked together for quite a few years, and they should hit the ground running very fast on Deltagen targets.”

The acquisition will be accounted for through Deltagen exchanging $23.5 million of newly issued stock for all of the units of membership interest of Bristol-Myers Squibb Pharma Research Labs. The amount of Deltagen shares issued will be determined by the daily weighted average selling price of the stock over a six-day trading period that began Feb. 6, although the number of shares will not be less than 2.17 million or more than 3.185 million.

Deltagen’s stock (NASDAQ:DGEN) fell 32 cents Monday, closing at $8.61. The company has about 28.8 million shares outstanding.

Deltagen, of Redwood City, Calif., is best known for its DeltaBase database of in vivo mammalian gene function information, a product with some heavy-hitter pharmaceutical subscribers, such as Pfizer Inc., of New York; GlaxoSmithKline plc, of London; and now Merck & Co. Inc., of Whitehouse Station, N.J. The Merck agreement, announced separately Monday, will provide the pharmaceutical giant with nonexclusive access to information related to 750 genes selected for their biological interest. The deals with Pfizer and GlaxoSmithKline each provides for payments aggregating $15 million over three years. Financial terms of the subscription to Merck were not disclosed, but Matthews said the deal was especially notable because Merck generally “does not go out and sign database agreements.”

Now, besides being able to mine for drugs of its own, Deltagen simply has more to offer others.

“There are two major areas that present difficulties [in drug discovery],” Matthews said. “One is target validation. Look downstream of that, and its lead optimization. [Optimization] is the sweet spot of the CombiChem group. What we will partner out is the soup and nuts part we have novel targets that are interesting, and we can put the chemistry into place. We can now offer something that is much more of a solution to our partners.”

Deltagen recently announced it discovered a new insulin-mediating drug target, DT011M, something it plans to develop for obesity and related diseases, including diabetes. That will be the first target attacked by the new subsidiary, Matthews said, although Deltagen expects to move between five and 10 targets into laboratory testing by the end of 2002. However, look for CD123, an antibody being developed for acute myelogenous leukemia, to be Deltagen’s first product to reach the clinic. When that might be is unclear, but Matthews said Deltagen would be able to “give really clear deadlines” on development programs come 2003.

“It’s been a busy week for us this past week,” Matthews said, referring to the requisite work for any major transaction. “[The acquisition] is very important. People want solutions. They want to be able to get targets, but highly validated targets and the molecules that go with them.”