By Randall Osborne

West Coast Editor

SAN FRANCISCO - Attendees jammed into a big meeting room of the Westin St. Francis to hear Jay Short, president and CEO of Diversa Corp., talk about bugs, drugs and sponges - and disclose a $20 million deal with IntraBiotics Pharmaceuticals Inc., based on Diversa's natural product libraries.

Then, about 25 of them trooped down the hall with him to hear more.

San Diego-based Diversa gets access fees, research fees and success-based milestone payments from IntraBiotics, of Mountain View, Calif., which gets an exclusive worldwide license to resulting products.

The aim is to identify and develop small-molecule compounds with antibacterial or antifungal properties, derived from Diversa's libraries, Short told the crowd Tuesday at the J.P. Morgan H&Q Healthcare Conference here.

Diversa's libraries come from all over the world.

"It's no longer a situation where scientists are asked on their vacations to fill up their suitcases with soil and water samples and bring it back to the lab to see what's valuable inside," Short said.

Instead, Diversa has hammered out agreements with countries such as Indonesia, which has "one-third of the world's insect diversity," and Bermuda, where Atlantic sea sponges are known to contain antitumor elements, he said.

"No one was allowed to come in with a backhoe to extract 100 kilograms of sponges," Short said. "Our approach avoids that harm." Diversa collects a small sample, just enough for cloning.

The company even has a deal with Yellowstone National Park, where Diversa is allowed to investigate the geothermal fields for developing enzymes to be used in paper processing.

As Chief Financial Officer Karin Eastham put it to would-be investors during the breakout session: "We take out less material than most people take out on their hiking boots."

Diversa is "not only a pharmaceutical player," she said. "We also play in other markets that have much shorter regulatory cycles, so we have a nice balance between products that will contribute in the near term, as well as having the big home-run product in the longer term."

Among the short-term moneymakers are enzymes used in corn wet milling, a process that breaks starch away from the kernel, for making corn syrup. It's also the first step in manufacturing ethanol.

"Our strength came first through enzymes, and now we're expanding that to make small molecules," Eastham told BioWorld Today. "We use the same core technologies but, if you look at where we've done our deals, obviously the pharmaceutical area is newer to us. We have more agricultural and industrial partners."

Among them is Syngenta, formed by the merger of agricultural units of Novartis AG, of Basel, Switzerland, and AstraZeneca plc, of London. Diversa said Tuesday it had achieved development milestones in the joint venture with Zymetrics, which is a joint venture with Syngenta begun in 1999.

Diversa said it had delivered an animal feed product candidate and several leads for other applications, and will get an undisclosed milestone payment.

Also Tuesday, Diversa said it has been issued a U.S. patent covering its Gene Site Saturation Mutagenesis technology, designed to create families of related genes from a parent gene, in order to generate all possible single amino acid substitutions in the expressed protein.

Short called the patent "method-independent. Any time you mutate all 19 amino acid changes at a whole variety of positions within a gene, Diversa covers that," he said. "And we think we're going to continue to reduce the number you have to change. In other words, any time you do 10 amino acid changes for more than 50 percent of the protein, we'll be able to own that."

Diversa has 37 issued patents, eight notices of allowance and more than 155 filed patent applications. With about 200 employees, the company has $211 million in cash and 34.9 million shares outstanding. Its stock (NASDAQ: DVSA) closed Tuesday at $16.875, down 6.25 cents.