By Debbie Strickland

Associate

Axys Pharmaceuticals Inc. has quietly turned a program originally designed to generate small-molecule libraries for the company's internal drug discovery efforts into a $180 million asset. Over the course of two years, the program evolved into a profitable combinatorial chemistry division and then a subsidiary called Axys Advanced Technologies that attracted multiple pharmaceutical and biotech partners.

Discovery Partners International Inc. acquired AAT in April, in a deal whose value was initially - and somewhat misleadingly - pegged at $60 million (see BioWorld Today, April 13, 2000, p. 1). DPI then was privately held, but the company immediately filed for an initial public offering that priced at $18 per share. The San Diego company's stock (NASDAQ:DPII) closed Monday at $22.75 per share.

"We really saw that as a two-stage transaction, said John Walker, Axys' CEO. "The deal was for $60 million of DPI stock when DPI was private. But the intention was that the combination of the two businesses would result in a business with significant critical mass in terms of revenue."

Axys now owns about one-third of DPI, a stake valued at roughly $180 million, and now is seeking to raise $20 million through an offering of convertible notes and warrants to boost the cash portion of a balance sheet now heavy with DPI stock. "We're putting some additional cash on the books to ensure we have maximum flexibility in how, when and where we choose to liquidate some of the position," said Walker. "We're also trying to ensure that we have appropriate cash reserves on our books so there is not an overhang on DPI stock."

The financing effort comes amid management changes at the South San Francisco-based company, with Walker stepping down for family reasons (a CEO search has begun) and new heads of finance (David Riggs) and medicinal chemistry (Michael Green) joining the company.

The details of the offering have not yet been set, said Walker. The placement agent is Diaz & Altschul Capital LLC.

The combination of cash on hand, DPI stock, the convertible offering and a $50 million funding commitment from Acqua Wellington gives Axys resources "north of $220 million," according to Walker. That's enough to last six to seven years based on the company's current burn rate of under $25 million per year, he said. Meanwhile, the company's market capitalization, using Monday's closing stock price of $6.75, is only about 14 percent above that level, at $250 million.

Indeed Axys shares (NASDAQ:AXPH) have been mired in the $5 to $8 range over the last six months in the wake of partner Bayer AG's late-May decision to discontinue development of an asthma drug. That product came out of a small-molecule tryptase inhibitor program that still looks promising, said Walker. An inhaled tryptase inhibitor, for example, did well in Phase IIa testing for allergen-induced asthma, and in June, the company reported it would continue a Phase II trial for a second-generation tryptase inhibitor, APC 2059, in ulcerative colitis based on interim results.

Even aside from the clinical setback, Axys' story has been a difficult one to sell to investors, Walker said. Created in 1998 through the merger of Sequana Therapeutics Inc. and Arris Pharmaceutical Corp., the company has over the last two years pared down to a few key pharmaceutical and biotech partnerships, spun off elements of its technology that could form the basis of new businesses (such as AAT) and focused on building an integrated oncology platform.

In addition to AAT, Axys has spun its technology into PPGx, a La Jolla, Calif., pharmacogenomics venture in which Axys owns an 80 percent stake (although partner PPD Inc. has rights to acquire an equal stake); and Akkadix Corp., a La Jolla agricultural genomics firm in which Axys holds a 25 percent stake. Axys expects its combined holdings in DPI, PPGx and Akkadix will result in at least $250 million to $300 million in value, which can be translated gradually into research and development funding for Axys' core oncology program.

"We're following the plan we put into place with these three spinouts," said Walker. "Over a five-year time period, each of the three spinouts would reach a point of liquidity, which we could translate to our balance sheet to fund our own research and discovery efforts."

The company is aiming to take to take at least one oncology product into clinical trials by the end of 2001. Potential products have not yet been disclosed.

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