By Karen Pihl-Carey

Axys Advanced Technologies Inc. (AAT) will merge with a subsidiary of Discovery Partners International Inc. (DPI) in a deal that will give parent company Axys Pharmaceuticals Inc. a $60 million stake in DPI.

DPI, in turn, said it plans to file with the SEC for an initial public offering. Due to the pending filing, both AAT and DPI were in quiet periods on Wednesday.

Axys decided to spin out the subsidiary to provide additional capital for the company¿s core business of drug discovery with an emphasis on oncology drugs, said Bill Newell, senior vice president of corporate development at Axys.

¿We looked at a number of different opportunities to spin the company out, and it was our decision at the end of the day that the fit with Discovery Partners International made the most sense,¿ Newell told BioWorld Today. ¿The two businesses are very complementary in terms of what they offer in the way of chemistry products and services.¿

AAT, of South San Francisco, is a subsidiary of Axys that produces and markets novel compound diversity libraries for drug screening. DPI, of San Diego, provides products, services and information to augment the internal drug discovery efforts of pharmaceutical and biopharmaceutical companies. It has three subsidiaries: IRORI, ChemRx and Discovery Technologies Ltd.

AAT will become a wholly owned subsidiary of DPI, and then will be merged with ChemRx to form ChemRx Advanced Technologies.

Under terms of the merger agreement, Axys receives a minority interest in DPI valued at about $60 million, based on DPI¿s last round of private financing. Axys also has the right to elect three of seven board members of DPI as long as the company remains privately held and retains its rights to use AAT¿s compound libraries in its drug discovery programs.

¿As Discovery Partners continues, and assuming it goes public, Axys¿ contractual right of having those three people on the board will disappear,¿ Newell said. ¿But as we have interest [in DPI], we would expect continuing having significant representation on the board.¿

The merger is expected close by the end of this month.

Axys recently raised $31.5 million privately through the sale of stock to fund the company¿s oncology program. (See BioWorld Today, Feb. 22, 2000, p. 1.)

The company has three oncology programs in preclinical research: a program to inhibit urokinase; a novel tumor suppressor protein, ASP-05; and development rights to selective estrogen receptor-beta modulators acquired from Signal Pharmaceuticals Inc., of San Diego.

While the company¿s focus since the beginning of 1999 has been on oncology drugs, before that it worked on combinatorial chemistry technology. In 1998, Axys took that technology and turned it into AAT with the idea of leveraging it through partnerships to generate revenue for Axys¿ drug discovery focus, Newell said. Over time, the subsidiary secured 12 contracts with pharmaceutical and biotechnology companies.

DPI was formed in October 1998 and has a mission to become the leading provider of drug discovery tools and services to the pharmaceutical industry. ChemRx has chemistry-based research agreements to develop multiple classes of compounds for companies such as Pharmacia and Upjohn, of Bridgewater, N.J.; Kirin Brewery Co. Ltd., of Tokyo; and DuPont Pharmaceuticals Co., of Wilmington, Del. The company operates on a fee-for-goods-and-services model, and does not require royalties or other trailing rights.

Axys¿ stock (NASDAQ:AXPH) closed Wednesday at $6.562, down 68 cents.