By Randall Osborne

Aiming to capitalize on the promise of pharmacogenomics - and fulfill the pledge made during a controversial takeover completed last year - Axys Pharmaceuticals Inc. entered a deal with PPD Inc. to absorb two of PPD's subsidiaries and form PPGx Inc., a company valued at more than $60 million.

"We've implemented the acquisition strategy we had, and we've clearly built tangible, realizable value," said John Walker, chairman and CEO of South San Francisco-based Axys, which has licensed to PPGx its pharmacogenomics intellectual property, bioinformatics software, and Allele Frequency Database of gene polymorphisms.

PPD, a contract research organization (CRO) in Wilmington, N.C., paid $11 million for an 18 percent interest in PPGx, not including the software-licensing fee, Walker said.

Under the terms of the agreement, Axys gets an up-front license fee and majority ownership of the new company. PPD gets worldwide marketing rights to PPGx's pharmacogenomics products and services, plus a minority ownership position.

PPD's two subsidiaries involved in the deal, Intek Labs Inc. and Intek Labs Ltd., specialize in genotyping, phenotyping, and large-scale DNA purification and archiving. The deal calls for PPD to provide staff and bioinformatics services.

PPGx will operate from La Jolla, Calif., with labs in North Carolina and the U.K., providing services to pharmaceutical and biotechnology firms. Jean Warner, vice president of medical affairs for Axys, has been named CEO of PPGx.

In May of last year, Axys formed Xyris Corp., a majority-owned agricultural biotechnology subsidiary. Axys itself is the result of South San Francisco-based Arris Pharmaceutical Corp.'s takeover of La Jolla-based Sequana Therapeutics Inc. (See BioWorld Today, Nov. 4, 1997, p. 1.)

When that $166 million deal was disclosed, a 5 percent Arris shareholder protested the acquisition and asked for restructuring of the agreement, claiming more shareholders also objected. (See BioWorld Today, Dec. 10, 1997, p. 1.)

But with the Sequana takeover came $50 million in cash and $70 million in guaranteed partner funding, Walker said. The Xyris and PPGx spin-outs total another $90 million in value - more than vindicating the plan outlined by Arris when the Sequana deal was taking place, he said.

"We tried to be clear at the time that we were not acquiring Sequana for the deals it had done, but for the deals it had not done," Walker said. "Now, we just want to declare victory and move on."

PPGx Adopts 'Customer's Perspective'

After studying the market and conducting focus groups, he said, Axys is taking a new, less research-oriented approach to pharmacogenomics service through PPGx.

"We have the customer's perspective," Walker said. "How you identify genes is not what the clinical-development guy cares about. He cares about the relationship between that gene and his drug." PPGx's strong bioinformatics capability is important to its effort, he said.

The CRO market is expected to grow 20 percent to 25 percent annually "for the foreseeable future," Walker said, with pharmaceutical companies outsourcing more services. PPD's revenues last year jumped to $285.6 million, an increase of 21 percent over 1997. Diluted earnings per share for last year's fourth quarter jumped 93 percent over the fourth quarter of the previous year, to $0.29.

"[Pharmaceutical companies] don't choose CROs on a 'one-stop-shop' concept," Walker said. "They seek best-in-class capabilities. We want to be 'best-in-class.' PPD had already made a move in this direction by acquiring Intek Labs in 1997."

PPGx, which incorporates Intek, likely will become "a profit contributor [for Axys] in the year 2000 and beyond," he said.

Axys' stock (NASDAQ:AXPH) closed Wednesday at $6.812, up $0.437.

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