By Lisa Seachrist

Washington Editor

WASHINGTON — Genzyme Molecular Oncology (GMO) has entered into a service agreement with Bayer AG to provide gene expression analysis for drug candidates.

Leverkusen, Germany-based Bayer will use GMO's patented SAGE (Serial Analysis of Gene Expression Technology) to identify novel genes expressed in diseased tissues in order to develop new drug candidates. The analysis will be conducted by GMO for Bayer's biological division in Berkeley, Calif.

The companies aren't releasing the financial terms of the agreement, but Gail Maderis, president of GMO, which is a division of Cambridge, Mass.-based Genzyme Corp., said the deal is the first step in what the company hopes will be an expanding relationship.

"We're very pleased," Maderis said. "This is our second major pharmaceutical account. We believe that of all of the gene expression technologies, SAGE is the most accurate, efficient and complete."

SAGE is a method of quantitating messenger RNA (mRNA) levels in a cell. Developed by Johns Hopkins University, in Baltimore, it was acquired by Genzyme in the purchase of Pharmagenics Inc., of Allendale, N.J., which licensed the technology from Johns Hopkins.

SAGE works by isolating short bits of the mRNA present in a cell. These short sequences, known as SAGE tags, are linked together for efficient sequencing and identification. This creates a data library of differences in gene expression between cells.

Bayer's Disease Targets Undisclosed Even To GMO

Bayer has not told GMO what diseases the collaboration will target. However, Kathy Klinger, senior vice president of genetics and genomics, said one advantage of SAGE technology is that companies don't have to tell GMO what the target tissues are in order to get complete data.

SAGE serves as the major revenue generator for GMO, which currently covers two-thirds of its pipeline development burn rate with collaborations and service contracts.

In May, GMO took this information to the investment community in anticipation of an initial public offering; however, market conditions have postponed that plan indefinitely.

"We went out in May and our story was very well received," said Maderis. "Unfortunately, we were doing our road show when the Asia concerns hit the market. So we chose not to go for the offering in such an unattractive market."

Following Tuesday's drop in the U.S. financial market, Maderis said her company will wait to see what happens before moving forward.

"We have more alternatives than many stand-alone companies, and we have more access to resources so that we don't have to go to the capital markets immediately," Maderis said.

Genzyme's stock (NASDAQ:GENZ) closed Wednesday at $28.875, up $0.50. *