LONDON - Drug discovery services company Oxford Molecular Group (OMG) plc has agreed to invest up to £2.5 million in MicroGenics Ltd., an Oxford University spin-off, with the aim of eventually turning it into a subsidiary.

MicroGenics was formed by Jeff Errington, professor of microbiology at Oxford, in the U.K., to develop screening systems for novel antibiotics based on his research into bacterial cell division and spore formation.

OMG is paying £500,000 for 19.99 percent of the ordinary share capital, with the remaining equity held by Errington and Oxford through its technology transfer arm, Isis Innovation Ltd.

In addition, OMG is subscribing £50,000 for preference shares in MicroGenics, with a further tranche of £950,000 over the next 12 months. OMG also will make a loan of up to £1 million to the new company. The investment will be funded from existing cash resources.

OMG has the right to acquire MicroGenics from 2000 to 2003, at a price based on 1.5 times earnings or eight times profit.

David Jackson, chief operating officer of OMG, told BioWorld International, “Our experience with two similar start-ups we have supported, Cambridge Combinatorial and Cambridge Drug Discovery, is that this is a more constructive way to found a company - to set it up with its own identity with the intention of it becoming part of the group.“

There is also a provision for further shares to be subscribed by managers joining MicroGenics, which Jackson said “is designed to incentivise new management.“ The £2.5 million start-up funding is expected to see MicroGenics through to profitability.

Through his work on bacterial cell division Errington has identified new targets that address the problem of resistance to existing antibiotics.

“If we are successful in finding chemicals which act on these targets, we will have antibiotics which have a novel mode of action,“ said Jackson.

Apart from offering new chemical entities to pharmaceutical companies, MicroGenics will provide its screens for testing against pharmaceutical companies' own compounds.

“OMG's investment in MicroGenics reflects its strategic aim of being able to offer a complete range of drug discovery services and to commercialize key technologies emerging from leading academic centers.“

Jackson noted OMG, which also emerged from Oxford University, keeps in close touch with intellectual property developments at the university.

“We are always looking for ways to expand our range of services,“ he said.

Last week OMG also disclosed it has signed a drug discovery contract with Mitsubishi Chemical Corp., of Tokyo, to identify lead compounds for the treatment of metabolic disorders.

The contract, signed jointly with OMG's affiliate Cambridge Combinatorial Ltd., involves an up-front fee by Mitsubishi, research funding and milestone payments.

Under the collaboration, Cambridge Combinatorial will synthesize novel libraries designed by OMG.

“This is a very significant deal for us, as it expands our market in Japan, where there is a drive to put more emphasis on the pharmaceutical sector. It demonstrates our ability to deliver high-value services and proves our combinatorial chemistry is leading edge,“ Jackson said. *