By Lisa Seachrist

Washington Editor

Combinatorial chemistry specialist Houghten Pharmaceuticals Inc. has entered into a small molecule drug development collaboration with Chugai Biopharmaceuticals Inc., a subsidiary of Chugai Pharmaceutical Co. Ltd., of Japan.

Although the companies did not release financial details of the agreement, it does include up-front cash for the San Diego-based Houghten as well as potential milestone and royalty payments for drugs that are developed out of the deal. In addition, Houghten obtained biological targets in diabetes and central nervous system disorders from Chugai Biopharmaceuticals also in San Diego.

“We view this as a very important deal,“ said Terence McMorrow, chief financial officer at Houghten. “There is research funding for Houghten which is very important for keeping our heads above water. But, we are particularly pleased by the technology transfer, which gives us biological targets.“

Under terms of the agreement, Chugai Biopharmaceuticals will have non-exclusive rights to screen Houghten’s combinatorial chemistry libraries to search for drug candidates to treat diseases of the bone and cardiovascular system as well as cancer and infectious diseases. Chugai will have worldwide rights to any drug that ultimately comes out of the screening, but will pay milestones and royalties to Houghten.

Houghten gains biological targets for diabetes and central nervous system disorders. Houghten will pay Chugai royalties on any drugs developed in these areas. The companies will jointly investigate and develop potential treatments for inflammation.

“In order to divide the biological targets, [Chugai] looked at their high priority targets and we considered our interests,“ McMorrow said. “It is pretty unusual in combinatorial chemistry deals for the chemistry company to gain targets.“

Rachel Leheny, an analyst Hambrecht & Quist in San Francisco, agreed with McMorrow, “This deal, with its exchange of targets, underscores the strength of the company. It is the first time I am familiar with a deal like that.“

“I’m enthusiastic about the deal,“ Leheny said. “It really differentiates Houghten from other chemistry companies. Instead of simply being a service company that provides potential drugs, they are committed to being a drug company as well.“

Houghten’s stock (NASDAQ:HPIP) closed at $6.13, up $0.25.