Arris Pharmaceutical Corp. said Thursday that it has signed anagreement with Merck & Co. to develop small molecule proteaseinhibitors to battle osteoporosis. It is the seventh deal that Arris haswith a major pharmaceutical company.

Arris, of South San Francisco, acquired the osteoporosis-relatedproteases when it bought Khepri Pharmaceuticals, also of South SanFrancisco, in December 1995. The Merck collaboration takesadvantage of the Whitehouse Station, N.J. company's experience inclinical and preclinical osteoporosis research while exploiting Arris'expertise in generating small molecule inhibitors of protease.

"This collaboration provides us with what we believe is the strongestpartner in the field of osteoporosis," said John Walker, president andCEO of Arris. "With Merck's recent success with Fosamax, theyclearly have the market presence as well as the capability from adevelopment standpoint to move an osteoporosis compoundforward."

While the financial terms of the collaboration were not disclosed, thecompany indicated that its potential value is more than the $21million Arris paid for Khepri in 1995, and is comprised of an up-front commitment fee, research support and milestone and royaltypayments.

The centerpiece of the Arris/Merck collaboration is a protease calledcathepsin K. Khepri identified and established this protease's role inthe disease by studying osteoporotic bone tissue and applying thetechniques of functional genomics. Merck will support Arris'chemistry efforts at creating small molecules to inhibit this enzyme.

When Arris decided to buy Khepri in 1995, the company said itplanned to recoup costs by leveraging Khepri's scientific assets andselling them for more than what was paid for the company. With thissingle collaboration, Arris has more than covered the cost ofpurchasing Khepri.

"This collaboration validates the discovery programs and technologybase that Khepri provided to the company," Walker said. "It validatesour whole acquisition of Khepri."

"Basically, this is an exceedingly well-run company," said RachelLeheny, an analyst with Hambrecht & Quist, in New York. "Thescience is clearly world class, but on top of that, they are veryfocused on making sure that they cover their expenses with thesedeals."

This year alone, Arris has consummated collaborations withPharmacia-Upjohn, SmithKline Beecham plc and now Merck.Leheny noted that such collaborations are fast becoming a model forthe biotech industry and "Arris has been using this model since 1993or 1994."

Walker noted that Arris has leveraged its success throughcollaborations, not equity. As a result, Walker said that in the pastfour years the company's burn rate was a mere $2 million, or lessthan $500,000 per year.

Arris' stock (NASDAQ:ARRS) closed Friday at $14.375, up $0.50on the news. n

-- Lisa Seachrist Washington Editor

(c) 1997 American Health Consultants. All rights reserved.

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