Pharmacopeia Inc. is spinning off its drug discovery business, fully separating the unit from its larger software division.

The Princeton, N.J.-based company said its board approved a plan to break the two units into a pair of independent, publicly traded companies. The plan calls for the spin off of its drug division to its current stockholders through a pro-rata distribution of 100 percent of the common stock of Pharmacopeia Drug Discovery Inc. The newly formed company then plans to apply for listing on the Nasdaq market.

"Pharmacopeia's board of directors has proposed to declare a dividend in the first quarter of 2004," Jim Rivas, the company's public relations manager, told BioWorld Today. "Essentially, there will be a new issue of shares that specifically will be Pharmacopeia Drug Discovery, which will be distributed to Pharmacopeia shareholders."

He added that the company is filing further details with the SEC, noting that the dividend of shares would be tax free to shareholders and Pharmacopeia.

Following the spin off, Pharmacopeia will continue to operate its scientific software business and then change its name to Accelrys Inc. In the end, Pharmacopeia's current shareholders will hold equity in both new entities, Rivas said. Through Sept. 30, Pharmacopeia reported 23.8 million shares outstanding.

San Diego will serve as the base for Accelrys, which will have between $90 million and $100 million in cash and no debt following the transaction. Pharmacopeia's Accelrys unit, which employs about 530 people, generated about $54 million in revenue for the first nine months of the year, and $95.1 million during all of last year.

According to plans, its business focus should remain unchanged - Accelrys will continue to design, develop, market and support software and provide related services for new product discovery and development.

Pharmacopeia Drug Discovery also will continue to operate in line with its current focus - seeking collaborative drug discovery opportunities and working to augment its internal pipeline. Its headquarters will remain in Princeton.

Pharmacopeia Drug Discovery employs about 170 people and is expected to have between $35 million and $45 million in cash, also absent of debt. It generated about $22 million in revenue for the first nine months of this year, compared to $29.3 million for all of 2002. Since August, its collaborators have begun clinical testing of two of its compounds.

"Each business will now have independent management teams exclusively focused on the strategy of the individual businesses," Rivas said, adding that the current structure possibly holds the two businesses back from their full potential in their respective markets. "So each team will be better positioned to pursue strategic opportunities per those businesses."

On the personnel front, current Pharmacopeia chairman, CEO and president Joseph Mollica is expected to serve as the drug discovery company's president and CEO until a successor is named. Current Pharmacopeia directors Gary Costley, Frank Baldino and James Marino will serve on its board. Pharmacopeia's drug discovery chief operating officer, Stephen Spearman, also will remain with the group.

Mark Emkjer, currently the software business's president, will become Accelrys' president and CEO. Current Pharmacopeia directors Ricardo Levy, Kenneth Coleman and Paul Bartlett will continue on Accelrys' board. Pharmacopeia's drug discovery chief financial officer, John Hanlon, will remain at Accelrys as its chief financial officer.

Pharmacopeia, which is being advised by New York-based Credit Suisse First Boston LLC, expects the spin-off to occur by the end of March. On Friday, Pharmacopeia's stock (NASDAQ:PCOP) gained $1.48, or 11.5 percent, to close at $14.30.