Associate

Diversa Corp. acquired a slate of preclinical antifungal compounds and intellectual property from GlaxoSmithKline plc in exchange for equity, and said it was restructuring a joint venture with The Dow Chemical Co.

It also released second-quarter earnings.

The three items combined to make a full 24 hours for San Diego-based Diversa. The decision behind the antifungal program acquisition "had several drivers," said Jay Short, the company's president and CEO.

"We knew of this collection because [Senior Vice President of Pharmaceutical R&D Gary Woodnutt] was previously vice president of anti-infectives at GlaxoSmithKline before he came to Diversa," Short told BioWorld Today. "So we had good knowledge about the basic platform."

The compounds acquisition bolsters its program on the pharmaceuticals side of the business, and it hopes to file an investigational new drug application for one of the newly acquired compounds in 2004. Toward that end, the company would like to bring aboard people with clinical expertise. The best way to attract good talent, Short said, is to have a strong pipeline.

Diversa issued 806,873 shares for the program from London-based GSK. Based on Monday's closing price of $10.69, the stock was worth about $8.6 million. For that, Diversa gets worldwide rights to "a whole group of compounds," Woodnutt told BioWorld Today, including "the starting lead plus a number of synthetic derivatives." There is intellectual property on about 1,000 compounds, some of which look promising, he said.

Diversa's stock (NASDAQ:DVSA) fell 4 cents Tuesday to close at $10.65.

The antifungal compounds are naturally derived and belong to the sordarin class of chemicals. Diversa said preclinical data demonstrate that sordarins display more activity than azoles - the current standard of care - and have activity against azole-resistant fungal strains. Also, the compounds are expected to be deliverable either orally or via intravenous injection. The company said it expects the initial IND would be filed in invasive candidiasis.

The Innovase LLC joint venture with Dow, of Midland, Mich., was formed in June 2000. Its focus was on discovering and developing enzymes with improved characteristics for industrial and consumer applications. The companies have been in discussions concerning restructuring the entity and have signed a nonbinding term sheet to make modifications. Specifically, they will continue to work on projects in the industrial enzyme field as well as other projects of interest, and Diversa will continue to develop several enzymes in the Innovase pipeline. Diversa said it plans to commercialize "at least one" of the compounds in 2004. The term sheet stipulates Dow will make payments of $5 million to Diversa.

"We are realigning strategically," Short said. "[The restructuring] allows us to regain some products in this area but allows us to eliminate a redundant cost. It's a win-win, given where we both are right now. Innovase still exists as a legal entity, it's just that Dow funding for some activities will cease."

Loss Grows, But Revenues Growing, Too

For the quarter ended June 30, Diversa posted a net loss of $12.5 million, or 30 cents per share; the consensus estimate was a loss of 31 cents. For the first six months of the year, Diversa lost $33.5 million. However, the loss for both the quarter and the year included write-offs - $1.9 million associated with a Syngenta Participations AG transaction, and $10.8 million associated with acquired in-process research and development, respectively. (In December, Diversa and Syngenta formed a collaboration around pharmaceutical and plant applications, with Syngenta taking a larger equity position in Diversa, and Syngenta scheduled to provide $118 million in funding. See BioWorld Today, Dec. 5, 2002.)

Diversa also updated its guidance. It had previously estimated a net loss for 2003 of $47 million to $50 million, said Karin Eastham, Diversa's senior vice president, finance, and chief financial officer, but now sees that loss climbing to between $58 million and $61 million in 2003. However, she noted, "that includes a number of noncash charges that aggregate to more than $25 million related to the GSK and Syngenta transactions."

The shares to GSK will be a charge of about $8.7 million, she said, and overall the company will incur a charge of about $17 million related to Syngenta.

Looking further ahead, the company expects to report a GAAP net loss of $30 million to $35 million in 2004, which includes a $7 million noncash charge related to the Syngenta transaction of 2002. In 2005, it still expects to report a loss, but that sum should be less than the loss in 2004, Eastham told BioWorld Today.

Diversa is developing products in several areas, including agricultural, chemical processing and industrial. Its industrial and agricultural enzymes, as well as other products, contribute to its bottom line. It reported $200,000 in product revenue in 2002, and expects that figure to rise to $2 million this year and more than $10 million in 2004.

"And we have high hopes it will continue to grow," she said.