In a move that may signal consolidation of genomics and combinatorial chemistry companies, combining technologies that can translate disease gene discovery into small molecule drugs, Sequana Therapeutics Inc. and Arris Pharmaceutical Corp. said today they will merge to form a new firm in a stock swap valued at $166 million.

Under terms of the deal, Arris, of South San Francisco, will take over Sequana, of La Jolla, Calif., by issuing 1.35 shares of common stock for each share of Sequana. Based on the closing stock prices Friday of each company — Arris (NASDAQ:ARRS) at $12 and Sequana (NASDAQ:SQNA) at $11.25 — the latter's shareholders will receive a 44 percent premium in the buyout.

Arris President and CEO John Walker will remain as CEO of the new company, which will be called Axys Pharmaceuticals Inc. and will be headquartered at Arris' site in South San Francisco.

Sequana's president and CEO, Kevin Kinsella, said he will remain a member of Axys' board, but will not continue as an executive of the new company.

In addition to the merger, which is expected to be complete in early 1998, Sequana said it negotiated a potential $103 million collaboration with Warner-Lambert Co., of Morris Plains, N.J., focusing on drug development for schizophrenia and bipolar disorder. The alliance is based on Sequana's gene discovery efforts in those two areas.

The five-year alliance will guarantee the new company, Axys, nearly half of the $103 million in up-front licensing fees and research funding. The balance will be earned in milestone payments and additional research funding tied to extensions of the collaboration.

Sequana officials also said they are renegotiating their alliance on diabetes and obesity gene discovery with Glaxo Wellcome plc, of London. In prepared statements, the two companies said "each is engaged in independent research activities that may be deemed to overlap in the context of the original agreement," which was formed in 1994.

Walker said the combination of Arris and Sequana's pharmaceutical alliances — which include partnerships not only with Glaxo Wellcome and Warner-Lambert, but also with Merck & Co., of Whitehouse Station, N.J., Bayer AG, of Leverkusen, Germany, Pharmacia & Upjohn Inc., of Windsor, U.K., Boehringer Ingelheim GmbH, of Ingelheim, Germany, Roche Holding Ltd., of Basel, Switzerland, and Abbott Laboratories, of Abbott Park, Ill. — represents $500 million in funding for Axys.

Mike King, analyst with Vector Securities International, of Deerfield, Ill., said the Arris-Sequana merger represents "the shape of things to come" in the biotechnology industry.

"We will continue to see this trend," he added, referring to the combination of gene discovery, combinatorial chemistry and high-throughput screening technologies.

"The more information you have, going from genetic targets to compound discovery to animal data [about therapeutic effect]," King said, the more valuable a company becomes to pharmaceutical partners.

King noted Millennium Pharmaceuticals Inc., of Cambridge, Mass., made a similar move in its takeover of ChemGenics Inc., also of Cambridge.

ArQule Inc., of Medford, Mass., King said, has taken another route, broadening its base of combinatorial chemistry and drug design technology through collaborations with Aurora Biosciences Corp., of La Jolla, Calif., and Cadus Pharmaceuticals Inc., of Tarrytown, N.Y. — both of which have high-throughput, cell-based screening capabilities — and RiboGene Inc., of Hayward, Calif., Scriptgen Pharmaceuticals Inc., of Medford, Mass., and Signal Pharmaceuticals Inc., of San Diego, all of which discover genetic targets.

Walker said his new company will continue to negotiate collaborations with pharmaceutical companies.

"We fully expect to have another pharmaceutical alliance in targeted drug discovery" to announce soon, he observed.

But Walker added Axys also will focus on its own drug development and commercialization in at least two areas, cancer and inflammatory diseases, based on progress made by Arris and Sequana in treating those diseases.

In addition to Walker, Axys' top management will include Daniel Petree, Arris' executive vice president of corporate development, as chief operating officer; Timothy Harris, Sequana's head of research and development, as manager of research at Sequana's laboratories; and Michael Venuti, Arris' head of research and development, as manager of research at Arris' laboratories.

Kinsella, who was a partner in Avalon Ventures, of San Diego, prior to taking over Sequana, said that after some time off, he plans to get back into the venture capital game. *