By Lisa Seachrist

Washington Editor

Two weeks after announcing the dissolution of a partnership with Novartis to develop a stroke and head trauma treatment, CoCensys Inc. said Tuesday it has struck a deal with Wyeth-Ayerst potentially worth $59 million.

Under the agreement, Wyeth-Ayerst has licensed the Irvine, Calif., company's lead anti-anxiety drug, Co 2-6749, for an up-front licensing fee of $5 million, an equity investment of $5 million and various milestone payments. Wyeth-Ayerst will absorb 100 percent of the clinical development costs for the drug. And, should a product come to market, CoCensys will share in royalties in addition to the $59 million from the licensing deal.

"This was a pretty nice deal," said David Lee, executive vice president of research and development at CoCensys. "Especially because this will likely be an extremely expensive drug development program."

In addition to covering all clinical development costs, Wyeth-Ayerst is funding a research into additional anti-anxiety compounds at CoCensys to the tune of $3 million a year for three years.

"Our lead compound is exciting," Lee said. "But, we are fortunate to have made the arrangement with a company that appreciates the importance of researching back up compounds."

Co 2-6749 is synthetic compound based on a class of naturally-occurring compounds called epalons which bind to the GABAa receptors found throughout the brain. Epalons serve to enhance the effect of gamma amino butyric acid (GABA) — the major calming neurotransmitter in the brain. CoCensys is developing several different synthetic epalons for treatment of anxiety, epilepsy and insomnia.

"Enhancing the GABAa receptor is well-established. For example, benzodiazepines, like Valium, enhance the activity of GABA, " Lee said. "But, our animal models indicate that the synthetic epalons act on a different area of the receptor."

As such, Lee said that the animal experiments also indicate that Co 2-6749 will provide an anti-anxiety effect without excessive side effects like sedation.

Alex Zisson, an analyst with Hambrecht & Quist, noted that the Wyeth-Ayerst deal couldn't have come at a better time for CoCensys. "The company was in a very dangerous cash position; up until now they didn't have enough to make it through the end of the year," Zisson said. "This is a very good deal because they had to put development of this drug on hold while they searched for a partner. Now, they should have this drug in humans by next year."

Edmund Debler, an analyst with Mehta & Isaly, called the Wyeth-Ayerst collaboration "an excellent deal. The most interesting thing about this deal is that it marks a departure from previous deals that focused on co-development programs that required the company to pay half the clinical development costs."

The Wyeth-Ayerst deal is "much more of a classic biotech licensing collaboration," Debler said. "And the deal addresses the catch-22 that the company found itself in where they had to spend money to make the drug attractive to partner in order to get money."

Debler also noted that the anti-anxiety market will be an expanding one as mental illness is increasingly being seen as a chemical phenomenon rather than solely and emotional problem. "Some of the taboos are washing away," he said. "A drug could provide the company with substantial royalties."

Zisson pointed out that the deal was very similar to an arrangement that CoCensys made with Searle to develop an epalon for the treatment of insomnia. Zisson expects that Searle will take the drug into Phase I trials this quarter.

CoCensys' stock (NASDAQ:COCN) closed at $4.06 down $0.06 on the news. *