Molecular Sex for Fun and Profit.

Diversa scours Latin America for genes it can breed into products.

DIVERSA CORP. HAD ONE OF BIOTECH'S MOST SPECtacular IPOs last year. The San Diego company's share price tripled on the very first day of trading, then doubled again over the next two weeks. The stock has since slipped but Diversa, which prospects for genetic raw material in Latin America, remains one of the leading DE--or directed evolution--companies.

A new and exciting--if financially risky--area of biotech, directed evolution goes a step beyond celebrated genomics companies like Celera, Incyte and Millennium by altering natural DNA and creating novel gene products it is hoped will improve on what nature created slowly and randomly over 3 billion years.

Diversa specializes in a technique known as gene shuffling. During sexual reproduction genes naturally recombine, producing obvious physical traits such as eye and hair color and more subtle differences, the genetic origin of which we are only beginning to understand. Diversa's scientists broaden, systematize and accelerate the process, breaking apart genes then mixing the fragments with parts of equivalent genes taken from different organisms, a process known as molecular sex. Diversa then tests the hybrid genes to see if they work better than the original ones. "Their technologies are very promising in digging out the hidden gene treasures," says University of Illinois chemical engineering professor Huimin Zhao. "The commercial potential for Diversa's technology is huge."

Diversa thus creates powerful new enzymes, biological catalysts that can accelerate otherwise random chemical reactions a billionfold. Such enzymes are used in everything from chemical manufacturing to food processing to new pesticides and herbicides. Diversa already licenses heat-tolerant enzymes that improve oil and gas recovery from deep wells by keeping drilling fluids flowing and more products are on the way.

The company is also inventing drugs. "We really believe in the combination of discovery and evolution as the best path to reaching the best products," says Monica Sullivan, Diversa's manager of licensing and technology transfer.

Other biotech companies, notably Maxygen, in Redwood City, California, perform gene shuffling and related techniques (see table). But only Diversa goes out into the world seeking entirely new microorganisms for its DNA. The ability to access nature's tremendous biodiversity gives Diversa a "big advantage" over Maxygen, says Jeff Moore, a senior research biochemical engineer at Merck Research Laboratories in Rahway, New Jersey. Maxygen's strength is in the technology of directed evolution science, not in genetic diversity, Moore says. "Gene shuffling relies quite heavily on the diversity of the genetic information that's input into that process ... That's the heart and soul of [Diversa's] strength."

Diversa has bio-prospecting agreements in place in six countries. It has found new "thermophile" microbes in the hot springs of Yellowstone and collected bacteria from a whale carcass in the Pacific Ocean. According to Diversa CEO Jay Short, only about 10,000 microbial species have been catalogued, but the company's growing DNA libraries now contain genes from nearly 2 million different strains of microorganisms. Many are from extreme environments, and Diversa expects their genes to yield super-tough new biological products that only nature could invent.

Gutsy research. In Latin America, Diversa has ongoing bio-prospecting programs in Costa Rica with the Institute of Biodiversity (INBio) and in Mexico with the Universidad Nacional Autonoma de Mexico; it is negotiating agreements in Panama and Brazil. In Costa Rica, Diversa's INBio collaborators collect organisms from thermal spots like hot springs, mud pots and steam vents. And, says Leif Christoffersen, diversity coordinator for Diversa, "they're looking at insects that eat strange things like toxic plants," says. The insect guts are extracted in order to find organisms that help the insects neutralize toxic chemicals. Soil samples are another rich source of biodiversity. In every case, Diversa extracts DNA from the raw biological sample, clones it, then runs the DNA products through a battery of tests. The best ones are improved through gene shuffling or other techniques.

But Moore cautions that gene shuffling and other such methods are not yet fully accepted by drug companies, which are Diversa's most important customers, because they're accustomed to using traditional chemistry for making drugs. "The industry as a whole is adopting a 'wait and see' attitude," he says. Although Moore believes that deliberately evolved enzymes will eventually play a major role in the synthesis of new drugs, that hasn't happened yet. "DE is a powerful [but] largely potential tool," he says.

Diversa is not yet profitable. Although company revenues increased from US$2 million in 1999 to about $24 million in 2000, overall losses are growing, too, as R&D expenses mount. Although Diversa has deals with Aventis, Introgen, Syngenta, Celera and Dow Chemical, it must find other partners. Despite talks between Diversa and Merck, "we have not been able to come to an arrangement that's comfortable between both parties," says Moore.

So far, so good. While genetically engineered drugs and industrial products haven't generated the same controversy as genetically modified foods, gene shuffling might raise a red flag for consumer groups. "Some of our products are genetically engineered," notes Diversa's stock prospectus. "If we are not able to overcome the ethical, legal and social concerns relating to genetic engineering, our products may not be accepted."

Consumer distrust of biotechnology, for now, seems limited to genetically altered crops. Despite the recent ruckus over modified corn in taco shells in the United States, genetically altered biological drugs, as well as genetically modified enzymes used in the industrial synthesis of drugs, have been on the market since the early '80s with almost no controversy. People seem happy to take genetically engineered hormones, for example, but get nervous about eating a genetically altered potato chip.

Whatever obstacles might be ahead, Diversa stands out among the new wave of directed evolution companies as "the major player in cataloguing, understanding and actually having the diversity," in Moore's words. The next few years will reveal whether gene shuffling's potential can be translated into concrete commercial reality.

                 DIRECTED EVOLUTION COMPANIES TAKE OFF
COMPANY            YEAR OF IPO,    MAIN APPROACH
                   DOLLARS RAISED
Applied Molecular  2000            Directed evolution
Evolution          $435 million    of monoclonal
                                   antibodies
Diversa            2000            Combines diversity
                   $200 million    bio-prospecting with
                                   directed evolution
Enchira            1993            Molecular breeding/
Biotechnology [*]  $16 million     gene shuffling
Maxygen            1999            Molecular breeding/
                   $110 million    gene shuffling
Phylos, Inc.       Privately held  Directed evolution
                                   of RNA/protein fusion
                                   products
COMPANY            MAJOR COLLABORATORS
Applied Molecular  * Bristol-Myers Squibb
Evolution          * Medimmune
                   * Cell Matrix
Diversa            * Aventis
                   * Dow Chemical
                   * Syngenta
Enchira            * Genencor
Biotechnology [*]  * M.D. Anderson Cancer
                   Center
Maxygen            * Integrated Genomics
                   * Pfizer Pioneer Hi-Bred
Phylos, Inc.       * Aventis
                   * Cubist Pharmaceuticals
(*.)formerly Energy Biosystems
SOURCE: LATIN TRADE