*Exclusive* Ergo Sci Seen Close to Diabetes Partnership Deal

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Ergo Science

(ERGO)

is close to signing a long-awaited partner for its diabetes drug

Ergoset

, perhaps with

Johnson & Johnson

(JNJ) - Get Report

, according to a major investor in the company who asked to remain anonymous.

The deal could come as early as this week, says the investor. The company presents Tuesday morning at the

Credit Suisse First Boston

health care conference in New York. A company spokeswoman wouldn't comment: "I am absolutely in no position to comment whatsoever," says Donna LaVoie, head of investor relations. J&J didn't return a call.

The biotech has said that it expected to sign up a partner for Ergoset, a pill for adult-onset diabetes, before it launches the drug (if approved, of course). Investors are highly skeptical about just how significant the drug is for diabetes -- which is a multi-billion dollar market worldwide -- and having gone this long without a partner has only increased the worry. Lacking a partner, Ergo's stock has traded down about 20% since mid-October. The stock is up about 10% this year to close Friday at 17, up 1/4 on light volume.

"They've been trying

to sign a deal. Frankly, the longer they wait, you wonder what their strategy was," says Charles Duncan, an analyst for

Chatfield Dean

, a modest Colorado investment bank. Duncan rates the company a strong buy.

A partnership with a member of Big Pharma would give investors more confidence in the drug, but skeptics caution that even Big Pharma makes mistakes. J&J has a deal with

Amylin

(AMLN)

to co-develop the hormone amylin for diabetes patients. But recent setbacks with that drug may be pushing J&J to explore other possibilities.

Investors had hoped a partnership would have been announced by the end of last year. Wall Street expects that the partner would be one of the major diabetes players, including

Warner-Lambert

(WLA)

,

Eli Lilly

(LLY) - Get Report

, or perhaps even

Pfizer

(PFE) - Get Report

, which is exploring alternative delivery of insulin.

Schering-Plough

(SGP)

had been rumored to be exploring a partnership with Ergo, but the big drug giant ended up signing a deal with

Novo Nordisk

, a major insulin force, in January to jointly market diabetes products in the U.S. instead.

The deal might be a 50/50 joint venture to sell Ergoset, a diabetes drug, with a $10 million to $15 million upfront payment, and then milestone payments, according to the investor. Ergo filed for approval of Ergoset in August and is expected to have an FDA panel meeting in May or June.

The company said in December, 1996 that a phase III trial of Ergoset the drug was safe and effective. Ergoset, the company said, showed a statistically significant 0.6% reduction in glycated hemoglobin, a measure of sugar control in comparison to a placebo in a 120 patient study. These results are marginal, some investors say.