Under the pact, Lion and Bayer plan to set up a so-called bioinformatics center in Cambridge, Massachusetts, where Bayer scientists will use Lion's gene-hunting software to comb dozens of international databases packed with esoteric information about new genes. Bayer has the right to acquire full control of the new bioinformatics venture when the accord expires in 2004.

Bayer has lagged behind major rivals such as SmithKline Beecham PLC, Glaxo Wellcome PLC and Roche Holding Ltd in building up genetic prowess, which promises to be a crucial tool in discovering blockbuster medicines of the future. But last year, Bayer showed it was determined to catch up -- forging a $465 million drug-discovery partnership with US biotechcompany Millennium Pharmaceuticals Inc. The accord with Lion ``brings us the last key link in the genetic research platform we need,'' said Wolfgang Hartwig, the research director at Bayer's drug division.

The deal is the biggest breakthrough yet for Lion, a two-year-old firm based in Heidelberg, Germany. Lion's eclectic team of founders and senior management includes a former auto-parts executive, a co-founder and former senior executive at German software company SAP AG, and a tight-knit group of software whizzes who pioneered electronic gene-hunting systems at the European Bioinformatics Institute.

Lion already has snagged collaboration pacts with major drug makers such as Pharmacia & Upjohn Inc and Boehringer Ingelheim GmbH. Moreover, several other prominent pharmaceutical companies already have agreed to license a new version of SRS, a software program that provides a convenient interface to a broad range of popular scientific databases.

Lion has exclusive commercial rights to the new SRS-6 systemunder a joint venture with the European Bioinformatics Institute. Lion also has moved aggressively to acquire rights to proprietary biological data - such as computer programs for analysis of cancer genes developed by the German Cancer Research Center, also based in Heidelberg.

Deluged by data, pharmaceutical companies are struggling to design computers powerful enough to digest the information. George Poste, chief technology officer at SmithKline, stunned the pharmaceutical fraternity six years ago by forging a $125 million research alliance with Human Genome Sciences Inc, a pioneering gene research firm.

But with little fanfare, Dr Poste soon spent hundreds of millions of dollars to beef up SmithKline's in-house computer systems. It is just the beginning: Dr Poste frequently predicts that one of the defining features of the 21st century will be the convergence between computing and biology -- a development likely to spur profound though unpredictable social fallout.

Pharmaceutical research obviouslyis the cutting edge of that trend. ``Companies like SmithKline and Glaxo already are re-engineering their information management systems. They have to, or they'll drown in data,'' said Dr. Friedrich von Bohlen, Lion's chief executive and co-founder. ``New technologies are being introduced every day. And data processing volumes will increase [a hundredfold over the next couple of years,'' he added. ``But there's no system around today that can handle this much data. Many companies are lost already.''

In a recent interview, Glaxo's research director James Niedel described how the British company spent the past four years methodically analysing research processes - "and automating everything possible," he said. Gene sequencing and automated chemistry have been high-profile targets. But there also have been sweeping changes in less glamourous areas, such as electronic publishing and warehousing. "It's striking how inefficient the drug industry has been because there's been no pressure," Dr. Niedelsaid.

Lion's blueprint for the venture with Bayer calls for a seamless in-house system offering scientists anywhere in the world access to rudimentary data on the sequences of unknown genes. Dr. von Bohlen promises to add software capable of translating that raw data to a protein target and then examining chemistry databases for compounds with potential structural affinity. Under the contract, Lion promises to discover at least 500 new gene targets through its electronic searchers - while at the same time providing validation of an additional 70 genes discovered by Millennium in conventional laboratories, also called ``wet'' labs.

Joining forces with Lion helps Bayer avoid a key competitive pitfall - the scarcity of experienced bioinformatics specialists. ``The most limiting resource in this business is people,'' Dr Von Bohlen says. Scientific journals bulge with advertisements from companies trying to recruit bioinformatics staff - and though companies are lucky to find two or three people after a year,``you need a group of five to 10 `bioinformaticians' to really be able to do anything,'' the Lion chief added.

Lion's payroll boasts about 50 of these so-called bioinformaticians -- most of whom were trained at leading institutions. That academic background is crucial, because so far the best gene-hunting software has been written by academics and usually made available to all comers through the Internet.

But companies including Incyte Pharmaceuticals Inc of the US and Oxford Molecular Group PLC have grown rapidly by offering drug companies access to more convenient commercial software packages. Bayer's Dr Hartwig is convinced that specialist companies such as Lion and Incyte will play increasingly important roles in the future.