By Debbie Strickland

Staff Writer

A Hayward, Calif., biotech company that issued little news during its first five years of existence debuted this week with a whopper: Metabolex Inc., a development-stage specialist in diabetes treatment, has secured $33.5 million in the biggest financing deal at any privately held biotechnology company thus far this year, plus a collaborative agreement with one of the financiers, Abbott Laboratories, of Abbott Park, Ill.

The financing, enough to fund at least three years of operation at current burn rate projections, is composed of $29.5 million from John Hancock Mutual Life Insurance Co., of Boston, and a $4 million equity investment from Abbott Laboratories. The New York investment bank Lehman Bros. managed the financing.

The Hancock investment is in the form of units, each of which consists of one share of Metabolex stock and a put option that allows the insurance company at certain specified times in the future to put the stock, or sell it back, to Abbott.

"This structure in effect gives [Hancock] security on their principal, while they have all the up-side on the stock," said Thomas Glaze, Metabolex's president and CEO. "This is a conservative biotech investment."

According to Lehman Bros., this novel arrangement could give biotechnology firms a new source of funding -- conservative investors like insurance companies.

"This is the first time this type of financing has been employed to raise funds within the biotechnology industry," said Fred Frank, vice chairman of Lehman Bros. "This structure allows pharmaceutical companies to utilize their strong balance sheets to help the biotechnology companies in their financing efforts, while not significantly affecting the pharmaceutical companies' near-term earnings per share, nor increasing their research budget."

The agreement gives Abbott a stake in Metabolex of under 5 percent, while the Hancock investment "represents approximately 20 percent of the company," Glaze said.

The financing ties into a drug-discovery collaboration agreement between Abbott and Metabolex. A separate collaborative agreement with Abbott's Ross Products Division covers development and marketing of a nutritional supplement for diabetics.

"These agreements, coupled with our acquisition of MediSense Inc. last year and our strong position in clinical testing and nutritional products, emphasize Abbott's intention to be a major participant in diabetes disease management," said Steve Weger, Abbott's vice president for corporate planning and development.

Abbott acquired MediSense, a Waltham, Mass., maker of blood-glucose tests, in 1996 for $876 million.

The Abbott-Metabolex drug discovery efforts focus on Metabolex's Intracellular Glucose Transport Signal Transduction (GTST) pathway and insulin-resistance program. Insulin resistance is characterized by decreased ability of insulin to stimulate the transport of glucose from the blood into the muscle. It is the most significant attribute of non-insulin-dependent diabetes mellitus, or adult-onset diabetes, which represents approximately 95 percent of diabetes cases worldwide.

Under the agreement, Metabolex is responsible for identifying molecular targets involved in the mechanism of insulin resistance and developing screening assays based on them. Abbott will use these assays for high-throughput screening of compound libraries and synthesis of chemical analogues of compounds. Both companies will evaluate potential compounds that result from these efforts.

Abbott gains exclusive worldwide rights to compounds of the collaboration and is responsible for preclinical and clinical development of any drug leads, along with government approval, manufacturing, marketing and sales.

In exchange, Metabolex will receive milestone payments and royalties on resulting products, both in undisclosed amounts.

The product under development with Ross -- an orally active, glucose-lowering substance called Insulin Potentiating Factor for use as an ingredient in medical foods, dietary supplements and food products -- is more likely to make it into the marketplace in the near term. The Ross Products Division, already a leading maker of nutritional supplements for diabetics, receives exclusive worldwide rights and will fund research and development, manufacturing, marketing and sales.

Metabolex will receive undisclosed milestone payments and royalties on eventual product sales.

The agreements with Abbott mark Metabolex's first corporate collaboration in its five-year history, most of which has been spent researching the nature of diabetes.

"We've kept a very low profile," said Glaze, "although we've become widely known within the diabetes research community.

"Our company is different from most biotech companies," he added. "Most are focused on bringing a particular technology to lots of diseases. We've really turned the paradigm around and focused on the disease first, then developing the technology and bringing in partners."

The company's most advanced diabetes therapy is its encapsulation technology to facilitate the transplantation of insulin-producing islet cells. That process, not a part of the collaboration with Abbott, could enter clinical trials next year.

Metabolex got off the ground in 1991 with funding from Charter Ventures, of Palo Alto, Calif., which, over the course of several rounds of financing, has invested more than $20 million.

At some point, the company may conduct a public offering, but such a move is not a priority now, Glaze said. *