National Editor

About two years after signing a partnership for protein optimization with Eli Lilly and Co. - and less than a week after filing its first investigational new drug application for a compound being developed in-house - Applied Molecular Evolution Inc. has agreed to merge with Lilly in a deal expected to be worth about $400 million, net of cash.

AME's stock (NASDAQ:AMEV) skyrocketed on the news, rising $5.99 Friday, or 50.9 percent, to close at $17.75.

"I don't think the timing is significant, relative to the IND," said John Sullivan, analyst with Stephens Inc. in Boston. "I'm sure part of the reason is that [Lilly] saw value in the molecule," he added, but the real reason was the pharmaceutical company's familiarity with the "versatility and power" of AME's technology.

Both firms' boards have given their blessings to the merger. AME shareholders must approve the deal, which also needs antitrust clearance and will have to meet other closing conditions, but AME is expected to become a wholly owned subsidiary of Lilly in the first quarter of next year.

Under the terms, AME shareholders will get $18 for each outstanding AME share at closing. They may take the $18 in cash or in shares of Lilly common stock based on its stock price on the closing date, although that is subject to pro-rating so that the total purchase price paid by Lilly is 80 percent stock and 20 percent cash.

AME, which focuses on optimizing genes and proteins, has a collaboration with Indianapolis-based Lilly to use directed molecular evolution on two of Lilly's protein therapeutics in return for an undisclosed up-front signing fee, milestone payments and royalties on sales. (See BioWorld Today, Dec. 20, 2001.)

Lilly's view was probably that "we can buy them now or buy them later, more expensively," Sullivan told BioWorld Today. "We saw the same sort of thing when Merck bought Rosetta."

In 2001, news that Merck & Co. Inc., of Whitehouse Station, N.J., was buying Kirkland, Wash.-based Rosetta Inpharmatics Inc., a genomics tools and software business, for about $620 million in stock boosted the latter's stock 75 percent. (See BioWorld Today, May 14, 2001.)

"I'm reluctant to call it a trend, because everybody's technology platform is different," Sullivan said, and not many such deals have been seen lately. "[The Lilly/AME merger] is much more a function of a company with a terrific technology meeting up with a partner who saw the potential."

AME's Directed Evolution method first creates a library of variant genes based on an initial gene that encodes for a protein of interest. The variant genes then are expressed into functional proteins. In the third and final step, the proteins are screened, or tested, for improved function.

In the merger with AME, Lilly said it plans to report as a one-time charge next year the acquisition of all in-process research and development in the merger, but otherwise the transaction will have no material dilutive impact on the pharmaceutical giant.

AME's IND is for AME-527, described by the company as a humanized monoclonal antibody with fully human frameworks that recognizes tumor necrosis factor-alpha with high affinity and specificity. The drug is the next generation of Malvern, Pa.-based Centocor Inc.'s Remicade (infliximab) for rheumatoid arthritis, said to have 10-fold greater potency than Remicade and six to eight times the potency of Humira, (adalimumab), the RA product from Abbott Laboratories Inc., of Abbott Park, Ill.

"They had a bright future as an independent company," Sullivan said. "I didn't expect [a buyout] this year."