By Mary Welch

Applied Molecular Evolution Inc. (AME) wants to raise $85 million in an initial public offering (IPO), with the proceeds aimed at the expansion and enhancement of its AMEsystem technology.

The company also will use the proceeds for internal development projects and general corporate purposes.

CIBC World Markets Corp., of New York, is the lead underwriter. PaineWebber Inc. and SG Cowen Securities Corp., both of New York, also are underwriting the offering. As of May 3, AME had 15.3 million shares outstanding, according to the registration statement.

The IPO proceeds, along with current cash and ongoing revenue, should provide sufficient capital to fund operations for the next two years.

The San Diego-based company is involved in the emerging field of directed evolution, a process for optimizing genes and proteins for specific commercial purposes, particularly biotherapeutics, which it described as protein pharmaceuticals such as antibodies, cytokines, hormones and enzymes.

The company intends to use its directed evolution technology to develop novel human therapeutics, as well as improve currently marketed FDA-approved drugs. It also plans to develop novel proteins for applications outside the area of human therapeutics in collaboration with other companies.

The company¿s AMEsystem replaces one amino acid at a time in a selected region of the target protein. It then replaces each amino acid in the region of interest with each of the other 19 possible amino acids, and evaluates the resulting proteins for improved characteristics. The system goes through the iterative process, combining positive changes until an optimized protein is produced.

AME believes its approach differs from that of competitors because it precisely controls the locations of where it introduces change, as well as the amount of change introduced. In addition, it tests the complete set of possible changes for each amino acid, thus minimizing the risk of entirely missing a possible improvement, it said in the filing.

In addition, AME has developed methods for applying its technology to proteins that cannot be produced in bacteria, which includes many important classes of therapeutic products.

Company Has Deals With MedImmune, Bristol-Myers

Among the clients AME has validated product candidates for are MedImmune Inc., of Gaithersburg, Md., and New York-based Bristol-Myers Squibb Co. (BMS).

Last year, AME agreed to develop four monoclonal antibodies for MedImmune. Vitaxin, AME¿s angiogenesis inhibitor, was exclusively licensed to MedImmune in return for an equity investment, milestone payments and royalties. MedImmune is responsible for all future clinical development, manufacturing and commercialization of Vitaxin.

AME increased by 90-fold the affinity for Vitaxin, an antiangiogenic monoclonal antibody that attacks tumors by cutting off their blood supply, and increased its manufacturing yield by 300 percent, the company said.

MedImmune will provide three more antibody targets to be optimized by AME.

At the time of the deal, MedImmune made a $4.15 million equity investment, and will provide research funding for the optimization of those antibody targets. MedImmune will pay milestone and royalties related to the commercialization of any product.

The company has two agreements with BMS. In the filing, AME said ¿we significantly reduced the risk that BMS¿s anti-CD40 antibody, a monoclonal antibody to treat graft-vs.-host disease caused by organ transplant rejection, would cause serious side effects in patients, and we increased the affinity of this antibody for its target by 500-fold. We also increased by over 30-fold the affinity for its target of BR96, a monoclonal antibody that targets solid tumors, and expanded the range of tumors that it recognizes.¿

AME received more than $27 million for its optimization work under those agreements, and potentially may receive future milestone payments and royalties.

BMS has licensed the improved version, hBR96, to Seattle Genetics Inc., of Bothell, Wash., for development of a treatment for breast, lung, ovarian, prostatic, colorectal and pancreatic cancers. AME may receive milestone payments and royalties from this product.

Incorporated in the summer of 1989 under the name Ixsys Inc., the name was changed in February. AME posted 1999 year-end revenues of $2.6 million and a net loss of $3.2 million. For the first quarter of 2000, which ended March 31, the company recorded revenues of $831,000 and a net loss of $815,000. As of March 31, the company had $2.3 million in cash.

Among the company¿s largest institutional shareholders are Alpha Bioventures LLC, of Ferrisburg, Vt.; Delphi Ventures, of Menlo Park, Calif.; Domain Partners, of Princeton, N.J.; Attenuon LLC, of New York; Hilal Capital Management LLC, of New York; Medicus Venture Partners, of Menlo Park; HarbourVest Partners LLC, of Boston; and MedImmune.

Applied Molecular Evolution¿s proposed Nasdaq ticker symbol is AMEV.