By Frances Bishopp

In a collaboration potentially worth up to $70 million, Eli Lilly & Co. and Millennium BioTherapeutics Inc., a newly formed subsidiary of Millennium Pharmaceuticals Inc., have entered into an agreement for the discovery and development of therapeutic proteins.

The new Cambridge, Mass.-based company will use genomics technology and bioinformatics to discover and develop biotherapeutic products including therapeutic proteins, antibody therapies, gene and antisense therapies.

The agreement, which marks Millennium Bio-Therapeutics' first collaboration, covers a three-year program with Lilly, of Indianapolis, providing $8 million to $10 million in research funding per year with a provision to extend up to an additional two years at the same level of funding.

Lilly will make a $20 million equity investment in exchange for an 18 percent equity share of Millennium BioTherapeutics.

Additional undisclosed licensing fees, clinical development milestones and royalties will be paid by Lilly for specific therapeutic protein product candidates identified in the collaboration and licensed by Lilly.

Millennium BioTherapeutics and Lilly will fund the program equally and each company will have equal rights to select candidate therapeutic proteins from the pool for its exclusive development and commercialization. Steve Holtzman, Millennium's chief business officer, explained the candidate proteins would be selected by each company through a "picking" mechanism, that would allow the companies to alternate the selection, with Lilly having the first choice in the first quarter.

Also, both companies will share the right to use discoveries made in the collaboration to develop small molecule drugs.

Millennium Pharmaceuticals, of Cambridge, transferred to the new company its existing and future biotherapeutic (therapy protein, antibody therapy, gene therapy and antisense) product development rights, which include rights to product opportunities that Millennium retains in any current and future pharmaceutical alliances and those arising from the company's existing and future independent research programs.

Millennium BioTherapeutics has transferred small molecule drug and predictive medicine (prognostic, diagnostic and pharmacogenetic products) rights to the parent company.

Millennium and its new subsidiary currently have approximately 400 employees (375 at Millennium Pharmaceutical and 25 at Millennium BioTherapeutics), and will add staff to both companies. Holtzman said within the next year, the company hopes to add 75 employees at Millennium BioTherapeutics and 100 at Millennium Pharmaceuticals.

Holtzman said formation of the new subsidiary is the end product of Millennium's "17-month and approximately $6 million investment in the therapeutic area."

The assets going into the new company, Holtzman said, are all of Millennium's retained rights out of its pharmaceutical partnerships in the area of biotherapeutic protein products. "Millennium BioTherapeutics becomes the development and commercialization vehicle for all of Millennium's activities with respect to biotherapeutics products [protein antibodies, gene therapy and antisense]," Holtzman said.

The second asset going into Millennium, Holtzman said, is the internal discovery program that has been going on in the company for the last year and a half. Of the thousands of genes Millennium has looked at, Holtzman said, 15 have been selected as high priority, two of which currently are in animal studies.

The start-up company has a valuation of $111 million. Holtzman said the new company would realize significant value for Millennium shareholders, if the asset base and opportunities for value creation are significant enough. "It wouldn't make sense if you start off a new company and tell them to get a $10 million valuation," Holtzman said. Millennium BioTherapeutics has at least two to three years of cash, he said.

Leslie Wright, an analyst with Robertson Stephens & Co., of New York, said Lilly is providing "substantial" confirmation of Millennium's management plan, which, instead of keeping drug development within the company, has spun out the new subsidiary to create "an entrepreneurial atmosphere."

"Having an expert in protein development like Lilly step up to the plate to the tune of possibly $70 million is quite a validation for Millennium," Wright said.

John Maraganore, who will head up the new company as its vice president and general manager, pointed out protein therapeutic drugs, since 1975, have grown to a value of $8 billion in sales in today's market, and added that the new company intends to be at the "front-end" of the explosion of new changes in genomics-based technology.

In January 1997, Millennium took over drug discovery company ChemGenics Pharmaceuticals Inc. in an exchange of stock valued at nearly $90 million. The merger was designed to broaden Millennium's basic human disease gene research to include genetic targets in pathogenic organisms for anti-infective drugs.

Millennium Pharmaceuticals has collaborations with American Home Products, of Madison, N.J., for genes involved in central nervous system disorders, with Lilly for atherosclerosis and cancer (a $69 million collaboration), with Roche Holding Ltd., of Basel Switzerland, for obesity and Type II diabetes, with Pfizer Inc., of New York, for fungal disease, and with Astra AB, of Sodertalje, Sweden, for inflammatory disorders of the respiratory system.

Millennium's stock (NASDAQ:MLNM) closed Thursday at $17, up $0.50. *

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