A strategic restructuring plan announced by Eli Lilly and Co. onTuesday will involve the sale of its only independentbiotechnology companies: Hybritech Inc. and Pacific BiotechInc.

The decision follows an announcement last October thatHybritech was dropping its development of radioimmunetherapeutics and in vivo diagnostic imaging products. Hybritechnow produces only in vitro diagnostics.

Lilly (ASE:LLY) of Indianapolis said it is divesting its medicaldevices and diagnostics businesses to concentrate on its corepharmaceutical business, which includes biotechnologyproducts both in development and on the market. The companyalso maintains a number of alliances and agreements withindependent biotechnology companies.

Under the restructuring plan, Lilly will move six medicaldevices and diagnostic businesses into a holding company,which will then be divested through a spinoff to Lillyshareholders or through public offerings of the holdingcompany's stock. The six businesses are AdvancedCardiovascular Systems Inc. of Santa Clara, Calif.; CardiacPacemakers Inc. of St. Paul, Minn.; Devices for VascularIntervention Inc. of Redwood City, Calif.; Heart RhythmTechnologies of Temecula, Calif.; Ivac Corp. of San Diego; andOrigin Medsystems of San Carlos, Calif.

Three of Lilly's businesses -- Hybritech and Pacific Biotech,both of San Diego, and Physio-Control Corp. of Redmond, Wash.-- will be sold outright. Lilly has retained Morgan Stanley & Co.to assist in the implementation of the restructuring plan.

Lilly purchased Hybritech in March 1986 for $364 million. Theacquisition also included the creation of contingent paymentobligation units (CPUs) under which Lilly would pay Hybritechshareholders up to an additional $268 million based onHybritech's earnings. Because of the company's low earnings,however, additional payments were never made, a Lillyrepresentative said.

Hybritech currently holds a license to one of Metra Biosystems'pyridinium collagen crosslinks, which it is developing as adiagnostic for metabolic bone disease. Hybritech also maintainsa research collaboration with Athena Neurosciences Inc. for thedevelopment of Alzheimer's disease diagnostics; a collaborativedevelopment, manufacturing and marketing agreement withBaxter Healthcare Corp. for MAb-based tests for cancer andother conditions; a non-exclusive licensing agreement for EnzonInc.'s SCA protein technology; an exclusive worldwide licensingagreement for Idexx Laboratories' Icon immunoassaytechnology for veterinary diagnostics; and an R&D distributionagreement for the U.S. and Europe for Matritech Inc.'s bladdercancer diagnostics, among others.

Pacific Biotech was acquired in May 1990 for 500,000 shares ofLilly common stock, then trading at approximately $78 pershare, placing the value of the acquisition at about $39 million.Pacific Biotech develops rapid immunodiagnostic tests usingmonoclonal and polyclonal antibody technology.

In the first three quarters of 1993, Hybritech and PacificBiotech reported combined profits of $60.4 million on grosssales of $113.9 million.

Patricia Padgett Lea, an analyst at Vector SecuritiesInternational Inc., told BioWorld the divestiture is ultimatelygood for Lilly. By selling Hybritech, she believes Lilly is losingan unprofitable and disappointing experiment in radioimmunetherapy and in vivo diagnostic imaging. "They are positioningthe company to be a global player five to 10 years from now,"she said. Divestiture of its medical device and diagnosticsdivisions will allow Lilly to concentrate on building its globalpresence, Padgett Lea said, particularly in Europe and the FarEast.

According to Padgett Lea, Lilly's device and diagnosticsbusinesses represent roughly 50 cents of its earnings per share.The spinoff of the holding company could recoup perhaps eightto 10 cents of this, she estimated, and with the sale ofHybritech, Pacific Biotech and Physio-Control, she predictedthat the net cash effect of the restructuring plan would be closeto neutral. She is maintaining her "buy" recommendation forLilly's stock.

$1.2 Billion Fourth-Quarter Charge

Lilly expects to report a pre-tax charge of $1.2 billion in the1993 fourth quarter, $540 million of which will be spent on thecompany's early retirement program (Lilly announced lastOctober that it would eliminate 4,000 jobs over several years;2,600 employees have opted to retire early, the company said).The company will also incur a $370 million charge for theconsolidation and rationalization of certain manufacturingoperations and the implementation of revised distributionstrategies. Lilly will record a $290 million charge for impairedmanufacturing assets and write-offs of acquired intangiblesand anticipated expenses related to certain patent and productliability matters.

The fourth-quarter charge will reduce the company's earningsper share for 1993, which Lilly is expecting to be about $4.50to $4.55.

-- Karl A. Thiel Associate Editor

(c) 1997 American Health Consultants. All rights reserved.