Eli Lilly & Co. and Hybritech Inc., two experts in cell fusion, are combining their companies to pursue new ways of diagnosing disease, identifying tumors and attacking cancer cells.
The companies recently announced that Lilly, a pharmaceuticals giant, will acquire Hybritech, a San Diego-based biotech firm, in a transaction valued at more than $300 million.
The merger marries Hybritech's technological edge with Lilly's vast marketing and distribution resources, a match similar to many arrangements designed to meet the changing needs of both the biotech and pharmaceutical industries.
Hybritech is considered one of the top contenders among biotech firms, the entrepreneurial companies emerging since the early 1970s to exploit new methods of genetic engineering. Through gene splicing, cell fusion and other methods of manipulating living cells, these companies are developing new ways to treat disease, process food and master agriculture.
Many biotech companies are rich in research talent but lack the financial resources and marketing muscle to translate their innovations into products, sales and profits. Launched with venture capital and fueled by Wall Street enthusiasm, most of these companies now have formed partnerships with large corporations to finance continued product development and to tap into global distribution and marketing networks.
These partnerships provide the large corporations with access to new technology and rights to new products. Pharmaceutical companies also see biotechnology as a way to move into profitable new products at a time when the federal government and private industry are working to lower health care expenses in ways that may reduce margins on other products.
Most of these partnerships have taken the form of joint ventures or licensing agreements. Lilly's outright acquisition of Hybritech, which is financially strong, may trigger similar purchases by Lilly's competitors, signaling a new phase of consolidation among pharmaceutical and biotech firms, some financial analysts have said.
The merger "validates the fact that value has been created in biotechnology," said Linda I. Miller, an analyst with Paine Webber Inc. "And it highlights the high entry fee of getting into the business . . . probably not more more than a handful of biotech firms will survive," she said.
Lilly's purchase also indicates that the large corporations are not interested in bailing out the struggling biotech firms. Instead, they are picking the winners, analysts said.
Hybritech is a profitable company, with the highest product sales of any biotech firm, and significant long-term opportunities. In May, First Boston Corp. rated Hybritech's stock as "the best value in the biotech group."
"Hybritech is one of the most successful biotech companies," said Miller of Paine Webber. "This is a clear signal of what it takes to aggressively penetrate the health-care field."
Hybritech, founded in 1978, earned $1 million (10 cents a share) last year on total revenue of $30.8 million. That compares with a loss of $474,000 on revenue of $12.6 million in 1983.
Hybritech is the only new biotech firm "that has any significant product sales from genetic engineering," said M. Kathleen Behrens, an analyst with Robertson, Colman & Stephens.
In 1984, the company's product sales increased 113 percent to $14.6 million, or about 47 percent of total revenue. Hybritech's fourth-quarter product sales, on an annualized basis, were $20 million, or about 61 percent of the total product revenue of all the entrepreneurial, pure biotech firms, according to Goldman Sachs Research.
Hybritech made its name through the mundane use of an exotic new technology. The company used monoclonal antibodies, a genetically engineered tool, to develop such a successful pregnancy test that it captured a dominant share of the laboratory market within its first year. Monoclonal antibodies are highly purified antibodies that can be used to locate, identify and measure minute amounts of substances present in the body's blood or urine. They can be used to detect the presence of a hormone that indicates pregnancy or the presence of certain types of cancer cells.
Lilly and Hybritech hope to use monoclonal antibodies in the future to locate tumors within the body and eventually to treat cancer. But to generate sales now, Hybritech and other biotech companies have started using monoclonal antibodies in diagnostic tests, an established and growing market.
Some of the tests used to identify the antibodies to the AIDS virus use monoclonal antibodies. Hybritech's 22 tests on the market can detect proteins such as those indicating the presence of colon cancer or the incidence of a heart attack. About one-third of Hybritech's product sales are generated by its pregnancy test, described by analysts as faster, more convenient, more precise and more cost-efficient than any other.
The worldwide immunodiagnostics market is expected to double to about $5.4 billion in 1990 from about $2.3 billion this year, according to SRI International.
Lilly's chairman, Richard D. Wood, noted that the acquisition of Hybritech will give Lilly "an immediate entry into the diagnostics market." The move "gets Lilly into a higher growth area at a time when cost-containment pressures are reducing" purchases of other Lilly products such as antibiotics and other hospital inventory items, said Munro Pitt, an analyst with Duff & Phelps Inc.
Diagnostics have provided one of the largest markets for the new products of genetic engineering. Because they are used to test laboratory specimens such as blood and urine rather being used in a patient's body, new diagnostic products can be developed in two to three years. By contrast, a new drug must undergo years of clinical trials before it can be sold to the public, and may take seven to 10 years to develop.
Centocor Inc. of Malvern, Pa., and Monoclonal Antibodies Inc. of Mountain View, Calif., have focused on monoclonal antibodies and are grouped with Hybritech as the top three companies in biotech in terms of product sales, according to Goldman Sachs. Hybritech and Lilly also are eager to use monoclonal antibodies for tumor detection and cancer therapy. Officials of the two companies hope that, working together, they can overcome the technical and financial hurdles along the way.
SRI estimates a potential U.S. market of more than $200 million a year for diagnostic imaging, the use of monoclonal antibodies to find cancer cells. SRI estimates a potential U.S. market of almost $1 billion a year for monoclonal-antibody cancer therapy, which would use the antibodies to deliver chemicals or radiation treatment to cancer cells in hopes of killing them while causing minimum damage to healthy tissue.
Although Hybritech is financially successful, it lacks the "hundreds of millions of dollars" it would need over the next five to seven years to develop and market cancer imaging and therapy products, said Timothy J. Wollaeger, Hybritech's chief financial officer. Analysts said Hybritech had privately estimated the costs at more than $500 million.
"The combination of our technological position with Lilly's financial, marketing, scientific and technical resources should significantly enhance and accelerate our development efforts," said Hybritech Chairman Howard E. Greene Jr. Financial analysts said the merger is a good move for both companies, and demonstrates the importance of sound management ability to young entrepreneurial firms. Hybritech was able to attract Lilly because it had proven its technology and had established its own financial strength. "Technology is part of the formula, but not the whole formula," Behrens said. "Management is the key to company development."