Subject: For Biotech, Pure Genius Isn't Enough Date: Published: 2/24/92 (304 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. For Biotech, Pure Genius Isn't Enough ---- By David Stipp and Udayan Gupta Staff Reporters of The Wall Street Journal In 1980, Genentech Inc. became the first biotechnology company to sell stock to the public, raising $35 million. Last year, biotech companies raised more than $3.4 billion in 88 stock offerings. They will need every penny. The biotechnology industry appears poised for rapid growth as it moves into its second decade. It has shown it can deliver marvelous drugs and captivate Wall Street, and by some estimates, the industry's revenues will jump sevenfold to $40 billion by the end of the decade. It has the support of the Bush administration, which last month proposed a $4 billion program to boost biotechnology research. "Biotechnology proved itself in the '80s," says John Wilkerson, a New York health-care industry consultant. "The '90s are going to be the testing ground for individual companies." Many new biotech companies are already being tested by the stock market. It isn't unusual for a company to lose -- or gain -- a chunk of its market value in one day. Wednesday, Centocor Inc. plunged $8.125 to $33.125 because of questions from the Food and Drug Administration about its septic shock drug. Yet on Jan. 13, Enzo Biochem Inc. shares jumped 77% after the company introduced eight new cancer diagnostic products. So far, only a few biotechnology companies, such as Amgen Inc., have made money. Indeed, the industry is gushing more red ink than ever: For the year ended June 30, losses swelled 45% to $2.9 billion from a year earlier, according to Ernst & Young, an accounting firm. Those losses underscore the fact that the great majority of the industry's players are still high-risk, development-stage companies that could easily scramble their new nest eggs. "A lot of very young companies suddenly got plenty of money," says Jean Deleage, a San Francisco venture capitalist. "Now they have to demonstrate they have the discipline to spend it wisely." The science behind the business is advancing so fast that research and development costs threaten to absorb much of the money the industry has raised. To survive, companies will have to focus their development efforts much more than in the past. But even businesses that find seasoned managers to plot strategy and see products through to market may find themselves pinched not only by competition, but also by government and insurance industry efforts to hold down health-care costs. Younger companies will have to show that "their technologies work and that they can successfully turn them into effective products," says Dr. Wilkerson, the consultant. For more mature businesses, the challenges will include funding enormously expensive clinical trials while building manufacturing and sales operations. All will be jockeying for talented managers, patents, corporate partners, regulatory approvals and ever more capital. "It was inordinately easier a decade ago to pick the Centocors and Amgens of the world" before they emerged as industry leaders, says Peter Drake, an analyst at Vector Securities International. "The companies were simpler, their technologies were easier to understand, and their competition was much easier to assess." The industry's scientific explosion further complicates the picture. Bioengineered drugs are already used to treat anemia, immune-system suppression induced by anti-cancer drugs, dwarfism in children, hepatitis and heart attacks. A host of other products are being tested in the clinic, including drugs to kill cancer cells without hurting normal ones and to prevent blood clots that can cause strokes and heart attacks. In the lab are crop plants genetically engineered to resist pests, drugs to block the genetic malfunctions underlying cancer, bioengineered microbes that consume toxic wastes and medicines to arrest disorders of aging, such as Alzheimer's disease. More than 100 biotechnology drugs are in clinical trials, and many will compete for shares of the same markets. About 10 categories of novel drugs are under development to treat autoimmune disorders such as rheumatoid arthritis and multiple sclerosis, says David Stone, an analyst with Cowen & Co. One key to navigating this flood of products is for companies to "focus," says Vector's Mr. Drake. Amgen's success, he adds, stems largely from a mid-1980s decision by the company's founder and former chairman, George Rathmann, who "looked at Amgen's pipeline of products and its cash and said, `We can't do all this stuff.' He directed the entire company to focus on EPO," the company's lucrative anti-anemia drug that now stands alone in its niche. In the industry's early days, the main strategy was to "go with what science you have and hope you can get there first," adds Stephen Duzan, chief executive and founder of Immunex Corp., a biotechnology company based in Seattle. But now businesses must be more selective, placing a smaller number of bets by carefully analyzing patent positions and market potential, which involves not just a drug's therapeutic value but also how likely the federal government and other health insurers are to pay for it. In an industry whose products can cost $100 million each to develop, companies that don't focus early can quickly get overextended. Consider NeoRx Corp., a Seattle company started in 1984 to develop antibody-based diagnostic and anti-cancer agents. It has requested federal marketing approval for two diagnostic products and has four cancer therapeutic and diagnostic agents in clinical trials. But it has yet to sell a product, and its losses have mounted steadily, totaling more than $54 million in its first six years. With a cash crunch looming, NeoRx in the last two years has drastically narrowed its research and development activities, limiting product development to the imaging and anti-cancer areas. It also has decided to license its first products to outside companies rather than to further develop them in-house. The result: a reduction of its work force by about 40% and a drop in its "burn rate" -- how fast companies use up cash -- by more than a third to between $10 million and $11 million. Another lesson from biotechnology's first decade is the importance of installing hardheaded executives early. Companies "need to hire managers who have the skills to direct a full-service drug company, not just a research boutique," says Dr. Wilkerson, the consultant. Perhaps two-thirds of biotechnology companies are trying to recruit senior executives and business development professionals, says Mr. Deleage, the venture capitalist. Walter Channing of CW Ventures, a New York venture capital firm, adds, "The key ingredient is increasingly becoming the star manager, not the star molecule." But not even a crack management team can guarantee that a biotechnology company's well-laid plans won't go astray. Some of the industry's biggest uncertainties stem from the battle to cut health-care costs. Government decisions on whether to pay costs of new drugs for patients covered by Medicare and other programs can be critical to the drugs' success. Because genetically engineered drugs tend to be costly -- commonly several thousand dollars for a course of treatment -- they have become lightning rods for criticism by those seeking to hold down such costs. "Five to eight years from now, we'll be looking at a very different cost and reimbursement environment" for drugs, says Linda Miller, an analyst with PaineWebber Inc. Indeed, the fear of tightened reimbursement rules for drugs already has some companies shying away from disease areas considered non-life-threatening. Immunex is pulling back in certain woundhealing areas. Though there's a significant market for companies that can help speed wound healing, the expense of developing such drugs and the prices that will be considered reasonable for them "will make it harder to recover costs" than for drugs to treat fatal diseases, says Mr. Duzan. Reimbursement policy isn't the only front on which biotechnology companies are feeling the heat from rocketing health-care costs. A bill recently introduced in Congress would cap sales of drugs under the federal Orphan Drug Act. The law now allows companies that develop drugs for diseases afflicting fewer than 200,000 people to be granted exclusive marketing rights to the drugs for seven years. The proposed cap would revoke the exclusivity when cumulative sales of an orphan drug exceed $200 million. The bill, if enacted, would undercut the ability of biotechnology companies to finance drug development, says Henri Termeer, chief executive of Genzyme Corp., a biotechnology concern in Cambridge, Mass., that's developing treatments for cystic fibrosis with orphan drug status. In particular, Mr. Termeer argues, the bill would curtail the use of "off-balance-sheet" financing for such drugs -- an increasingly popular strategy in which companies form publicly traded research subsidiaries to develop the drugs. Many investors buy shares in such spinoffs partly because the risks are balanced by the potentially large payoffs for products with orphan drug status, he says. Mr. Termeer's arguments highlight biotechnology's expanding need for capital as it pushes more products into the costly clinical trial phase. Many biotechnology companies are seeking partnerships that will further their goals of becoming big, independent drug companies. In the past, the companies often had little choice but to trade technology for money in licensing pacts with drug-company partners. But now the industry's basic technology has been validated by the successful launch of blockbuster drugs. Last year's stock-selling bonanza also has strengthened their hands. For three-year-old Isis Pharmaceuticals Inc., which raised $72 million last year, the funds mean "more flexibility and say in how and with whom we will do deals," says founder Stanley Crooke. Isis doesn't have to continually flog its technology in presentations to potential partners -- a process that's very time-consuming for company scientists, Mr. Crooke adds. And it has the luxury of holding out until it finds allies that bring both money and other competitive advantages to the company. True collaborations, rather than just trades of technology for money, are on the rise between biotechnology companies and their bigger partners. When ImmuLogic Pharmaceutical Corp., Cambridge, Mass., recently agreed to develop its anti-allergy technology with Marion Merrell Dow Inc., a Kansas City, Mo., drug concern, the companies formed a committee of managers from each side to oversee the work. ImmuLogic also retained U. S. rights to market products based on the research. The secret to successful collaborations is to "make sure you have a champion at the larger company who believes in your product," says Ramesh Ratan, senior vice president at Repligen Corp., a Cambridge, Mass., biotechnology concern. And if the partnership doesn't work out, consider buying the technology back from the larger company before the project dies on the vine. Last year Repligen reacquired rights from Merck & Co. to certain monoclonal antibodies for fighting AIDS infections. Merck and Repligen wanted to pursue different uses for the technology, Mr. Ratan says. Moreover, Merck had licensed similar antibodies from another biotechnology concern, Medimmune Inc., indicating the larger company's interest in Repligen's antibodies had fallen. Partnerships between biotech and drug companies sometimes unravel because of clashes between big-company and small-company operating styles. But that's less of a problem with a growing variation on the partnership theme: collaborations between biotechnology companies. Last year, such partnerships accounted for about half of U. S. pharmaceutical research alliances, according to Ernst & Young. Many biotechnology companies now have the financial wherewithal to play the role of deep-pockets partner, notes Richard F. Pops, president and chief executive officer of Alkermes Inc., a Cambridge, Mass., company developing treatments for brain diseases. After raising about $60 million in public offerings, his company recently agreed to fund up to $26.5 million of joint research with Cortex Pharmaceuticals Inc., Irvine, Calif., on drugs to treat stroke and other brain disorders. In a related trend, the buyers of troubled biotechnology companies are increasingly likely to be other biotech concerns -- a noted example being Chiron Corp. 's purchase of Cetus Corp. last year in a stock swap valued at $660 million. This trend should help prevent a slowing of biotechnology's financial momentum, says Vector Securities' Mr. Drake, even if the stock market isn't as generous with the industry during the next few years as it was in 1991. "The good news is that the biotech industry will be self-rejuvenating as it moves into the 1990s," he says. --- Who's Who in the Biotech World The leading biotechnology companies are ranked by stock market capitalization STOCK PROPRIETARY MARKET ------- NUMBER OF DRUGS* ------- DRUGS FOR CAPITAL- IN PRE- IN AWAITING HUMANS IZATION CLINICAL CLINICAL FDA ON ($ Millions) TRIALS TRIALS APPROVAL MARKET Amgen $8,309.7 2 8 2 2 Genentech 3,080.2 N. A. 10 0 3 Chiron 1,509.6 7 14 0 3 Centocor 1,296.8 0 5 3 0 Synergen 1,205.4 6 3 0 0 Genzyme 935.9 1 1 0 1 Biogen 879.8 3 3 0 2 Gensia 860.1 8 1 0 0 Immunex 791.8 4 4 1 2 Alliance 644.0 7 2 1 0 US Bioscience 570.8 4 4 1 1 Xoma 489.5 7 6 2 0 Medimmune 448.8 6 1 0 1 Affymax 409.6 0 0 0 0 Immune Response 395.2 1 1 0 0 Genetics Institute 379.6 3 3 2 1 Molecular Biosystems 373.8 0 0 1 0 Cytogen** 352.3 0 1 0 0 Immunomedics 337.1 1 2 0 0 Liposome Co. 334.9 2 3 0 0 *Numbers indicate the actual number of compounds in development for therapeutic purposes. Companies may be developing a single compound for several indications. **Primary interest is nondrug medical products N. A. =Not available Source: Wilkerson Group, New York [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]