As Shakeout Looms, Giants Join Forces With Pioneers
Gene splicers have pried open living cells, mastered techniques to rearrange the building blocks of life and dazzled the world with potential remedies for cancer, genetic disorders and world hunger.
For most biotechnology companies, that was the easy part. Now, the commercial promise of the 13-year-old industry draws near and, with it, a market shakeout that executives and Wall Street analysts say only a handful of the 200 U.S. biotechnology companies will survive.
“The next year or two is going to be a crucial time. Lots of little companies are going to go broke,” says Susan K. Clymer, a market strategist for Bio-Response Inc., a Hayward, Calif., company that mass-produces genetically engineered cell lines.
Entrepreneurs skilled at biology and risk-taking now must develop a less glamorous talent: marketing. They also must secure enough financing to last until they get products out the door. Biotech leaders say failure in either area will mean being crushed or bought by giants of the chemical, food and drug industries.
From the beginning, big companies such as Exxon, Campbell Soup, Seagram, DuPont and Monsanto have thought that biotechnology might produce meatier tomatoes, better drugs or new-fangled organisms capable of making oil refining cheaper. Most also had their doubts, however, and, until recently, made only small investments in fledgling firms. Though meager, the funding gave big companies a low-cost, low-risk look at the technology while providing entrepreneurs with much-needed seed money.
Now, although biotechnology’s promise remains largely untested, genetically engineered products have started to move from lab to market, making the industry’s potential more certain. In response, corporate behemoths that only tested the water now are using joint ventures, licensing pacts and acquisitions to plunge in. Some, such as DuPont and SmithKline Beckman, have spent millions of dollars in the last several years to go it alone and build their own life science laboratories.
“There’s a David and Goliath development within the industry,” says Linda Miller, analyst with Paine Webber in New York. “Before, it was one small firm against another. Big companies move in, and suddenly it’s Shea Stadium rather than a sandbox.”
Small biotech firms, lacking commercial production facilities and marketing know-how, increasingly seek collaborations with large corporations. They hope to take advantage of the giants’ ready-made marketing muscle and, in the process, make allies out of potential competitors for what promises to be a multibillion-dollar industry. Established corporations, for their part, hope such alliances will enable them to cash in on the new technology rather than see their sales eroded by it.
“I’ve always thought that the commercialization of biotechnology would be fueled by the large companies,” says Robert P. Luciano, chairman and chief executive of drug and cosmetic giant Schering-Plough. “You need entrepreneurial spirit to develop products, but you need brute force for marketing. No product’s any good if you can’t sell it.”
Schering-Plough is a good example of a company that tested the market early and steadily increased its involvement. In 1979 and 1980, it paid $12 million for a 14% stake in Biogen, based in Cambridge, Mass. Then, in 1982, Schering paid $29 million for DNAX, a small biotech firm in Palo Alto.
Other examples abound. A year ago, Eastman Kodak paid $8.4 million to acquire a 5% stake in ICN Pharmaceuticals, a Costa Mesa company trying to develop drugs to fight cancer. Last month, Kodak and ICN announced a $45-million joint venture for expanded research.
Several months ago, Kodak spun off a new Life Sciences Division to concentrate its vast resources and chemical know-how on genetically engineered products.
In 1984, Nabisco, which for several years has had a modest in-house program to explore the use of biotechnology in food production and processing, formed a joint venture of undisclosed value with Cetus, a biotechnology company based in Emeryville in the San Francisco Bay Area. Although neither side will discuss details, it is estimated to be worth at least several million dollars.
The W. R. Grace 1983 annual report said the company had spent $50 million over five years in “outside research” to learn about biotechnology’s potential uses. Last year, Grace outdid that investment in a single day by committing “in excess of $60 million” to form a partership with Cetus to develop agricultural products to augment the conglomerate’s considerable position in the feedstock and fertilizer markets.
The mounting enthusiasm of big corporations indicates that the time and money needed to make biotech products has begun to approximate the investment required to make chemicals and drugs by traditional means, says Robert Fildes, president of Cetus.
Biotechnology is a series of techniques developed in the 1970s to rearrange deoxyribonucleic acid, or DNA, the basic string of genetic material that tells living cells what to do. The object is to create cells that produce large quantities of desired human, animal and plant proteins.
A key technique is recombinant DNA technology, or gene splicing, in which genes are taken from one cell, cut up, reassembled and inserted into another to produce a cell with a desired characteristic such as the ability to make human insulin or growth hormone.
Another technique is hybridoma or monoclonal antibody technology, in which a cell that makes a desired substance is fused with an immortal, or cancer, cell. The fusion smashes together the cells’ genes and creates a third or hybrid cell that acts as a tiny factory, endlessly churning out desired substances such as enzymes or antibodies that fight disease.
Industry experts estimate that each genetically engineered drug will take an average of six to 10 years and $75 million to get to market, about the same it takes to develop a chemically made drug. Biotech products for agriculture and industry will take less time and money, although potential environmental hazards could entangle them in red tape.
Know How to Sell
Unlike smaller companies, large companies have deep pockets, established distribution channels and experience in handling agencies such as the Food and Drug Administration. They also know how to sell in foreign markets such as Japan, the biggest drug market in the world after the United States.
Although such attributes may crush many of the smaller companies, they can help others, as firms such as Cetus well know. “The only way to get into a shark-infested world is to go in on a shark,” says Fildes, citing Cetus’ joint ventures with W. R. Grace & Co. and Nabisco. “Our joint ventures make us giants. They put us on equal footing.”
Members of the Industrial Biotechnology Assn. and the Assn. of Biotechnology Companies, the two biggest trade groups, have always included both large and small companies. Industry leaders say that what has changed is not the number of big companies involved but the resources they are committing to the technology.
What began as a contest for scientists’ ideas and Wall Street’s money is now a race to get new products into the market, says Harvey Price of the Industrial Biotechnology Assn. In 1984, the stock and venture capital markets for biotechnology slumped, forcing companies to get funding by pairing off with established corporations. As confidence in the industry has picked up, so have the capital markets, where the price of biotechnology stocks rose 18% on average in the first quarter of this year.
More Acquisitions
Industry analysts and executives say companies will continue to pair up, but for marketing rather than funding. They say acquisitions in particular will increase during the next 18 months, with most executed in the spirit of “corporate entrepreneurships,” where acquired companies keep their independence but have access to the parent’s money and regulatory expertise.
“Sometimes it’s tough to set up the relationship (between a big and small company), but when you find a common ground, everybody gains,” says Norman M. Goldfarb, chairman of Calgene Inc., a small company in Davis, Calif., founded in 1980 with seed money from Allied Corp.
For centuries, human beings have made products such as alcohol using biological processes like fermentation. Modern biotechnology, however, was born in 1973, when biologists put genes from one bacterium into another.
Ten years later, genetically engineered human insulin made by Genentech in South San Francisco and marketed by drug giant Eli Lilly became the first--and still the only--biologically engineered drug sold in the United States. A product of gene splicing is used to make aspartame, the wildly successful low-calorie sweetener that G. D. Searle & Co. sells under the trade name NutraSweet. In the agricultural area, a new biotech vaccine protects calves from the scours, a form of dysentery. Genex Corp., in Rockville, Md., last fall began selling a genetically engineered industrial drain cleaner called Proto.
Many Products Readied
The list promises to get longer quickly as a host of products for non-human use are readied for market and the FDA gets close to approving several new drugs. Using a licensing agreement with Schering-Plough, for example, Biogen expects to have on the market by January a genetically engineered drug to treat three types of cancer and to prevent the common cold.
For many small companies, failure to get a product out the door in the next 18 to 24 months will mean failure or takeover, industry leaders say. Good ideas alone can no longer keep investors interested.
“Those that didn’t go public in 1982 or 1983 will try to get equity investments to keep going, but most major companies have made their financial commitment and will wait for the companies to become desperate enough that the stock falls very, very low. There’s going to be a lot of bargain hunting,” says Bio-Response’s Clymer.
Small but well-respected companies such as Biogen, determined to survive the expected shakeout, have geared up by trimming work forces and putting marketers rather than scientists in top management spots.
At many companies, in fact, marketing strategy has become as important as science. Cetus, for example, has targeted specific cancer patients. The company reasons that there are only 30 or 40 major cancer centers around the country, enabling it to use 50 salespeople as effectively as the 500-to-1,000-person forces that big health-care companies use to sell products to doctors and hospitals across the nation.
Most Not Worried
Biotechnology companies without such a strategy will be forced to merge or collapse for lack of funding, leaving bigger companies to dominate, entrepreneurs agree. But most insist that they aren’t worried. “Only companies deserving to fail will die,” Goldfarb says. “It’ll be because they didn’t think ahead, not just because the big guys move in.”
The glory years for taking biotech companies public were 1980 and 1981. Venture capital flowed, and the dozen or so companies founded in the late 1970s were joined by dozens more, with the number of new biotech firms peaking in 1983. Then, the shortsighted investors who had confused biotechnology with computer technology became disillusioned. The market sank.
The payoff on biologically engineered products takes years longer than that for computer products, and the wait left many investors disappointed. Now, the prospect of products nearing market has rekindled Wall Street’s interest.
This time around, however, investors are more sophisticated. They realize that biology is not like electronics, where gadgetry put together in a garage can create a company such as Apple Computer in a few years. But they also realize that a Johnny-come-lately can steal market leadership overnight, as IBM has done to Apple in desk-top computers or Lipton has done to Celestial Seasonings in herbal teas.
Investors also wonder whether biotechnologists have learned from the mistakes of the nuclear industry, where accidents and fears of misuse bred a morass of red tape and ineffective regulation that helped strangle it. But, more often than not, industry analysts and executives say they expect biotechnology to follow the path of the food and drug industry, where patents, consumer marketing and regulation have encouraged product creation while protecting the environment and consumer.
Rely Heavily on Patents
Biotech firms, for example, already rely heavily on patents, on which they spend millions of dollars a year. But many companies realize that they could die in the market while winning legal battles. “We must develop our products in such a way that we will be able to claim a substantial market share no matter what the patent situation,” says Walter Gilbert, the former chairman of Biogen and now a scientific consultant to the company.
As big corporations spend millions to build their own labs, buy struggling biotechnology companies with good ideas or provide the marketing channels for products, small companies will engage in life-and-death struggles. Many, however, say they will benefit from the legitimacy that big companies bestow on a market they enter and even from acquisitions several years down the road. Says Cetus’ Fildes, “We don’t want to be acquired right now, but, if the price were right, sure, why not?”
