Four Biotech Companies Set Course for Surviving Turmoil of New Field
As the biotechnology industry has started to realize its commercial potential, analysts and investors have renewed their interest in the companies involved. They have also increased their scrutiny as fear of a shakeout grows.
To weigh a biotech company’s worth, analysts say they first look at the scientific soundness of a firm’s products: Will they work as intended and fulfill a demand? Management is equally important: Can the executives steer the company from a research and development phase into a marketing mode, and can they manage the company’s financial resources so that it can survive until it makes a profit?
Analysts say the four companies profiled here by Kathleen Day are among those that stand a good chance of surviving.
BIOGEN Seeks to Improve Business Image
Nobel Prize winner Walter Gilbert stood before a group of analysts in early December and declared that Biogen, the company he helped found seven years ago, had reached a watershed in 1984.
“We see this year as the end of our first stage of development,” said Gilbert, who was then chief executive of the Cambridge, Mass.-based company. “Our losses should peak out, . . . (and) we should remain roughly at our current size until our products begin to produce revenues to support our continued growth.”
Four days later, Gilbert resigned and went sailing for a month in French Polynesia. He remains a director, but Biogen acknowledges that the resignation was “not unwelcome.”
Biogen officials know they must convince Wall Street that they are no longer managed by scientists but by business leaders who can focus the company’s resources on commercializing its laboratory products. Gilbert’s resignation symbolizes the company’s attempt to do just that.
“Our first priority is to make money. That’s why we’re in business,” says Mark B. Skaletsky, who bears the title “acting principal executive” until the Biogen board votes in June on a permanent replacement for Gilbert.
Just as Genentech is known for having made a profit every year of its history, Biogen is known for its uninterrupted string of losses. Skaletsky, a former marketer at Bristol-Myers who stands a good chance of winning the board’s approval, says Biogen now has a plan in place that will end its losses in 1986 and give it a profit in 1987.
Wall Street investors, impressed by the company’s technology but unconvinced about its management, remain skeptical: Biogen’s stock has hovered at $6 or $7, well below its $23 price when the company went public in 1983.
Like other leading biotechnology firms, Biogen is focusing on cancer markets, where the Food and Drug Administration is likely to give speedier approval to desperately needed treatments.
Through a licensing agreement with Schering-Plough, Biogen’s alpha interferon went on sale in April in Ireland and has approval in three other European markets. The FDA is expected by year-end to approve sale of the drug in the United States to treat certain cancers and prevent common colds. But the company will meet strong competition: A similar product is expected on the market under a similar arrangement between Hoffmann-La Roche and Genentech.
Biogen has six other top-priority products in various stages of development and testing, each of which has been licensed to U.S. and Japanese giants for marketing. One is an animal growth hormone. The others are human therapeutics and include an anti-blood-clotting agent, a hepatitis B vaccine and a protein that attacks tumors. All are products of gene splicing.
In the short term, the company’s strategy is to make money through licensing and joint venture agreements, but in the long run it hopes to become a fully integrated drug company that develops, manufactures and markets human proteins. Licensing agreements from now on will retain the right for Biogen to co-produce and co-market any of its products, Skaletsky says.
The company has about $70 million in cash, enough to survive until it can turn a profit through operations, he says. In 1984, Biogen lost $11.6 million on revenues of $22.8 million.
Biogen has a key marketing advantage in its new manufacturing plant in Geneva, Switzerland. By making products abroad, Biogen can sell them in countries where they are approved for use even if the products have not won approval for U.S. sale. The FDA outlaws foreign sales of a U.S.-made pharmaceutical unless the drug has the agency’s approval. That could be a severe financial barrier to companies such as Cetus and Genentech, which cannot afford to build plants abroad.
Genentech,Inc Leader Is Quick and Commercial
Genentech makes no bones about its position as the undisputed leader of the biotech industry.
The South San Francisco company begins its 1984 annual report with a quote by David MacCallum, a health-care analyst for Hambrecht & Quist, a research firm: “No company in the industry has demonstrated a technical virtuosity and a sense of urgency in commercializing the technology to the same degree as Genentech.”
The stocks of most other companies have fallen below the price of their initial public offerings, partly because of a general slump in the market last year and partly because of disenchantment with particular companies. But the stock of Genentech, the first biotechnology company to go public, has traded persistently above the $23.33 adjusted per-share price it commanded in late 1980 at its initial public offering. For several months, it has been trading in the $45-to-$50 range.
A strong balance sheet and marketing strategy tell why. Largely through savvy use of innovative financing by Robert A. Swanson, co-founder and chief executive, Genentech has been profitable every quarter since 1979. Last year, the company earned $2.7 million on revenue of $66 million.
Without skimping on basic research, Genentech has been quick to develop profitable products and get them out the door. The company’s human insulin, for example, which is marketed by Eli Lilly, two years ago became the first genetically engineered drug to reach the market. Genentech’s royalties from the pharmaceutical tripled in 1984 over the previous year.
Later this year, through a similar arrangement with Hoffmann-La Roche, Genentech’s alpha interferon, a protein that stimulates the body’s immune system against certain cancers and infectious diseases, is expected to be approved for U.S. sale.
“We’ve always been focused on making and selling products ourselves, and we’ll continue to focus on that,” says Swanson, who has a chemistry degree and an MBA from Massachusetts Institute of Technology.
Genentech will use joint ventures with Corning Glass, A. E. Staley and Hewlett-Packard to pursue biotech applications in plastics, agriculture and computer instrumentation. The main focus of Genentech’s time and money, however, is human drug therapy, especially a human growth hormone that will be the first product marketed under the company’s own label and is expected to be approved for U.S. sale this year or next.
By early 1987, Genentech hopes to market under its own name a blood-clot dissolver and a gamma interferon to fight certain cancers and viruses. By 1990, it hopes to market a protein that attacks tumors directly and a blood-clotting protein missing in hemophiliacs.
The company’s target markets can be reached with 50 to 100 salespeople, a staff a company of Genentech’s size can muster and manage with ease. Most cancer specialists, who must be sold on Genentech’s products before they will prescribe them, are affiliated with one or more of the 40 major cancer centers in the country.
In countries where the cost of creating its own sales would be too expensive, however, Genentech will use the marketing muscle of such foreign giants as Fujisawa, Japan’s third-largest pharmaceutical company.
CETUS
Plans to Do Its Own Marketing
Cetus has several products on the market, including instruments it developed for its own use and then decided to sell commercially. It also offers a blood-screening diagnostic kit to detect a specific antibody that causes infectious disease in hospital patients and a vaccine to protect baby pigs from life-threatening dysentery, which is licensed to SmithKline Beckman.
But Cetus, which is headquartered in Emeryville, across the Bay Bridge from San Francisco, wants to become a fully integrated drug company--developing, manufacturing and marketing its own products. It is putting most of its time and money into developing genetically engineered proteins to treat cancer and various infectious diseases such as AIDS. These products, it reasons, can be marketed with a sales force of 40 to 50 people.
By 1988 the company expects to have two anti-cancer, anti-viral drugs on the market--beta interferon and interleukin-2. Both stimulate the body’s immune system to attack tumor cells or invading viruses.
By the end of the decade, Cetus expects to have four more drugs on the market. These include an immunotoxin, which is created by using both hybridoma and recombinant DNA technology and has the potential to poison selected cells in the body without disturbing healthy ones.
Cetus plans to market products with agricultural or chemical applications through joint ventures with companies such as W. R. Grace & Co. and Nabisco, taking advantage of those companies’ strong cash and marketing positions. This will leave it free to focus on drug development.
On Capitol Hill, Cetus is lobbying hard to change a federal law that prohibits the foreign sale of drugs that have been made in the United States but that do not yet have Food and Drug Administration approval for sale here.
Cetus, whose manufacturing facilities are in Emeryville, says it cannot afford to build a plant in Europe to circumvent the law. Sales in other countries, many of which approve drugs for sale more quickly than the U.S. government does, could be a vital revenue stream for Cetus.
At the same time, however, the company expects the FDA to act quickly to approve anti-cancer and anti-viral drugs because of the need for them.
Cetus’ management team is strong. Many of its marketing and research executives came from established drug companies such as Abbott Laboratories or Bristol-Myers, providing experience that will help the company conduct clinical trials quickly and to the FDA’s satisfaction.
The company is strong financially, too. It has broken even or made money for nine quarters and has $88 million in cash. In 1984, it earned about $1 million on revenue of $35.8 million. Still, Wall Street is wary of the three-year wait the company expects before it can get a drug to market in this country: Cetus’ stock sells at about $11, less than half the $23 per share when the company went public in 1981.
Hybritech Incorporated
Looks to Medical Applications
Since its founding in 1978, Hybritech Inc. in San Diego has put 20 products on the market, all of them diagnostic kits based on monoclonal antibody technology.
The kits are used by commercial and hospital laboratories to detect pregnancy, certain types of cancer and pituitary and thyroid disorders. Commercialization of the diagnostic applications of hybridoma technology has given Hybritech seven straight profitable quarters. In 1984, the company earned $1.1 million on $33.5 million in sales.
Now the company is moving full speed to apply the technology to medical imaging and to cancer therapy.
In medical imaging, the company is conducting clinical trials of monoclonal antibodies that have been connected to radioactive materials. The monoclonal antibodies travel through the body, latching onto cancer tumors. Doctors then use instruments that measure radioactivity to detect the location and extent of cancer tumors. The product may be available as early as next year.
Monoclonal antibodies also can be attached to toxic drugs used in chemotherapy. As the monoclonal antibodies glom onto cancer cells, they take the toxic substances with them. This reduces side effects while allowing higher drug doses to be concentrated on a tumor.
Hybritech is developing the drug jointly with American Cyanamid, which makes several chemotherapy substances. The drug is in clinical trials at Johns Hopkins Medical School in Baltimore and could be available in four years.
Hybritech has relied on its own sales force to market its diagnostic products to medical professionals here and in Europe but will rely heavily on licensing agreements with the Japanese company Teijin to get products such as pregnancy tests into consumer markets in Japan and Europe.
“We’re already a fully integrated drug company,” boasts David Hale, Hybritech president and chief executive. Stock in the company, which went public in 1981 for $11 a share, now trades in the $25 range.
In its May issue, Inc. magazine named Hybritech as the 10th-fastest-growing publicly held company in the United States, based on sales from 1980 through 1984.
