Syntex Serves as Model for Young Firms : Now Major Player in Drug Field, It Also Has Some Headaches

For centuries, the people of Mexico have rubbed their hands and feet with the root of a scraggly herb called barbasco in the belief it would heal wounds. Then, in the mid-1940s, the plant found a more lucrative application: Syntex Corp. plucked it from folklore medicine for use as a cheap source of a substance needed to make sex hormones.

The Palo Alto drug maker, founded in 1944 by a group of scientists, spent the next few years using a steroid extract from the plant to pioneer the birth control pill. Rich in knowledge but lacking resources to make and market such a pill, Syntex sold the substance during the 1950s and 1960s to major U.S. drug companies such as Johnson & Johnson and Upjohn, which used it as the main ingredient in three of the first four oral contraceptives in the United States.

Selling its first product to other drug makers cost Syntex the leading spot in the oral birth control market, a position it has never been able to recapture. But subsequent gains outweigh that loss. Money earned from early research catapulted Syntex into the hard-to-enter drug industry, providing funds to develop other drugs it later could afford to market under its own label--a far more profitable practice than offering products wholesale.

Enough Money to Survive

“To make money you don’t want to stay a research firm,” Syntex Chairman and Chief Executive Albert Bowers said in a recent interview. “But you have to make enough money to survive till you’re strong enough to sell products of your own.” Syntex eventually introduced a birth control pill under its own label, but it remains a distant third in oral contraceptive market share. “It’s the price you have to pay,” Bowers said. “It’s a small price.”

Today, 41-year-old Syntex ranks 11th in sales among U.S.-based drug companies. Despite its growth and early role helping spawn the sexual revolution, the company is virtually unknown among consumers because it makes no over-the-counter products. Among competitors and Wall Street analysts, however, Syntex is known and praised as the only start-up company since World War II to become a major player in the drug market worldwide. Its name is invoked both as a role model for would-be pharmaceutical giants and as a mirror of opportunities and hurdles facing today’s established leaders.

“Syntex could be viewed as a microcosm of the drug industry,” says David Crossen, analyst at Sanford C. Bernstein & Co. in New York. “It possesses substantial growth potential. It also is beset by serious problems in the form of its loss-ridden non-drug businesses, its over-dependence on one product and heavy competition for its planned new products.”

For executives in biotechnology--the drug industry’s newest start-ups--Syntex serves as a text-book example of how to become a fully integrated drug company. These fledgling firms look to Syntex as they fight to balance the sale of early research to major companies (including Syntex) with the goal of remaining independent. Syntex’s history has become an industry blueprint on the effective use of early profits to leverage a start-up into the big leagues.

Firm Beat the Odds

“If I had to pick a company that beat the odds of doing that, of breaking into the drug industry club, the model would be Syntex,” said Robert A. Fildes, president and chief operating officer of Cetus Corp., a leading biotech company which is based in Emeryville in the San Francisco Bay Area. “We want to do the same thing.”

Syntex followed the success of its birth-control pill work with two other “blockbusters”--Wall Street’s term for big money-makers in the drug market. The first was Synalar in 1961, a steroid-based cream to apply to the skin to reduce inflammation. Steroids are a sub-class of hormones, which trigger and regulate many key body functions, including those differentiating the sexes.

The second was Naprosyn in 1972, a non-steroidal drug to reduce inflammation in arthritis patients.

Naprosyn has become the leading arthritis drug and the fifth best-selling drug in the world. Its success is largely responsible for feeding Syntex’s spurt of growth since the mid-1970s.

Like many drug companies during the 1960s and 1970s, Syntex went on an acquisitions spree with the goal of diversifying into other areas of health-care. By 1980, Syntex had five divisions outside its drug operations: beauty care, contact lenses, dental products, diagnostic equipment and agriculture. Syntex learned that while drugs can be very profitable, many health-related ventures are money-losers.

Today the company says it expects most of its growth through the rest of the century to come from drugs, and, when the shakeout in the medical equipment market ends, from diagnostic products.

Requires New Products

Success in those areas requires a steady stream of new products. Accordingly, Syntex says it will continue a tradition of outpacing the industry in the amount of money invested in basic research: 13.5% of sales, compared to the industry average of 10%. While it sees traditional, chemically-concocted drugs as the biggest money-makers over the next five years, it has quietly apportioned what it will only say is a “substantial” portion of that funding to biotechnology.

Syntex also has decided to shed the money-losing operations that don’t fit in with its long-range focus. Last year it sold its beauty division. The company has hinted that it is likely to sell its eye and dental care divisions within 12 months, too.

The company last year also sold some of its agricultural division’s production facilities. But Syntex says it is likely to keep the bulk of that unit, which contributes less than 10% to company sales. It says its animal drug line, which includes compounds to promote weight-gain and to kill worms, traditionally has made money and complemented the company’s human drug research.

Syntex’s earnings have been dampened by its non-drug units. But with 68% of sales coming from profitable drug operations, the company’s growth has been hefty anyway. Sales in the 1986 fiscal year, which began Aug. 1, are expected to exceed $1 billion, nearly four times the revenues 10 years ago.

Much More Muscular

“Syntex is much more muscular than it was even five years ago,” said David H. MacCallum, drug analyst in New York for Hambrecht & Quist. “It has superb scientists and a solid structure.” Even so, he and other analysts say, the company is at a critical juncture, just like many other drug companies.

The arthritis drug Naprosyn, as Syntex’s key money-maker, was largely responsible for feeding Syntex’s spurt of growth since the mid-1970s. As sales for Naprosyn slow, Syntex’s hopes for continued expansion are pinned primarily on two new drugs in its product pipeline.

Cardene, a heart medicine to counter the squeezing, choking and chest discomfort associated with angina, is expected to be introduced by 1987. Gardrin, an anti-ulcer drug, should be available about the same time. But Syntex faces stiff competition in each market, both from other name brands as well as from an increasing array of generic drugs. As a result, the company’s marketing arm has become even more critical than in the past to the company’s success.

In the last six months, however, the company has lost two top marketers to retirement. “It won’t cripple the company but it comes at a bad time,” said MacCallum at Hambrecht & Quist. “They have other top-notch people but the departures could have been better timed.”

The constant pressure to follow one blockbuster with another is shared by such companies as SmithKline Beckman, whose anti-ulcer product Tagamet is the world’s most-prescribed drug; and Hoffmann-La Roche, whose tranquilizer Valium is the second-largest seller.

Increasingly Expensive

For these companies as well as Syntex, the process of concocting a winning drug becomes increasingly expensive and time-consuming. A few years ago, Syntex employees devised a game called “Develop a New Drug” that was a take-off on the popular board game Monopoly. The game chronicled the then-average $25 million and nine years it took to develop and test a product and get it approved by the Food and Drug Administration. To be accurate today, the board game would reflect a cost of $75 million and a time span of 15 years.

Drug companies face stiffer competition from generic drug makers, too. Recent federal legislation makes it easier for a copy-cat version of a drug to get through FDA red-tape and onto the store shelf once a patent has expired. They also face increasing costs related to rising claims and awards in product liability lawsuits, an area in which Syntex has first-hand experience.

The company is fighting multimillion-dollar personal injury claims stemming from an infant formula it recalled in 1979 and no longer manufactures or sells. Plaintiffs say that the solution contained less chloride and salt than Syntex said it did, causing chemical deficiencies and, in some instances, permanent injury, in the infants who were fed it.

Another set of suits involve the federal government, the state of Missouri and private plaintiffs, who say Syntex and a subsidiary are responsible for the improper disposal of hazardous waste, including dioxin, at a plant that Syntex owns in Verona, Mo., and leased to a now-defunct chemical company.

Despite the potential cost of these suits, Wall Street is generally optimistic about the future of Syntex and its ability to sustain its position among drug leaders.

“Syntex is one of the jewels of the world pharmaceutical market,” said MacCallum. “It’s still small enough that another successful drug can significantly increase growth but it’s also big enough that it can absorb problems and take risks.”