Biotech Drug Gives Boost to Genentech : Growth Hormone’s Maker Takes Giant Step Into Marketing
Eight-year-old Kevin McDermott got a break two weeks ago when the government approved a new genetically engineered human growth hormone. The Los Angeles youngster, like 15,000 other children in the United States, needs the drug to make up for his body’s inability to produce the substance, which triggers the biological clock for growth. Without it, Kevin has little chance of growing taller than his current 3-foot 10-inch height.
The drug’s manufacturer, 9-year-old Genentech, also is pleased by the federal Food and Drug Administration’s approval. The decision makes the hormone only the second genetically engineered drug available for sale in the United States. But, more importantly, the ruling makes Genentech the first firm in the fledgling biotechnology industry to sell a drug under its own label. And that is a monumental step for the company and the industry.
Genentech now stands as a fully integrated drug company: developing, making and marketing its own products. As such, it has broken into the hard-to-enter pharmaceutical industry and gained an edge in the race among biotech start-ups to become a significant player in that field. To Wall Street, it offers proof that such a feat is even possible.
“From the company’s standpoint, it means we’re for real,” said Robert A. Swanson, Genentech’s 37-year-old chief executive and co-founder. “The biotech industry has had a continual flow of progress, but the world will view this latest success as its coming of age.”
Historic Moment
“It confirms our relationship to the classical pharmaceutical industry,” said G. Kirk Raab, who left Abbott Laboratories six months ago to become president of Genentech. Agreed Paine Webber biotech analyst Linda Miller: “It was a very historical moment. But already Wall Street is wondering, ‘Who will be next?’ ”
Analysts say that winning approval to market a drug under its own name further strengthens Genentech’s ability to remain independent at a time when a market shakeout is forcing many young biotech firms to merge with larger companies with deeper pockets. But even Genentech’s success in making the transition from research concern to drug company is no guarantee of long-term staying power.
Swanson is the first to agree. Genentech now must prove that it can muscle its way to a significant position among pharmaceutical giants, who themselves are pushing into the biotech market. It will need marketing might to fend off impending competition as well as a string of strong new products for continued growth. Industry analysts say they believe that the company has both. The blend of science and business that, since its founding in 1976, have kept Genentech a Wall Street favorite will continue to move it forward, they say.
Broke Barriers
“We’ve broken technology barriers,” said Jim Gower, Genentech vice president of marketing. “In effect, Wall Street is now saying, ‘They’ve cloned, but can they sell?’ ”
In fact, Syntex Corp. of Palo Alto is the only company since World War II to start from scratch and become a dominant player in the drug industry. It took Syntex 41 years to hit the $1-billion sales mark. Genentech, which last year earned $2.7 million on $65.6 million in royalties and interest income, hopes to match the Syntex performance by its own 14th birthday in 1990.
Biotechnology is a series of techniques developed in the 1970s to rearrange deoxyribonucleic acid, or DNA, the basic building block of life. DNA provides the blueprint for cellular activity. Using biotech as a tool, scientists can create cells with desired characteristics, such as the ability to make human growth hormone or insulin.
More than a decade later, the industry is just beginning to fulfill its commercial promise as products begin to come to market. Drain cleaner, animal vaccines, diagnostic kits and the main ingredient of aspartame, better known as NutraSweet, are among the scores of genetically engineered products for sale. But human pharmaceuticals, analysts say, promise to be the most lucrative of biotech’s creations.
Genentech’s Swanson, who has degrees in chemistry and business from the Massachusetts Institute of Technology, knows the importance of being first in the biotech industry. Every notch below a number one spot shakes investor confidence and cuts down on the money that a company can get to develop drugs with gene splicing.
Swanson has sweated to keep the South San Francisco company ahead of the dozens of genetic engineering firms that have been formed since scientists first learned how to rearrange DNA.
Series of Firsts
Winning FDA approval to sell the growth hormone, whose trade name is Protropin, was the latest in a series of firsts for Genentech. In 1980, the company was the first biotech firm to go public. In 1983, its human insulin, which it licensed to drug giant Eli Lilly for marketing, became the first genetically engineered drug to get FDA approval. (The company that sells a drug--not the company that makes it--is the one that must get federal approval.)
Selling drugs directly is five to 10 times more lucrative than licensing products to other companies. Drug analysts say that direct sales are the only way that start-up firms like Genentech can hope to make enough money to grow in stature and avoid the fate of being forced to merge. But direct sales require a marketing channel that often is too expensive for a start-up.
Genentech, for example, would have prefered to sell its insulin under its own label. But, two years ago, it lacked the money and marketing muscle to do so. Selling the product to Lilly in exchange for royalties has paid off, however; the arrangement provided Genentech with the money to develop products, such as the growth hormone, that it now can afford to market on its own. Besides, Genentech’s Gower said, it made more sense to allow Lilly rights to its insulin product because that company already dominated the market with an insulin extracted from the pancreas of pigs and cows. “We had no intention of wasting our resources battling an established giant like that,” he said.
Instead, Genentech’s long-term plan is to create and sell drugs for illnesses such as cancer and acquired immune deficiency syndrome (AIDS)--areas in which few effective products are available. Such a strategy takes advantage of the high demand for such products and the likelihood that the FDA will give speedier approval to remedies for life-threatening illnesses. Shaving several years off the regulatory process can save millions of dollars and provide savings that are especially important for start-up concerns.
Growth hormone, like many specialty drugs, will be dispensed mostly through hospital pharmacies. It is typical of the type of drug that Genentech hopes to market, and with good reason. A sales force of 20 to 50 people can easily reach the 100 major hospital centers in the United States, where most doctors specializing in hormone disorders practice. That’s a marketing army that a company the size of Genentech can afford. Moreover, it’s one that can be as effective as the 500- to 1000-person forces that big health-care companies use.
Genentech expects to file as early as next year for FDA approval for TPA, a blood-clot dissolver used to treat heart attack patients. Genentech hopes that TPA will be its next direct-sell product. By the time that product goes to market, Gower said, the company’s marketers will have had two years of experience and will be able to provide a ready-made channel for a new stream of drugs.
Analysts say that getting a sales force in place can come none too soon. During the next two years, dozens more genetically engineered pharmaceuticals are expected to enter the market, including several to compete with Genentech’s lines. Gower hopes that having an established marketing mechanism in place will enable Genentech to protect the market share it captures during its current head-start.
When Gower joined the company 4 1/2 years ago, he was Genentech’s only marketing and sales employee. That staff now has about 35 employees. Nearly 20 of them are direct-sales people who were culled from a list of more than 700 candidates and hired within the last few weeks to sell Protropin. The list of new hires is expected to grow to 100 by the end of 1987.
Drug Linked to Virus
Protropin will be sold to help children with pituitary gland deficiencies achieve normal or near-normal height. Taking a new drug is not without risk, even one with FDA approval. Hidden side effects might not appear for years. But with no other growth hormone available, Kevin McDermott’s mother is willing to wager that the new drug is safe rather than leave her son a dwarf.
It’s a risk she has taken before. When Kevin was 3, he weighed no more than the average 18-month-old baby. Since then and until last spring, he has taken a natural growth hormone extracted from the pituitary glands of human cadavers, an expensive process that costs $45 for each milligram of the hormone. But the product was yanked off the market in April after it was linked to several cases of an incurable virus that attacks the brain.
Analysts think the resulting gap in the market accelerated the FDA approval process for Genentech’s Protropin. The green light came just two years after Genentech submitted its application for approval. The process might have taken at least twice that long were it not for the pressing need of families like the McDermotts.
Researchers say the virus in the extracted hormone was transmitted from the cadavers; the biotechnology process, they say, eliminates such dangers. The gene-spliced version is also $10 cheaper per milligram. But best of all, it can be produced in quantities that will supply the needs of all 15,000 children like Kevin who are afflicted by the condition rather than the 4,000 who were lucky enough to get the limited supplies of human-derived hormone.
Now that the company has jumped the major hurdles of the biotech industry, it finds itself face to face with the problems of the drug industry. No one company dominates that market the way International Business Machines dominates the computer industry; no pharmaceutical giant controls more than 8% of the total $15 billion U.S. prescription drug market.
Expensive Process
But every giant dominates at least one of the hundreds of market segments. For example, SmithKline Beckman became a behemoth in the industry largely because of Tagamet, an anti-ulcer agent that is the world’s best-selling prescription drug.
Creating new drugs is expensive: Only one out of every new 10 drugs makes it to market. Those that do typically take eight years and from $30 million to $70 million to reach the pharmacy shelf. Genentech will have to develop markets carefully and watch pennies to be able to continue to make that kind of investment.
Management is a large part of the formula for success, analysts agree. Swanson’s greatest strength, they say, has been knowing how to delegate responsibility to others to make up for his own lack of experience in running a drug company. Six months ago, for example, he lured Raab (pronounced rob) from the position of president at Abbott, one of the most successful health-care and drug corporations.
Raab, who now holds the same position at Genentech, says he will concentrate on pumping up the company’s production facilities and focus even more sharply on human drugs. As part of that plan, he pushed for the company’s recent decision to sell its animal product marketing and production businesses to chemical manufacturer Ciba-Geigy for $42 million plus royalties.
‘Raab and Bob Show’
Company officials say Raab’s arrival in no way detracts from Swanson’s role in the company. “We’re just getting too big to have one person running things,” said one spokesman, adding that employees refer to the duo as “the Raab and Bob show.”
Swanson and Raab say emphatically that neither would consider selling Genentech “at any price” and stress the company’s resolve to go it alone. “We have the drive, the resources and the management to do it,” Swanson said over and over.
Gower puts it a little differently. “We’ve gotten lots of accolades from the press and from Wall Street, but that’s all transitory,” he said. “All that counts is performance. None of us here wants to become a footnote in history.”
WHERE GENENTECH PRODUCTS STAND IN THE REGULATORY PIPELINE
Animal testing Factor VIII, the blood-clotting agent needed by hemophiliacs.
Human testing for safety and to determine appropriate dosage: Tumor necrosis factor, an anti-cancer agent.
Hepatitis-B vaccine
Human testing for effectiveness in treating or preventing an illness or disease: Gamma interferon, an anti-cancer agent.
TPA, a blood clot dissolver for heart attack victims.
Pending FDA approval: Alpha interferon, an anti-cancer agent (to be sold by Hoffmann-La Roche).
On the Market Human insulin (sold by Eli Lilly).
Human growth hormone (sold by Genentech).
