Branching Out From Wrinkle Treatment : Collagen Corp. Turns Cowhide to Cash

The essence of Collagen Corp. is flesh and bone. From a sticky glop that is among the most common materials in animal and human tissue, the Palo Alto company has concocted a unique product. It makes a goo of natural proteins called collagens that it extracts from cowhide and modifies for human use. It then sells the stuff to doctors, who inject it under patients’ skin to smooth wrinkles and scars or to rebuild tissue during plastic surgery.

Already the 10-year-old biomedical concern has made millions of dollars marketing implants to fill in facial lines and defects. More than 250,000 people in 25 countries have been injected. Three percent of the company’s $18 million in sales comes from physicians’ offices in the Beverly Hills area alone.

Within days the company expects to win approval from the Food and Drug Administration for a collagen injection to treat corns and calluses. Several podiatrists and medical analysts herald the product as the first breakthrough in foot care in two decades.

“So far we’ve been solving the minor medical problems of the majority rather than the major medical problems of a few,” said Collagen Corp. President Howard D. Palefsky. The strategy has succeeded in transforming the company from a research start-up to a market-driven money maker swiftly enough to sustain investor interest.

Firm Isn’t Content

But Palefsky says that Collagen Corp. isn’t content just to help fulfill age-old desires for younger-looking skin and pain-free feet. Its researchers think its proprietary extractions can be used to replace worn-out valves in the stomach and bladder, to repair muscle and bone, and even to encase and strangle cancer tumors. Health-care big-shots such as Monsanto and Bristol-Myers, who have invested millions of dollars in Collagen Corp.’s research, think so, too.

Although the company will pursue products that hold promise in the treatment of certain fatal diseases, Palefsky insists that such markets will not become the company’s main focus. “We’re essentially going to stick to the business of treating people who are basically healthy, not the terminally ill--of improving lives, not saving them,” he said.

In keeping with that philosophy, the company hopes eventually to sell collagen products to remedy maladies from heartburn to gum disease. By expanding from wrinkle and corn treatments into products aimed at audiences with more debilitating--and, therefore, potentially lucrative--ailments, Collagen Corp. hopes to become a big-league player in the medical products industry by decade’s end.

But even with FDA approval, Collagen Corp. can make no absolute guarantee that its products are safe. Side effects from medical materials, devices or drugs often take years to appear. Collagen Corp. could be particularly vulnerable should any side-effect show up, because its entire product line rests on one basic compound that is injected into the body either for cosmetic or reconstructive purposes.

Nor has the company any guarantee that doctors and clients will opt to use its products in the numbers the company expects. Indeed, the company’s sales and earnings in 1983 and 1984 disappointed many on Wall Street as demand for wrinkle and acne scar treatment grew more slowly than expected.

But as research continues to bolster confidence in the long-term promise and safety of collagen-based products, investors have renewed their enthusiasm for the company and say its sales could reach $100 million by 1990. “The company is unique. They do something no one else does,” said Scott King, analyst at Montgomery Security in San Francisco. “Their potential markets are enormous, their operating margins are great. They’ve got the ingredients to become a major company within three or four years.”

Profit From Vanity

Agreed Palefsky: “We want to make truly new things in markets that we dominate.” So far, he admits, the company has profited mainly from vanity. An aging population that will be increasingly concerned with looking younger and fixing deteriorating bodies, “won’t hurt us either,” he said. “People will pay a bundle to look good.”

Analysts say that unique products are not all that distinguish Collagen Corp. from scores of promising drug and medical device companies that have been formed during the last 15 years. Most such start-ups have found it difficult if not impossible to translate research into salable products fast enough to satisfy investors--exceptions are firms that licensed their first product to a company large enough to finance mass marketing efforts.

Collagen Corp., by developing and selling its first products under its own label, was pegged by Wall Street from the start as a product-driven technology company.

The company’s products work differently from the collagen that has become popular for cosmetic companies to include in moisturizing creams--although they are essentially the same thing. More than half of all proteins in animal and human bodies is collagen. The stringy substance serves as a living lattice for muscle, cartilage and bone. Cells latch onto collagen and grow much as vines latch and grow on a garden trellis.

No Lasting Value

Moisturizers merely allow collagen to be rubbed on top of the skin, an application that may reduce wrinkles for a few hours by helping pores retain moisture but which has no lasting value.

In contrast, Collagen Corp.’s products are implanted under the skin and mimic the natural collagen that pads the body’s muscle and bone. The implants last from six months to a year before new injections are needed. They work not only by filling flesh cavities but also by stimulating the natural growth of body tissue and dictating how cells will organize.

Aging, injury, genetic quirk, acne or disease can break down natural collagen, leaving dents in the natural foundation of body tissue. The results range from wrinkles to the deterioration of bones or muscle.

The company says that its products, in addition to treating facial lines, have been used successfully to elevate “cosmetically unacceptable” skin grafts, reconstruct tissue after breast surgery and counter birth defects.

A typical patient spends between $250 and $900 a year for treatment.

10-Year Lead

Although one company in Japan and another in Italy are exploring the use of collagen, analysts say that Collagen Corp. has a 10-year lead in the industry. That, they say, is a head start that will pay off even when the company’s use patent, which is licensed from Stanford University, expires in mid-1989. David H. MacCallum, medical and pharmaceutical industry analyst for Hambrecht & Quist, says that is no cause for worry. “By then they’ll have a slew of new patents,” he said.

They’re also likely to have a slew of new products. Some, such as collagen-based injections to replace bone lost from gum disease, could provide a totally new remedy for an estimated 3.3 million people in the United States whose jaws are so deteriorated they cannot even wear dentures. Others, however, will pit Collagen Corp. against competitors as diverse as manufacturers of foot care products and dental suppliers.

In the foot product arena, for example, Collagen Corp.’s injectable product provides a cushion between skin and bone, cutting the friction that causes protective clumps of skin, known as corns and calluses, to form.

The company is betting that significant numbers of the estimated 6 million adults who suffer from such growths will find the injections more effective than current treatments--including foot pads or minor surgery to correct underlying bone deformities.

Differs From Silicon

In the reconstructive surgery market, the company’s biggest competitor is silicon, an inert substance that the body does not make. Unlike silicon, which has been the material traditionally used in plastic surgery, collagen can be broken down and absorbed by the body. Because the substance interacts with the body, it is less likely to be rejected or cause infection.

No one knows why age causes wrinkles or injuries cause scars. But doctors do know that, for whatever reason, the body reduces the amount of collagen in areas where such defects occur. Because the same unknown forces will eventually dissolve implanted collagen, injections must be repeated as often as twice a year. But that gives the substance a significant boost over silicon, which sits inertly once injected and is never accepted by the body as fully as a natural protein can be.

Although collagen is a natural substance that is injected into the body, the FDA views Collagen Corp. as a medical device maker. In fact, non-pharmaceutical status was a key reason Collagen Corp. got a product to market so fast: The FDA tends to approve medical devices more quickly than it does new drugs.

Despite its classification among regulators, however, the company is treated by Wall Street like a pharmaceutical maker. Explains Palefsky, “We have the economics of drug industry, with high gross margins as well as high research and marketing costs.” He said that medical device makers typically have tight margins and research costs that are lower than for drugs.

Cancer Research Implications

Dr. John R. Daniels, a cancer specialist at the University of Southern California Medical School and one of Collagen Corp.’s four founders, said that from a scientific point of view, the company’s research can be summed up as an effort to understand how body parts and tissues differentiate themselves from each another. He described “tissue organization” as one of the hottest areas of biology and one with fundamental implications in cancer research.

The company spent its first six years as a private research company, living off $8.5 million in venture capital, including $2.5 million that it received from Monsanto in 1980. It then raised $13.5 million in its initial public offering in 1981 and an additional $16 million in a second offering in 1983.

Only after getting a product out the door under its own name did Collagen Corp. sign marketing agreements with companies, such as Schering-Plough, to distribute its goods abroad.

Today Collagen Corp. can make $500,000 worth of injectable collagen from a cowhide worth $60. Even with other operating costs, the company’s gross margins are an impressive 82%, compared to 60% or less that is typical among drug and device makers. Sales of wrinkle and scar implants are expected to grow 15% a year, a rate that alone would boost sales to $36 million in 1990.

New Products

But what holds Wall Street’s attention is the prospect of sales that are double or triple that number--a feasible increase even if only a few of the company’s planned new products succeed.

On its own, Collagen Corp. is developing collagen devices to replace worn-out or defective valves in the gastrointestinal system. A valve to prevent stomach juices from going up into the esophagus, for example, could cure chronic heartburn. The company also is developing implants to replace jaw bones and tissues lost from gum disease.

It has joined with Monsanto, which already owns 14% of Collagen Corp.’s stock, in an effort to isolate a protein that induces bone and cartilage growth. This year it joined with Zimmer Inc., a subsidiary of Bristol-Myers, to develop ways to treat broken bones with collagen-based products, and with a division of drug giant Eli Lilly to develop collagen-based treatments for tumors for which surgical removal is too dangerous.

Analysts seem to agree that the company has proved its technological and business prowess. Now, they say, marketing poses the greatest challenge to the company as it moves from cosmetic implants to therapeutic and remedial product markets. “But that’s a challenge that plays right into upper-management’s strengths,” said analyst MacCallum, referring to Palefsky’s six years as a marketer at such health-care companies as Alza and American Home Products.

Discretion Counts

But health-care products differ, and Collagen Corp.’s marketers have learned that discretion is the greater part of success in selling treatments for wrinkles and scars. “People want our products but don’t want to admit it,” said administrative manager, Joan M. Trampenau.

For treatment of acne scars, for example, dermatologists have provided the best introduction to prospective users, which so far have included as many men as women.

This year, under the guidance of the Los Angeles advertising agency of Chiat/Day, the company made its print ads in women’s magazines more subtle. The old ads featured a woman’s face before and after wrinkle treatment. Now the ads feature a woman’s desk with a gold bracelet, leather gloves and a child’s picture on it--but no woman--and the sentence, “She’s successful enough to have earned a few wrinkles and smart enough to know what to do about them.”

Such ads clearly target the affluent and with reason. In the United States, as in other countries, most of the sales for implants come from middle-to-upper class individuals in urban areas. After testing a television ad campaign in Texas earlier this year, Collagen Corp. decided that broadcast ads are too expensive and not selective enough in the audiences they reach.

Earnings Dipped

Although growing demand for such products has boosted sales, the company’s earnings have dipped since 1982, when it first made a profit. The decline is the result of the company’s decision to pour large chunks of income into the research, development and marketing of new products. “It’s money well-spent,” says Hambrecht & Quist’s MacCallum.

But the company once already has not lived up to its own goals. Sales of its first two wrinkle and acne scar products have grown to $18 million a year since the first was introduced in 1981, but that is well below the $50 million the company expected by now.

The disappointing results pushed the company stock down to $9 a share last year--a significant drop from the $13-a-share price paid in the initial public offering in 1981 and less than half the stock’s all-time high of $18.375 in 1982. Recently, Collagen Corp.’s stock has risen to the $14-a-share range in over-the-counter trading, and some analysts say it will reach $18 or more within six months.

CORPORATE HISTORY: 1975: Founded by two researchers at Stanford University and two researchers at Project HEAR, a private research center in Palo Alto. Company gets exclusive licenses from both institutions to develop a proprietary collagen into a series of medical products. (Licenses expire 1989.)

1981: Raises $13.5 million in first public stock offering.

Wins U.S. Food and Drug Administration approval to sell Zyderm, a collagen-based substance that is injected under the skin to smooth wrinkles, acne scars and other minor skin defects.

1982: Makes first yearly profit.

1983: Wins FDA approval to sell Zyderm II, a concentrated version of its first product that is designed to treat more serious skin scars.

1984: Begins joint research with Monsanto Co. in effort to isolate a protein that induces bone and cartilage growth.

1985: Wins FDA approval to sell Zyplast Implant, a collagen product for use in plastic and reconstructive surgery.

In expectation of FDA approval for its fourth product, begins teaching podiatrists how to use a collagen-based injection called Keragen Implant to treat corns and calluses.