Rejection of Genentech’s Heart Drug Surprises Biotechnology Investors

After seven years of work, Genentech executives went before a Food and Drug Administration advisory panel Friday afternoon with high hopes of receiving the go-ahead to market their highly touted heart drug, TPA. The nation’s biggest biotechnology company had even scheduled a champagne reception in anticipation of approval.

But after five hours of presentations and questions, the panel stunned Genentech officials and the 400 other industry executives and analysts packed into the FDA auditorium in Bethesda, Md.: It rejected the drug. The panel asked for further study of TPA, long projected by analysts to be the first genetically engineered drug to reap $1 billion in annual sales.

“There was a gasp from the audience,” said biotechnology analyst Sarah Gordon of Hambrecht & Quist. “We couldn’t believe it. It came as a total shock to the company and the entire investment community.”

The panel’s decision was the most serious setback in the short but impressive 11-year history of Genentech, the first biotechnology firm to go public and the first to get FDA approval for a genetically engineered drug.

The ruling by the FDA Advisory Committee on Cardiovascular and Renal Drugs, however, is not final. Genentech plans to submit new evidence to the agency and still is expected by analysts to win final approval from the agency in a year or so.

But as a result of the regulatory delay, analysts expect South San Francisco-based Genentech to lose as much as $350 million in potential sales as well as what would have been a two-year lead over its competitors in bringing a product to market.

The news drove down Genentech’s stock and that of other biotechnology companies. Genentech plunged $11.50, to $36.75; Chiron was off $3.50, to $30.25; Amgen fell $2.875, to $37.75, and Cetus closed at $28.50, down $2.125.

“It’s an object lesson in the riskiness of the industry,” said S. Robert Kupor, an analyst with the brokerage firm of Cable Howse & Ragen.

TPA is designed to prevent heart attacks caused by blood clots that, by clinging to fat deposits on the walls of blood vessels, impede the flow of blood. TPA, to be marketed under the name Activase, is supposed to dissolve the blood clots.

But the FDA advisory committee said Genentech failed to prove that TPA extended the life of heart attack patients after dissolving the blood clots. Genentech had begun manufacturing TPA and assembled a sales force of about 100 to start selling the drug later this summer.

“You have a company with over 1,200 people who are devoted to tasks that are suddenly meaningless,” said Kupor. “They have salesman that have nothing to sell and manufacturing people with nothing to make.”

Even more importantly, the delay in bringing TPA to market will mean Genentech ultimately will be forced to lower prices on its product in the face of competition. “The price they will charge will be substantially less than the $2,200 to $2,500 per heart attack patient we had expected them charge,” Gordon said.

Over the next five years, Genentech’s revenue from TPA will be $350 million less than previously estimated as a result of lower prices, Gordon said.

Analysts were quick to cut their projections for Genentech’s sales and earnings. After previously estimating sales of $170 million this year, Kupor cut his projection to about $55 million. He also slashed his estimate for the company’s 1987 earnings to about $2.5 million from $4.9 million.

At the same time, analysts say the company’s substantial cash reserves will allow it to absorb the setback. Genentech said Monday it will not lay off any workers.

But, some analysts said, Genentech’s failure to win FDA approval renews doubts about the industry’s ability to bring products to market.

“If Genentech can’t pull it off,” said David Paisley, a biotechnology consultant, “how can smaller companies make it big? . . . It’s going to make it harder for other biotech companies to finance their research.”

Others downplayed Friday’s announcement. Robert Fildes, president of Cetus Corp., a biotechnology firm specializing in cancer drugs, said: “It’s unfortunate that people don’t understand that Friday’s decision will only affect Genentech in the short term and it won’t affect other companies.”