Cytel Hopes to Emulate Hybritech’s Formula for Success

When Howard E. (Ted) Greene began knocking on investors’ doors in 1978 looking for money to start a biotechnology company, he was met with a cool reception. How could he hope to compete, the investors asked, with established pharmaceutical giants such as Merck, Eli Lilly, Smith Kline and others in pursuing blockbuster drugs and diagnostic products?

Nevertheless, Greene and his associates at San Diego-based Hybritech proceeded to teach the pharmaceutical industry an object lesson in how to beat the big boys. Under Greene, who was both chief executive and co-inventor of a critical patent, Hybritech became the first drug company to commercialize monoclonal antibody technology, introducing a broad range of diagnostic products.

Hybritech also embarked on clinical tests of the first therapeutic drugs based on monoclonals, including a liver cancer treatment that Hybritech stands a good chance of bringing to market over the next several years.

Bought by Eli Lilly

Hybritech’s products and patent position--the strongest in the monoclonal industry, analysts say--persuaded Eli Lilly to buy Hybritech for $480 million in 1986, making Greene and many other executives and stockholders wealthy.

“When people asked how in the world we could compete against those folks, my answer was that, when you are working in an area where ideas count the most, it’s not how many salespeople you have in your organization that is going to be the difference between success and failure,” Greene said.

“In this new technology, the problems to be solved will be solved by a few people, not by armies of people,” Greene said. “And it’s better that these people be all together, working toward the same goal, operating on a first-name, verbal-communication basis than scattered among thousands of employees at some pharmaceutical company.”

Recently, Greene again was out pounding doors to raise money for his latest venture called Cytel Corp., a San Diego company trying to develop immunomodulators, or drugs that fight disease by mobilizing or blocking the body’s immune responses. Greene is Cytel’s chief executive.

As one might expect, Greene’s pleas for money met with a much friendlier reception from investors than 10 years ago. Greene’s role in Hybritech’s success story is well known in venture capital circles and investors were downright eager to become a part of Cytel.

“They paid attention this time,” Greene said.

Last week, Greene collected $6 million from leading U.S. venture firms, including J.H. Whitney of New York, Morganthaler Ventures of Cleveland, billionaire Henry Hillman of Pittsburgh and Sutter Hill Ventures of Palo Alto. The funds will enable Cytel to lease a 13,000-square-foot building in Torrey Pines and to double a staff that now numbers 20, 17 of whom are scientists.

Seed capital totaling $1 million was provided to Cytel last summer by Biovest Partners, a San Diego venture capital firm that Greene started after the Lilly buy-out with fellow Hybritech alumnus Timothy Wollaeger.

Backed by Big Names

In promoting Cytel, Greene had more than his Hybritech track record to fall back on. Dr. Howard Grey, formerly chief of immunology at National Jewish Center for Immunology and Respiratory Medicine in Denver, has joined Cytel as chief technical officer. Grey has been at the fore of research in major histocompatibility (MHC) molecules, which are present on the surface of all human cells and which signal to the body’s immune system that an “invader” organism is present and should be wiped out.

Grey’s research on MHC will provide the basis for Cytel’s products, Greene said. He refused to say which products Cytel will try to develop first.

“When the history of immunology is written 10 years from now, it will be shown that MHC molecules represented the key to the development of therapeutic drugs for controlling immune responses,” Greene said. “Howard Grey is the man who has been doing the leading work in understanding how MHC activates that response.”

Grey, 55, has also persuaded half a dozen of his research associates at National Jewish Center to leave academia and join him at Cytel. He has also helped Cytel recruit 10 other top scientists.

Cytel has also received a seal of approval from Scripps Clinic and Research Foundation of La Jolla, the site of some of the world’s most advanced immunological research. Scripps Research Institute director Richard Lerner is a member of Cytel’s board of directors, and Cytel’s scientists are leasing temporary lab space at Scripps until Cytel’s building is ready.

Lerner’s association with Cytel is particularly valuable because he helped pioneer “rational drug design,” a method of designing purely synthetic molecules to cause a specific biological response, Greene said. Cytel plans to use those design methods to bring along its line of products.

Stock-for-Technology Swap

In exchange for its cooperation, Scripps will receive an undisclosed percentage of Cytel stock, a novel arrangement for Scripps but similar to a stock-for-technology swap made recently by Immulogic of Cambridge, Mass. with Massachusetts Institute of Technology. Immulogic is also trying to develop drugs that use the immune system to combat disease.

In the past, Scripps has profited from the technology developed by its staff scientists only through licensing arrangements that generated royalty fees. Holding stock in companies such as Cytel trying to develop “blockbuster” drugs offers Scripps the potential of a much bigger payoff.

“These small companies have often made important technical and intellectual contributions to science,” Lerner said. “And, as there is a move in many institutions to take part in these companies, it behooves the institutions to take the (stock) positions when they are offered.”

Cytel faces stiff competition in its quest for successful immunomodulators, from small companies such as Immulogic to larger ones such as Genentech, Hoffmann-La Roche, Schering-Plough and Eli Lilly.

“The woods are full of companies chasing immunomodulators,” said David MacCallum, managing director of Hambrecht & Quist in New York. “There is an awful lot of money chasing this concept.”

Kathy Behrens, a biotechnology analyst with Robertson, Colman & Stephens investment bankers in San Francisco, said: “I can’t name a single pharmaceutical company in the United States that is not looking into (immunomodulators). Everyone’s goal is rational drug design.”

Immulogic was co-founded last year by MIT professor Malcolm Gesten, who has co-authored immunological studies with Cytel’s Grey. Immulogic President Gustav Christensen said his company hopes to have an anti-allergy product ready for clinical trials in three to four years. The company has also targeted diabetes for product development.

“For the first time, we have an understanding of how the immune system works. What we are all working on is the ability to enhance or prevent an immune response. That knowledge makes us confident that, over a number of years, you will start having therapeutic products that can deal with diseases.”

In the face of the competition, Cytel’s fortunes will depend on Greene’s ability, as he expresses it, to “draw some sense out of the incredible flow of discoveries about the immune system. The veil is being lifted and there is an incredible degree of excitement and intellectual churning going on.”

MacCallum of Hambrecht & Quist said Greene proved his abilities in product development and strategic planning in taking Hybritech “from one of many to the leader in that industry.”

Philip Paul, chairman of Hillman Ventures, the Henry Hillman-owned venture capital firm based in Menlo Park that invested in Cytel and previously in Hybritech, said Greene has “all the answers.”

“Ted has proven he can take a small company into the teeth of very large company competition and make a winner out of it,” Paul said. “Small companies focused on specific technology and specific market applications can outrun a larger company with greater resources. They don’t have to put up with all of the committees and strategic reviews that larger companies demand as a way of managing.

“So his previous experience gives us a great deal of confidence,” Paul said.

Greene, 45, is an Ohio native with an undergraduate degree in physics from Amherst and a graduate degree in business at Harvard. He was a management consultant at McKinsey & Co. for five years and an executive at Baxter Travenol for seven years before joining Hybritech.

Greene seemed undaunted that Cytel may eventually require just as much money--$150 million in equity capital--from investors before its products are ready for market. To mitigate those costs, Cytel will begin forming commercial relationships with large drug companies fairly soon, he said, by selling them rights to Cytel technology.

He said he will remain as Cytel chief executive for about two years before turning over the reins to a full-time CEO. Meanwhile, Greene and partner Wollaeger will continue to scout for more investments for Biovest, their “seed capital” venture firm that has invested in six start-up companies, including four in San Diego, over the past two years .