Biotech's Centocor Jockeys For Position In Drug Field

With several pharmaceutical products about to emerge from the pipeline, the firm sets its sights on becoming a `Merck of the year 2000' MALVERN, PA. -- When chemist Vincent Zurawski left Massachusetts General Hospital in 1979 to help found a new biotech company, Centocor Inc., he was like perhaps hundreds of other bright young scientists of his generation. He had an urge to scratch an entrepreneurial itch. "There was no doubt in my mind," recalls Zurawski, "that we were going to create a billion-dollar company." But a decade later, as bio-technology's industry-wide sales reach a billion dollars for the first time, Centocor's annual revenue is only flirting with the $28 million mark, and the fulfillment of Zurawski's dream for his Malvern-based company still appears remote. Clearly, Centocor has a long way to go. Nevertheless, the company - for reasons that go beyond revenue numbers - is widely recognized as a significant player in the biotech industry. Last year Centocor celebrated its 10th anniversary by forming its own European sales organization, obtaining European approval for Myoscint (the first monoclonal antibody-based cardiac imaging agent), getting approval for a new manu- facturing plant in the Netherlands, and introducing the first immunodiagnostic test to monitor a patient's resistance to certain chemotherapeutic agents. Currently, the firm is preparing to launch a global marketing and sales campaign to promote Centoxin, potentially the first monoclonal antibody-based therapeutic. It expects to receive approval for the product from the Food and Drug Administration (FDA) and European Community (EC) in late 1990 or early 1991. "Our goal," says Centocor's chairman and CEO, Hubert Schoemaker, "is to be a Merck of the year 2000." With so much of a small company's attention and financial resources focused on business issues, can it maintain a sufficiently strong commitment to basic research? Zurawski's answer is a qualified "yes." Centocor's budget for discovery research, he says, has stayed at the same level over the past six or seven years, while sales for the company have increased fivefold. And he says that the price of developing a product like CA 125 within eight months is scientific perfection: "You can't always be sure the test is as perfect as you would like it to be," he laments. "But being the first in a market is important." Though Centocor will certainly need to devote more of its revenue to basic research to keep the potential products coming, Zurawski says that the fact that a large percentage of this budget is devoted to collaborative projects with academic institutions such as Harvard, the Massachusetts Institute of Technology, and the Wistar Institute is of greater importance than the amount itself. "I am not naive enough to think that we're going to make all of the important discoveries in this field within our own four walls," he says. Within Centocor, product development has led scientists down unexpected career paths. Chaunce Bogard, a Ph.D. who worked on Centoxin in the lab for several years, is now running Centocor's pilot manufacturing facility for the therapeutic. And Bert Del-Villano, a microbiologist who was one of the first scientists hired by Zurawski, left Centocor last fall as the company's vice president of marketing and sales for the diagnostics division to become CEO of his own biotech firm, Matrix Pharmaceuticals in Menlo Park, Calif. --S.L-J D. History may show that Cento-cor's aspirations are a bit grand, but they are typical of the euphoria being gener- ated at other leading biotech companies, which be- lieve they have established a formidable presence in the pharmaceutical industry. For the last two decades both science and Wall Street have invested countless millions in biotechnology. Some relatively small products - for the most part diagnostic and imaging agents - have emerged. "But the blockbuster drugs that the technology promised always remained in the future," says G. Steven Burrill, national director of High Technology Industry Services for the accounting firm of Ernst & Young. "The future is now here," he adds. "The nineties will be their decade." Indeed, recent years have seen the first therapeutics to emerge from the biotech industry. Among the most widely acknowledged of these are TPA from Genentech, IL-2 from Cetus, and EPO from Amgen. And as biotech products from small and large companies alike replace the more traditional pharmaceutical products, analysts predict that biotech sales will increase to $100 billion by the year 2000. But such immense growth pre-sents an entirely new set of challenges for Centocor and its colleagues, who will be tested not just on their products and innovativeness, but also on their ability to stay alive in a competitive, capital-intensive market. "The cost of developing a drug is astronomical - $150 million per successful drug, not to mention the 80 percent of the drugs that fail," says Rich Purcell, a senior consultant with New Jersey-based Kline & Co. "It takes a lot of money to keep up in the pharmaceutical industry; and there's an astronomical cost to be successful." To get Centoxin to its current status, where it is pending FDA and EC approval, Centocor estimates that it has spent at least $150 million. The firm was able to meet the long-term expense of its research and development effort, company executives and industry analysts agree, because Centocor adopted a business-oriented attitude from the start. "From day one we were looking for products," recalls Zurawski. "We kept our eye on the bottom line." Centocor's well-defined area of scientific expertise - monoclonal antibodies - also helped get the company off the ground. "The key to Centocor has been their focus," acknowledges Purcell. Zurawski; Schoemaker; and their partners, Michael Wall and Hilary Koprowski, developed a business plan that hinged on their ability to develop and get approval for monoclonal-based diagnostic and imaging agents quickly. Once they were established in the marketplace, they would have a customer base - and some capital - with which to start marketing the therapeutics, which would take longer to develop and garner regulatory approval. "We did develop those first products quickly," says Zurawski, recalling the effort to produce Centocor's second test, CA-125, a test for gastrointestinal cancer. "From the time we got the antibody in house to when we put the test on sale and had a New England Journal of Medicine paper describing the test was just eight months." Another successful move was signing marketing and distribution agreements with major pharmaceutical companies - such as Abbott Laboratories and Hoffman-La Roche - for the diagnostic and imaging agents. Without signing away product rights, Centocor avoided incurring the cost of worldwide distribution for these first products, and gained recognition through association with respected industry leaders. To finance the more recent, capital-intensive efforts of clinical testing (the number of patients enrolled in Centocor's clinical trials has tripled over the past three years), manufacturing (the firm opened a 40,000-square-foot facility in Holland last year and is renovating a 60,000-square-foot building in Malvern), and marketing and sales, Centocor has turned to limited partner- ships. This is another mechanism whereby Centocor can raise capital from outside investors without relinquishing the rights to its products, or worse, the company itself. Such a long-term view - not mortgaging one's future for short-term capital - CEO Schoemaker says, is crucial to staying alive in the pharmaceutical business. "I get a call a week to buy or invest in a small startup that is going out of business. In every case the rights to their products are licensed out." Another key to playing this game successfully is having a full product line, not just one or two drugs on which the entire company is staked. Purcell is grudgingly respectful of Centocor's established line of products, and of the 11 drugs it has in clinical trials. But he is quick to point out, again, that even established industry leaders are having trouble developing a broad base of biotech products - this is one of the major impet-uses behind the consolidation currently going on within the industry. It might not always take four people to start a company, but in the case of Centocor, CEO Hubert Schoemaker says that the synergy among the quartet of founders was tangible from the start. "The key to our success was the complementary skills that each of us brought," Schoemaker says. Schoemaker was with Corning Glasssworks' Medical Division in the late 1970s when he got the urge to start his own company in the area of monoclonal antibodies. "It was a new technology that looked extremely promising," Schoemaker recalls. His call to long-time friend Vincent Zurawski, who was the first scientist at Massachusetts General Hospital to make a monoclonal antibody, was well timed. "I couldn't see myself in the laboratory for the next 20 years trying to discover the next subatomic particle," Zurawski says. "I wanted to turn what we had done into something of immediate value." The two of them soon discovered that Michael Wall, with whom Schoemaker had had previous business dealings, and Hilary Koprowski, director of the Wistar Institute in Philadelphia and leader of the first group to make hybridomas in the United States, were in the process of developing a business plan for a similar company. Though each of them brought their own areas of expertise to bear on the project - Koprowski and Zurawski in science, and Schoemaker and Wall in finance and business - Schoemaker says that if any one of them were to be termed the founding father of Centocor, Michael Wall is the one who deserves the honor. "His experience in starting companies was invaluable to us," Schoemaker says. "He was a known entity on Wall Street, when all I knew was that there was a Wall Street." Today, though each of the founders maintains some kind of working relationship with Centocor, Schoemaker is the only one who is concerned with the day-to-day operation of the multimillion-dollar company. Michael Wall has moved on to another startup, Alkermas - widely recognized in the business as one of the most promising new companies in the boom area of drug delivery. Koprowski still heads the Wistar Institute and serves as scientific adviser to Centocor. And after heading product development at Centocor for several years, Zurawski has returned to the lab, where, as chief scientific officer, he is in charge of all cancer-related research. Today Zurawski is one of the almost 200 scientists at Centocor; 120 of them work in the lab, the balance in clinical and manufacturing facilities. A small number of clinical and laboratory people are employed in Leiden, Holland, and Japan, but the majority operate out of corporate headquarters in Malvern, Pa. The company is currently recruiting scientists at the Ph.D., master's, and bachelor's levels. "Their job," says Schoemaker of Centocor's scientists, "is to continue to create our future." --S.L-J D. "Squibb had no breadth in R&D, and a weak product line; they called a merger [Squibb's purchase agreement with Bristol-Myers in 1989], but I didn't see anyone from Bristol-Myers being fired," Purcell observes dryly. And Genentech, which produced the blockbuster TPA, sold 60 percent of itself to Hoffman-La Roche last year for $2.2 billion. Genentech is widely recognized for its outstanding research staff. "And they built an excellent sales and marketing staff for TPA and human growth hormone," he says. "But if you have a big bag with only one or two things in it, it doesn't work." Even Hoffman-La Roche, Purcell's former employer, which put millions into its in-house biotech research, "couldn't build their own product line." Even if a Centocor can manage to juggle these internal issues with better success than some of its more established and well-financed competitors, there are several external factors that are brought to bear on an effort to build a multinational pharmaceutical firm. A predominant one is the need to master the nuances of conducting business in a number of different cultures. Schoemaker says that a unified European market will make that aspect of the business easier, and that with respect to culture and distance, running a business in Western Europe is "no different from having a staff in California." But Japan is another story. There, the differences in culture and the regulatory system are much greater. The Japanese, Zurawski observes, have instituted a more factual, quality assurance-oriented evaluation than that of FDA. "In Japan they are not concerned whether the test is clinically effective," he says. "They leave that to the doctors. Rather, they are interested in whether or not the test you have designed picks up the protein that you say it will." To better deal with these nuances, Centocor has exchanged product license rights with leading Japanese pharmaceuticals, including Toray-Fuji Bionics. Another environmental factor that has both large and small pharmaceuticals worried is a major shift in the reimbursement structure for drugs. Previously, the drug companies themselves set prices, based on what the market would bear. But now, Medicare and insurance companies are determining the prices by specifying reimbursement levels. "Society is demanding quality health care at a lower cost," says Burrill. The result, he adds, is "an intensely competitive arena in which the rules are dramatically changing." The emergence of generic drugs and the need for biotech companies to convince the medical community to accept new answers (for example, monoclonal antibody-based therapeutics) to clinical problems also impede any clear picture of the future market. And even if a Centocor can negotiate all of these hurdles successfully, there will always be a competitor fighting for market share. Centoxin has proved effective in clinical trials against gram-negative septicemia, a bacterial infection that the Centers for Disease Control recognizes as the 13th leading cause of death in the United States. And Centocor is especially optimistic about the product because it is the first therapeutic based on a human antibody, rather than that of a mouse. But Xoma, a biotech firm in Berkeley, Calif., beat Centocor to the punch by filing for FDA approval of its own (murine-based) monoclonal antibody treatment for septicemia six months earlier. Analysts estimate that the two companies will be fighting over an initial market of $10-$20 million, but that this number will grow to $100 million within 10 years. Within the range of all monoclonal antibody-based therapeutics, the competition is broader. NeoRx, Immunex, Molecular Genetics, International Genetic Engineering, and Immunogen all have applications pending with FDA. The race is on to see which company will get the first monoclonal therapeutic to market. So despite Centocor's well-carved niche, creative financing, and promising products in its research pipeline, the company has a difficult road ahead of it. The consensus is that the role of the successful biotechs will be in focused, niche markets - where there is, nonetheless, a lot of money to be made. Few recommend that the small companies even try to be a Merck. "Merck," Burrill says, "isn't just going to roll over and play dead." Susan L-J Dickinson is a freelance writer based in Philadelphia.

Biotech's Centocor Jockeys For Position In Drug Field

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