Gene Dreams: The Bursting Of The Biotechnology Bubble

[Editor's note: On Oct. 14, 1980, a small San Francisco startup firm, a company that had yet to produce a single product, cornered the imagination and captured the deep pockets of Wall Street with a dazzling new concept - biotechnology. The company, Genentech Inc., was the creation of Robert Swanson, a venture capitalist, and Herbert Boyer, a biochemist who along with a colleague had been the first to extract a gene from one organism and successfully implant it in another. Investors liked this idea of gene splicing. In fact, they loved it - so much that within 30 minutes after the stock market opened, the cash-hungry young company, which had elected to sell a million shares of stock at $35 a piece, had sold out. By the end of the day, Genentech's stock would make market history by hitting a high of $89, a record for an initial public offering. As Robert Teitelman recounts in his book, Gene Dreams: Wall Street, Academia, and the Rise of Biotechnology, the Genentech offering would for years generate ripples in the world of biotech-biomedical research. It would produce a seismic shift in the traditional structure of basic scientific research, luring researchers from academia to scientific laboratories funded not by the National Institutes of Health, but by banks, brokers, and individual shareholders. Never before had an entire industry been spawned with university scientists playing such a major role, and never before had Wall Street opened its wallet so quickly or widely to gamble on scientific research. In a few short years, more than 100 biotechnology companies were up and running, fueled by some $500 million raised publicly. The phenomenon soon took on a name: biomania. The promise was twofold: big bucks, which would accrue from the dozens of independent high-tech companies and breakthrough products that the scientific revolution would generate; and "magic bullets" - the ubiquitous catchphrase of biotechnology, which referred to the revolutionary gene-based pharmaceutical regimens (read cures) - for such diseases as cancer. Almost a decade after the Genentech offering, Teitelman - a financial writer who tracks the biotech industry - now points out that biotechnology has yet to fully deliver on either of these promises. Companies have yet to identify, much less manufacture and market, a cure for cancer or AIDS. And Genentech, for all its hopes of blossoming into a fully integrated, independent pharmaceutical company, has sold out a majority share. Simply put, the revolution has fizzled - or so argues Teitelman, who explains why in the following excerpt from his new book.] For all the progress made over the last two decades in understanding cancer, the very basic arguments still rage: Is cancer one disease or many? Is it a unitary phenomenon - triggered by a simple common switch - or a heterogeneous one? Does the answer lie in the genome, in some still-elusive pattern of oncogenes, or does it exist in some higher level of organization? And cancer is not alone; fundamental questions rage about many intractable diseases, about basic questions of life, death, and aging. As much as molecular biology has learned about the immune system, for instance, more needs to be done before one can truly manipulate it. This underlying scientific uncertainty creates significant commercial implications. From its earliest days, biotechnology has been continually offered up, particularly to the investment community, as the next great technological revolution, a worthy successor to the triumphant march of the semiconductor and computer revolutions. Such talk came not only from biotech entrepreneurs like Bob Nowinski [one of the founders of a Seattle-based bio-tech startup, Genetic Systems], but from Wall Street brokers and analysts and from the press. Even industry critics, eager to indicate the depth of their concerns, would emphasize the unprecedented nature of the new biology - although they would often compare it to nuclear energy, with its weapons and fallout, rather than to the seemingly more benign micro-electronics. It was, like the magic bullet, an argument nearly impossible to bring back down to earth; like a cliche, it carried about itself the confidence of self-evident truth. Actually, the notion of a revolution could take on many meanings. They, in turn, could be sorted into two kinds of arguments. First, there was the long view that focused on the science. Biotechnology was portrayed as a chapter in a scientific revolution comparable to the impressive sweep of twentieth-century electronics, with its roots in the fertile soil of nineteenth-century physics. In both electronics and biology, a scientific revolution - "revolution" in the Kuhnian sense - spawns technologies that trigger the kind of "long-wave" economic revolution described by the late Austrian economist Joseph Schumpeter. The equation, simply put, has science creating technology, which, through the creative agency of the entrepreneur, then drives economic growth. The second view represented a popularization of the Schumpeterian thesis. It focused more exclusively on the technological component and emanated strongly from Wall Street. It took as its model the invention, and subsequent development, of the semiconductor transitor. Given the obvious presence of a revolution - and in this popular version, science and technology tended to be confused - who would serve as the investable vanguard? The answer, borrowed again from the semiconductor experience, was an entrepreneurial company like Fairchild, National Semiconductor, or Intel (or, in computers, Data General, Digital Equipment, or Apple). Are these analogies valid? It is difficult to gauge the profound changes that molecular biology may have on either medicine, or, more speculatively, the economy over a period of decades. The essential question to ask here, however, is: Who shall control these technological changes that we have already witnessed? What will be the structure of the industry over the next decade? Why, unlike semiconductors and computers, hasn't a wave of new companies swept aside the traditional drug companies? Biology is far earlier in its development cycle than electronics. By the end of World War II, electronics had already been spinning off developments for over a century, beginning with the telegraph and telephone, followed by radio, radar, television, and the first crude digital computers. In 1953, Watson and Crick unraveled the structure of DNA, five years after John Bardeen, William Shockley, and Walter Brattain developed the first semiconductor. The transistor was an application of science to construct a manufactured object, a technology; it led almost immediately to the first products and the first leapfrogging technologies. Watson and Crick worked from a much thinner scientific base; the structure of DNA was a paradigmatic event, but it did not spawn a technological breakthrough for twenty years. And even if one begins to count from Boyer and Cohen's 1973 recombinant experiment, the first product, human insulin, took over a decade to commercialize and was controlled, in the end, by a large company, Eli Lilly. While this is relatively rapid by traditional pharmaceutical standards - although these standards were changing as well over this period - it is, by the time frame of semiconductors, lethally slow. Just as important is the relationship between the pace and structure of financing and product development. In microelectronics, the time it took to go from laboratory to marketplace was very short. The first commercial semiconductor product, a so-called point-contact transistor, went on the market in 1951, a year after the invention. By 1954 the number of firms producing transistors in the United States grew from four to twenty-six; by 1957 these new companies held about 64 percent of the market. Companies quickly became forces in the business. More remarkable was the rapid leap from organization to public offering. Public money was used for expansion, not creation. Thus, the dynamics of the two industries were dramatically different. Although both semiconductors and biotechnology organized and tapped the public markets relatively quickly, the chip companies generated products either before going public, like Intel, or soon after. As a result, they were able to reduce almost immediately their dependence on outside financing. Because biotechnology companies went public so early in both organizational and technological lives, they required a far longer nurturing from outside financing. Although dependence on outside financing is not necessarily lethal, particularly if prudently managed, the possibility of failure rises quickly. A company dependent on outside financing is a company exposed. Semiconductor history is characterized by rapid, continuous, and nearly exponential improvements on a basic technology. Science was important, but semiconductor companies were not wanting for conceptual breakthroughs on the frontiers of physics to generate new generations of products. Semiconductors, and Silicon Valley generally, were the province of engineers and inventors, not, for the most part, academicians and theoreticians. There was a strong consensus of fundamentals; there were no Harry Rubins [a Berkeley biologist who questioned the notion that scientists could ever know all they needed to about the cell] in the chip business. New companies could steal the march quickly enough to beat back much larger, wealthier firms. Because they moved so quickly, money was far less important than technology. In biotechnology, the transition of science to technology has, so far, not been so smooth. Companies were organized and built with Wall Street financing. Unable to strike quickly, they then had to turn to deal making - peddling off a project here, floating a partnership there - that made the kind of long-term profits needed for self-sustaining takeoff more and more difficult to generate and that made ever-greater demands on the technology to create a breakthrough product. Biotechnology was not competing with the drug companies for financing; they were, to their long-term advantage, competing with other high-technology industries like computers. Although a few companies - Genentech, Amgen, and Centocor, perhaps - may achieve that takeoff, the technology for the most part is being reabsorbed into traditional structures. Bristol-Myers buys Genetic Systems; Johnson & Johnson licenses dozens of products from dozens of companies; Merck pours hundreds of millions of dollars into a laboratory for molecular biology overseen by two former academics, chairman Roy Vagelos and R&D chief Edward Scolnick. Thus, although biotechnology has changed the way the drug business works, it has not sparked anything approaching a Schumpeterian economic revolution. Wall Street's willingness to raise billions in capital does not a revolution make; Wall Street annually throws millions away on unproductive investments. The major drug companies still dominate; despite generics and the increasing costs of R&D, the last few years have been some of the most profitable in history. At the same time, financing difficulties stemming in part from the stock market crash of 1987 have forced many biotech firms to license away major products to the large drug companies. The biotechnology industry increasingly looks like a middleman on a technological transmission belt between academia and pharmaceuticals. Meanwhile, the triangular relationship between academia, the drug industry, and the bureaucracy survives - although parts of the system have been battered, particularly NIH. Indeed, the one move that might have radically altered those relationships - a 1988 Reagan administration trial balloon to privatize NIH - was greeted by howls of protest. How does the public fare in all this? We have seen the waste, the false expectations, the tendency of research efforts to go sniffing mindlessly after the hot new Wall Street trend, and the tendency to absorb some of the worst of the Wall Street and academic worlds and proclaim it wonderful. The public has been led hither and yon. But there is a more positive side to this as well. Although the myth of the scientific entrepreneur has proven less mighty than its promoters first suggested, biotechnology did bring a new electricity to a highly bureaucratic biomedical establishment. The drug companies were moving sluggishly in the late 1970s to absorb the tools of molecular biology, and academic researchers at NIH or the universities seemed to be settling for grand theory at the expense of practice. Biotechnology upset that complacency and forced those institutions to respond more quickly, more flexibly. Moreover, biotechnology - or whatever name it takes in the future - should fill an important role in those institutions if funding is available. The small companies can move more nimbly on thorny, if perhaps narrower, problems, than on large ones; they may also have more of a tendency to take risks, to tempt serendipity. The large companies, on the other hand, possess the resources to synthesize results into an encompassing systemic approach, particularly against chronic diseases such as cancer or those of aging. And the smaller companies can fill a social need as well, as a haven for researchers stifled by academia, repelled by large organizations, or interested in finally making a real buck. And, perhaps, their day will come. The microelectronics analogy does offer the possibility that as the new biology matures, the true economic revolution may be yet to come. That will undoubtedly be held out for some yet as an incentive to form new, small companies, no matter the odds. And to provide the money for them.

Gene Dreams: The Bursting Of The Biotechnology Bubble

The Scientist Staff

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