Good Science Doesn't Guarantee Profitability

[Editor's note: The following interview with Robert Teitelman took place on March 5, 1990, one month after Genentech Inc., a pioneer in the biotechnology industry, sold a controlling stake in the company to Roche Holding, Ltd., the Swiss parent of drug giant Hoffmann-La-Roche & Co. Teitelman, a senior editor at Institutional Investor, talked with Julia King, a contributing editor of The Scientist.] Q Who's managing today's biotechnology industry? Scientists or big business? A Early on it was the scientists. There was a strong base of scientists at the top. It began to change in the mid-1980s, when financing became a problem. Wall Street wanted managers. The classic case was the removal of Walter Gilbert - a Nobel Prize winner - at Biogen. That was 1984 or 1985, [when] it was clear that the company was losing tons of money, and they had lost a series of races to Genentech in particular. Q What is more important in terms of winning races? Good management or good science? A Good science is important early on, but these things are intertwined. Cloning, expression, and all of the things that we think of as the basic scientific stuff are probably less important than clinical trials and the Food and Drug Administration in terms of who's going to finish first. The drug companies will tell you that the basic science is important, but management of the commercialization process is a lot more important on an ongoing basis. You can make it once or twice with science alone, but if you don't have all these guys that fill out the forms, and the doctors who run the clinical trials, and all of the lobbyists who see to the FDA, then you're in trouble. Genentech got in trouble by its failure to manage that [commercialization] process with TPA [for tissue plasminogen activator, an antiblood clotting drug approved by FDA later than Genentech had projected]. Q How did Genentech mismanage TPA's commercialization? A I think what happened is that Genentech convinced itself that TPA was a product that mankind needed immediately. In convincing themselves, they convinced Wall Street and they sold it much too hard. If they had downplayed it, it would have attracted a lot less attention. When that problem came out with FDA, it was the first time there were any chinks in their armor. They thought that the romance of biotech could carry them through. Genentech fooled themselves, too. One of the most interesting things was just before it was approved, Genentech went out and bought back the limited partnership that had funded part of the [TPA] research. They bought back at an unbelievably high price based on the current stock price. What that told you is that they fully expected this billion-dollar product. In actual fact, it turned out to be about one third of that. Q Why would Genentech in particular - and the biotechnology industry in general - take such risks with inadequate scientific support for them? A One of the things that happened is that there was a change in the mindset of molecular biology in the 1970s. There was tremendous pressure on academics to compete with each other to get more money. Then along came antibodies and recombinant DNA, and everybody saw the opportunity to get funding from a source no one never thought about before, which is Wall Street. As molecular biology got to be a big science, some of the internal questioning of the assumptions behind the science tended to disappear. Molecular biology became this machine. In any kind of situation like this there is a tendency to discourage dissent against certain basic assumptions, and that carried over into the companies. Interferon was a wonderful example. Everybody who knew anything knew there were major questions about interferon, but you never heard about them from anybody. Immunotherapy was sort of new and young and needed the money. There were all these disciplines in molecular biology fighting for dollars. This carried over to the companies where, of course, it was even more extreme because you're talking about company survival. Q Where do you see research budgets of biotech companies going? Will we again see Genentech plow back 40 percent of revenues into research? Or is the focus now on getting out profitable products? A I think you've got to discriminate between companies. I think it's sort of a survival mentality right now in biotechnology. In the smaller companies, there are big problems. The only place that funding is coming from is the large companies, but they're getting more and more discriminating about what they're choosing to fund. They're getting tougher as the market stays down. With money not available, they're going to cut tougher and tougher deals [with biotech companies]. They're going to get what they want. They're not going to pay for everything, and they're going to own the products. In the big drug companies, most of which fund research internally from sales, research budgets will undoubtedly continue to rise. In fact, that is where the action will probably be. They have the money. Q Has Wall Street become completely disillusioned with biotechnology? A I think it's a company-by-company case. Amgen has done very well and there's a little flurry of excitement after the Genentech-La-Roche business because people started talking takeovers. But taking over a biotech company sometimes is much more complicated than taking over a much bigger company. It's not a question of money. It's a question of alliances, who owns the product, whether they can hold the sci- entists. There's lots of reasons not to take over a biotechnology company. The classic example is Hybritech. Lilly bought it and set up a very elaborate system whereby previous management who continued to work there would get stock and money if they met their [Lilly's] projections. Lilly had all the things that entrepreneurs say you have to have in place to provide incentive for independent management in a company like this. Even with that in place, within a year or two, the entire top management of the previous Hybritech that built the company was gone. Q What does a startup biotechnology company need to have in place in order to be successful in today's market? What kind of company would it take to rekindle Wall Street's interest in biotechnology? A There are two different answers. What would attract Wall Street is a company that can cure AIDS, cancer, or one other prominent disease, like Alzheimer's. What would attract Wall Street is a single product - something simple that can cure a serious and profound disease. Of course, those companies don't exist - if they do exist, it's usually hype - but that's what attracts Wall Street. If I was going to set up a company I would want something very defined, and lead time over everybody else. [This is because] the drug companies have now caught up. They might not move as fast on a day-to-day basis, but they have molecular biologists. They know what's going on. They're not asleep anymore, so you can't get the jump you used to be able to get. The technology still doesn't have the brute force to get to the FDA fast enough, to surprise everybody, and to generate those huge numbers that you really have to generate to really make a difference. Q Are you saying, then, that in order to be successful, biotech companies will need to focus on very directed research and that those days when scientists were given money to "go out and discover something" are over? A Yes, unfortunately. The sad part is not that research is directed in the companies because that's what companies are all about. But I think what's happening is that the commercial ethos - the technological ethos - has seeped into academia. Q How so? A There is much more directed research than there used to be in academia. It's not just because people are looking for Nobel Prizes, but because a lot of academic departments are working for companies. They can say the money comes with no strings attached, but they're awfully glad to license off a monoclonal antibody or a whole series of antibodies. Every institution is now trying desperately to make a living. I could be wrong because I'm obviously not in academia, but my sense is that the tougher times get and the more constrained funding gets, the more directed research will become.

Good Science Doesn't Guarantee Profitability

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