Cetus: A Collision Course With Failure

Insiders say that the biotech firm got too big for its britches--while putting all of its eggs into one basket Biotechnology firm Cetus Corp., which more or less disappeared from sight in the wake of last month's $700 million takeover by its Emeryville, Calif., neighbor Chiron Corp., once seemed to have all the tools needed to succeed. But the company didn't survive--despite its talented scientists, deep pockets, and the prospect of a blockbuster product. And the factors that led to the ing

Jan 20, 1992
Sally Lehrman
Insiders say that the biotech firm got too big for its britches--while putting all of its eggs into one basket
Biotechnology firm Cetus Corp., which more or less disappeared from sight in the wake of last month's $700 million takeover by its Emeryville, Calif., neighbor Chiron Corp., once seemed to have all the tools needed to succeed.

But the company didn't survive--despite its talented scientists, deep pockets, and the prospect of a blockbuster product. And the factors that led to the inglorious fading away of this once-promising northern California firm could serve as a warning to other entrepreneurial hopefuls.

While former Cetus scientists and administrators interviewed for this article willingly describe a series of chronic problems besetting the company, they tend to agree that the fundamental flaw was Cetus' inclination to behave like a fully mature drug company instead of the adolescent it really was.

Many former top managers at Cetus point to a pattern of miscalculating the potential of new products--undervaluing some and promoting others beyond their real worth. Some also say that the research effort at the company, lacking sufficient discipline and direction, failed to focus on marketable products. Ronald Cape, Cetus' cofounder and its final chief executive, at-tributes the decline of the enterprise to its decision to bank everything on a single lead drug--a dramatically heralded anticancer pharmaceutical called interleukin-2 (IL-2).

"Cetus made a gamble on IL-2 and lost," says Cape. "And everything is secondary. Let's face it, we had anticipated and had acted like an integrated company on expectations that turned out to be premature."

Founded in 1971 and propelled 10 years later by what was reported to be the largest initial public stock offering in U.S. history (5.2 million shares priced at $23 a share), Cetus moved into the 1980s with many of the elements that industry analysts look for: top executives who had worked at major pharmaceutical houses, more than $100 million to carry out an ambitious research and development program into anticancer drugs, and a talented team of scientists.

Moreover, during the mid-1980s, Cetus had developed the process and technology for polymerase chain reaction--or PCR--a method for replicating DNA that has gained acceptance in thousands of laboratories worldwide and that, from the outset, could be counted on by Cetus as the source of future revenue.

With all of this business and scientific ammunition at its disposal, the company launched its next phase of marketplace forays with justifiable confidence. That this bravado eventually yielded a product commercialization program that outpaced the company's scientific capability, however, proved to be its undoing (see accompanying story).

"It'd make a great case study of how to run and how not to run a company," says Brian Atwood, who led Cetus' instrumentation group for six years before leaving in 1987. "The right things were there, but they weren't harnessed properly."

Atwood and other former insiders say a string of ill-advised management decisions set Cetus down the wrong path: Although IL-2 had yet to gain its regulatory acceptance or prove its broad-scale efficacy and commercial viability, company executives poured $127 million into manufacturing and office facilities associated with it. This premature development included two factories--an on-site plant in Emeryville and a second in the Netherlands. The company also hired a large staff to prepare the marketing of the experimental cancer treatment. To boot, Cetus in 1987 licensed away its PCR technology, which many company scientists saw as the firm's most valuable commodity.

Cape acknowledges that Cetus executives, in part blinded by their hopes for IL-2, didn't recognize the revenue-generating potential of PCR. They wanted to build a therapeutics company, not a technology development outfit, he says, so they charged ahead, directing resources into what they hoped would be a revolutionary cancer treatment. Looking back, Cape says: "It doesn't take too much intelligence to see it was a wrong decision to build up the infrastructure before the product was ready."

Cetus' early preparations for full-steam-ahead investment in IL-2 marketing and manufacturing might have succeeded if the product's development had remained on schedule. Instead, the anticancer drug hit a series of development snags, culminating in the summer of 1990 with the rejection of the drug by a Food and Drug Administration advisory panel. Within weeks, the company announced a 23 percent climb in losses to $61.5 million during fiscal 1990. Robert Fildes, who was CEO at the time, resigned; layoffs and drastic cost-cutting followed.

IL-2 wasn't the only drug that failed to fulfill its promise. Cetus had chosen to focus on several therapeutics that later stumbled. Beta interferon, a recombinant drug being tested to combat AIDS and multiple sclerosis, developed more slowly than anticipated. The treatment was licensed in 1991 to Berlex, a San Francisco Bay-area company, and is now in late-stage clinical studies. A breast cancer immunotoxin turned out to be toxic, and Cetus had to stop human tests. Tumor necrosis factor worked well in animals but faltered when Cetus started safety trials in humans. Work on the product has essentially stopped. Cetus lagged behind other companies in the development of a monoclonal antibody for treatment of septic shock, caused by a deadly bacterial infection that can attack patients after surgery, burns, or trauma.

Cape, who relinquished the title of CEO and involvement in the day-to-day operations of Cetus in 1986 to become chairman of the board, returned to replace Fildes in August 1990 in an effort, he says, to rescue the company. But the blow to IL-2 plans, as it turned out, had been lethal: Last summer, a year later, the company agreed to hand over its business--indeed, its entire being--to Chiron. And this past December 10, Chiron and Cetus shareholders approved the merger, for which they exchanged three-tenths of a Chiron share for every one of Cetus'. Cetus staff and projects were folded into the acquiring company--and the next day, signs at Cetus headquarters were changed to read "Chiron Corp."

Cape notes that, in contrast to companies in other emerging industries, few biotech firms are launched with their founders envisioning that they can grow it to the point at which it will be acquired by or merged with a large pharmaceutical concern. He says that he and his Cetus colleagues from the start had fervently wished to go it alone. It was, he says, the unforeseen series of scientific and regulatory disappointments, combined with the resulting financial strain--and the negative publicity accompanying it--that forced Cetus to begin searching for a strategic partner, and ultimately a buyer.

Cetus began looking for a strategic partner in October 1990, after the FDA committee turned down IL-2, Cape says. Cetus approached 75 companies over a period of nine months, but most weren't interested, he says. It became clear that Cetus could not remain independent. "There comes a time when [selling] is the right thing to do," Cape says.

"It's not only the financial trouble we got into," Cape notes. "There was almost a reluctance on the part of analysts and investors to deal with us [or] of other companies to consider strategic alliances." For Chiron, the merger catapults the 10-year-old company into the elite tier of biotechnology companies with drugs to sell.

Chiron had been known for its discovery of the hepatitis C virus; its accomplished research staff; and a series of vaccines, diagnostic tests, and new drugs promising strong profits by the middle of the 1990s. But its earnings so far had come only from the blood-screening and diagnostic tests for such diseases as hepatitis B and C and AIDS, which the company sells with partner Ortho Pharmaceutical Co. in Raritan, N.J. Such diagnostics are generally the first saleable products for biotech companies and are considered an early-stage achievement within the industry.

Now, Cetus provides Chiron with a generic cancer drug business--selling drugs that don't have patents. It currently sells six such drugs, including the popular doxorubicin, which Cetus produces in a joint venture with Ben Venue Laboratories Inc. In fiscal 1991, these drugs generated $32 million in net sales. Chiron also obtains IL-2 as it finally appears to be approaching the U.S. market and a 25-person European sales staff and network, along with IL-2 annual sales in Europe--where it is approved in several countries--of $13 million. Industry analysts expect IL-2 to win U.S. marketing approval by mid-1992, based on an additional year's worth of clinical data.

Chiron also collects two manufacturing plants from Cetus, plus existing Cetus research into other treatments for cancer. Moreover, Cetus scientists rank among the most stellar names in immunology and cancer research: Former senior scientist Frank McCormick has led work in the field of oncogenes, genes believed to stimulate cancer growth, and former senior scientist Henry Erlich is known for his research into MHC, a portion of the immune system, research that scientists believe could lead to a new approach to disease treatment. And despite its financial and management struggles, Cetus has achieved a number of technological breakthroughs in addition to its PCR technology--for example, a "gun" that can shoot genes into cells.

Furthermore, Cetus developed business strategies that have since become common within the biotech industry. It won a number of product ownership battles against major drug and diagnostic test makers, including Hoffmann-La Roche Inc. and E.I. du Pont de Nemours & Co. Inc. Cetus also devised a way to make money while laboring over new drug development. It set up the joint venture with Ben Venue to sell generic cancer drugs--earning revenue and a reputation in the cancer market all at once. Today, nearly every biotech startup must be ready to similarly leap into business if it wants to woo venture capital, industry analysts agree.

They also agree that Cetus' management from time to time worked miracles in devising strategies to raise cash, from their phenomenal initial public offering to their strategic research-and-development partnership. "They were very clever financial engineers," says Joe Lacob, a venture capitalist with Kleiner, Perkins, Caufield & Byers of San Francisco, who was director of marketing at Cetus from 1982 to 1987. "Their timing was impeccable in terms of raising money."

In spite of these successes, sources say, management had trouble harnessing and capitalizing on research, as evidenced by the problems with IL-2 and PCR. A wide gulf separated business and science at Cetus, according to many former business managers and researchers, making it difficult to turn discoveries into new products.

The business executives complain that R&D managers were homegrown and inexperienced at administration. Despite the corporate focus on cancer, some say, research followed its heart in a strong, science-driven culture. Those on the science side criticize top executives for discounting their vision and isolating them from business decisions. The lack of communication hurt commercialization, according to former Cetus officials. "There was a tremendous amount of creative science going on at Cetus, and there was a problem in putting the commercial focus on that science and carrying it through," Barton says.

Fildes and Cape say that managing scientists can be a delicate matter. "There were some scientists frustrated because they weren't able to go in directions that had no commercial applications," Fildes says.

Cape acknowledges that there were dozens of minor disagreements between the research and business sides of the company. But, he adds, "the fact that they were arguing means they were talking." Referring to the lost gamble on IL-2, he says, "I don't think it would have changed anything if [communication] had been better."

Sally Lehrman writes a weekly biotechnology column for the San Francisco Examiner.