Genentech Builds a Blockbuster-free Road to Billions

Courtesy of GenentechGenentech, the first US biotechnology company, has survived ugly patent disputes, product flops, and a Big Pharma partnership to become the biotech every company wants to be. The stock market value of the company, which makes the cancer drugs Herceptin and Rituxan, rose $7 billion (US), or 12%, in a single day in April based on promising data for a new lung-cancer treatment, Tarceva. That jump came less than a year after good results for Avastin in colon cancer trials sent t

Susan Warner
Jun 6, 2004
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Courtesy of Genentech

Genentech, the first US biotechnology company, has survived ugly patent disputes, product flops, and a Big Pharma partnership to become the biotech every company wants to be. The stock market value of the company, which makes the cancer drugs Herceptin and Rituxan, rose $7 billion (US), or 12%, in a single day in April based on promising data for a new lung-cancer treatment, Tarceva. That jump came less than a year after good results for Avastin in colon cancer trials sent the stock up $9 billion in a day.

Genentech's stock market value has doubled in one year, making it more valuable than some major pharmaceutical firms, including Wyeth, Schering-Plough, and Bristol-Myers Squibb. Yet the San Francisco company casts itself as the 'anti-pharma' company.

Genentech nurtures its image as a science-driven company that rejects the drug industry's blockbuster model, which is based on mass-market anticholesterol, blood pressure,...

ACADEMIC INDUSTRY

<p>Genentech's Gounder Research Center</p>

Courtesy of Genentech

In the highly secretive pharmaceutical industry, Genentech scientists publish more than 200 papers a year. The company has 600 scientists on staff including 60 postdocs, and awards "joint appointments" in different sections of the company to foster collaboration and fend off corporate rivalries.

Scheller says Genentech scientists are encouraged to spend at least some time following their own research interests. "I really try to make sure scientists have discretionary research time to work on their own projects that are not determined by the administration – me, if you will – so that they have the freedom to pursue their own ideas," he says. "These ideas may or may not result in a discovery that leads us to a product or a technology, and that's just fine."

On average, Scheller says, Genentech scientists spend about 25% of their time working on their own projects, although some never do and others do so exclusively. Scheller says the time to explore their own interests is an incentive that for many scientists is more important than money. "The ability to be a curious scientist and do experiments of any kind, to just follow your intuition, is the more important incentive for the scientist, not actually money, although that probably wouldn't be turned down," says Scheller.

Genentech is perhaps the best example of how the once sticky revolving door between academia and business now spins more freely. Last year, neurobiologist Marc Tessier-Lavigne, who was a professor at Stanford and an HHMI investigator, joined Genentech as senior vice president for drug discovery. In another time, he says, he would not have been interested in coming into industry.

Ten or 20 years ago, says Tessier-Lavigne, drug development was largely based on serendipity, enhanced by some rational guesswork. Now, with the development of new genetic tools, scientists are able to systematically attack disease and build cures. "We can really crack this. Why not go for it?" he says. "It was that realization for me that opened my mind to the possibility of coming into industry at this time."

TENSE HISTORY

Genentech was founded in 1976 by biologist Herbert Boyer and venture capitalist Robert Swanson. Boyer, a professor at the University of California, San Francisco, pioneered the development of recombinant DNA technology. More than 20 years later the company agreed to pay UCSF $200 million to settle a patent dispute rising from allegations that a Genentech scientist snuck into his former university lab at night and stole cloned DNA samples to make the company's first major product, human growth hormone. In its early days, the company also developed gamma interferon for cancer, and human insulin, which became the subject of a later patent suit.

David Goeddel, founder and chief executive of Tularik, was hired as Genentech's first scientist. He recalls a youthful, practical-joking culture that went along with long hours in the lab. "It was pretty wild. There were not a lot of rules," he says. "You had young scientists who had just come from the universities and a lot of it was being made up as we went along."

Goeddel recalls that life at Genentech was not so much fun in the late 1980s, after tissue plasmingen activator, a highly anticipated therapy to break up blood clots that could result in heart attacks, fell flat. The company was strapped for cash, and in 1990 Switzerland's Roche Group paid $2.1 billion for a 60% stake. "It would have been very difficult for Genentech to continue to invest in its pipeline in 1990 without the equity investment by Roche," concedes Joseph McCracken, Genentech's director of business development.

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Courtesy of Genentech

Mike Powell, who had just joined Genentech as a scientist when the company brokered the Roche deal, says the sale decreased morale among some researchers. "For the independent scientist with the long ponytail down their back, it was all too Big Pharma and they said that's not what they signed on for," says Powell, who is now managing director of Sofinnova Ventures, a San Francisco venture-capital firm. "But if you think of the breaks Genentech got, the deal with Roche has to be considered as one of their biggest breaks."

Roche went on to make additional purchases of company stock and has the rights to sell many Genentech products in Europe. The decision to sell to Roche illustrates the company's research strategy, says Cynthia Robbins-Roth, a former Genentech scientist who is now a biotech consultant in the Bay Area.

"Why sell to Roche? I think there were people who said 'If we try to keep going on our own we're going to run out of money.' Research is really expensive, and so is clinical and commercial development, so rather than choose one or another they decided to choose both and use somebody else's money to do it," she says. "Roche has benefited tremendously from the deal in access to products and all the run-up in the stock. They've more than made back what they spent."

STAFFING STRATEGY

Another critical point came in 1995 when the board appointed Arthur Levinson as CEO after his predecessor was forced out in a dispute about personal loans from Roche. Levinson was research director at the company. Robbins-Roth says it is telling that Levinson got the job instead of a more business-oriented executive, such as Amgen's chief executive Kevin Sharer, who joined the rival biotech after business careers at MCI Communications, General Electric, and the consultancy McKinsey & Co. "That choice showed the focus on innovative research and development," Robbins-Roth says.

Levinson possesses both business acumen and scientific depth. "That's the number one thing that gives Genentech its credibility; the guy at the top is not just a card-carrying scientist, but one of the best scientists around," Powell says. Scheller says that despite the company's determination to maintain its academic feel, Genentech has grown more businesslike in the three years he has been there. The company has reined Genentech researchers in by tightening the company's focus on just three areas of exploration: cancer, immunology, and vascular biology.

Limiting the company's areas of research allows Genentech to develop enough momentum in those fields to generate break-through discoveries, Scheller says. "I have a strong belief there is a requirement for a certain size group in order to really maximize the efforts of the individual."

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Courtesy of Genentech

The company has shed its historic expertise in endocrinology and metabolic disease, and given up work in gene therapy, cardiology, plants, animal hormones, and vaccines. "As the company has gotten larger and more successful, its become more and more focused on what we believe are the opportunities," Scheller adds.

Outside the lab, Genentech is pursuing a business model that rejects the Big Pharma formula of tailoring research only to products that have the potential to rack up sales of more than $1 billion a year. These high-volume drugs, which are often similar to others on the market, are needed to support a company's overhead, which includes not just research, but thousands of people in sales, marketing, and administration, says McCracken.

ROLE OF RESEARCH

Genentech's strategy aims to create targeted, truly novel products for life-threatening diseases or conditions for which there is no treatment available. McCracken says this type of drug can command a premium price (a regimen of Avastin costs more than $40,000 a year) and does not require a massive sales force.

For example, McCracken points to a new drug called Lucentis that the company is developing for macular degeneration; the drug works in a way similar to Avastin. "There are a lot of ophthalmologists, but only a small number are retinal specialists. They are our target audience for Lucentis, and even within those specialists who treat age-related macular degeneration, there is a subset that are the high-volume early adopters, the thought leaders, and that's where we focus our efforts."

McCracken says the current dearth of new products from Big Pharma pipelines is a sign those companies have few options but to continue to merge and survive by cost cutting rather than creating new medicines. Genentech's growth comes from the ground up. "Drug discovery is biology," he says, "and you can't force biology to give you something it doesn't want to give you."

Still, Genentech is in no way oblivious to the marketplace. One highly commercial strategy has the company combing through its portfolio looking for existing products that might be successful in combating other diseases. McCracken says the company's work in anti-angiogenesis, which generated Avastin, has lead to Lucentis, which in theory could arrest macular degeneration by shutting off the development of blood vessels in the retina the way Avastin chokes off blood to tumors. Lucentis is in Phase II clinical trials. "We are going through our portfolio, but nobody in the commercial organization said, 'Hey, we have an ophthalmology sales force; research, give us a new product for ophthalmology'," McCracken says.

Genentech, like all drug companies, is also active in partnering to boost its own product pipeline. The company structured an unusual development deal with Xoma to develop Raptiva, which was approved last year for psoriasis.

Genentech did the initial work on the drug in the early 1990s, but its development teams were operating at capacity and did not have enough time to take on Raptiva. Genentech arranged with Xoma to do clinical studies until the product was ready for a full-scale Phase III trial, when Genentech stepped back in. "Nothing is done without a plan at Genentech," says Tessier-Lavigne, who adds that the current success at Genentech did not catch the company off guard. "It's been planning, planning, planning for the past 10 years," he adds.

Indeed, as Genentech approaches 30 years, the company seems to have it all: scientific and financial success. "Maybe they got lucky and maybe their luck will run out, but they clearly have the best pipeline in the industry and the most interesting set of drugs on the market," says Eric Schmidt, biotechnology analyst at SG Cowen & Co. "The question now becomes, can they continue to do it on a repetitive basis."

Susan Warner swarner@comcast.net is a freelance writer in Philadelphia.

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