The Name Has to Change As Growth Drives the Game

Date: May 25, 1998 Author: David P. Holveck To most people, the term biotechnology evokes the image of speculative innovation, of a research-driven, technology-based industry focused on developing novel approaches to diseases. Today, this picture is fundamentally accurate. But in the current health care environment, the biotech image is limited in scope. The term itself can create artificial boundaries between such key constituents as employees and investors, which can inhibit development and stifle growth. How companies describe themselves today is vitally important and defining. A name can be a critical factor in a company's growth process. Names shape views, convey messages, or elicit responses--good, bad, or indifferent. They can be instruments through which companies--or industries--gain focus and develop an identity that fosters growth. Our company, Centocor, reflects this aspect of our industry's development, as we evolve from being a biotech company to a biopharmaceutical or biopharma organization. We are in the process of moving from technological development to full-scale commercialization. Our transition parallels what is taking shape in today's brave new world of biotechnology, where a powerful set of dynamics promises--or threatens, depending on one's point of view--to accelerate the maturation process. Among these are market, economic, competitive, and regulatory forces, including: An unprecedented number of product introductions from the health care industry. The emergence of a new wave of industry leadership as certain biologically based products mature and their growth rates slow, to be replaced by newer products with strong upside potential. An increasingly difficult environment for raising capital. In a bull market that shows no signs of abating, investors today are less willing to risk their capital on companies in the discovery or development stage. Health economics that are forcing drug companies to focus on speed, quality, and value. As the large pharmaceutical companies know, revenue growth cannot be sustained simply by raising prices. It takes new products that deliver rapid onset of effect and provide long-lasting benefits. In this new environment, Centocor's vision is to become a sustainable growth company, with real products, real profits, and real returns for our shareholders year after year. How can we accomplish this? By breaking out of the mold of technology-driven companies and into the broader-based realm of health care and pharmaceutical organizations. Growth is the basic premise, the underlying factor, and the motivating force. Whether driven by technology or innovation, growth is what investors want. Investors and capital markets are key to this evolutionary process. Biotech still conveys the perception of speculative innovation to Wall Street. Adequate investor support is vital for biotechs to evolve along the growth continuum beginning with research and development (R&D), to biotech product-development stage, to profitable top-tier biotech, on to biopharmaceuticals, and, finally, to a mid-cap health care company. A biotech company's investor profile is closely tied to its stage of development. The younger the company, the riskier it is as an investment. If already public, its stock is driven almost exclusively by events, such as the release of clinical data or one-time milestone payments, usually from a large pharmaceutical partner. The competition for capital was not as intense 20 years ago when the economy was in transition. With Rust Belt industries out of favor on Wall Street, virtually any company or industry that held out the promise of a new and innovative technology could attract capital. Is that capital available today? Do investors have the patience they had 10 or 15 years ago when the expectations for stock performance were not as high as they are now? Biotech companies today would be wise to avoid the time-warp trap that can lull them into believing that what worked then will work now. As a company matures and reaches profitability, growth becomes less speculative and more measurable. Its stock becomes less event-driven and trades more on its earnings performance. But whether a company is a start-up, early stage, or a mature top-tier, the biotech label carries with it an inherent risk, particularly given the high growth multiples assigned by Wall Street. This can be a limiting factor as a growing company tries to move to the next plateau. To minimize that risk and reduce trading volatility, maturing biotechs need to broaden their shareholder base to include more growth-oriented investors, who tend to have a longer investment horizon, and who will not bridle at the slightest hint of an unfavorable clinical-trial result or disappointing quarterly results. Attracting this type of investor can help ensure that the stock achieves a valuation reflective of the current level of development. Of course, there's no such thing as a free lunch; growth investors demand continual improvement in financial performance. The best way to attract long-term, growth- oriented shareholders is to match the kind of investor you want to your company's mission. The elements that define biotech--technology platforms discovering products--raise several questions: How relevant are these elements in the near term as more molecular products are developed and brought to market? Does the history of biotech, which has produced relatively few real success stories, affect investor perception and put biotech companies in a high-risk pool from an investment standpoint? Does biotech's elusive goal--to schedule invention--meet with the realities of today's health care marketplace? If scheduling invention is an elusive goal, can you really schedule growth? Today the biotech industry functions in large measure as a kind of technological farm system for the large multinational pharmaceutical giants, not unlike the way the minor leagues in baseball develop players for the major leagues. The real challenge for biotech companies--from a growth perspective--comes after these biological products progress through the discovery and development stages. Many biotechs turn to Big Pharma to help them bring the product along through commercialization. Partners infuse the cash and/or equity needed to help fund costly clinical trials, and cover the expense of launching the drug. Partnering is certainly a viable strategic alternative, but is it the way to become an independent, sustainable growth business with multiple products in the market and a commercial infrastructure to sell those products? So what is the key to breaking this chain and evolving successfully from biotech to biopharmaceutical and eventually to mid-cap health care company? Go from being research-driven to research-led and operationally driven. Build a growth engine fueled by multiple products in sizable markets. Support it with a critical mass of infrastructure from which to lever your assets and acquire more products, companies, and technology to ensure continued growth. As you evolve, you change gears in this growth engine, from first and second gear (vision and money), to third gear (profitability), and then to fourth and fifth gears (long-term, sustainable growth). This is true not only for biotechnology but for many other industries as well. Centocor is in the process of morphing its image to biopharmaceutical. But we're also a company on a mission to become an emerging force in the health care field as a mid-cap company. That's health care, not biotech. Centocor completed its first full year of operating profitability in 1997 and reached the $200 million level in revenues for the first time. We have three therapeutic products on the market--ReoPro and Retavase for cardiovascular disease, and Panorex, currently marketed in Germany for colorectal cancer. Our fourth product--cA2, in the autoimmune area--is close to market for Crohn's disease and is in late-stage clinical testing for rheumatoid arthritis. Our primary technology platform is monoclonal antibodies, and we are in early-stage development with gene-based DNA vaccines for solid tumor cancers. Centocor today is a very different company than it was even last year. Fueled by ReoPro's clinical and commercial success, we were able to buy Retavase, a major strategic acquisition, with the potential to give us a leadership position in acute cardiovascular care. And we are preparing to launch cA2 on our own in the United States with Schering-Plough Corp. as the international distributor. David P. Holveck is chief executive officer of Centocor Inc. in Malvern, Pa. Our acquisition of Retavase for $335 million this past March brought with it a 140-person sales force, enabling Centocor to advance into the commercial arena with our own sales effort. It also provides a sales and marketing infrastructure that can be leveraged to support our U.S. marketing efforts for cA2. Our business model, whether we choose to describe ourselves as a biotech company or a biopharmaceutical company, is that of a sustainable growth business, as follows. We are maximizing our asset base by leveraging our existing operating infrastructure--clinical research, manufacturing, and sales and marketing--with multiple products. This kind of critical mass positions us to drive costs down by improving operating efficiencies. Our multiple products will be at different stages in their development, so our growth as a company will not run in tandem with the life cycle of any one product. As many biotechs have found out the hard way, we know that invention cannot be scheduled, so we will use our financial leverage to drive further growth by licensing new technology or acquiring other products to supplement our internal R&D efforts. The name of the game is growth. No matter how you label your company--biotech, biopharmaceutical, pharmaceutical, or health care--growth must be your driving force. Visionary companies do not remain comfortable but instead reinvent themselves. For a biotech company to succeed in today's marketplace, it needs to stretch itself, to look beyond the concept biotech to the broader realm of health care. The ability to maximize assets, to put more products through those assets, is more critical to becoming a sustainable growth business than having a technology platform and being seen as a biotech company. The transition from biotech to biopharmaceutical, with multiple products and the critical mass to leverage those products, provides a broader platform on which to operate. This stability and long-term growth orientation improves the risk-reward ratio, resulting in a more stable investor base and less volatility for the shareholder.

The Name Has to Change As Growth Drives the Game

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