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Genentech, Inc.

Genentech, Inc.

One DNA Way
South San Francisco, California 94080-4990
U.S.A.
Telephone: (650) 225-1000
Fax: (650) 225-6000
Web site: http://www.gene.com

Public Subsidiary of Roche Holding Ltd.
Incorporated:
1976
Employees: 7,646
Sales: $3.98 billion (2004)
Stock Exchanges: New York
Ticker Symbol: DNA
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 325414 Biological Product (Except Diagnostic) Manufacturing; 541710 Research and Development in the Physical, Engineering, and Life Sciences

Genentech, Inc. is the oldest and second largest biotechnology company in the world. Genentech discovers, develops, manufactures, and markets human pharmaceuticals for significant medical needs. The company fabricates organisms from gene cells, organisms that are not ordinarily produced by the cells. Conceivably, this process, referred to as gene splicing or recombinant DNA, may lead to cures for cancer or AIDS. Genentech markets a host of pharmaceuticals, but several of its drugs stand above the rest, serving as the revenue-generating engines that propel the company forward. Rituxan, used to treat non-Hodgkin's lymphoma; Herceptin, designed to treat breast cancer; and Avastin, developed to treat colon cancer, rank as the company's most important products developed in its oncology franchise.

Early Years

Founded in 1976, Genentech was financed by Kleinman, Perkins, Caufield and Byers, a San Francisco high-tech venture capital firm, and by its cofounders, Robert Swanson and Herbert Boyer. Swanson, a graduate of the Sloan School of Management at the Massachusetts Institute of Technology, was employed by Kleinman, Perkins, where he learned of the achievements of Cetus, a biotechnology firm founded in 1971; he decided to investigate the prospect of marketing DNA products. Initially, the concept was met with little enthusiasm, but in Herbert Boyer, a distinguished academic scientist, Swanson found someone who enthusiastically supported his plan. One of the first scientists to synthesize life (he had created gene cells with Stanley Cohen), Boyer wanted to take his research further and to create new cells.

Boyer and Swanson decided to leave their respective jobs and to found Genentech (genetic engineering technology). Thomas J. Perkins, a partner with Kleinman, Perkins, who became Genentech's chairman, suggested that the new company subcontract its early research. Swanson followed Perkins's advice and contracted the City of Hope National Medical Center to conduct the company's initial research project.

Boyer and Swanson, desiring to achieve credibility for Genentech, wanted to exhibit their grasp of the relevant technology before they attempted to market products. To accomplish this goal, Boyer intentionally selected an easily replicated cell with a simple composition, Somatostatin. The first experiment with Somatostatin required seven months of research. Scientists on the project placed the hormone inside E. coli bacteria, found in the human intestine. The anticipated result was that the bacteria would produce useful proteins that duplicated Somatostatin, but that did not happen. Then a scientist working on the project hypothesized that proteins in the bacteria were attacking the hormone. Somatostatin was protected, and the cell was successfully produced. Although it established credibility for the company, the experiment brought no real financial returns. Boyer and Swanson intended to produce human insulin as Genentech's first product.

Early in the summer of 1978 Genentech experienced its first breakthrough in recreating the insulin gene. This development required an expenditure of approximately $100 million and 1,000 human years of labor. By 1982 the company had won approval from the Food and Drug Administration (FDA). Eli Lilly and Company, the world's largest and oldest manufacturer of synthetic insulin, commanded 75 percent of the U.S. insulin market, and Swanson knew that Genentech stood little chance of competing with them. He informed Lilly's directors of Genentech's accomplishments, hoping to attract their attention: he believed that the mere threat of a potentially better product would entice Lilly to purchase licensing rights to the product, and he was correct. Lilly bought the rights and marketed the product as Humulin. This maneuver provided ample capital for Genentech to continue its work. By 1987 the company was earning $5 million in licensing fees from Lilly.

Swanson pursued a similar strategy with the company's next product, Alpha Interferon. Hoffmann-La Roche purchased the rights to Interferonwhich it marketed as Roferon-Aand paid approximately $5 million in royalties to Genentech in 1987. Revenues from these agreements helped to underwrite the costs of new product development, which ran from $25 million to $50 million per product prior to FDA approval. Meanwhile, Genentech went public in 1980, raising $35 million through an initial public offering.

Entering the Marketing Arena in the Middle to Late 1980s

The first product independently marketed by Genentech, human growth hormone (HGH) or Protropin, generated $43.6 million in sales in 1986. Demand for HGH increased as the medical profession learned more about the drug's capabilities and diagnosed hormone inadequacy more frequently. Protropin enjoyed record-setting sales over the next six years, topping $155 million by 1991. Approved by the FDA in 1985, Protropin helped prevent dwarfism in children. Genentech's entry into the market was facilitated by an FDA decision to ban the drug's predecessor because it was contaminated with a virus. By the end of the 1980s a "new and improved" version of HGH patented by Eli Lilly also had received approval from the FDA. Lilly's drug, unlike Genentech's version, actually replicated the growth hormone found in the human body. To counter this potential threat to their market, Genentech sued the FDA to force the agency to determine which company held exclusive rights to the product. At the end of 1991, Genentech's Protropin maintained an impressive 75 percent share of the HGH market.

Such legal disputes were not unusual for biotechnology firms still in their infancy. Because the products of the industry duplicated substances found in nature, they challenged long-established patent laws. Traditionally, products and discoveries determined as not evident in nature receive patent awards. Biotechnology firms contested these standards in the courtroom, attempting to force alterations in the law, to make it conform to the needs of the industry. Companies applied for broad patents to secure against technological innovations that could undermine their niche in the marketplace. For start-up firms such as Genentech, patent battles consumed large sums of money in both domestic and foreign disputes.

Genentech introduced tissue plasmogen activator (t-PA) in 1987 as Activase, a fast-acting drug that helped to break down fibris, a clotting agent in the blood. At $2,200 per dose, t-PA was marketed as a revolutionary drug for the prevention and treatment of heart attacks. When Genentech failed to provide the FDA with evidence that Activase prolonged the lives of heart attack victims, the federal agency delayed approval until 1988. The drug brought in almost half of the company's $400 million in 1989 revenues.

But Activase was soon battered with legal and clinical setbacks. Genentech's claim to exclusive ownership of natural t-PA and all synthetic variations on it was struck down in Britain when the British firm Wellcome Foundation Ltd. challenged Genentech's patent in the British courts, claiming it was overly broad. In 1993, however, Genentech won a court victory against Wellcome, preventing the U.K. firm from marketing t-PA in the United States until 2005, when Genentech's patent was due to expire. Clinical data showed that the drug caused serious side effects, including severe internal bleeding. A European study indicated that the drug was faster, but no more effective, than some competitors costing just $200 per dose. The troubles continued when a controversial study comparing Activase, SmithKline Beecham plc's Eminase, and another firm's streptokinase was released in March 1991. The International Study of Infarct Survival (ISIS-3) found all three drugs to be equally effective at keeping people alive, which again reflected badly on Activase's high cost. Genentech discounted several of the research methods used, then commissioned its own 41,000-patient comparative trial (at a cost of $55 million), which was completed in 1993 and vouched for the superiority of Activase over streptokinase. By the mid-1990s, however, Genentech was selling just $300 million worth of Activase per year, a far cry from the $1 billion annual sales it had projected for the product in the late 1980s.

Company Perspectives:

Our mission is to be the leading biotechnology company, using human genetic information to discover, develop, manufacture and commercialize biotherapeutics that address significant unmet medical needs. We commit ourselves to high standards of integrity in contributing to the best interests of patients, the medical profession, our employees and our communities, and to seeking significant returns to our stockholders, based on the continual pursuit of scientific and operational excellence.

Early to Mid-1990s: From Roche Merger to CEO Controversy

The regulatory, legal, and clinical roadblocks that stymied Genentech's introduction of Activase, combined with competition from large pharmaceutical and chemical companies that bought into biotechnology in the late 1980s, culminated in Genentech's 60 percent acquisition by Switzerland's Roche Holding Ltd. The merger was one of many in 1989 and 1990, which resulted in such pharmaceutical giants as SmithKline Beecham plc and Bristol-Myers Squibb Company. Genentech used the $2.1 billion influx of capital to fund research, finance patent disputes, and invest in cooperative ventures to develop synthetic drugs using biotechnological discoveries. Also in 1990, G. Kirk Raab, whom the Wall Street Journal described as a "master marketer," was named CEO of Genentech. That year, the company launched the first commercial life sciences experiment in space when it sponsored research aboard the space shuttle Discovery, and it received FDA approval to ex-pand the marketing of Activase to include the treatment of acute massive pulmonary embolism (blood clots in the lungs).

Activase had faced stiff competition when it first entered the market in the late 1980s. Delays in approval gave competitors such as Biogen and Integrated Genetics the opportunity to catch up with the industry leader. A dozen or so companies filed patents for similar drugs. Genentech could not expect to easily secure foreign markets for its new drug, either. Competition was stiff; this relatively new industry had little time to carve out established markets, and there were important competitors, particularly in Western Europe. In 1991, however, Genentech won an exclusive patent for recombinant t-PA in Japan. Genentech also had several new products in FDA trials in 1991. An insulin-like growth factor for the treatment of full-blown AIDS patients and relaxin, an obstetric drug, were in development that year. Genentech's DNase (pronounced dee-en-ayse), for use in the management of cystic fibrosis and chronic bronchitis, entered Phase III FDA trials. The firm's HER2 antibody entered clinical trials in 1991 as well. This treatment for breast and ovarian cancer was first developed from mouse cells. Genentech also was able to begin marketing of interferon gamma, or Actimmune, in 1991. The product's relatively meager sales of $1.7 million were connected to the small number of patients suffering from chronic granulomatous disease, an inherited immunodeficiency.

In 1993 Genentech received regulatory approval to market Pulmozyme, its brand name for DNase, in the United States, Canada, Sweden, Austria, and New Zealand, for the treatment of cystic fibrosis. The company's relationship with Roche led to the establishment of a European subsidiary of Genentech to develop, register, and market DNase in 17 primary European countries. Genentech also allotted Roche an exclusive license to sell DNase anywhere but Europe, the United States, Canada, and Japan. DNase was considered the first major advance in the treatment of cystic fibrosis in 30 years. Sales of Pulmozymewhich had gone from conception to market in just five years, half the industry averagereached $76 million by 1996.

Genentech continued to expand its product line during the 1990s. In March 1994 the FDA approved a new Genentech human growth hormone, Nutropin, for the treatment of growth failure in children. Other uses for Nutropin soon followed, including the treatment of adults suffering from growth hormone deficiency and of short stature associated with Turner syndrome. A third Genentech HGH, Nutropin AQ, the first liquid HGH, received its first FDA approval in 1996. That year the company's line of growth hormone products generated $218.2 million in revenues.

By mid-1995 Roche's holding in Genentech had increased to about 65 percent. As part of its original stake purchased in 1990, Roche had received the option of purchasing the remainder of the company at $60 per share, an option that expired June 30, 1995. In May 1995, however, Genentech and Roche reached an agreement whereby the option would be extended to June 30, 1999. The option was set to begin at $61.25 per share, then increase each quarter by $1.25 until expiring at $82.50. As part of the agreement, Roche took over Genentech's Canadian and European operations, with Genentech agreeing to receive royalties on sales of Pulmozyme in Europe and on sales of all of the company's products in Canada.

Key Dates:

1976:
Robert Swanson and Herbert Boyer found Genentech, Inc.
1978:
Company scientists recreate the insulin gene, Genentech's first marketable product.
1980:
Company raises $35 million through an initial public offering (IPO).
1982:
Human insulin clone wins FDA approval and is marketed as Humulin under license by Eli Lilly.
1985:
Protropin, the first product independently marketed by Genentech, receives FDA approval for the treatment of dwarfism.
1987:
Company begins marketing Activase as a way to dissolve blood clots in heart attack victims.
1990:
Switzerland's Roche Holding Ltd. purchases a 60 percent stake in the company for $2.1 billion.
1993:
Pulmozyme receives FDA approval for the treatment of cystic fibrosis.
1994:
Company begins marketing a second human growth hormone (HGH), Nutropin.
1995:
Roche agrees to extend its option to buy remainder of Genentech for four more years; Genentech board forces CEO G. Kirk Raab to resign after allegations of ethical improprieties arise; Dr. Arthur Levinson is named as successor.
1996:
Nutropin AQ, the first liquid HGH and Genentech's third HGH product, receives FDA approval.
1997:
Company begins marketing Rituxan for the treatment of non-Hodgkin's lymphoma; revenues surpass $1 billion for the first time.
1998:
FDA approves Herceptin in the treatment of breast cancer.
1999:
Company pays $50 million to settle charges that it had illegally marketed Protropin for unapproved uses; Roche exercises option to buy remainder of the company, then sells about 34 percent of its stock back to the public through two public offerings; Genentech agrees to pay the University of California at San Francisco $200 million to settle a patent dispute involving Protropin.
2004:
Levinson's emphasis on oncology produces two new drugs, Tarceva and Avastin.

In the midst of the negotiations on this deal, Raab approached Roche to seek a $2 million guarantee of a personal loan. When Genentech's board found out about this improper move, it conducted a broad review of his leadership. Finding other problems, including ongoing federal regulatory investigations into charges that Genentech was promoting the use of its products in unapproved ways, the board forced Raab to resign in July 1995. Named to replace him as president and CEO was Dr. Arthur Levinson, a molecular biologist who had headed the company's research operations. One outcome of the federal probes came in April 1999, when Genentech finalized an agreement to pay $50 million to settle charges that it had illegally marketed Protropin for unapproved uses, such as a kidney disorder and severe burns, from 1985 to 1994. The company also pleaded guilty to a criminal violation, "introducing misbranded drugs in interstate commerce."

Revitalizing the Product Pipeline in the Late 1990s

Although many questioned the wisdom of appointing as CEO a scientist who had never before run a company, Levinson helped restore the company's reputation by shifting its focus away from the marketing arena and back to the laboratory. Genentech reached new heights in the late 1990s, with revenues surpassing the $1 billion mark for the first time in 1997 before reaching $1.15 billion the year after. The reemphasis on research revitalized the company's product pipeline, leading to a substantial increase in the sales of products Genentech marketed itself. In 1998 such sales reached $717.8 million, an increase of nearly 23 percent from the previous year. The growth was attributable to the sales of two new products. In November 1997 Genentech began selling a monoclonal antibody called Rituxan, the first such entity approved to treat a cancer, specifically a form of non-Hodgkin's lymphoma (a cancer of the immune system). Sales of Rituxan, which was codeveloped with La Jolla, California-based IDEC Pharmaceuticals Corporation, were $162.6 million in 1998, the first full year of sales. Monoclonal antibodies are designed to zero in on cancer cells and kill a tumor without harming healthy tissue. A second Genentech-developed monoclonal antibody, Herceptin, was approved by the FDA in September 1998 to treat breast cancer. In clinical trials at this time was a third cancer treatment, called Anti-VEGF, which was being studied as a treatment for several types of solid-tumor cancers.

In June 1999 Roche exercised its option to acquire the 33 percent of Genentech it did not already own for $82.50 per share, or about $3.7 billion. Just one month later, however, Roche sold about 16 percent of Genentech stock back to the public in an initial public offering (IPO) that raised about $2.13 billion at the offering price of $97 per share. Genentech thereby resumed trading on the New York Stock Exchange but under a new symbol, DNA. In October 1999 Roche made a secondary offering of 20 million Genentech shares at $143.50, raising $2.87 billion in the largest secondary offering in U.S. history. Following the offerings, Roche held a 66 percent stake in Genentech, which retained the operational autonomy through which it had thrived.

In November 1999 Genentech agreed to pay $200 million to the University of California at San Francisco (UCSF) to settle a nine-year dispute over a patent underlying Protropin. The university had charged that Genentech scientists had stolen a DNA sample from a lab in 1978 and used the specimen to develop Protropin, which by the end of the 1990s had generated $2 billion in sales over its lifetime. The university had sought $400 million in lost royalties and other damages.

The UCSF lawsuit was not the only legal blemish on Genentech's record at the turn of the century, but overall the period was more noteworthy because it validated the decision to put Levinson at the helm. In 2002, a Los Angeles County Superior Court jury awarded the Duarte, California-based City of Hope National Medical Center $500 million in royalty payments and punitive damages for Genentech's failure to pay royalties connected to a licensing agreement in 1976. Specifically, the law-suit charged that Genentech had hidden licensed sales and not paid royalties on a process for inserting genes into bacteria and inducing them to produce proteins, a process developed by two City of Hope scientists. The jury's decision was a blow, to be sure, but with a market capitalization of nearly $30 billion and $2.5 billion in cash and long-term marketable securities, the company could incur the loss without fear of financial collapse. Of a bigger concern were the delays in bringing several drugs to market, which cast a pall over Genentech's immediate future at the time the jury's decision was announced, at least as indicated by Wall Street's estimation of the company.

A Focus on Cancer for the Future

Levinson's most vital contribution to Genentech was steering the company toward oncology, a decision that promised to define his legacy. He wanted to make Genentech the world's leader in developing drugs to treat cancer, setting 2005 as the target date for the company to achieve such status. The introduction of Rituxan and Herceptin provided an intoxicating start to the emphasis on cancer treatments, with each registering stunning success. Herceptin generated $152 million sales during its first year on the market, making it the most successful cancer drug ever, and exhibited fantastic growth with each passing year, building a business volume that grew to $347 million in sales by 2001. Rituxan demonstrated even greater sales growth, quickly becoming a financial boon for Genentech. Between 1999 and 2001, Rituxan's sales mushroomed from $263 million to $818 million.

Herceptin and Rituxan became the two major sources of growth for Genentech during the first years of the decade, replacing the company's traditional core business of growth hormones and Pulmozyme as the financial foundation of the company. Levinson's decision to focus on oncology sparked impressive financial growth, but early in the decade the company was beset with delays for its next wave of drugs to enter the market. Xolair, an asthma drug, was supposed to be released in 2001, but the FDA demanded more tests midway through the year, which pushed back the release of the drug to the end of 2003. A psoriasis drug, Xanelim, was slated for debut in 2002, but the company did not submit an application until mid-2002, delaying its introduction. Further, a promising cancer drug known as Tarceva was still years away from being released, offering no immediate source of revenue. One drug was progressing through the development pipeline faster than expectedAvastin, scheduled to be released in 2003but the absence of any new drugs entering the market prompted the investment community to voice its displeasure. Genentech's stock peaked in March 2000 before beginning to drop in value substantially. By the end of 2001, the company's stock had dropped 40 percent. By mid-2002, the stock was trading for 75 percent of its value in March 2000. Despite the negative reaction from Wall Street, there remained an air of optimism. Genentech, the company that had invented its industry, had legions of admiring fans, including supporters who worked on Wall Street. "These guys are very, very good," an analyst remarked in a December 18, 2001 interview with Investor's Business Daily. "Wall Street has very high expectations for them. So when they miss on expectations, one way or another, the response seems to be magnified."

Levinson and his team fulfilled the expectations of Wall Street by ending the lull in new drug introductions with a flurry of new pharmaceuticals. Xolair, the first humanized therapeutic antibody for the treatment of asthma, received FDA approval in 2003, the same year the company's psoriasis drug, which was launched as RAPTIVA, received approval. In 2004, the company's lung cancer drug, Tarceva, which was developed with OSI Pharmaceuticals, won approval, but the year's biggest introduction was a drug the company developed on its own. In February 2004, Avastin, which was designed to choke the blood supply that feeds tumors, was approved for sale by the FDA, the first drug of its kind to enter the market. The expectations for Avastin put the drug on the same level of Herceptin and Rituxan, both of which continued to serve as the lifeblood of the company nearly a decade after their release. Sales of Avastin in the third fiscal quarter of 2005 reached $325 million, nearly 80 percent more than the drug had generated during 2004's third quarter. With Avastin's sales expected to surpass $1 billion within a few years and roughly 30 projects in the company's development pipeline, optimism for the future ran high at the company's central offices on One DNA Way in South San Francisco. In the years ahead, with an emphasis on oncology delivering enviable results, Genentech promised to remain one of the most successful biotechnology companies in the world.

Principal Subsidiaries

Genentech Espana, S.L. (Spain).

Principal Competitors

Abbott Laboratories; American Home Products Corporation; Amgen Inc.; Bayer AG; Biogen, Inc.; Bristol-Myers Squibb Company; Chiron Corporation; E.I. du Pont de Nemours and Company; Eli Lilly and Company; Genzyme Corporation; Glaxo Wellcome plc; Hoechst AG; Immunex Corporation; Johnson & Johnson; Merck & Co., Inc.; Novartis AG; Novo Nordisk A/S; Pfizer Inc.; Pharmacia & Upjohn, Inc.; Rhone-Poulenc Rorer Inc.; Schering-Plough Corporation; SmithKline Beecham plc.

Further Reading

Abrahams, Paul, "Biotech Veteran Seeks a Formula for Growth," Financial Times, July 10, 2002, p. 13.

Arancibia, Juan Carlos, "Genentech Keeping Pipeline Full," Investor's Business Daily, August 29, 2005, p. B2.

Arnst, Catherine, "After 27 Years, a Big Payoff," Business Week, June 1, 1998, p. 147.

Baum, Rudy, "Knotty Biotech Issues Receive Attention," Chemical & Engineering News, April 27, 1992, pp. 30-31.

Blumenstyk, Goldie, "U. of California Patent Suit Puts Biotech Powerhouse Under Microscope," Chronicle of Higher Education, August 6, 1999, pp. A45-A46.

Bylinsky, Gene, "Got a Winner? Back It Big," Fortune, March 21, 1994, pp. 69-70.

Chase, Marilyn, "Hedged Bet: As Genentech Awaits New Test of Old Drug, Its Pipeline Fills Up," Wall Street Journal, April 30, 1993, p. A1.

Crabtree, Penni, "Oceanside Plant Purchase Shows Genentech Is Sailing," San Diego Union-Tribune, June 19, 2005.

Darmiento, Laurence, "Settlement Possible After Huge City of Hope Verdict," Los Angeles Business Journal, June 17, 2002, p. 9.

Fisher, Lawrence M., "Rehabilitation of a Biotech Pioneer," New York Times, May 8, 1994, Sec. 3, p. 6.

"Genentech's Winning Formula," Business Week Online, May 17, 2005.

Grabarek, Brooke H., "Genentech: Still Nowhere But Up?," Financial World, June 21, 1994, pp. 16, 18.

Hamilton, Joan, "How Long Can Biotech Stay in the Stratosphere?," Business Week, November 25, 1991, p. 224.

, "It Ain't Over Till It's Over at Genentech," Business Week, July 24, 1995, p. 41.

, "A Miracle Drug's Second Coming," Business Week, June 3, 1996, p. 118.

, "A Star Drug Is Born," Business Week, August 23, 1993, p. B6.

"Heart Attack Drugs: Trials and Tribulations," Economist, March 19, 1991, pp. 86-87.

King, Ralph T., Jr., "'Assembly Line' Revs Up Genentech," Wall Street Journal, March 12, 1998, p. B1.

, "Genentech Inc. Names Its CEO As Chairman," Wall Street Journal, September 23, 1999, p. B18.

, "Genentech to Pay $200 Million to End Suit Over Patent," Wall Street Journal, November 17, 1999, p. B7.

, "Profit Prescription: In Marketing of Drugs, Genentech Tests Limits of What Is Acceptable," Wall Street Journal, January 10, 1995, p. A1.

, "Roche to Unload As Much As 17% of Genentech," Wall Street Journal, October 11, 1999, p. B2.

Levine, Daniel S., "Genentech Finds a Swiss Cure for Its Wall Street Ills," San Francisco Business Times, June 16, 1995, p. 6.

McCoy, Charles, "Genentech's New CEO Seeks Clean Slate," Wall Street Journal, July 12, 1995, p. B6.

"Mergers and Acquisitions: Strategic Is the Word," Institutional Investor, January 1991, pp. 74-81.

Moukheiber, Zina, "The Great White Hunter," Forbes, July 26, 1999, pp. 133-36.

"A Natural Selection," Chief Executive, May 1992, pp. 34-39.

Reeves, Amy, "Genentech Inc. South San Francisco, California Hey, Investors: We're Still Turning a Profit," Investor's Business Daily, December 18, 2001, p. A12.

Rigdon, Joan E., "Fatal Blunder: Genentech CEO, a Man Used to Pushing Limit, Exceeds It and Is Out," Wall Street Journal, July 11, 1995, p. A1.

Shinkle, Kirk, "Genentech Beats Q3 Profit," Investor's Business Daily, October 11, 2005, p. A1.

Silber, Judy, "Shares of Biotech Company Genentech Fall on Cancer Medication Side-Effect News," Contra Costa Times, August 14, 2004.

Slutsker, Gary, "Patenting Mother Nature," Forbes, January 7, 1991, p. 290.

Thayer, Ann, "Biotech Firms' Revenues Up But Earnings Win First Half," Chemical & Engineering News, August 31, 1992, pp. 15-16.

Weintraub, Arlene, "Another Pain for Genentech," Business Week Online, June 17, 2002.

, "Giving Birth to Biotech," Business Week, October 18, 2004, p. 16.

Westphal, Christoph, and Sherry Glied, "AZT and t-PA: The Disparate Fates of Two Biotechnological Innovations and Their Producers," Columbia Journal of World Business, Spring/Summer 1990, pp. 83-100.

                                        April S. Dougal

        updates: David E. Salamie; Jeffrey L. Covell

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Genentech, Inc.

Genentech, Inc.

One DNA Way
South San Francisco, California 94080-4990
U.S.A.
Telephone: (650) 225-1000
Fax: (650) 225-6000
Web site: http://www.gene.com

Public Company/66 Percent Owned Subsidiary of Roche Holding Ltd
Incorporated:
1976
Employees: 3,389
Sales: $1.15 billion (1998)
Stock Exchanges: New York Pacific
Ticker Symbol: DNA
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 325414 Biological Product (Except Diagnostic) Manufacturing; 541710 Research & Development in the Physical, Engineering, & Life Sciences

Genentech, Inc. became a pioneer of biotechnology when it was founded in the late 1970s. A publicly traded company, Genentech is controlled by Roche Holding Ltd. (parent of Swiss pharmaceutical giant Hoffmann-La Roche) through that companys 66 percent stake, but is allowed to operate independently. Genentech discovers, develops, manufactures, and markets human Pharmaceuticals for significant medical needs. The company fabricates organisms from gene cells, organisms that are not ordinarily produced by the cells. Conceivably, this process, referred to as gene splicing or recombinant DNA, may lead to cures for cancer or AIDS. The potential success of this young science causes it to flourish, attracting entrepreneurs and investors. After being swept up in a wave of takeovers and mergers that shook the industry in the late 1980s, Genentech emerged in the 1990s as one of the most solid biotechnology companies in the world. At the turn of the century the company marketed seven products in the United States: Protropin, Nutropin, and Nutropin AQ, all for the treatment of growth deficiency or failure; Activase, used to dissolve blood clots in heart attack and stroke patients; Pulmozyme, a therapy in the treatment of cystic fibrosis; Rituxan, used to treat non-Hodgkins lymphoma, a cancer of the immune system; and Herceptin, for the treatment of breast cancer.

Early Years

Founded in 1976, Genentech was financed by Kleinman, Perkins, Caufield and Byers, a San Francisco high-tech venture capital firm, and by its cofounders, Robert Swanson and Herbert Boyer. Swanson, a graduate of the Sloan School of Management at the Massachusetts Institute of Technology, was employed by Kleinman, Perkins, where he learned of the achievements of Cetus, a biotechnology firm founded in 1971; he decided to investigate the prospect of marketing DNA products. Initially, the concept was met with little enthusiasm, but in Herbert Boyer, a distinguished academic scientist, Swanson found someone who enthusiastically supported his plan. One of the first scientists to synthesize life (he had created gene cells with Stanley Cohen), Boyer wanted to take his research further and to create new cells.

Boyer and Swanson decided to leave their respective jobs and to found Genentech (genetic engineering technology). Thomas J. Perkins, a partner with Kleinman, Perkins, who became Genentechs chairman, suggested that the new company contract out its early research. Swanson followed Perkinss advice and contracted the City of Hope National Medical Center to conduct the companys initial research project.

Boyer and Swanson wanted to exhibit their grasp of the relevant technology before they attempted to market productsto achieve credibility for Genentech. To accomplish this goal, Boyer intentionally selected an easily replicated cell with a simple composition, Somatostatin. The first experiment with Somatostatin required seven months of research. Scientists on the project placed the hormone inside E. coli bacteria, found in the human intestine. The anticipated result was that the bacteria would produce useful proteins that duplicated Somatostatin, but that did not happen. Then a scientist working on the project hypothesized that proteins in the bacteria were attacking the hormone. Somatostatin was protected, and the cell was successfully produced. Although it established credibility for the company, the experiment brought no real financial returns. Boyer and Swanson intended to produce human insulin as Genentechs first product.

Early in the summer of 1978 Genentech experienced its first breakthrough in recreating the insulin gene. This development required an expenditure of approximately $100 million and 1,000 human years of labor. By 1982 the company had won approval from the Food and Drug Administration (FDA). Eli Lilly and Company, the worlds largest and oldest manufacturer of synthetic insulin, commanded 75 percent of the U.S. insulin market, and Swanson knew that Genentech stood little chance of competing with them. He informed Lillys directors of Genentechs accomplishments, hoping to attract their attention: he believed that the mere threat of a potentially better product would entice Lilly to purchase licensing rights to the product, and he was correct. Lilly bought the rights and marketed the product as Humulin. This maneuver provided ample capital for Genentech to continue its work. By 1987 the company was earning $5 million in licensing fees from Lilly.

Swanson pursued a similar strategy with the companys next product, Alpha Interferon. Hoffmann-La Roche purchased the rights to Interferonwhich it marketed as Roferon-Aand paid approximately $5 million in royalties to Genentech in 1987. Revenues from these agreements helped to underwrite the costs of new product development, which ran from $25 million to $50 million per product prior to FDA approval. Meanwhile, Genentech went public in 1980, raising $35 million through an initial public offering.

Entering the Marketing Arena in the Middle to Late 1980s

The first product independently marketed by Genentech, human growth hormone (HGH) or Protropin, generated $43.6 million in sales in 1986. Demand for HGH increased as the medical profession learned more about the drugs capabilities and diagnosed hormone inadequacy more frequently. Protropin enjoyed record-setting sales over the next six years, topping $155 million by 1991. Approved by the FDA in 1985, Protropin helped prevent dwarfism in children. Genentechs entry into the market was facilitated by an FDA decision to ban the drugs predecessor because it was contaminated with a virus. By the end of the 1980s a new and improved version of HGH patented by Eli Lilly also had received approval from the FDA. Lillys drug, unlike Genentechs version, actually replicated the growth hormone found in the human body. To counter this potential threat to their market, Genentech sued the FDA to force the agency to determine which company held exclusive rights to the product. At the end of 1991, Genentechs Protropin maintained an impressive 75 percent share of the HGH market.

Such legal disputes were not unusual for biotechnology firms still in their infancy. Because the products of the industry duplicated substances found in nature, they challenged long-established patent laws. Traditionally, products and discoveries determined as not evident in nature receive patent awards. Biotechnology firms contested these standards in the courtroom, attempting to force alterations in the law, to make it conform to the needs of the industry. Companies applied for broad patents to secure against technological innovations that could undermine their niche in the marketplace. For start-up firms such as Genentech, patent battles consumed large sums of money in both domestic and foreign disputes.

Genentech introduced tissue plasmogen activator (t-PA) in 1987 as Activase, a fast-acting drug that helped to break down fibris, a clotting agent in the blood. At $2,200 per dose, t-PA was marketed as a revolutionary drug for the prevention and treatment of heart attacks. When Genentech failed to provide the FDA with evidence that Activase prolonged the lives of heart attack victims, the federal agency delayed approval until 1988. The drug brought in almost half of the companys $400 million in 1989 revenues.

But Activase was soon battered with legal and clinical setbacks. Genentechs claim to exclusive ownership of natural t-PA and all synthetic variations on it was struck down in Britain when the British firm Wellcome Foundation Ltd. challenged Genentechs patent in the British courts, claiming it was overly broad. In 1993, however, Genentech won a court victory against Wellcome, preventing the U.K. firm from marketing t-PA in the United States until 2005, when Genentechs patent was due to expire. Clinical data showed that the drug caused serious side effects, including severe internal bleeding. A European study indicated that the drug was faster, but no more effective, than some competitors costing just $200 per dose. The troubles continued when a controversial study comparing Activase, SmithKline Beecham plcs Eminase, and another firms streptokinase was released in March 1991. The International Study of Infarct Survival (ISIS-3) found all three drugs to be equally effective at keeping people alive, which again reflected badly on Activases high cost. Genentech discounted several of the research methods used, then commissioned its own 41,000-patient comparative trial (at a cost of $55 million), which was completed in 1993 and vouched for the superiority of Activase over streptokinase. By the mid-1990s, however, Genentech was selling just $300 million worth of Activase per year, a far cry from the $1 billion annual sales it had projected for the product in the late 1980s.

Company Perspectives:

Our mission is to be the leading biotechnology company, using human genetic information to develop, manufacture and market Pharmaceuticals that address significant unmet medical needs. We commit ourselves to high standards of integrity in contributing to the best interests of patients, the medical profession, and our employees, and to seeking significant returns to our stockholders based on the continued pursuit of excellent science.

Early to Mid-1990s: From Roche Merger to CEO Controversy

The regulatory, legal, and clinical roadblocks that stymied Genentechs introduction of Activase, combined with competition from large pharmaceutical and chemical companies that bought into biotechnology in the late 1980s, culminated in Genentechs 60 percent acquisition by Switzerlands Roche Holding Ltd. The merger was one of many in 1989 and 1990, which resulted in such pharmaceutical giants as SmithKline Beecham plc and Bristol-Myers Squibb Company. Genentech used the $2.1 billion influx of capital to fund research, finance patent disputes, and invest in cooperative ventures to develop synthetic drugs using biotechnological discoveries. Also in 1990, G. Kirk Raab, whom the Wall Street Journal described as a master marketer, was named CEO of Genentech. That year, the company launched the first commercial life sciences experiment in space when it sponsored research aboard the space shuttle Discovery, and it received FDA approval to expand the marketing of Activase to include the treatment of acute massive pulmonary embolism (blood clots in the lungs).

Activase had faced stiff competition when it first entered the market in the late 1980s. Delays in approval gave competitors such as Biogen and Integrated Genetics the opportunity to catch up with the industry leader. A dozen or so companies filed patents for similar drugs. Genentech could not expect to easily secure foreign markets for its new drug, either. Competition was stiff; this relatively new industry had little time to carve out established markets, and there were important competitors, particularly in Western Europe. In 1991, however, Genentech won an exclusive patent for recombinant t-PA in Japan. Genentech also had several new products in FDA trials in 1991. An insulin-like growth factor for the treatment of full-blown AIDS patients and relaxin, an obstetric drug, were in development that year. Genentechs DNase (pronounced dee-en-ayse), for use in the management of cystic fibrosis and chronic bronchitis, entered Phase III FDA trials. The firms HER2 antibody entered clinical trials in 1991 as well. This treatment for breast and ovarian cancer was first developed from mouse cells. Genentech also was able to begin marketing of interferon gamma, or Actimmune, in 1991. The products relatively meager sales of $1.7 million were connected to the small number of patients suffering from chronic granulomatous disease, an inherited immunodeficiency.

In 1993 Genentech received regulatory approval to market Pulmozyme, its brand name for DNase, in the United States, Canada, Sweden, Austria, and New Zealand, for the treatment of cystic fibrosis. The companys relationship with Roche led to the establishment of a European subsidiary of Genentech to develop, register, and market DNase in 17 primary European countries. Genentech also allotted Roche an exclusive license to sell DNase anywhere but Europe, the United States, Canada, and Japan. DNase was considered the first major advance in the treatment of cystic fibrosis in 30 years. Sales of Pulmozymewhich had gone from conception to market in just five years, half the industry averagereached $76 million by 1996.

Genentech continued to expand its product line as the 1990s continued. In March 1994 the FDA approved a new Genentech human growth hormone, Nutropin, for the treatment of growth failure in children. Other uses for Nutropin soon followed, including the treatment of adults suffering from growth hormone deficiency and of short stature associated with Turner syndrome. A third Genentech HGH, Nutropin AQthe first liquid HGHreceived its first FDA approval in 1996. That year the companys line of growth hormone products generated $218.2 million in revenues.

By mid-1995 Roches holding in Genentech had increased to about 65 percent. As part of its original stake purchased in 1990, Roche had received the option of purchasing the remainder of the company at $60 per share, an option that expired June 30,1995. In May 1995, however, Genentech and Roche reached an agreement whereby the option would be extended to June 30, 1999. The option was set to begin at $61.25 per share, then increase each quarter by $1.25 until expiring at $82.50. As part of the agreement, Roche took over Genentechs Canadian and European operations, with Genentech agreeing to receive royalties on sales of Pulmozyme in Europe and on sales of all of the companys products in Canada.

Key Dates:

1976:
Robert Swanson and Herbert Boyer found Genentech, Inc.
1978:
Company scientists recreate the insulin geneGenentechs first marketable product.
1980:
Company raises $35 million through an IPO.
1982:
Human insulin clone wins FDA approval and is marketed as Humulin under license by Eli Lilly.
1985:
Protropin, the first product independently marketed by Genentech, receives FDA approval for the treatment of dwarfism.
1987:
Company begins marketing Activase as a way to dissolve blood clots in heart attack victims.
1990:
Switzerlands Roche Holding Ltd. purchases a 60 percent stake in the company for $2.1 billion.
1993:
Pulmozyme receives FDA approval for the treatment of cystic fibrosis.
1994:
Company begins marketing a second human growth hormone (HGH), Nutropin.
1995:
Roche agrees to extend its option to buy remainder of Genentech for four more years; Genentech board forces CEO G. Kirk Raab to resign after allegations of ethical improprieties arise; Dr. Arthur Levinson is named as successor.
1996:
Nutropin AQ, the first liquid HGH and Genentechs third HGH product, receives FDA approval.
1997:
Company begins marketing Rituxan for the treatment of non-Hodgkins lymphoma; revenues surpass $1 billion for the first time.
1998:
FDA approves Herceptin in the treatment of breast cancer.
1999:
Company pays $50 million to settle charges that it had illegally marketed Protropin for unapproved uses; Roche exercises option to buy remainder of the company, then sells about 34 percent of its stock back to the public through two public offerings; Genentech agrees to pay the University of California at San Francisco $200 million to settle a patent dispute involving Protropin.

In the midst of the negotiations on this deal, Raab approached Roche to seek a $2 million guarantee of a personal loan. When Genentechs board found out about this improper move, it conducted a broad review of his leadership. Finding other problems, including ongoing federal regulatory investigations into charges that Genentech was promoting the use of its products in unapproved ways, the board forced Raab to resign in July 1995. Named to replace him as president and CEO was Dr. Arthur Levinson, a molecular biologist who had headed the companys research operations. One outcome of the federal probes came in April 1999, when Genentech finalized an agreement to pay $50 million to settle charges that it had illegally marketed Protropin for unapproved uses, such as a kidney disorder and severe burns, from 1985 to 1994. The company also pleaded guilty to a criminal violation, introducing misbranded drugs in interstate commerce.

Revitalizing the Product Pipeline in the Late 1990s

Although many questioned the wisdom of appointing as CEO a scientist who had never before run a company, Levinson helped restore the companys reputation by shifting its focus away from the marketing arena and back to the laboratory. Genentech reached new heights in the late 1990s, with revenues surpassing the $1 billion mark for the first time in 1997 before reaching $1.15 billion the year after. The reemphasis on research revitalized the companys product pipeline, leading to a substantial increase in the sales of products Genentech marketed itself. In 1998 such sales reached $717.8 million, an increase of nearly 23 percent from the previous year. The growth was attributable to the sales of two new products. In November 1997 Genentech began selling a monoclonal antibody called Rituxan, the first such entity approved to treat a cancer, specifically a form of non-Hodgkins lymphoma (a cancer of the immune system). Sales of Rituxan, which was codeveloped with La Jolla, California-based IDEC Pharmaceuticals Corporation, were $162.6 million in 1998, the first full year of sales. Monoclonal antibodies are designed to zero in on cancer cells and kill a tumor without harming healthy tissue. A second Genentech-developed monoclonal antibody, Herceptin, was approved by the FDA in September 1998 to treat breast cancer. In clinical trials at this time was a third cancer treatment, called Anti-VEGF, which was being studied as a treatment for several types of solid-tumor cancers.

In June 1999 Roche exercised its option to acquire the 33 percent of Genentech it did not already own for $82.50 per share, or about $3.7 billion. Just one month later, however, Roche sold about 16 percent of Genentech stock back to the public in an IPO that raised about $2.13 billion at the offering price of $97 per share. Genentech thereby resumed trading on the New York Stock Exchange but under a new symbol, DNA. In October 1999 Roche made a secondary offering of 20 million Genentech shares at $143.50, raising $2.87 billion in the largest secondary offering in U.S. history. Following the offerings, Roche held a 66 percent stake in Genentech, which retained the operational autonomy through which it had thrived.

In November 1999 Genentech agreed to pay $200 million to the University of California at San Francisco to settle a nine-year dispute over a patent underlying Protropin. The university had charged that Genentech scientists had stolen a DNA sample from a lab in 1978 and used the specimen to develop Protropin, which by the end of the 1990s had generated $2 billion in sales over its lifetime. The university had sought $400 million in lost royalties and other damages. Despite this latest embarrassment, Genentech entered the 21st century as the most highly respected biotechnology company. With more than a dozen promising products in various stages of clinical development and plenty of cash on hand to fund its aggressive research efforts, Genentech seemed certain to maintain this position well into the new century.

Principal Competitors

Abbott Laboratories; American Home Products Corporation; Amgen Inc.; Bayer AG; Biogen, Inc.; Bristol-Myers Squibb Company; Chiron Corporation; E.I. du Pont de Nemours and Company; Eli Lilly and Company; Genzyme Corporation; Glaxo Wellcome pic; Hoechst AG; Immunex Corporation; Johnson & Johnson; Merck & Co., Inc.; Novartis AG; Novo Nordisk A/S; Pfizer Inc.; Pharmacia & Upjohn, Inc.; Rhone-Poulenc Rorer Inc.; Schering-Plough Corporation; SmithKline Beecham plc.

Further Reading

Arnst, Catherine, After 27 Years, a Big Payoff, Business Week, June 1, 1998, p. 147.

Baum, Rudy, Knotty Biotech Issues Receive Attention, Chemical & Engineering News, April 27, 1992, pp. 3031.

Blumenstyk, Goldie, U. of California Patent Suit Puts Biotech Powerhouse Under Microscope, Chronicle of Higher Education, August 6, 1999, pp. A45A46.

Bylinsky, Gene, Got a Winner? Back It Big, Fortune, March 21, 1994, pp. 6970.

Chase, Marilyn, Hedged Bet: As Genentech Awaits New Test of Old Drug, Its Pipeline Fills Up, Wall Street Journal, April 30, 1993, p. A1.

Fisher, Lawrence M., Rehabilitation of a Biotech Pioneer, New York Times, May 8, 1994, Sec. 3, p. 6.

Grabarek, Brooke H., Genentech: Still Nowhere But Up?, Financial World, June 21, 1994, pp. 16, 18.

Hamilton, Joan, How Long Can Biotech Stay in the Stratosphere?, Business Week, November 25, 1991, p. 224.

, It Aint Over Till Its Over at Genentech, Business Week, July 24, 1995, p. 41.

,A Miracle Drugs Second Coming, Business Week, June 3, 1996, p. 118.

, A Star Drug Is Born, Business Week, August 23, 1993, p. B6.

Heart Attack Drugs: Trials and Tribulations, Economist, March 19, 1991, pp. 8687.

King, Ralph T., Jr., Assembly Line Revs Up Genentech, Wall Street Journal, March 12, 1998, p. B1.

, Genentech Inc. Names Its CEO As Chairman, Wall Street Journal, September 23, 1999, p. B18.

, Genentech to Pay $200 Million to End Suit Over Patent, Wall Street Journal, November 17, 1999, p. B7.

, Profit Prescription: In Marketing of Drugs, Genentech Tests Limits of What Is Acceptable, Wall Street Journal, January 10, 1995, p. A1.

, Roche to Unload As Much As 17% of Genentech, Wall Street Journal, October 11, 1999, p. B2.

Levine, Daniel S., Genentech Finds a Swiss Cure for Its Wall Street Ills, San Francisco Business Times, June 16, 1995, p. 6.

McCoy, Charles, Genentechs New CEO Seeks Clean Slate, Wall Street Journal, July 12, 1995, p. B6.

Mergers and Acquisitions: Strategic Is the Word, Institutional Investor, January 1991, pp. 7481.

Moukheiber, Zina, The Great White Hunter, Forbes, July 26, 1999, pp. 13336.

A Natural Selection, Chief Executive, May 1992, pp. 3439.

Rigdon, Joan E., Fatal Blunder: Genentech CEO, a Man Used to Pushing Limit, Exceeds It and Is Out, Wall Street Journal, July 11, 1995, p. A1.

Slutsker, Gary, Patenting Mother Nature, Forbes, January 7, 1991, p. 290.

Thayer, Ann, Biotech Firms Revenues Up But Earnings Win First Half, Chemical & Engineering News, August 31,1992, pp. 1516.

Westphal, Christoph, and Sherry Glied, AZT and t-PA: The Disparate Fates of Two Biotechnological Innovations and Their Producers, Columbia Journal of World Business, Spring/Summer 1990, pp. 83100.

April S. Dougal

updated by David E. Salamie

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Genentech, Inc.

Genentech, Inc.

460 Point San Bruno Blvd.
San Francisco, California 94080
U.S.A.
(415) 266-1000
Fax: (415) 266-2501

Subsidiary of Roche Holdings, Ltd.
Incorporated:
1976
Employees: 2,200
Sales: $515.9 million
Stock Exchanges: NASDAQ New York
SICs: 2834 Pharmaceutical Preparations; 6794 Patent Owners and lessors; 8731 Commercial Physical Research.

Genentech, Inc. became a pioneer of biotechnology when it was founded in the late 1970s. The 60 percent-owned subsidiary of Roche Holdings Ltd. discovers, develops, manufactures, and markets human Pharmaceuticals for significant medical needs. The company fabricates organisms from gene cells, organisms that are not ordinarily produced by the cells. Conceivably this process, referred to as gene splicing or recombinant DNA, may lead to cures for cancer or AIDS. The potential success of this young science causes it to flourish, attracting entrepreneurs and investors. After being swept up in a wave of takeovers and mergers that shook the industry in the late 1980s, Genentech has emerged as one of the most solid biotechnological companies in the world. Founded in 1976, Genentech was financed by Klein-man, Perkins, Caufield and Byers, a San Francisco high-tech venture capital firm, and by its co-founders, Robert Swanson and Herbert Boyer. Swanson, a graduate of the Sloan School of Management at MIT, was employed by Kleinman, Perkins, where he learned of the achievements of Cetus, a biotechnology firm founded in 1971; he decided to investigate the prospect of marketing DNA products. Initially, the concept was met with little enthusiasm, but in Herbert Boyer, a distinguished academic scientist, Swanson found someone who enthusiastically supported his plan. One of the first scientists to synthesize life (he had created gene cells with Stanley Cohen), Boyer wanted to take his research further and to create new cells.

Boyer and Swanson decided to leave their respective jobs and to found Genentech (genetic engineering technology). Thomas J. Perkins, a partner with Kleinman Perkins, who became Genentechs chairman, suggested that the new company contract out its early research. Swanson followed Perkinss advice, and contracted the City of Hope National Medical Center to conduct the companys initial research project.

Boyer and Swanson wanted to exhibit their grasp of the relevant technology before they attempted to market productsto achieve credibility for Genentech. To accomplish this goal, Boyer intentionally selected an easily replicated cell with a simple composition, Somatostatin. The first experiment with Somatostatin required seven months of research. Scientists on the project placed the hormone inside a bacteria E. coli, found in the human intestine. The anticipated result was that the bacteria would produce useful proteins that duplicated Somatostatin, but that did not happen. Then a scientist working on the project hypothesized that proteins in the bacteria were attacking the hormone. Somatostatin was protected, and the cell was successfully produced. Although it established credibility for the company, the experiment brought no real financial returns. Boyer and Swanson intended to produce human insulin as Genentechs first product.

Early in the summer of 1978 Genentech experienced its first breakthrough in recreating the insulin gene. This development required an expenditure of approximately $100 million and 1,000 human years of labor. By 1982 the company had won approval from the Food and Drug Administration. Eli Lilly & Co., the worlds largest and oldest manufacturer of synthetic insulin, commanded 75 percent of the American insulin market, and Swanson knew that Genentech stood little chance of competing with them. He informed Lillys directors of Genentechs accomplishments, hoping to attract their attention: he believed that the mere threat of a potentially better product would entice Lilly to purchase licensing rights to the product, and he was correct. Lilly bought the rights. This maneuver provided ample capital for Genentech to continue its work. By 1987 the company was earning $5 million in licensing fees from Lilly.

Swanson pursued a similar strategy with the companys next product, Alpha Interferon. Hoffmann-La Roche purchased the rights to Interferon and paid approximately $5 million dollars in royalties to Genentech in 1987. Revenues from these agreements helped to underwrite the costs of new product development, which can run from $25 to $50 million per product prior to FDA approval.

The first product independently marketed by Genentech, human growth hormone (HGH) or Protropin, generated $43.6 million dollars in sales in 1986. Demand for HGH increased as the medical profession learned more about the drugs capabilities and diagnosed hormone inadequacy more frequently. Protropin enjoyed record-setting sales over the next six years, topping $155 million by 1991. Approved by the FDA in 1985, HGH helps to prevent dwarfism in abnormal children. Genentechs entry into the market was facilitated by an FDA decision to ban the drugs predecessor because it was contaminated with a virus. By the end of the 1980s a new and improved version of HGH patented by Eli Lilly had also received approval from the FDA. Lillys drug, unlike Genentechs version, actually replicated the growth hormone found in the human body. To counter this potential threat to their market, Genentech sued the FDA to force the agency to determine which company holds exclusive rights to the product. At the end of 1991, Genentechs Protropin maintained an impressive 75 percent share of the HGH market.

Such legal disputes are not unusual for biotechnology firms still in their infancy. Because the products of the industry duplicate substances found in nature, they challenge long-established patent laws. Traditionally, products and discoveries determined as not evident in nature receive patent awards. Biotechnology firms contest these standards in the courtroom, attempting to force alterations in the law, to make it conform to the needs of the industry. Companies apply for broad patents to secure against technological innovations that could undermine their niche in the marketplace. For start-up firms such as Genentech, patent battles consume large sums of money in both domestic and foreign disputes.

Genentech introduced tissue plasmogen activator (t-PA), in 1987 as Activase, a fast-acting drug that helped to break down fibris, a clotting agent in the blood. At $2,200 per dose, t-PA was marketed as a revolutionary drug for the prevention and treatment of heart attacks. When Genentech failed to provide the FDA with evidence that Activase prolonged the lives of heart attack victims, the federal agency delayed approval until 1988. The drug brought in almost half of the companys $400 million 1989 revenues.

But Activase was soon battered with legal and clinical setbacks. Genentechs claim to exclusive ownership of natural t-PA and all synthetic variations on it was struck down in Britain when the British firm Wellcome Foundation Ltd. challenged Genentechs patent in the British courts, claiming it was overly broad. This decision against the company, viewed more as an annoyance than a serious blow, may be reversed on appeal. Future patent decisions may hinge on Genentechs contention that the source of a biotechnology productpurification versus production by recombinant techniquesshould determine its uniqueness.

Clinical data showed that the drug caused serious side effects, including severe internal bleeding. A European study indicated that the drug was faster, but no more effective, than some competitors costing just $200 per dose. The troubles continued when a controversial study comparing Activase, SmithKline Beecham PLCs Eminase, and another firms streptokinase was released in March 1991. The International Study of Infarct Survival (ISIS-3) found all three drugs to be equally effective at keeping people alive, which again reflected badly on Activases high cost. Genentech discounted several of the research methods used, then commissioned its own 40,000-patient comparative trials to be completed in 1993.

The regulatory, legal, and clinical roadblocks that stymied Genentechs introduction of Activase, combined with competition from large pharmaceutical and chemical companies that bought into biotechnology in the late 1980s, culminated in Genentechs 60 percent acquisition by Switzerlands Roche Holdings Ltd. The merger was one of many in 1989 and 1990, which resulted in such pharmaceutical giants as SmithKline Beecham PLC and Bristol-Myers Squibb Company. Genentech used the $2.1 billion influx of capital to fund research, finance patent disputes, and invest in cooperative ventures to develop synthetic drugs using biotechnological discoveries.

In 1989, Genentech increased advertising support for Activase and other products by 360 percent. The marketing support and an intensive sales campaign helped Activase capture about 50 percent of the t-PA market. In 1990, Genentech launched the first commercial life sciences experiment in space when it sponsored research aboard the space shuttle Discovery.

Activase faced stiff competition when it entered the market. Delays in approval gave competitors such as Biogen and Integrated Genetics the opportunity to catch up with the industry leader. A dozen or so companies filed patents for similar drugs. Genentech could not expect to easily secure foreign markets for its new drug either. Competition was stiff; this relatively new industry has had little time to carve out established markets, and there are important competitors, particularly in Western Europe. In 1991, however, Genentech won an exclusive patent for recombinant t-PA in Japan. Genentech also had several new products in Federal Drug Administration trials in 1991. An insulin-like growth factor for the treatment of full-blown AIDS patients and relaxin, an obstetric drug, were in development that year. Genentechs DNase, for use in the management of cystic fibrosis and chronic bronchitis, entered Phase III FDA trials. The firms HER2 antibody entered clinical trials in 1991 as well. This treatment for breast and ovarian cancer was first developed from mouse cells. Genentech was also able to begin marketing of interferon gamma, or Actimmune, in 1991. The products relatively meager sales of $1.7 million were connected to the small number of patients suffering from chronic granulomatous disease, an inherited immunodeficiency.

Genentechs relationship with Roche led to the establishment of a European subsidiary of Genentech that would develop, register, and market DNase in 17 primary European countries. Genentech also allotted Roche an exclusive license to sell DNase anywhere but Europe, the United States, Canada, and Japan.

Although Genentechs revenues only rose one percent during the first half of 1992, it was one of only five biotech firms to show a profit for the period. Many biotechnology firms, including Genentech, were nonplussed by the lagging earnings figures, as concerns (and funds) were focused on research and marketing.

The applications of biotechnology extend beyond health care; they also affect the agricultural and chemical industries. Agriculture still remains a dominant industry in the United States, and experiments in cell replication could transform that industry. Technological innovations affect not only farmers but also food processors, plant-oil manufacturers, the forestry industry and the ornamental and floral industries. Over the next 30 years the discoveries of biotechnology will alter human existence. At the forefront, Genentech helps to establish new precedents for the field, yet it suffers the consequences of its position. The company has shown it has the capability to regroup, plan effective strategies and move on to find revolutionary solutions to both medical and social problems.

Principle Subsidiaries: Genentech Development Corp.; Genentech Venture

Further Reading

Baum, Rudy, Knotty Biotech Issues Receive Attention, Chemical & Engineering News, April 27, 1992, pp. 3031.

Hamilton, Joan, How Long Can Biotech Stay in the Stratosphere? Business Week, November 25, 1991, p. 224.

Heart Attack Drugs: Trials and Tribulations, Economist, March 19, 1991, pp. 8687.

Mergers and Acquisitions: Strategic is the Word, Institutional Investor, January 1991, pp. 7481.

A Natural Selection, Chief Executive, May 1992, pp. 3439.

Slutsker, Gary, Patenting Mother Nature, Forbes, January 7, 1991, p. 290.

Thayer, Ann, Biotech Firms Revenues up But Earnings Win First Half, Chemical & Engineering News, August 31, 1992, pp. 1516.

Westphal, Christoph, and Sherry Glied, AZT and t-PA: The Disparate Fates of Two Biotechnological Innovations and Their Producers, Columbia Journal of World Business, spring/summer 1990, pp. 83100.

updated by April S. Dougal

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"Genentech, Inc.." International Directory of Company Histories. . Encyclopedia.com. 19 Aug. 2017 <http://www.encyclopedia.com>.

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"Genentech, Inc.." International Directory of Company Histories. . Retrieved August 19, 2017 from Encyclopedia.com: http://www.encyclopedia.com/books/politics-and-business-magazines/genentech-inc-1

Genentech, Inc.

Genentech, Inc.

460 Point San Bruno Blvd.
San Francisco, California 94080
U.S.A.

Public Company
Incorporated: 1976
Employees: 900
Sales: $43.5 million
Market Value: $49 million
Stock Index: NASDAQ

Genentech Inc. develops and manufactures products to alleviate life-threatening diseases. An acknowledged leader in biotechnology, the company fabricates organisms from gene cells, organisms that are not ordinarily produced by the cells. Conceivably this process, referred to as gene splicing or recombinant DNA, may lead to cures for cancer or Aids. The potential success of this young science causes it to flourish, attracting entrepreneurs and investors. Founded in 1976, Genentech was financed by Kleinman, Perkins, Caufield and Byers, a San Francisco high-tech venture capital firm, and by its co-founders, Robert Swanson and Herbert Boyer.

Swanson, a graduate of the Sloan School of Management at MIT, was employed by Kleinman, Perkins, where he learned of the achievements of Cetus, a biotechnology firm founded in 1971; he decided to investigate the prospect of marketing DNA products. Initially, the concept was met with little enthusiasm, but in Herbert Boyer, a distinguished academic scientist, Swanson found someone who enthusiastically supported his plan. One of the first scientists to synthesize life (he had created gene cells with Stanley Cohen), Boyer wanted to take his research further and to create new cells.

Boyer and Swanson decided to leave their respective jobs and to found Genentech (genetic engineering technology). Thomas J. Perkins, a partner with Kleinman Perkins, who became Genentechs chairman, suggested that the new company contract out its early research. Swanson followed Perkinss advice, and contracted the City of Hope National Medical Center to conduct the companys initial research project.

Boyer and Swanson wanted to exhibit their grasp of the relevant technology before they attempted to market productsto achieve credibility for Genentech. To accomplish this goal, Boyer intentionally selected an easily replicated cell with a simple composition, Somatostatin. The first experiment with Somatostatin required seven months of research. Scientists on the project placed the hormone inside a bacteria E. coli, found in the human intestine. The anticipated result was that the bacteria would produce useful proteins that duplicated Somatostatin, but that did not happen. Then a scientist working on the project hypothesized that proteins in the bacteria were attacking the hormone. Somatostatin was protected, and the cell was successfully produced. Although it established credibility for the company, the experiment brought no real financial returns. Boyer and Swanson intended to produce human insulin as Genentechs first product.

Early in the summer of 1978 Genentech experienced its first breakthrough in recreating the insulin gene. This development required an expenditure of approximately $100 million and 1,000 human years of labor. By 1982 the company had won approval from the Food and Drug Administration. Eli Lilly, the worlds largest and oldest manufacturer of synthetic insulin, commanded 75% of the American insulin market, and Swanson knew that Genentech stood little chance of competing with them. He informed Lillys directors of Genentechs accomplishments, hoping to attract their attention: he believed that the mere threat of a potentially better product would entice Lilly to purchase licensing rights to the product, and he was correct. Lilly bought the rights. This manuever provided ample capital for Genentech to continue its work. By 1987 the company was earning $5 million in licensing fees from Lilly.

Swanson pursued a similar strategy with the companys next product, Alpha Interferon, Hoffmann-La Roche purchased the rights to Interferon and paid approximately $5 million dollars in royalties to Genentech in 1987. Revenues from these agreements helped to underwrite the costs of new product development, which can run from $25 to $50 million per product prior to FDA approval.

The only product independently marketed by Genentech, human growth hormone (HGH), generated $43.6 million dollars in sales in 1986. Approved by the FDA in 1985, HGH helps to prevent dwarfism in abnormal children. As the medical profession learns more about the drugs capabilities, demand for HGH should increase. Genentechs entry into the market was facilitated by an FDA decision to ban the drugs predecessor because it was contaminated with a virus. A new and improved version of HGH patented by Eli Lilly has also received approval from the FDA. Lillys drug, unlike Genentechs version, actually replicates the growth hormone found in the human body. To counter this potential threat to their market, Genentech sued the FDA to force the agency to determine which company holds exclusive rights to the product.

Such legal disputes are not unusual for biotechnology firms still in their infancy. Because the products of the industry duplicate substances found in nature, they challenge existing legal theories. Traditionally, products and discoveries determined as not evident in nature receive patent awards. Biotechnology firms contest these standards in the courtroom, attempting to force alterations in the law, to make it conform to the needs of the industry. Companies apply for broad patents to secure against technological innovations that could undermine their niche in the marketplace. For start-up firms like Genentech, patent battles consume large sums of money in both domestic and foreign disputes.

In Britain, Genentech recently lost its exclusive rights on t-PA, or tissue plasminogen activator. The British firm Wellcome challenged Genentechs patent in the British courts, claiming it was overly broad. This decision against the company, viewed more as an annoyance than a serious blow, may be reversed on appeal. A far more serious setback for Genentech occurred when the FDA refused to approve t-PA for the American market.

Activase (t-PA) helps to break down fibris, which causes blood clots, and is used to treat heart attack victims. Delay in approval for the drug, expected in 1988, resulted from the failure of Genentechs evidence to prove the drug prolonged the lives of heart attack victims. Clinical data showed serious side effects to the drug, such as severe internal bleeding in patients treated with high dosages.

In anticipation of FDA approval, Genentech manufactured large amounts of t-PA to ensure an adequate supply for the anticipated demand. But Activase, considered far superior to similar products, faces stiff competition when it enters the market. Delays in approval give competitors like Biogen and Integrated Genetics the opportunity catch up with the industry leader. A dozen or so companies have filed patents for similar drugs. Genentech cannot expect to easily secure foreign markets for its new drug either. Competition is stiff; this relatively new industry has had little time to carve out established markets, and there are important competitors, particularly in Western Europe and Japan. Germanys BASF has appealed to the courts for the right to market its own version of t-PA.

The FDA compounded Genentechs setback when it recommended approval for the intravenous method used to administer Activase for a competing drug, Skreptokinase. Skreptokinase, currently injected into the coronary artery by catheter, costs about $200 dollars per dose. The cost of Activase, approximately $3,000, holds little appeal for hospitals: the slower acting Skreptokinase apparently produces similar effects to those of Activase at much less cost.

Genentech faces other critical challenges. Unwilling to ignore the projected billion dollar sales potential of the products of the biotechnology industry, large pharmaceutical and chemical companies aggressively seek to establish a presence in the same marketplace. Because of their size, these companies react slowly when initiating research projects, yet they face fewer capital constraints. The evolution of biotechnology requires companies to manufacture as well as develop products if they expect to remain competitive. The big companies have the capability to meet this requirement. Other factors favor the big companies. They face fewer staffing limitations; they already employ large numbers of employees engaged in marketing and manufacturing. For these reasons, only a small number of the smaller biotechnology firms is expected to survive mergers or acquisitions by the large firms. The others, forced out of manufacturing and product development, will survive as contract researchers.

Though the future looks bleak for the smaller, less well-established biotechnology firms, they do retain some advantages. The start-up firms tended to cultivate close working relations with the universities. This relationship has allowed the start-ups to maintain a superior research position as well as an advantage in attracting academic talent. The financial benefits offered by the start-up companies present great financial opportunities to academic scientists in exchange for their services. Through stock options, many have the opportunity to become wealthy overnight.

During 1987 start-up biotechnology firms rasied $1.1 billion dollars in 50 share offerings. In 1980, when Genentech went public, the value of its shares soared because Wall Street investors were willing to gamble on the promise of the company. Genentechs share price more than doubled, from $35 to $82. Financial analysts suggested that over-enthusiastic investors were pushing the value of Genentech sharesand those of other biotechnology firmswell above the real value of the companies, and cautioned that a decline was inevitable. Following the FDAs failure to approve Activase, Genentechs share price did decline. Because the company is considered the industry leader, that decline rippled throughout Wall Street, causing the value of many other start-up firms to decline as well.

Despite recent difficulties, Genentech earned $6.6 million in interest on capital on hand and, although criticized on many fronts, the companys management continues to command a positive cash flow. The creative financial manuevers initiated by Swanson have secured the company against recent setbacks. Current estimates suggest that Activase will be earning $250 million a year by 1990.

The applications of biotechnology extend beyond health care; they also affect the agricultural and chemical industries. Agriculture still remains a dominant industry in the United States, and experiments in cell replication could transform that industry. Technological innovations affect not only farmers but also food processors, plant-oil manufacturers, the forestry industry and the ornamental and floral industries. Over the next thirty years the discoveries of biotechnology will alter human existence. At the forefront, Genentech helps to establish new precedents for the field, yet it suffers the consequences of its position. The company has shown it has the capability to regroup, plan effective strategies and move on to find revolutionary solutions to both medical and social problems.

Principal Subsidiaries

Genentech Development Corp.; Genentech Venture.

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