Genentech, Inc.

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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 Genentech’s chairman, suggested that the new company contract out 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 wanted to exhibit their grasp of the relevant technology before they attempted to market products—to 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 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. Eli Lilly, the world’s 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 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. 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 company’s 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 drug’s capabilities, demand for HGH should increase. 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. A “new and improved” version of HGH patented by Eli Lilly has also received approval from the FDA. Lilly’s drug, unlike Genentech’s 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 Genentech’s 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 Genentech’s 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. Germany’s BASF has appealed to the courts for the right to market its own version of t-PA.

The FDA compounded Genentech’s 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. Genentech’s share price more than doubled, from $35 to $82. Financial analysts suggested that over-enthusiastic investors were pushing the value of Genentech shares—and those of other biotechnology firms—well above the real value of the companies, and cautioned that a decline was inevitable. Following the FDA’s failure to approve Activase, Genentech’s 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 company’s 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.