Genentech, Inc.

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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 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 & Co., the world’s 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 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 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 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 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, HGH helps to prevent dwarfism in abnormal 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 had also 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 holds 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 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 company’s $400 million 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. 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 Genentech’s contention that the source of a biotechnology product—purification versus production by recombinant techniques—should 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 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 40,000-patient comparative trials to be completed in 1993.

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 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. Genentech’s DNase, 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 was also 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.

Genentech’s 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 Genentech’s 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