Going for the Gene Green

By Charles P. Alexander

The young biotechnology industry has already shown that it can perform miracles of science, creating marvelous synthetic molecules with the potential to attack cancer or stop heart attacks. Now the genetic engineering companies are out to prove that they can work the same magic in the marketplace, turning those wonder drugs into profitmakers. Last week Genentech, an industry leader based in south San Francisco, began selling its first drug product for humans: Protropin, a growth hormone used to treat dwarfism in children. Genentech had previously developed Humulin, a synthetic insulin, but licensed it to an established pharmaceutical company, Eli Lilly, which put the drug on the market. Protropin, which is expected to generate annual sales of $40 million, is the first human drug that a new biotech company has tried to sell on its own. Says Robert Swanson, Genentech's cofounder: "This is the beginning of the coming of age of the biotechnology industry."

For the investors who have sunk $1.5 billion into biotech start-ups, the journey from the laboratory to the marketplace has seemed agonizingly long. The industry was born in the 1970s, when scientists developed techniques for manipulating genes and converting bacterial and animal cells into tiny factories that could mass-produce drugs and other useful chemicals. When the first of the gene-splicing firms, led by Genentech and Cetus of Emeryville, Calif., went public in the early 1980s, Wall Street went wild. Genentech's stock jumped from $35 to $71 the first day. Biotech seemed like the next computer industry, and everyone was looking for the new IBM.

Wall Street, though, soon saw the high hurdles that lay ahead for biotech companies. After a new drug is developed, it must go through five to six years of painstaking tests in animals and human patients before it can win the approval of the Food and Drug Administration. In addition, a new firm faces the formidable tasks of equipping factories to mass-produce new drugs and building a national sales force to distribute them. Uncertain that the new biotech companies were up to the job, investors grew wary. Genentech's stock slipped to a low of about 17 in 1982, and Cetus dropped below 8 that year, from a 1981 high of 23.

Responding to Wall Street's concern, the genetic engineering firms began hiring employees who wore business suits instead of lab smocks. In 1983 Cetus brought in a new president, Robert Fildes, who had been a vice president of operations at Bristol-Myers, a major pharmaceutical company. Fildes quickly recruited a cadre of experienced managers with M.B.A.s, including some of his old colleagues from Bristol-Myers. He also pared back Cetus' rambling research to focus on projects with the most commercial potential. The company is now testing its version of interferon, a promising anticancer agent, and hopes to have the product on the market in two years. But at least five other firms, including Genentech and Geneva-based Biogen, are also in the interferon race.

Early this year G. Kirk Raab, the second in command at Abbott Laboratories, a large drug company, left to become president of Genentech. To prepare for the introduction of Protropin, Raab helped build a national marketing organization, which includes 15 hospital-based sales representatives with an average of 15 years' experience. Now Raab is working on plans to sell interferon and TPA (tissue plasminogen activator), a drug that dissolves blood clots and thus may help prevent heart attacks.

The biotech companies' new emphasis on marketing has revived Wall Street's enthusiasm for their stocks. Genentech has risen from 34 to 49 since January, while Cetus has gone from less than 9 to nearly 16. Says Peter Drake, a biotechnology expert at the Kidder Peabody investment firm: "From an investor's standpoint, the industry is at a breakout point in 1985."

The coming of age of biotechnology has not escaped the notice of established corporations. Companies with large investments in genetic research range from chemical firms like Du Pont and Monsanto to oil giants, including Exxon and Chevron. The most active players are the pharmaceutical houses, which have been feverishly striking alliances with the biotech companies. A recent licensing agreement allows Johnson & Johnson to sell products developed by Amgen of Thousand Oaks, Calif.

Some drug companies have decided that the best way to join the business is to swallow biotech firms whole. Eli Lilly announced in September that it would pay $300 million for San Diego-based Hybritech, one of the leaders in the development of monoclonal antibodies, which are proteins that could potentially help diagnose and conquer diseases like cancer. Last week Bristol-Myers said it would buy Seattle's Genetic Systems, another specialist in monoclonal antibodies, for $260 million.

Many experts think that takeovers will benefit the development of biotechnology. Most of the 200 or so small, research-oriented companies in the industry may need the resources and expertise of a large corporation to bring their discoveries quickly and successfully to market. The question remains whether or not biotech innovation will continue to flourish under the banner of the FORTUNE 500. Hybritech President David Hale, for one, thinks that it will. Says he: "We will continue to operate independently, and we feel that the company can still foster its entrepreneurial atmosphere as a subsidiary of Lilly."

Despite the talk of takeovers, the industry's current leaders seem determined to remain independent. Says Cetus' Fildes: "I can't predict the future, but I can tell you that Cetus is definitely not interested in being acquired by a large drug company. We think we have the products, the financing and the experienced people to build a very successful business on our own." Echoes Swanson of Genentech: "I believe we are well on our way to building a major, profitable pharmaceutical company." But Genentech, Cetus and the other pioneers of the brave new world of biotech still have a long way to go. --By Charles P. Alexander. Reported by Cristina Garcia/San Francisco

With reporting by Reported by Cristina Garcia/San Francisco