Biotech Blues

THE NEWS TEAMS DIDN'T SHOW UP at Cetus Corp., a biotechnology company near Oakland, Calif., until Friday, December 6. But when they came, they came in force. "I think we had eight television crews and something in the neighborhood of 80 press calls to deal with," says Katharine Russell, who as Cetus's communications director found herself at the center of the storm. "No one here had quite predicted how the media and the general public would react."

Behind this flurry of activity was a dramatic report in the December 5, 1985, issue of the New England Journal of Medicine. A team led by Dr. Steven A. Rosenberg, the National Cancer Institute surgeon who took part in President Reagan's colon-cancer operation, had conducted an experimental treatment regimen on 25 critically ill cancer patients. Rosenberg and his colleagues reported that 11 members of the group responded to the treatment, with 10 experiencing at least a 50% reduction in tumor size. One patient's cancer had gone into remission entirely.

The key ingredient in the program was a substance known as interleukin-2, or IL-2. Minute quantities of IL-2 occur naturally in the body's immune system. But genetic engineers at Cetus and elsewhere had learned to synthesize the substance biologically, and medical researchers had immediately begun testing its effects as a pharmaceutical. Now, several years later, the results of the tests were beginning to come in. Rosenberg's report, the most promising so far, suggested that Cetus had an effective anti-cancer agent on its hands. And that, as the company quickly discovered, was news.

Biotechnology has been in the news a lot lately. This year alone, a California biotechnology company got in trouble for conducting unauthorized tests on a new virus, and a Nebraska animal-health concern found itself in the midst of a furor over its genetically engineered swine vaccine. But if such episodes stir the public's fears, its hopes for biotech have seemed to fasten on the dozen or so companies focusing on new pharmaceuticals. Like IL-2, most of the drugs under development are aimed at cancer, heart disease, or other hitherto intractable illnesses. Nearly all are still in the testing stages. But whenever a test result is announced, people stop, look, and listen.

Especially people on Wall Street. Boosted by Rosenberg's announcement, Cetus's stock rose from around 20 in late November to nearly 30 on December 6, and in late spring was trading close to 40. Other biotech stocks have done even better in recent months, propelled upward by a sense that some of the industry's research and development is finally bearing fruit. "The transformation of the industry is occurring," says J. Misha Petkevich, an analyst with Hambrecht & Quist's New York City office. "There's going to be a flood of data in the medical literature about biotech's products, and that's going to keep [all the companies] in the public eye."

The pharmaceutical branch of the biotech business, in short, has regained the luster it had a few years ago: it's once again a sort of entrepreneurial Land of Opportunity, complete with Wall Street glamour and dazzling new products in the works. This time there's even a sense of ambition emanating froml the industry itself. In their early days, biotech companies were typically no more than glorified R&D labs, many of them founded and run by the scientists who developed the breakthrough technologies. As new products began to work their way through the six-to-eight-year testing pipeline, though, most of the companies quietly brought in seasoned top management -- chief executives, often, with years of experience in the pharmaceutical industry.With them came a new vision. "Cetus's objective is to become a large, fully integrated pharmaceutical company," says Robert A. Fildes, the company's jovial, cigar-smoking chairman and CEO, and his words are echoed by the CEOs of Cetus's competitors. New technologies spawn big new companies, so the thinking runs -- and like Apple Computer Inc., the biotech companies should grow up to take their rightful places alongside their Fortune 500 predecessors.

The events of recent months have lent credibility to such ambitions, with reporters and investors alike both buying and peddling the companies' stories. But before the bandwagon gets too crowded, it's worth remembering that businesses -- even high-tech, big-money businesses -- aren't all the same. In biotech, the odds in favor of successful, long-term company building have been poor from the beginning. Despite all the recent developments, despite all the excitement, they aren't much better today.

In a sense, a biotech CEO's troubles begin with that six-to-eight-year pipeline. Companies in other industries develop a product and make plans to have it on the market in a few months or a year. Biotech companies develop a new drug and ask the government's Food and Drug Administration when they can begin testing it. The tests alone are likely to take five years, and the agency may then take at least another year to make its decision. Unlike conventional drug manufacturers, biotech companies can't depend on a backlog of existing products to keep them thriving while new ones run the testing gauntlet.

They depend instead on immense quantities of capital. It takes from $25 million to $50 million to bring one pharmaceutical from lab bench to marketplace. Since an ambitious company can't risk putting its eggs in a single basket, all the major players have several products in the works. Typically, they must come up with something between $75 million and $300 million before they can expect significant revenues from sales.

In their younger days, biotech companies were content to take that capital in whatever form they could find it, without much thought for the future. Most cut licensing deals with the pharmaceutical giants, giving up manufacturing or marketing rights to their earliest drugs in return for equity investments or fat research contracts. Several assembled hefty R&D limited partnerships, raising tens of millions of tax-advantaged dollars against the chance of down-the-road payoffs. And all but one or two went public as soon as they could.

That was fine as far as it went. But they still need money today, because they still have a ways to go. "If you carry out [biotech companies'] current resources and spending lines," says Luther Smithson, director of the biotechnology program at SRI International, a research firm, "the cross-over point is somewhere between 1989 and 1990. Most of the products won't be on the market until after that." And if they're really shooting for the Fortune 500, they can't keep trading away future revenues. Partnerships and licensing deals were "a stage in the evolution of companies," explains M. Kathleen Behrens, an analyst with Robertson, Colman & Stephens; "one way or another you had to bring the capital in the front door. But very few companies have been successful by being [just] licensing or R&D companies."

The only source of capital left, in short, is the public markets. Companies haven't been shy about going back to this well: in the first four months of 1986, for example, nine already-public biotech concerns issued secondary offerings totaling some $292 million. And Wall Street, in its present expansive mood, has been snapping them up. No stock buyer, least of all an institutional money manager, wants to be accused of having missed the company that found a cure for cancer.