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LEGAL ISSUES

All the President's Men

Biotech firm fights federal bureaucracy by turning government into a partner and ally
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John Henry's challenge was to assemble a team that could turn an intimidating government bureaucracy into a partner and ally

Nothing elicits more fear and loathing from a business owner than dealing with the federal bureaucracy. Biotech executive John Henry felt that hostile relationships with government officials -- a nuisance for some companies -- could kill his. Henry devised an unusual strategy: he'd regard certain agencies as partners, not adversaries, and treat government relations as just another business discipline, like marketing or research. His approach reveals a lot about the federal regulatory system. -- J.F.

John Henry is usually an optimist, but on the afternoon of March 4, 1986, his mood was as bleak as the late-winter Washington weather. He had just left a boisterous hearing on Capitol Hill, and the realization was sinking in that his company, then only five years old, might die long before it could ever bring a product to market.

Henry had known from the start that biotechnology was a tough business. The science was exotic. Technological dead ends would appear frequently. The burn rate of his venture capital would be high. At best, profits were a decade away. Still, by 1986 Crop Genetics International was looking at a promising future. Henry's "gene jockeys" were developing a plant vaccine that could, if it worked as planned, eventually replace many chemical pesticides.

Henry was pursuing the same kind of radical change in farming as had his distant ancestor Cyrus McCormick, who invented the reaping machine in 1831 and commercialized it by founding International Harvester Corp. McCormick had carried the industrial revolution to the farm; now, Henry was helping to usher in the next great wave of change through biotechnology.

The newer technology, though, was charged with the kind of danger and controversy that had never touched McCormick's invention. The reaper was a mechanical device that greatly increased the productivity of human labor; Henry's product is a biological agent that carries the seeds of both growth and destruction. And it is that very real threat of destruction -- what unintended perils might arise from the release of new biological agents into the environment? -- that has raised public concern to such a pitch that it could bring down Henry's company.

It didn't help that the biotech industry was shooting itself in the foot. The hearing that day had been called by the oversight subcommittee of the House Science, Space and Technology Committee to investigate a company named Advanced Genetic Sciences Inc. (AGS). In November 1985 AGS had been granted the first permit from the Environmental Protection Agency for a test "release" of a genetically engineered organism contained in a product called Frostban, which gave strawberries greater resistance to frost damage.

But The Washington Post had reported that, long before acquiring its EPA approval, AGS had injected the test bacterium into more than 45 fruit trees on the rooftop of its Oakland, Calif., headquarters. When the news broke, the EPA suspended AGS's license and levied a $20,000 fine. (The Frostban tests were later conducted by scientists in protective suits and masks.) The incident crystallized public suspicion that biotech companies were dangerously out of control, ethically dubious, and poorly regulated. Could they, as some critics warned, unleash some deadly new organism, an Andromeda strain?

John Henry was hardly an innocent in the Byzantine drama of Washington politics. He had spent three years on the staff of the Senate Foreign Relations Committee after graduating from Harvard College in 1971. But he wasn't prepared for the spectacle that unfolded before him in the hearing room that March day. The place was jammed with environmental activists, EPA officials, and journalists, and the atmosphere was chaotic.

Medical biotech is regulated by the Food and Drug Administration. But the EPA was trying to cope with the agricultural side of the industry with regulations aimed at chemicals; it had not devised any long-term policy for the release of new life forms into the environment.

By the time the hearing ended, some members of Congress were talking about creating a brand-new regulatory system for agricultural biotech. Crop Genetics might not survive several years in regulatory limbo. With a dwindling supply of venture capital and a business plan that allowed no time to spare, Henry reckoned he could be bankrupt before his technology ever got out of the gate. "My overwhelming feeling as I left that hearing was fear," he recalls. "Everything we had worked for since 1981 could go down the tubes."

It was then that Henry decided on an unusual strategy. By and large, U.S. industry and the regulatory system regard each other with mutual hostility. But Henry decided to consider the EPA not an adversary but a partner; environmental activists were to be regarded as "a fourth branch of government." Government relations would become just another business discipline, like marketing or research. And the dominant discipline at that: for the foreseeable future, government relations would be the business of Crop Genetics.

Three weeks after the hearing, Henry walked into the Washington office of a Seattle-based law firm called Perkins Coie to see William D. Ruckelshaus.

Ruckelshaus is a veteran on the Washington scene. He has been EPA administrator twice, first in 1970, when the agency was new, and again in 1983, when it was struggling to regain credibility in the wake of the Rita Lavelle perjury trials. In between, he was deputy U.S. attorney general. In March 1986 he was back in private life. Henry figured if anyone understood the regulatory zeitgeist, had stature and credibility, and knew how to deal with the government, that person was Bill Ruckelshaus.

Philip Angell, who had served as Ruckelshaus's chief of staff at the EPA, was a consultant to Perkins Coie. As a confidant of his old boss, he attended that first meeting. "Henry believed very deeply in what he was doing, and he asked us how to deal with a regulatory situation that was fraught with emotionalism," says Angell.

Ruckelshaus and Angell concluded that what Henry needed was good advice on sidestepping the political perils befalling other biotech outfits. They decided to put together a brain trust of Washington wise men.

In the annals of entrepreneurship, this may have been the most high-powered advisory panel ever assembled. Henry recruited Douglas M. Costle, who had headed the EPA in the Carter Administration. Ruckelshaus brought in Robert M. Teeter, a prominent Republican pollster who in 1988 would become co-chairman of the George Bush Presidential transition team. And he enlisted his old Justice Department boss, former attorney general Elliot L. Richardson, who has held a record number of Cabinet posts -- Defense, Commerce, and Health, Education and Welfare.

It might seem odd that a small company with no profits could attract such heavy-gauge talent, but there was a certain logic to it. Ruckelshaus, for instance, had been a director of Monsanto Co., a chemical industry giant. Richardson, for his part, was intrigued by the idea that the plant vaccine could trim the use of chemical pesticides, a leading cause of groundwater pollution, food contamination, and bird kills. (Some 1.4 billion pounds of chemicals are dumped on U.S. farms every year, twice the amount applied just 25 years ago.) Crop Genetics paid the members $1,000 for each of the formal brainstorming sessions the committee held and gave them stock options in the company.

Henry required their advice to achieve one clear strategic objective. Because his plant vaccine is designed to kill insects, it is classified as an insecticide. And he could not conduct the first, all-important field trial without an experimental-use permit from the EPA. It was absolutely critical that the company get that permit and do its test on time.

The test was scheduled for summer 1988. The company planned to conduct it on just an acre of corn at its farm on Maryland's Chesapeake Bay. A second round of tests the following summer, to be held in the Midwest, would be far more extensive. Both field trials would have to succeed before the EPA would register the product and sales could begin. Henry aimed to introduce his product in the fall of 1991 in the United States and France, Europe's largest corn producer, envisioning a market of about $100 million. He planned to market it for use on the world's three major crops: first corn, then rice and wheat.

The EPA requires pesticide tests that prove safety. In this case, the safety question centered on the difficult issue of "spread." Could the organism move from target plants to other plants?

Henry was reasonably sure they could not. After all, his biopesticidal vaccine grew inside the plant. An organism that operated inside plants was containable, at least in theory. And anyway, lab tests showed that the microbe could survive only in the sap of living plants. Outside, in soil or water, it died.

Furthermore, the biopesticide in question is a benign, naturally occurring organism called Bt that has been used for decades with no ill effects on mammals, fish, birds, or nontargeted insects. What made the new product unique -- and patentable -- was its delivery system. The company had found an obscure type of bacterium called an endophyte. Lab work showed that it could be made to multiply through cell division inside more than 80 kinds of plants, from pansies to pumpkins. By splicing a single Bt gene into this endophyte, Crop Genetics scientists could "grow" pesticides inside plants -- something nobody had ever attempted before.

Henry believed that farmers would clamor for the product. After all, chemical pesticides affect farmers more than anyone else. They contaminate the water they drink and the air they breathe. This new product promised to be safer and less expensive. And consumers would approve because it would solve the problem of pesticide residue on fruits and vegetables.

"The beauty of the system is that it requires virtually no manufacturing," says Peter Carlson, Crop Genetics' cofounder and chief scientist. "We enjoy a huge material advantage over chemical insecticides. Once our product is inside a plant, it acts like a tiny microbial factory, manufacturing pesticides around the clock. Only 20 pounds will stop the European corn borer -- our first target pest -- from damaging Iowa's 10-million-acre corn crop."

The corn borer, the nation's greatest uncontrolled corn pest, infests more than half of America's 70 million acres of corn, inflicting some $400 million in damage every year. Acting like a biological Roto-Rooter, it eats its way up and down the stalk until the plant grows so weak it simply blows over in the wind. For Crop Genetics, a vaccine for corn was to be just the beginning. But in the spring of 1986, the company's fate hinged on one thing: obtaining the EPA permit to conduct that field test. "Without that," Henry says, "we were dead meat."

There was, however, an interesting political wrinkle at work. Given the electrified atmosphere surrounding biotech, the EPA was unlikely to issue the permit without the approval of the country's main environmental groups. For Henry, the uncertainty was nerve-racking. Political risks were piling up on top of scientific risks. It was a hell of a way to have to run a business.

"The essence of our strategy was 'no surprises to anybody,' " Angell recalls. "We wanted to involve all the pertinent people as early as possible, to touch every base in sight. We wanted to contact anyone who could conceivably be interested in this experiment -- to tell them who we were and what the company was doing."

And always there was an eye to the inevitability that sooner or later, Jeremy Rifkin and his Foundation on Economic Trends would take a lively interest in the company's plans. Rifkin was not to be taken lightly. Through sheer force of personality and a charismatic stage presence, he had made himself a force to be reckoned with in biotech.

Working through the courts, Rifkin had stalled the Frostban tests for several years. Later, by threatening to sue the EPA, he had caused the agency to reject a permit application from Monsanto. Rifkin was waging biotech battles nationwide, with an opposition to the new science that amounted to a crusade. He almost certainly could be counted on to fight Crop Genetics.

Richardson, though, was not intimidated. "The most effective way to deal with the Rifkins of this world is to be in a situation in which you're hiding nothing, to be prepared to answer any fair questions," he says. "And if people then attack you in some way that seems to call your good faith into question, they weaken their own position, not yours." He advised a policy of maximum disclosure of the company's work.

In the summer of 1986, the federal government decided that it wouldn't need a new law for biotech -- the threat that had lingered after that congressional hearing in March. Instead, it devised the so-called "combined coordinated framework for biotechnology." The idea was to ensure that existing regulatory standards meshed, to present a unified federal approach.

This was a welcome development. Instead of operating on uncertain regulatory terrain, Henry knew the rules. But as it turned out, the new system placed yet another hurdle in his path. He was no longer dealing with just the EPA. He now had to obtain a separate test permit from the U.S. Department of Agriculture's Animal and Plant Health Inspection Service (APHIS).

Henry accepted this burden with equanimity. "You can't have a wild reaction to regulation," he says. "You have to take the world as you find it, and make it work for you. That is the tremendous insight that Bill Ruckelshaus and Elliot Richardson helped me with."

For openers, he sent his top scientists down to EPA headquarters to meet with the agency's pesticide specialists, the people who actually made the decisions. This was in mid-1986, more than a year before the company applied for its first permit.

"We explained our technology and asked them to tell us what the safety issues were," he says. "We did the lab tests, and then went back to them. Each time, we narrowed the areas of concern about our biopesticide. Does it spread? Is it harmful? Is it in the food? We entered a process of first getting a consensus on the issues, and then going out to get the data they wanted."

Next Henry turned his attention to politicians and environmental activists in Maryland, where the test would be held. It was critical to have local opinion makers on his side to offset the not-in-my-backyard syndrome. To orchestrate this delicate operation he brought in yet another high-powered adviser, Russell "Tim" Baker Jr.

Baker, a product of Harvard Law School, had been a partner in the Baltimore firm of Piper & Marbury. In 1986 he had narrowly lost a bid to become attorney general of Maryland. A Democrat, he had enjoyed unanimous support from the state's environmental groups, for whom he'd done a great deal of pro bono legal work. He also had strong connections in state politics, stemming from eight years as a federal prosecutor, including four as U.S. Attorney for Maryland.

After the election, Baker had worked with two of the venture capital firms backing Crop Genetics. Once he understood that the new technology could help eliminate chemical pesticides, he applied himself fervently to the company's cause.

"John asked me to take him around and introduce him to a series of groups," he says. "We wanted everybody to know about us before they read about us in The Washington Post. We were afraid the reporters would quote Rifkin saying how horrible this project was. So we talked to community associations and PTAs. We held a town meeting. We talked to local politicians, people in the governor's office, the state's U.S. senators and representatives -- some 40 politicians in all. We explained that the technology was safe, that they shouldn't be worried. Their eyes just glazed over.

"But in talking to friends, I happened to point out that if this technology works, it's going to replace pesticides, which is one of the largest unsolved problems in the pollution of the Chesapeake Bay. John had been hesitant about bringing this up for fear of arousing the competitive juices of the chemical giants. But when you talk about eliminating chemical pesticides, you're hitting apple pie and motherhood. So we quickly started including that in our presentation."

On a Saturday morning in early December 1987 Baker made his major strategic move. He appeared at a meeting at the Baltimore home of Ajax Eastman, a prominent environmentalist and member of the Maryland Conservation Council. Among the more than 50 guests were leaders of the local chapters of the Sierra Club, the Nature Conservancy, and others.

"I knew this was the group that would be Rifkin's natural allies," Baker says. "Our strategy all along had been to isolate Rifkin. I knew that if this group analyzed this technology objectively, they would not ally with him on this one."

For this presentation, Baker brought in Peter Carlson, the mastermind behind the new product. Carlson, a former college professor, is as much a salesman as a scientist when he speaks, taking off his jacket, pacing around, gesturing emphatically. At first the audience was skeptical. For 90 minutes, Carlson explained the plant-vaccine technology. Even as he spoke, Baker could sense attitudes changing. He knew things were looking up when Malcolm E. King, founder of a national conservation outfit called Save Our Streams, asked the first question. He wanted to know how he could buy some Crop Genetics stock.

When it came to the national environmental groups, the company employed a similar strategy. Three of the most prominent organizations concerned with biotechnology -- the National Wildlife Federation, the Environmental Defense Fund, and the National Audubon Society -- had been heavily funded by the Joyce Foundation of Chicago to analyze the implications of biotech for the Farm Belt. National Wildlife, which received $210,000 over three years, had gone further, establishing the National Biotechnology Policy Center to study the new industry.

Center director Margaret Mellon, an attorney and molecular biologist Ph.D., sums up the concerns. "Society must identify the environmental problems raised by biotechnology before they occur, not after," she says. "Otherwise, we could confront in 50 years the biotech equivalents of hazardous-waste dumps, greenhouse gases, and pesticides that persist in the environment and devastate wildlife."

In keeping with Richardson's advice of "maximum disclosure," Henry dispatched Carlson to these three groups and had him bring a 500-page document that described the company's work in mind-boggling detail. It paid off. The Audubon Society praised the company, telling the EPA that "such openness and cooperation are rare, and reflect well upon the company's sensitivity to environmental and public concerns."

All this was taking an enormous amount of Henry's time and energy. On the one hand, he had the normal challenges of managing a growing company -- he was up to almost 100 employees. On the other, several tough scientific problems still had to be solved, a big technological gamble. As he puts it, "I had to move a lot of pieces down the chessboard at the same time." And if the EPA refused to grant the permit, it was checkmate.

He had, however, anticipated these demands and had styled his management structure accordingly. "I have things pretty well staffed, so I'm not needed day to day," he says. "I can go where the problems are. I have really talented people, and I delegate."

But there was no denying that lobbying was complicating progress on one vital front. For the field trial, the company planned to inject each corn plant with the recombinant microbe. For commercial use, however, the organism will have to be inoculated into seed corn, a process that requires new technology.

Crop Genetics would need seed-company partners to help invent and install seed-inoculation machines; no such machines existed. But, as Henry says, "It would have been absurd to ask seed companies to team up with us for that kind of work if we couldn't successfully launch even this small-scale test." So this fundamental component of the business -- marketing and distribution -- had to be put on hold.

Money, at least, wasn't a pressing problem. True, Henry had spent almost $14 million in venture capital. But early in 1987 the company had gone public. Ruckelshaus had spoken on the company's behalf to investors in New York City. Richardson appeared when the road show played in Switzerland. With their help, the offering brought in $23 million, enough to fuel the firm for two more years.

But Henry, who had spent two years as a Wall Street securities lawyer, was already planning a second offering for 1988. And he knew that if his permit application failed, he could forget that.

Honing yet another prong in his offensive, Henry emphasized the public interest. On Richardson's counsel, he approached the Agricultural Research Service (ARS), a prestigious test facility of the Department of Agriculture. Scientists at the ARS-operated experimental farm in Beltsville, Md., agreed to collaborate with the company in testing the vaccine by planting an acre of test corn.

The collaboration benefited Crop Genetics. ARS had special labs and expertise that the company lacked. The government scientists would publish their studies, which Henry hoped would augment the company's own test analysis. Teaming up with ARS would also give him the imprimatur of government sanction and help expedite the APHIS permit. It was a brilliant move.

In December 1987 Crop Genetics formally filed its permit application with the EPA, a massive document three inches thick and crammed with scientific data.

Waiting for the permit was not uneventful. In March, all hell broke loose because of a mistake of the company's making.

The company's PR firm, Fenton Communications Inc., issued a press release inviting Washington reporters to a breakfast briefing at the Hay-Adams Hotel featuring Henry, Carlson, and Elliot Richardson, by now a director. The idea was to explain the company's work so that when the permit was issued, the press would have the background. It seemed harmless.

But David Fenton, seeking a sexy angle, couldn't resist inserting this little nugget: "The principal chemical pesticide now used against the European corn borer is Furadan, which a recent EPA study said could be responsible for as many as 2.4 million deaths of birds nationwide [including] as many as 13 bald eagle deaths since 1985 in the Chesapeake Bay area, where the national bird has been making a comeback."

Now as it happened, Furadan was manufactured by FMC Corp., which was represented in Washington by Harold Himmelman, one of the country's top pesticide lawyers. In fact, he was the very same attorney Henry had hired a year earlier to represent Crop Genetics before the EPA. FMC was not amused by Fenton's "chemical bashing," and in the dustup that ensued, Himmelman dropped Crop Genetics in favor of his much larger client.

"Here it was March, less than two months before what we viewed as the climactic lawsuit with Rifkin that we'd have to win fast, and there we were without a law firm," says Tim Baker. "It was like the eighth inning and the team quits. John told me, 'Go out and find a new team, we're up next.' "

Baker frantically began interviewing law firms. Oddly enough, he was on good terms with Himmelman. They had been classmates and lacrosse teammates at Williams College in the 1960s. And Himmelman recommended that Baker try the law firm of Weil, Gotshal, & Manges, where he met Jim Davis, a young partner.

Davis turned out to be yet another Washington insider who could make water flow uphill. Not only did he have a scientific background -- a Ph.D in chemistry from California Institute of Technology -- but he also had spent two years as special assistant to John Moore, then the EPA's assistant administrator for pesticides and toxic substances. Davis knew the EPA, biotech, and regulatory nuances like nobody's business. Baker signed him up immediately. (Henry later hired him as general in-house counsel.)

In April the three major environmental groups submitted to the EPA their comments concerning the permit application. Not one of them would fight it. Only Rifkin weighed in with an opposing view, arguing that the delivery microbe is known to cause a stunting disease that could spread to other plants.

"Spread" was something that had also troubled Rebecca Goldburg of the Environmental Defense Fund. "I'm concerned that it might infect wild plants," she says. "I don't want to make wild plants resistant to the insects that feed on them. I mean, wild plants are the basis of the food chain." Still, given the containment procedures the company planned for its field test, she felt confident that spread would, if anything, be minimal.

As the action moved into May, Davis went into crash mode to prepare for a Rifkin legal challenge. If Rifkin sued the EPA for issuing a permit, the Justice Department would represent the agency. But Baker was skeptical. "Having been a deputy assistant attorney general there, I knew the department could get itself fouled up," he says. "I didn't want to count on them to carry the load. I thought we should get ready ourselves."

By mid-May the Crop Genetics team was set for combat. "If Rifkin sued, he'd run into a buzz saw," Baker says. "We were prepared to fight in state court or federal court. We tried to figure out every angle Rifkin might use to come after us, then have a strategy ready for it. If he filed, we'd file our papers the next day.

"We couldn't afford to lose any time. Rifkin couldn't beat us on the merits, but he wouldn't have to. All he'd have to do was get some judge confused long enough and it would end up being mid-July -- it would be too late to plant the test crop."

In late May the EPA and APHIS issued the two experimental-use permits. It was an event of such moment that it made the "CBS Evening News." Crop Genetics was the only biotech firm in the country to have made it through the first round of regulatory hoops without being delayed or stalled.

Rifkin didn't sue. He and his staff attorney, Andrew Kimbrell, concluded that they didn't have much of a case after all -- not this time, anyway. But that didn't soften the blow when John Henry opened the legal bills: Baker's came to $50,000.

"The cost of this thing was just incredible," Baker says. "And how do you price all the time that John Henry and Peter Carlson put in, and their scientists? It turned out that we could afford it, and we did everything right. We had played error-free ball, and we were lucky. But what happens to a company that isn't lucky, or doesn't play it so well?"

At this writing, in December [1988], Crop Genetics has harvested its test corn and is compiling the results. Mind you, all this had nothing to do with proving that the product will work. It was only to show that the microbes didn't spread into surrounding plants. So far, says Henry, "things look good."

Already, he is preparing another application to conduct large-scale field tests next summer in the Midwest with his four new seed-company partners. They include DeKalb-Pfizer Genetics, the second-largest producer and marketer of field-corn seed in the world, and Rogers Brothers, the largest sweet corn-seed company. Those tests, Henry hopes, will demonstrate that the product's delivery system works.

The only thing he knows for sure is that this time around the action will be more bruising. "We'll be there for this one," says Andrew Kimbrell, Rifkin's attorney. Rifkin himself pledges that the first company that tries to test recombinant microbes on a large scale will face "years of battle in the courts and in Congress."

The big environmental groups also will be much more aggressive next time. "We thought there was very little risk associated with a small-scale test of this organism," says Margaret Mellon. "We based that largely on the containment features. But we are not as sanguine about the large-scale use of the product."

John Henry waxes whimsical about all this. "Sometimes I wonder why I ever got into such a complicated business," he muses. But he knows why -- a huge new market beckons, just as it did for his ancestor, Cyrus McCormick. Still, he says, "It's a long, long march."




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