PRODUCT REPORT
Consolidation Begins for Biotechnology Firms David Webber, C&EN New York
The new biotechnology's march to commercialization began a few years ago in pyrotechnics of promises and stock prices. It may n o w h a v e reached its first major crossroads. There, at a point where developments in laboratories, pilot plants, and boardrooms are soberly converging, a clearer picture of who will be doing what in the long run is likely to emerge. This figurative crossroads marks a critical juncture for all the players—both current and future—in the commercialization of biotechnology. The ranks of the smaller companies, which sprang up several years ago on the strength of their expertise in genetic e n g i n e e r i n g and hybridoma technology, have large-
ly survived unscathed up to now. But a combination of more measurable results of the efficacy of their products, more-realistic knowledge of the regulatory hurdles facing those products, and the changing nature of financing further development is yielding a better indication of what will determine their commercial success or failure. At the same time, many members of the established chemical and pharmaceutical industries are reassessing their commitment to biotechnology. The decisions they make in the near term will not only shape their own strategy to exploit the commercial potential of the new science, but will have a profound impact on many of the smaller pioneers, which count the large companies as not only their chief con-
tract R&D customers, but also, increasingly, as their chief sources of capital funding. The resulting situation will be a winnowing out of the small genetic engineering and hybridoma companies that received their seed money from venture capitalists and stock market investors. Some of those firms will become integrated manufacturers and marketers of their own medical or agricultural products. Others will find their future limited to contract research or production work for clients with greater resources. Some will be acquired or will merge to survive. And a few, having exhausted their current finances and unable to attract more, will disappear. The result also will include a much deeper involvement in bioNovember 18, 1985 C&EN 25
Product Report
Bulk of first genetic engineering products to reach U.S. market will be human therapeutics Product
Proximity to market
Company (collaborators)
Marketed
Human insulin Human growth hormone
Lilly (Genentech) Genentech
Approval filed
«-Interferon
Clinical trials (Phase III)
«-Interferon Hepatitis Β vaccine
Roche (Genentech) Schering-Plough (Biogen) Exovir Merck (Chiron)
Clinical trials (Phase II)
«-Interferon ^-Interferon 7-lnterferon
Enzo Biochem Shell Oil (Cetus) Shionogi (Biogen) Boehringer Ingelheim (Genentech)
Hepatitis Β vaccine Immunotoxin-melanoma lnterleukin-2
SmithKline Beckman Xoma Cetus Shionogi (Biogen) Lilly SmithKline Beckman Boehringer Ingelheim (Genentech)
Proinsulin Retrovirus vaccine Tissue plasminogen activator
Clinical trials (Phase I)
Anticancer antibody (pancreatic, colorectal cancer) Epidermal growth factor 7-lnterferon Immunoagent (B-cell lymphoma) Immunoagent (lung cancer) Immunoagent (skin cancer) Immunoagent (bone marrow) Immunoradiotherapeutic (hepatocellular cancer) lnterleukin-2 Malaria vaccine Tumor necrosis factor
Centocor (Roche) Chiron Amgen Schering-Plough (Suntory) Damon Biotech (Biotherapy Systems) Damon Biotech (Scripps) Damon Biotech (undisclosed) Hybritech Hybritech Roche (Immunex) SmithKline Beckman Genentech
Note: U.S. only. Source: Paine Webber
technology by the large chemical and pharmaceutical corporations. Up to now, the large companies' ap proach to biotechnology has varied widely. There has been little doubt in the chemical and drug industries for some time that biotechnology was a revolutionary research tool; less universally accepted was the premise that biotechnology would lead to revolutionary products. Con sequently, few major corporations have invested heavily in building up their internal research capabili ties in recombinant and hybridoma techniques. On the other hand, many companies, waiting to have biotechnology's commercial poten tial proved to them, have been con tent to keep abreast of developments 26
November 18, 1985 C&EN
through "windows on technology"— small equity purchases, some basic R&D in-house, and a scattering of research contracts. That strategy is beginning to change. "Several large corporations had already made a philosophical com mitment to biotechnology," says Franklin Pass, chief executive offi cer of Molecular Genetics, Minnetonka, Minn. "Then there has also been a group of tire kickers. Well, now some of them are deciding that it's time to make their move, too." The reason is a new sense of concreteness about biotechnology's commercial possibilities. To a great extent—despite some failure to live up to original, inflated claims— practical applications are being
proved in clinical trials, field tests, and in the marketplace. Last month's approval by the Food & Drug Ad ministration of Genentech's geneti cally engineered human growth hor mone, Protropin (C&EN, Oct. 28, page 9), marked the first successful movement of a recombinant DNA human therapeutic agent to the mar ketplace by a genetic engineering company. True, the market for Protropin probably will not be es pecially large, and, true, the poten tial for unethical use of the hor mone remains a disturbing un known. But the achievement by the South San Francisco-based firm is still perceived by many as an im portant symbolic milestone. Another milestone, one even dearer to the hearts of the invest ment community, was also reached this fall. First, Hybritech, San Diego, agreed in mid-September to be ac quired for more than $300 million by Eli Lilly & Co. (C&EN, Sept. 23, page 5). Next, in late October, Ge netic Systems, Seattle, agreed to be purchased by Bristol-Myers for as much as $294 million (C&EN, Oct. 28, page 9). Hybritech and Genetic Systems are two of the most visible biotechnology firms currently pro ducing in-vitro diagnostic tests based on hybridoma technology. The acquisitions are not the first of biotechnology companies by large, established corporations. A year ago, for example, Lubrizol picked up debt-ridden Agrigenetics of Boulder, Colo., in a stock swap as part of a program to expand the chemical producer's presence in the seed market. What differentiates the recent purchase agreements are the large cash sums involved and the healthy balance sheets of the firms being bought. To many analysts, that indicates a shift in the way big cor porations regard both biotechnolo gy's commercial potential and the question of timing their large-scale entry into the field. According to this line of reasoning, the estab lished corporations—most of which, in line with their inherent conser vatism, have viewed biotechnology skeptically—are now becoming be lievers in the business promise of biotechnology. "The purchase of Hybritech by Lilly put the stamp of approval on
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Product Report the biotechnology industry," declares Robert A. Fildes, president and chief operating officer of Cetus, in Emeryville, Calif. Nigel L. Webb, president and chief operating officer of Damon Biotech, Needham Heights, Mass., agrees. "The acquisitions signify, as all of us have now started generating revenues from making products, albeit on a small scale, that nevertheless we've now got credibility as an industry. This is an industry that is, in fact, going to make things that people need," he says. "Hybritech and Genetic Systems are two successful companies that had reached the point at which they were not just speculative opportunities for investment anymore," comments Linda I. Miller, an analyst w h o follows biotechnology firms in the human health care area for Paine Webber. "If you're going to pay $300 million for a company, it's beyond the point of an R&D play." Also, up to now, the evaluation of a biotechnology company has been little more than an artful leavening of the firm's market value (nothing more than the current stock price multiplied by the number of shares of outstanding common stock) with information on the firm's business plan, progress in product development, cash reserves, and
quality of management. Now, because of the two acquisition agreements, there are more tangible indicators. An examination of the pros and cons for each party in the two agreements provides insights into the choices now facing both small companies and large corporations. Hybritech, for instance, had already built up a booming business in monoclonal antibody-based medical diagnostic devices. Over the first half of the year, the firm reported the highest revenues of any biotechnology firm after Genentech (excluding the support segment, made up of suppliers of instrumentation, equipment, and laboratory reagents). And unlike Genentech, nearly a third of Hybritech's revenues came from product sales. Despite its success, however, Hybritech clearly had reached a crossroads of its own. Under the company's business plan, the in-vitro diagnostics operation was intended to provide an immediate, safe flow of revenues to underpin the firm and help fund development of the products in which Hybritech really saw its future: hybridoma-based invivo diagnostic imaging and therapeutic agents. But whereas in-vitro regulatory barriers are low, those for in-vivo uses are high. Consideration of the tremendous costs of
Herbicide-resistant corn plants growing in Calgene greenhouse in Davis, Calif. 28
November 18, 1985 C&EN
clinical trials to achieve success in the next phase of its business plan very likely rendered Hybritech's management more receptive to Lilly's offer. In addition, in late August the company lost a patent infringement suit against Monoclonal Antibodies Inc., a smaller producer of diagnostic kits sold in many of the same markets (C&EN, Sept. 9, page 6). A federal judge ruled Hybritech's technology patent invalid, an act that, even though Hybritech may appeal the ruling, seems to open the company's breadand-butter market to greater competition. "Hybritech's agreement to be acquired probably indicates that the company was not yet fully mature," says Paine Webber's Miller. "Even though Hybritech had a good business, it wasn't mature enough in its financial resources or in its sales and distribution organization to generate enough cash on its own to enter the therapeutic side." Hybritech had built up its diagnostics operation well enough to compete with giants like Abbott Laboratories, she notes, "but then the company looked at the rest and decided it couldn't do both." "Lilly had the cash to spend," agrees Scott King, an analyst who tracks biotechnology companies for Montgomery Securities. "Hybritech didn't." Similar considerations probably propelled the decisions made in the deal between Genetic Systems and Bristol-Myers. Like Hybritech, the Seattle company was planning on using revenues from its diagnostic products, many of which are licensed to Syntex, to help finance work on anti-infective and anticancer therapeutics. Like Hybritech, Genetic Systems boasted a healthy balance sheet. In fact, the firm had recently signed agreements, pegged to shareholder approval later this year, under which Syntex was to plow $40 million into the company for an 18% equity stake and another $20 million into research funding. Still, points out Miller of Paine Webber, these cash infusions would have left Genetic Systems merely stable, not rich enough to bring therapeutic products to market. "Their activities at the end of the
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Product Report Biotechnology stocks have overtaken the stock market with recent surge . . . Price index, average of Sept.-Dec. 1983 = 100 Standard & Poor's 400 industrial s t o c k s 3
110 100
60 ι ι ι ι 1 1 1 ι Ι 1 1 1 Ι 1 1 1 h ι ι ι 1 1 ι ι 11 ι 11 11 ι ι Ι ι ι 11 ι 11 11 ι 11 Ι ι ι Dec
Jan
Feb
Mar
-1984-
Apr
May
June July
Aug
Sept Oct
-1985-
a Reindexed to average for Sept.-Dec. 1983 period to show relative change. Prices as of Friday close each week, b Based on stock prices for Amgen, Applied Biosystems, Biogen, Centocor, Cetus. Damon Biotech, Genentech. Genetic Systems, Genex, Hybritech, Molecular Genetics, and Monoclonal Antibodies.
Remember when invesxment decisions about biotechnology stocks were made by gauging cosmic promises and counting Nobel Laureates? Things have changed somewhat. True, price-toearnings ratios, the yardsticks dearest to analysts, remain nominal and few among the public companies using bio technology. And products, particularly those made with recombinant technol ogy, remain scarce. Nonetheless, the investment community, having lost faith in the companies' stocks for much of 1984, now senses a new solidity in the basis for its decisions. The result: a year-long surge in biotechnology stock prices that has culminated in the past month in 52-week highs for several issues. This reborn investor enthusiasm has a number of sources. Products based on monoclonal antibodies are having great success in the medical diagnos tics market. Indications of commercial
day would have left them with too m u c h g o i n g for t h e m a n d not enough cash/' she says. So enter Bristol-Myers. Like Lilly, Bristol-Myers lacks a w i n d o w on the fast-growing diagnostics sector. But attractive as the diagnostics busi ness might be, it was probably not the chief reason Bristol decided to buy. "Bristol bought Genetic Sys 30
November 18, 1985 C&EN
Latest price·
Company
120
Nov
. . . but individual stock performance reflects companies' varying fortunes Amgen Applied Biosystemsc Biogen Bio-Response California Biotech Centocor Cetus Chiron Collaborative Research Damon Biotech DNA Plant Technology Genentech Genetic Systems0 Genex Hybritech6 Molecular Genetics Monoclonal Antibodies
$10%
24% 11 1 / 2
6% 10% 20 15%
9V4 3% 61/2
8% 48% 9% 1% 27%
7V4 16%
%
change6
139% 69 64 12 72 90 51 90 -14 37 73 51 39 -80 86 0 56
52-week range High Low
$10%
$ 3%
27%
13% 4% 3% 4% 8 8%
11 1 / 2
9% 12 20% 16% 10%
41/4
61/4
2%
7% 9
4Ve
56 1 / 2
9% 10% 30 10% 16%
3% 28% 5 1% 14 6 7%
a As of close on Friday, Nov. 1, 1985. b Nov. 2, 1984, to Nov. 1, 1985. c Adjusted for 2-for-1 stock split in March 1985. d To be acquired by Bristol-Myers, pending shareholder approval, e To be acquired by Eli Lilly.
survivability, such as joint ventures and other long-term agreements, are more common than before. At many firms, losses are narrowing and disappear ing. Even FDA's approval of Protropin, Genentech's genetically engineered hu man growth hormone, though it will neither make nor break the company, has a symbolic power of assurance. But the most concrete measures of the payoff potential of biotechnology stocks are two agreements made this fall: Eli Lilly's decision to buy Hybritech, and Bristol-Myers' decision to buy Ge netic Systems, both in the $300 mil lion range. Such developments light fires under investors. Both to-be-acquired companies have concentrated on monoclonal antibody technology, so investors turned in Oc tober to two other hybridoma-based firms, Centocor and Monoclonal Anti bodies Inc. Per-share prices for each reached 52-week highs late last month.
tems for its therapeutic research ca pability," says Parag Saxena, a Citi bank assistant vice president in charge of that institution's emerg ing health care fund. For one thing, he points out, Genetic Systems' di agnostics for sexually transmitted diseases are licensed to Syntex ex cept for its test for the acquired immune deficiency syndrome (AIDS)
The surge also has elevated shares in such genetic engineering firms as Cetus, Biogen, and Amgen to 12-month high points during the past month. Each has reported management, business, and scientific developments this fall that have pleased the market. Most of the better-known biotechnology issues, in fact, have risen sharply over the past 12 months, lifting their composite value on Nov. 1 to 5 6 % above the year-ago level and 1 7 % above the average value for late 1983, when C&EN began tracking the stocks. Not all the biotechnology stocks fared so well between Nov. 2, 1984, and Nov. 1, 1985. The per-share price for Genex plummeted after the com pany lost a vital contract in April, and remains mired 8 0 % below its yearearlier level. Collaborative Research's market value has fallen 14% over the past 52 weeks. And Molecular Genet ics' stock price has been flat.
antibody. "But Bristol-Myers is not paying nearly $300 million for an AIDS diagnostic," Saxena says. "If it had wanted that, it would have bought another firm instead. "Bristol-Myers is really paying $300 million for being behind in t h e r a p e u t i c r e s e a r c h , " he says. "There are enough clinical data now to Ije able to say that this science is
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November 18, 1985 C&EN
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Product Report nology/' remarks Cetus president Fildes. "They have a bias toward chemical synthesis, and they viewed it skeptically. Around 1982, they began to see a number of ways in which the technology could produce diagnostics and therapeutics, and they began to get interested. The perceived risk of investment declined, and that led to R&D contracts, licensing, and equity positions. Last month's acquisitions were the culmination of that trend. "Most of the drug companies haven't put much in place, but now they realize the potential of the technology," he says. "So now the choice is to go in-house or by acquisition." Teena L. Lerner of Reinheimer Nordberg comments, "Many large corporations are interested in stepping in now and are willing to pay a higher price than before." Citibank's Saxena argues that it is possible to make a good case for purchasing a human therapeuticoriented biotechnology company now. At $300 million, he says, the price is not that much greater than a company would have to spend in a year or so on that kind of research anyway. "A drug company could Shell scientist exposes plant leaves to have set up its own program and organisms that may genetically create would have spent a lot," he remarks. plant that secretes its own "pesticide" The message that if a Lilly and a for real, to believe that you can ac- Bristol-Myers think it the right tually make money by investing in time to buy a chunk of biotechnology and that other drug houses might this area/7 Saxena believes that the estab- act on similar logic in fear of either lished corporations—especially drug falling behind in the technology or companies, since the initial impact losing their chance to acquire a of genetic engineering will come in choice company or both has not human therapeutics—are now at a been lost on the stock market. There, point where they must ask them- investors reacted to the pair of acselves three questions about their quisitions by bidding up the prices own involvement in biotechnology of other companies most like Hybriresearch. First, have we got all the tech and Genetic Systems. For exR&D going that we want? Second, ample, the stock prices of two such have we put our biotechnology dol- hybridoma-based firms, Centocor lars in the right area? And third, if and Monoclonal Antibodies, both we have never invested in biotech- shot up in late October to their highest levels in the past 12 months. nology, had we better do so now? Partly, the increases reflected both Adding urgency to this reassessment is a growing two-pronged a general surge in biotechnology threat to the drug firms—techno- stocks and recent developments at logical competition from the bio- the firms in question. Monoclonal technology companies themselves Antibodies, for instance, in the past and marketing competition from the few months has not only apparently triumphed in the Hybritech lawthriving generic drug producers. "Up until a few years ago, most suit, but has reported its first profof the major pharmaceutical compa- itable quarter, raised some cash, obnies pretty; much shunned biotech- tained a bank line of credit, and 36
November 18, 1985 C&EN
expanded its relationship with the Ortho division of Johnson & Johnson. In addition, Monoclonal Antibodies has far fewer shares of outstanding common stock, relatively speaking, than most other biotechnology companies. It therefore takes much less investment to get the price moving. Still, as Paine Webber's Miller opines, it has been all those factors plus "the flavor of acquisition potential" that has led to the stock's climb. This "flavor" on the senses of the investment community has led primarily to speculation on the acquisition of other hybridoma firms. "The value of a monoclonal antibody company is more analyzable," remarks Montgomery Securities' King. But looking further ahead, analysts are also wondering whether contract producers of monoclonals, such as Damon Biotech and BioResponse, might be the next takeover candidates. "The contract production companies are the next logical group," says King. "Now that the value of monoclonal antibodies is obvious, the question of who will make them economically is the next step." "If you're going to pay $300 million for a company like Hybritech or Genetic Systems, you need a way to produce the monoclonals," Miller points out. "Nowhere are monoclonal antibodies being produced in commercial quantities for therapeutics. So the next logical addition to your armamentarium is a production company." Nevertheless, analysts do not expect serious interest in such acquisitions to emerge overnight. Citibank's Saxena notes that volume requirements for diagnostics are relatively small. Only when therapeutic agents using monoclonal antibodies reach the market will production needs increase substantially. "But I don't see that happening until the end of the 1980s," he says. At Damon Biotech, however, one of the companies in question, president Webb tends to disagree. "From our standpoint, the acquisitions put us, along with Centocor, Monoclonal Antibodies, Molecular Genetics, and a few others, on the short list," he says, "in contrast to the long list for the recombinant companies."
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