Genentech, Inc., is a biotechnology corporation which became a subsidiary of Roche in 2009. Genentech Research and Early Development operates as an independent center within Roche.
Genentech, Inc. became a pioneer of biotechnology when it was founded in the late 1970s. A publicly traded company, Genentech is controlled by Roche Holding Ltd. (parent of Swiss pharmaceutical giant Hoffmann-La Roche) through that company’s 66 percent stake, but is allowed to operate independently. Genentech 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 emerged in the 1990s as one of the most solid biotechnology companies in the world. At the turn of the century the company marketed seven products in the United States: Protropin, Nutropin, and Nutropin AQ, all for the treatment of growth deficiency or failure; Activase, used to dissolve blood clots in heart attack and stroke patients; Pulmozyme, a therapy in the treatment of cystic fibrosis; Rituxan, used to treat non-Hodgkin’s lymphoma, a cancer of the immune system; and Herceptin, for the treatment of breast cancer.
Founded in 1976, Genentech was financed by Kleinman, Perkins, Caufield and Byers, a San Francisco high-tech venture capital firm, and by its cofounders, Robert Swanson and Herbert Boyer. Swanson, a graduate of the Sloan School of Management at the Massachusetts Institute of Technology, 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&mdashø 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 E. coli bacteria, 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 (FDA). Eli Lilly and Company, the world’s largest and oldest manufacturer of synthetic insulin, commanded 75 percent of the U.S. 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 and marketed the product as Humulin. 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–which it marketed as Roferon-A–and paid approximately $5 million in royalties to Genentech in 1987. Revenues from these agreements helped to underwrite the costs of new product development, which ran from $25 million to $50 million per product prior to FDA approval. Meanwhile, Genentech went public in 1980, raising $35 million through an initial public offering.
Entering the Marketing Arena in the Middle to Late 1980s
The first product independently marketed by Genentech, human growth hormone (HGH) or Protropin, generated $43.6 million 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, Protropin helped prevent dwarfism in 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 also had 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 held 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 were not unusual for biotechnology firms still in their infancy. Because the products of the industry duplicated substances found in nature, they challenged long-established patent laws. Traditionally, products and discoveries determined as not evident in nature receive patent awards. Biotechnology firms contested these standards in the courtroom, attempting to force alterations in the law, to make it conform to the needs of the industry. Companies applied 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 consumed 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 in 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. In 1993, however, Genentech won a court victory against Wellcome, preventing the U.K. firm from marketing t-PA in the United States until 2005, when Genentech’s patent was due to expire. 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 41,000-patient comparative trial (at a cost of $55 million), which was completed in 1993 and vouched for the superiority of Activase over streptokinase. By the mid-1990s, however, Genentech was selling just $300 million worth of Activase per year, a far cry from the $1 billion annual sales it had projected for the product in the late 1980s.
Early to Mid-1990s: From Roche Merger to CEO Controversy
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 Holding 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. Also in 1990, G. Kirk Raab, whom the Wall Street Journal described as a ‘master marketer,’ was named CEO of Genentech. That year, the company launched the first commercial life sciences experiment in space when it sponsored research aboard the space shuttle Discovery, and it received FDA approval to expand the marketing of Activase to include the treatment of acute massive pulmonary embolism (blood clots in the lungs).
Activase had faced stiff competition when it first entered the market in the late 1980s. 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 had little time to carve out established markets, and there were 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 FDA 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 (pronounced dee-en-ayse), 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 also was 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.
In 1993 Genentech received regulatory approval to market Pulmozyme, its brand name for DNase, in the United States, Canada, Sweden, Austria, and New Zealand, for the treatment of cystic fibrosis. The company’s relationship with Roche led to the establishment of a European subsidiary of Genentech to 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. DNase was considered the first major advance in the treatment of cystic fibrosis in 30 years. Sales of Pulmozyme–which had gone from conception to market in just five years, half the industry average–reached $76 million by 1996.
Genentech continued to expand its product line as the 1990s continued. In March 1994 the FDA approved a new Genentech human growth hormone, Nutropin, for the treatment of growth failure in children. Other uses for Nutropin soon followed, including the treatment of adults suffering from growth hormone deficiency and of short stature associated with Turner syndrome. A third Genentech HGH, Nutropin AQ–the first liquid HGH–received its first FDA approval in 1996. That year the company’s line of growth hormone products generated $218.2 million in revenues.
By mid-1995 Roche’s holding in Genentech had increased to about 65 percent. As part of its original stake purchased in 1990, Roche had received the option of purchasing the remainder of the company at $60 per share, an option that expired June 30, 1995. In May 1995, however, Genentech and Roche reached an agreement whereby the option would be extended to June 30, 1999. The option was set to begin at $61.25 per share, then increase each quarter by $1.25 until expiring at $82.50. As part of the agreement, Roche took over Genentech’s Canadian and European operations, with Genentech agreeing to receive royalties on sales of Pulmozyme in Europe and on sales of all of the company’s products in Canada.
In the midst of the negotiations on this deal, Raab approached Roche to seek a $2 million guarantee of a personal loan. When Genentech’s board found out about this improper move, it conducted a broad review of his leadership. Finding other problems, including ongoing federal regulatory investigations into charges that Genentech was promoting the use of its products in unapproved ways, the board forced Raab to resign in July 1995. Named to replace him as president and CEO was Dr. Arthur Levinson, a molecular biologist who had headed the company’s research operations. One outcome of the federal probes came in April 1999, when Genentech finalized an agreement to pay $50 million to settle charges that it had illegally marketed Protropin for unapproved uses, such as a kidney disorder and severe burns, from 1985 to 1994. The company also pleaded guilty to a criminal violation, ‘introducing misbranded drugs in interstate commerce.’
Revitalizing the Product Pipeline in the Late 1990s
Although many questioned the wisdom of appointing as CEO a scientist who had never before run a company, Levinson helped restore the company’s reputation by shifting its focus away from the marketing arena and back to the laboratory. Genentech reached new heights in the late 1990s, with revenues surpassing the $1 billion mark for the first time in 1997 before reaching $1.15 billion the year after. The reemphasis on research revitalized the company’s product pipeline, leading to a substantial increase in the sales of products Genentech marketed itself. In 1998 such sales reached $717.8 million, an increase of nearly 23 percent from the previous year. The growth was attributable to the sales of two new products. In November 1997 Genentech began selling a monoclonal antibody called Rituxan, the first such entity approved to treat a cancer, specifically a form of non-Hodgkin’s lymphoma (a cancer of the immune system). Sales of Rituxan, which was codeveloped with La Jolla, California-based IDEC Pharmaceuticals Corporation, were $162.6 million in 1998, the first full year of sales. Monoclonal antibodies are designed to zero in on cancer cells and kill a tumor without harming healthy tissue. A second Genentech-developed monoclonal antibody, Herceptin, was approved by the FDA in September 1998 to treat breast cancer. In clinical trials at this time was a third cancer treatment, called Anti-VEGF, which was being studied as a treatment for several types of solid-tumor cancers.
In June 1999 Roche exercised its option to acquire the 33 percent of Genentech it did not already own for $82.50 per share, or about $3.7 billion. Just one month later, however, Roche sold about 16 percent of Genentech stock back to the public in an IPO that raised about $2.13 billion at the offering price of $97 per share. Genentech thereby resumed trading on the New York Stock Exchange but under a new symbol, DNA. In October 1999 Roche made a secondary offering of 20 million Genentech shares at $143.50, raising $2.87 billion in the largest secondary offering in U.S. history. Following the offerings, Roche held a 66 percent stake in Genentech, which retained the operational autonomy through which it had thrived.
In November 1999 Genentech agreed to pay $200 million to the University of California at San Francisco to settle a nine-year dispute over a patent underlying Protropin. The university had charged that Genentech scientists had stolen a DNA sample from a lab in 1978 and used the specimen to develop Protropin, which by the end of the 1990s had generated $2 billion in sales over its lifetime. The university had sought $400 million in lost royalties and other damages. Despite this latest embarrassment, Genentech entered the 21st century as the most highly respected biotechnology company. With more than a dozen promising products in various stages of clinical development and plenty of cash on hand to fund its aggressive research efforts, Genentech seemed certain to maintain this position well into the new century.