07 Aug 2000  Research & Ideas

The Business of Biotech

On the cusp of what most analysts agree will be the age of biotechology, Professor Gary P. Pisano and four HBS alums on the front lines of the biotech revolution offer their views of the challenges, issues and opportunities facing the industry in the laboratory, the boardroom and the marketplace.

 

New Year's Eve 1999 gave revelers a once-in-a-lifetime opportunity for celebration—the exhilarating thrill of ringing in a year that's always had an aura of science fiction mystery. When the champagne corks popped at midnight, however, most merrymakers probably did not realize that they were also heralding the start of National Biotechnology Month, as January 2000 had been designated by the U.S. Senate.

For biotech, in fact, the party had begun months earlier, when hundreds of millions of dollars had poured into promising companies that seemed closer than ever to delivering on expectations. With the sequencing of the human genome running ahead of schedule, the American Stock Exchange's "BTK" biotech index registered an annual increase of 232 percent in February, prompting exuberant headlines ("Move Over, Dot-Coms: Biotech Is Back") and hopeful talk of cures for cancer and AIDS.

Those working in the biotech trenches, however, point out that the real work has only just begun. Dr. Robert Tepper, chief scientific officer for Millennium Pharmaceuticals, Inc., put it this way in a Business Week interview: "Having just the sequence of the human genome is akin to [having] a dictionary that lists all the words in the English language but doesn't include their meanings." How those words are defined remains to be seen, but most analysts agree that if the 1990s belonged to the Internet, the new decade marks the advent of another dramatic revolution—the coming of age of biotechnology.

The disappearance of "blockbuster" drugs could create new management challenges for pharmaceutical companies.
— Gary Pisano

The prospect is exhilarating, but the road to this brave new biotech world has more than a few bumps. With an average time line of ten years required to bring a drug to market—and the potential for failure looming every step of the way—the business of biotech is one of managing uncertainty over time. HBS professor Gary P. Pisano, a longtime observer of the industry, points to two key elements common to successful biotech firms: development capabilities and strong senior management. "Once you attract bright, young scientists," he says, "you need to get them to realize this is not a postdoc lab, this is a business. It's not enough just to do the experiment; somebody's got to take the ball and run with it."

Lately, competition in the biotech industry has become more heated than ever, as a steadily increasing number of companies enter a market that, despite its risky nature, has the potential for enormous rewards in the future. "It may be that the time to profitability isn't that much longer for a biotech company than an Internet start-up," remarks Pisano. "In biotech, one big drug will make you very profitable for a long time, but the percentage of drugs that make it to market is so low that it remains a risky proposition." Profitable firms such as Genentech, Genzyme, and Biogen already have products on the market, as does Amgen, where Gordon M. Binder (MBA '62) served as CEO until his retirement last month (he will continue to serve as chairman through December). Amgen's Epogen (a treatment for anemia in kidney dialysis patients) and Neupogen (which restores white blood cells in cancer patients) generated more than $2 billion in sales last year.

photo of Alan Crane
Millennium Pharmaceuticals: Alan Crane (photo: Shelly R. Harrison)

As the ability to analyze a patient's genetic material is developed, however, many believe that drug "blockbusters" will disappear. Recent developments suggest that doctors will eventually be able to treat patients more effectively with medicine tailored to their genetic makeup, including, in some cases, gene replacement therapies. "The drug market may become much more fragmented," Pisano comments. "The $1 and $2 billion drugs will give way to $200 to $300 million drugs. That will be a very different world for big drug companies, with different cost structures and resource-allocation processes."

And the drug industry won't be the only field affected, according to Alan L. Crane (MBA '92), VP of business and commercial development at Millennium Pharmaceuticals in Cambridge, Massachusetts. "It will revolutionize how medicine is practiced," he states simply. "Right now the doctor listens to your heart with a stethoscope and maybe draws a blood sample, but that's a very crude way of understanding the physiological state of the human body. A much better method is to get information about the DNA, RNA, and proteins. Understanding that information will help us detect a disease before it becomes symptomatic."

photo of Gail J. Maderis
Genzyme: Gail Maderis (photo: courtesy Genzyme)

"It's a way of thinking about disease that wasn't open to us a decade ago," says Gail J. Maderis (MBA '85), president of Genzyme Molecular Oncology, also based in Cambridge. "Right now, we think of cancer as breast cancer, lung cancer, colon cancer. Eventually we'll be able to diagnose and treat on the molecular—rather than the anatomical—basis of the disease." Genzyme, which currently has drugs in clinical trials for melanoma and breast cancer, hopes to have its first products on the market as early as 2004. "I think we're going to see more people in the next decade who are living with cancer and thinking of it as a chronic condition like cardiovascular disease, rather than as an acute, fatal disease," Maderis concludes.

Hitting the target

When human lives are at stake, the urgency involved in turning such predictions into reality goes beyond the wish to reap financial rewards from years of investment. Steve Williams (MBA '84), senior director at Genentech, Inc., in South San Francisco, remembers watching a television program about the biotech industry in late 1987 with his father, who was fighting metastatic colon cancer. "My dad looked at me and said, 'Why don't you think about doing that?' I have found that many people who come into this industry do so for a combination of professional and personal factors," Williams says, adding that he left his job at a technology consulting firm and joined a biotech start-up soon after that conversation.

Education and public dialogue are fundamental to biotech's success.
—Gail Maderis

Time—a precious asset in any industry—has special value in biotech, particularly since the multiphase FDA approval process can add years to a drug's development. "My biggest source of frustration is the inability to move candidates into products more quickly," remarks Mara Aspinall (MBA '87), president of Genzyme Emerging Technologies at Genzyme Corporation. "But I think in the post-genome era, the process will become much more efficient. With the data we're collecting now, we'll have virtual clinical trials that will bypass actual humans. The number one challenge is going to be utilizing these vast quantities of data to create products faster."

"If we can understand every molecule in the body with which a drug is interacting, we can predict the basis for toxicity as well as efficacy," says Alan Crane of Millennium. "With the whole genome known, the process of drug discovery in the future will involve comprehensively identifying all molecular interactions for a drug."

Genetic information should be public, but companies need to protect their investments in developing new treatments.
—Steve Williams

If the current environment is any indicator, biotech companies—and the large pharmaceutical firms many of them are affiliated with—won't be the only sector of the economy trying to capitalize on the new pool of genetic information. In a recent Harvard Business Review article, ("Transforming Life, Transforming Business: The Life-Science Revolution"), Juan C. Enriquez (MBA '86) and Ray A. Goldberg, the School's George M. Moffett Professor of Agriculture and Business, Emeritus, suggest that traditional boundaries between businesses will continue to dissolve, resulting in "the largest industry in the world: the life-sciences industry." Seeds, the authors note, have gone from being "little-noticed commodities to hot products" due to their ability to sprout disease-resistant crops with higher nutritional values. The next step? "Agriceuticals," or crops that have been engineered to have higher medicinal value. An "apple a day," in other words, would do more than keep the doctor away—it could replace the painful prick of a vaccination needle. And as "delivery vehicles" for medicines proliferate, new distribution channels, such as supermarkets and health clubs, could offer products alongside the more established sources like HMOs and pharmacies.

photo of Mara Aspinall
Genzyme: Mara Aspinall (photo: courtesy Genzyme)

A healthy controversy

All this "cross-pollination"—whether between industries or between species—tends to make people nervous. Several days before the Biotechnology Industry Organization's (BIO) annual conference convened this past March in Boston, opponents held their own forum of seminars and talks under the banner of BioDevastation 2000. Obviously, advances in biotechnology are not viewed with confidence by all. Although much of the debate focuses on the possible health hazards posed by genetically engineered crops, as well as their potential for causing environmental harm, some observers have also expressed ethical concerns regarding the medical sector of the industry.

In the post genome era, virtual clinical trials will increase the efficiency of the FDA approval process.
—Mara Aspinall

Privacy is an issue for those who worry that complete knowledge of an individual's genetic makeup could have negative effects. If employers know an individual has a predisposition for cancer, will that person still be hired—and receive health insurance? Some would counter that such personal information is, in a sense, already available, pointing to the fact that many companies require physicals for their employees as part of the hiring process. And if medical advancements keep pace with the growing availability of information, they argue, it follows that our potential to develop a particular disease will matter less and less to insurers. The general consensus, however, is that new legislation will be required in the meantime for this and a host of other issues, much of it relating to the regulation and labeling of bioengineered foods.

Another source of controversy and confusion is the patenting of genes and access to data from the human genome. "As a company, we believe that genetic information should be available to anyone for research purposes, and it is," says Genentech's Steve Williams. "But in order to determine that genetic information has a therapeutic use, we have to make a substantial investment—$350 to $500 million—in doing the clinical trial work. From a business standpoint, we need to protect our investment."

photo of Steve Williams
Genentech: Steve Williams (photo: courtesy Genentech)

"High, upstream knowledge should not be owned by one company," notes Gary Pisano. "You don't want patents to preempt innovation, you want them to stimulate innovation, and the way to stimulate innovation is to give lots of people access to the pool of information." He believes the public's wariness will diminish when some kind of payback from biotechnology is realized. Pisano puts it in the context of another current topic of debate: "People worry about privacy issues concerning the Internet, but we all use it because there are benefits."

Whatever influence biotechnology hopes to have on the future of human life, all agree that one of the industry's biggest tests—in addition to maintaining its focus and delivering on expectations—will be communicating with the public it would like to benefit. "The key is education and public dialogue," says Gail Maderis. "People tend to be afraid of the unknown. We spend a lot of time at Genzyme meeting with groups that work to educate legislators, as well as the general public." Representatives from Genzyme and hundreds of firms at the Bio2000 conference in Boston were confronted with a crowd of 2,500 protesters marching through Copley Square—many of them costumed as ghoulish vegetables or three-headed beasts. The scene was hardly the ideal forum for discussion. But as knowledge of life sciences develops alongside even swifter advances in technology, it seems inevitable that biotechnology's influence will be felt to a profound degree well before we ring in many more New Years. And if companies meet the numerous challenges that lie ahead, we all could have good reason to celebrate.

From the Harvard Business School Bulletin, June 2000.