ILLUSTRATION: ORIGIN OF THE BIOTECHNOLOGY INDUSTRY

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Dec 5, 2012 (4 years and 8 months ago)

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SCIENCE ADMINISTRATION


FREDERICK BETZ

PORTLAND STATE UNIVERSITY



LECTURE 5


SCIENTIFIC TECHNOLOGY


ILLUSTRATION:

ORIGIN OF THE BIOTECHNOLOGY INDUSTRY

AMGEN

XOMA LTD



SCIENTIFIC TECHNOLOGY


Technology uses science to know and understand nature.


Science constructs mathematical models of nature by theory and experiment.


These models can be used for prediction of technical performance when nature is
manipulated.


By predicting technical performance, the engineer can design the performance
required for an application of the technology.


Both scientific theory and observation/experimentation are useful to technology.



In modern times, all the major new technologies on earth has been invented
based on scientific progress.


This fact gives rise to a central idea in science administration
--
‛scientific
technology’.


‛Scientific technology’ is a manipulation and use of nature for human
purpose, based on recognized scientific phenomena.


ILLUSTRATION: Origin of the Biotechnology Industry



S&T infrastructures have a major impact on the economy when
technological revolutions are begun on scientific discoveries. The
opportunity to start new firms and the ability to position corporations in
a new technology occur in the early years of the technology.


The biotechnology industry was created directly from the scientific
discoveries in genetics.


In 1973 the scientists, Cohen and Boyer, applied for a basic patent on
recombinant DNA techniques for genetic engineering


which was
assigned to Stanford university.


Subsequently, Boyer founded Genentech. Cohen joined Cetus. These
were two of the first biotech firm. In the years from 1976 to 1982 in the
United States over 100 other research firms were formed to
commercialize the new biotechnology.


In 1980, Genentech and Cetus both went public The scientists, Boyer
and Cohen, became millionaires.

GENENTECH


Genentech was founded by the scientist, Herbert Boyer, and an
entrepreneur, Robert A. Swanson.


Swanson heard of the new DNA technique and saw the potential for
raising venture capital to start a genetic engineering firm.


The story is that Swanson walked into Boyer's office and introduced
himself. He proposed that they start a new firm. They each put up $500 in
1976 and started Genentech.


Early financing in Genentech was secured from venture funds and
industrial sources. Lubrizol purchased 24% of Genentech in 1979.
Monsanto bought about 5%.


Genentech offered stock
-
options to their key scientists. Genentech was
one of the first of the biotechnology firms to go public. Genentech
realized net proceeds of $36 million. In 1981, it had $30 million cash, but
it required about a million yearly for its R&D activities.


MARKET

VOLUME

OF

INDUSTRY

TIME

INDUSTRIAL DYNAMICS:
INDUSTRIAL LIFE CYCLE

APPLICATION

LAUNCH OF

NEW

HIGH
-
TECH

PRODUCT

PRODUCT

BECOMES

A COMMODITY

PRODUCT

MATURE

INDUSTRY

CORE

TECHNOLOGY

BECOMES

OBSOLETE

HIGH
-
TECH

INDUSTRY

COMMODITY

INDUSTRY

CETUS


Cetus had been founded earlier in 1971
--

to provide a commercial service
for fast screening of microorganisms.


After the invention of the recombinant DNA technique, Cetus in 1976
changed its business to designing gene
-
engineered biological products.


For this, Cetus first retained Stanley Cohen as one of its 33 scientific
consultants and then hired Cohen as head of Cetus Palo Alto .


Further investment in Cetus came from companies interested in the new
technology. A consortium of Japanese companies owned 1.59% of Cetus.
Standard Oil of Indiana purchased 28% of their stock. Standard Oil of
California bought 22.4%. National Distillers & Chemical purchased 14.2%.
Corporate investors wanted to learn the new technology.


In its public offering, Cetus raised $115 million at $23 a share. Of this, $27
million was intended for production and distribution of Cetus
-
developed
product processes, $25 million for self
-
funded R&D, $24 million for
research administrative facilities, $19 million for additional machinery and
equipment, and $12 million for financing of new
-
venture subsidiaries.



RADICALLY NEW PRODUCT REALIZATION PROCESS

FUNDAMENTAL

RESEARCH

APPLIED

RESEARCH

TECHNOLOGY

DEVELOPMENT

COMMERCIALIZATION

NEW KNOWLEDGE AS DISCOVERY

& UNDERSTANDING & MANIPULATION

OF NATURE

NEW KNWOWLEDGE AS


FUNCTIONAL MANIPULATION


OF NATURE IN RESPONSE

TO IDENTIFIED NEED

NEW KNOWLEDGE AS

IMPROVEMENT


OF CRITICAL PARAMETERS &

OPTIMIZATION OF

PERFORMANCE IN


FUNCTIONAL MANIPULATION

OF NATURE

NEW KNOWLEDGE AS PROPRIETARY


SKILL IN THE DESIGN & PRODUCTION


0F GOODS & SERVICES, UTILIZING

FUNCTIONAL MANIPULATIONS

OF NATURE

SCIENTISTS

& MANAGERS

SCIENTISTS

& ENGINEERS

& MANAGERS

SCIENTISTS

& ENGINEERS

& MARKETING

PERSONNEL

& MANAGERS


SCIENTISTS

& ENGINEERS

& MARKETING,

PRODUCTION,

FINANCE

PERSONNEL

& MANAGERS

RESEARCH

UTILITY

TIME

COST

FUNCTIONAL

PROTOTYPE

AND DESIGN

STANDARDS


UNIVERSITY

LABORATORY


INDUSTRIAL

LABORATORY

INDUSTRIAL


DIVISION

UNIVERITY

LABORATORY & INDUSTRIAL



LABORATORY

TECHNICAL

RISK

COMMERCIAL

RISK

For new firms, it is important that early products create income.


In 1982, Genentech's product interests were in health care, industrial
catalysis, and agriculture. Then early products were aimed at genetically
engineered human insulin, human growth hormone, leukocyte and
fibroblast interferon, immune interferon, bovine and porcine growth
hormones foot
-
and
-
mouth vaccine.


Genentech's human insulin project was a joint venture with Eli Lilly,
aimed at a world market of $300 million in animal insulin.


Genentech's human growth hormone project was a venture with KabiGen
(a Swedish pharmaceutical manufacturer), a world market of $100 million
yearly.


The leukocyte and fibroblast interferon was a joint venture with
Hoffmann
-
La Roche, and the immune interferon with Daiichi Seiyaku and
Toray Industries.


The bovine and porcine growth hormones were a joint venture with
Monsanto, and the foot
-
and
-
mouth vaccine, with International Minerals
and Chemicals.

Genentech had hoped that a producing a protein product called TPA
would catapult them into the large firm status, but the costs of
developing and proving products and the relatively small market for TPA
put Genentech into a financial crises in 1990.


To survive, Genentech sold 60% of its equity to Hoffman
-
La Roche:


Despite TPA

s success today, it took the 20
-
year
-
old company many
years and many millions of dollars to prove that it had an important
product.


(Thayer, 1966, p 13).


By 1996, the biotechnology industry had created 35 therapeutic products
which then had a total annual sale of over $7 billion dollars. These
biopharmaceutical products were used to treat cancer, multiple
sclerosis, anemia, growth deficiencies, diabetes, AIDS, hepatitis, heart
attack, hemophilia, cystic fibrosis, and some rare genetic deceases.


But the industry was not initially as successful as early
investors had hoped.


Why had the early hoped
-
for
-
big
-
profits in biotechnology not occurred,?
Yet the biotechnology has survived and continues to develop?


The answer lie in biological science:
“Early expectations, in
hindsight considered naive, were that drugs based on
natural proteins would be easier and faster to develop. . . .
However, ... Biology was more complex than anticipated.


(Thayer, 1996, p 17)


For example, one of the first natural proteins, alpha
-
interferon, took ten
years to be useful in antiviral therapy. And when interferon was first
produced, there had not been enough available to really understand its
biological functions. The production of alpha
-
interferon in quantity
through biotechnology techniques allowed the real studies and
experiments to learn how to therapeutically begin to use it.


In biotechnology, developing the technologies to produce therapeutic
proteins in quantity and to use them therapeutically took a long time and
many developmental dollars.


Also in the United States, the innovation process for biotechnology
industry in the United Sates took time.


In addition to (1) developing a product and (2) developing a production
process


it also included (3) testing the product for therapeutic
purposes and (4) proving to the US

s FDA that the product was useful
and safe


before finally (5) marketing the product.



In fact, the recombinant DNA techniques was only a small part of the
technology needed by the biotechnology and the smallest part of its
innovation expenditures.


The testing part of the innovation process to gain FDA approval took
the longest time (typically seven years) and the greatest cost.



RADICALLY NEW PRODUCT REALIZATION PROCESS

FUNDAMENTAL

RESEARCH

APPLIED

RESEARCH

TECHNOLOGY

DEVELOPMENT

COMMERCIALIZATION

NEW KNOWLEDGE AS DISCOVERY

& UNDERSTANDING & MANIPULATION

OF NATURE

NEW KNWOWLEDGE AS


FUNCTIONAL MANIPULATION


OF NATURE IN RESPONSE

TO IDENTIFIED NEED

NEW KNOWLEDGE AS

IMPROVEMENT


OF CRITICAL PARAMETERS &

OPTIMIZATION OF

PERFORMANCE IN


FUNCTIONAL MANIPULATION

OF NATURE

NEW KNOWLEDGE AS PROPRIETARY


SKILL IN THE DESIGN & PRODUCTION


0F GOODS & SERVICES, UTILIZING

FUNCTIONAL MANIPULATIONS

OF NATURE

SCIENTISTS

& MANAGERS

SCIENTISTS

& ENGINEERS

& MANAGERS

SCIENTISTS

& ENGINEERS

& MARKETING

PERSONNEL

& MANAGERS


SCIENTISTS

& ENGINEERS

& MARKETING,

PRODUCTION,

FINANCE

PERSONNEL

& MANAGERS

RESEARCH

UTILITY

TIME

COST


FUNCTIONAL

PROTOTYPE

AND DESIGN

STANDARDS


UNIVERSITY

LABORATORY


INDUSTRIAL

LABORATORY

INDUSTRIAL


DIVISION

UNIVERITY

LABORATORY & INDUSTRIAL



LABORATORY

TECHNICAL

RISK

COMMERCIAL

RISK

Because of this long and expensive FDA process in the U.S.,
extensive partnering occurred between U.S. biotech firms and the
larger, established pharmaceutical firms.


For example in 1995, pharmaceutical companies spent $3.5 billion
to acquire biotechnology companies and $1.6 billion on R&D
licensing agreements (Abelson, 1996).


Also pharmaceutical firms spent more than $700 million to obtain
access to data banks on the human genome that was being
developed by nine biotechnology firms.


The U.S. Government role in supporting science was essential to
the U.S. Biotechnology industry: “The government has a very big
role to play (in helping ) to decrease the costs.

Support of basic
research through NIH (National Institutes of Health) is very
important to continue the flow of technology platforms on which
new breakthrough developments can be based.”

(Henri Termeer,
chairman and CEO of Genzyme,
1996)


U. S. Expenditures for academic R&D

by source of funds: 1990

2003

In this case study of the early decades of the biotechnology industry,
we see that the scientific importance of understanding the molecular
nature of biology (the discipline now called

molecular biology

) proved
to be the future of the pharmaceutical industry
--

as an essential
methodology to develop new drugs.



Yet the making of money from the technology of recombinant DNA was
harder and took longer than expected.


The reason was that biological nature turned out to be more
complicated than anticipated.



The biotechnology industry technology depended on and continues to
depend on new science. In turn, the technology needs of the
biotechnology industry has helped drive the discoveries in biological
science.

The progress of a new technology depends on the progress
of science: understanding the
complexity of nature
.

ILLUSTRATION: XOMA LTD.


Jackson Pollack described a biotech company existing in 2007: “Dr.
Scannon is founder and chief biotechnology officer at Xoma Ltd., one of
the nation’s oldest biotech companies. But discovering drugs has proved
difficult.” (Pollack, 2007)


Xoma, which Dr. Scannon started in 1981, has never earned an operating
profit or marketed a drug of its own.


And in the quarter
-
century since its birth, Xoma has managed to burn
through more than $700 million raised from investors and other
pharmaceutical companies.


In most other industries, companies could not survive that long


and
churn through piles of cash


without turning a profit.


But Xoma illustrates a truism of the ever
-
promising biotechnology
business. For every successful company like
Amgen
, there are many
more that never make it or that take huge amounts of time and money
before they do.

Other unprofitable companies, like
ImmunoGen
, Repligen,
Immunomedics
,
Biopure

and
Cytogen
, have been around roughly as
long as Xoma.
OSI Pharmaceuticals
, which expects to finally break
into the black this year on sales of a cancer drug, has lost $1.3 billion
since its inception in 1983.


“It’s sort of baffling in a way, an industry that stays afloat, sort of
defying the laws of economic gravity,” said Gary P. Pisano, a
Harvard

Business School professor. “After 20 years or 15 years, you kind of
would expect companies to be profitable or be gone. You just kind of
wonder: Is this an efficient way for industry to operate?”


Arthur D. Levinson, chief executive of
Genentech
, told analysts in
New York last year (2006): Biotechnology has been “one of the
biggest money
-
losing industries in the history of mankind,”



Levinson estimated that the biotech industry as a whole has lost
nearly $100 billion
--

since Genentech, the industry pioneer and one
of its most successful companies, opened its doors in 1976.


Only 54 of 342 publicly traded American biotech companies were
profitable in 2006, according to Ernst & Young.


XOMA, which went public 20 years ago, is a case study of unfulfilled
promise in the biotech business.


It may also be a story that ends happily, if very belatedly, with success.
The company’s management and some investors, including OrbiMed, say
they are convinced that what they describe as Xoma’s dogged
determination is finally making headway, or at least that its stock has
room to grow.


The company’s stock has nearly doubled over the last year, hitting a 52
-
week high on Friday of $3.30, before closing at $3.04. Still, that is well
below the stock’s record high of $32 a share, reached in both 1987 and
1991.


Xoma has had one setback after another in drug development


on drugs
for bacterial infections, acne and a complication of bone marrow
transplants.


In some cases, this was because the technology it chose, monoclonal
antibodies, wasn’t quite ready for prime time. And some of the diseases it
went after were hard to treat.

Part of the magic of American capitalism is, of course, that torrents of
money are available to fund inspiring start
-
ups that may amount to
nothing more than ill
-
conceived fliers.


At the same time, torrents of good money also often chase torrents of
bad money, regardless of the flaws behind certain ideas or products.
Nowhere, perhaps, do these two dynamics coexist as visibly and as
starkly as they do in the biotech business.


Much of that is explained by the fact that investors are willing to keep
underperforming biotech companies on life support because they are
looking for the rare hit that will make them rich


or even a stock that
can rise modestly.


For every round of investors who get burned, there always seem to be
others willing to buy in, usually at a far lower price, to fund the next
project.


The companies themselves can cut expenses to the bone to stay in
operation, allowing them to plod on for years in a zombie
-
like state.

U. S. Venture capital disbursements, by stage of financing:

1994

2004

Also the science underlying biotechnology continues to rapidly
progress, funded in the U. S. by the U.S. Federal government.


As Termeer emphasized:


“The U.S. Government role in supporting science has been essential to
the U.S. biotechnology industry.


The government has been playing a very big role in helping to
decrease the costs to industry of biotechnology science.



Support of basic research through the U.S. National Institutes of
Health (NIH) is very important to continue the flow of technology
platforms (science) on which new breakthrough technology
developments can be based.” (Termeer)

U. S. R&D expenditures by source of funds: 1990

2004

Contracted
-
out U.S. industrial R&D: 1993

2003

S2

S1

O1

02

EXPERIMENT

THEORY

PREDICTION

E1

P2

PRODUCT DEVELOPMENT

INVENTION


METHODS OF SCIENCE & TECHNOLOGY & ENGINEERING & BUSINESS

M1

C1

SALES

REVENUE

BUSINESS

ENTERPRISE

SCIENTIST

SCIENTIST/

ENGINEER

ENGINEER

CUSTOMER

PHENOMENA

O BJECT

PRODUCT

SCIENCE &

ENGINEERING

DISCIPLINES

T1

A1

P1

T2

TECHNOLOGY

ARTIFACT

A2

TECHNOLOGY DEVELOPMENT

MANIPULATION

TECHNOLOGIST

TECHNOLOGIST

UNIVERSITY RESEARCH

AND INDUSTRIAL R & D

E2

PROTOTYPE

DESIGN

NEW PRODUCT

INNOVATION

RESEARCHER

M2

C2

MARKET

PRODUCTION

MANAGER

MANAGER

Xoma executives say that such patience and trust will start to pay off for
its investors. At long last, they say, Xoma is poised to turn a profit in
2008.


They say the company will pull off this feat without needing to have a
single one of its drugs approved, because it sells access to technologies
and excess manufacturing capacity it has developed over decades.


The field of monoclonal antibodies


which are customized versions of
the proteins the body uses to fight germs and are the company’s
specialty


is hot right now. large companies like
Schering
-
Plough

and
Takeda have brought Xoma aboard to help them develop such drugs.



The federal government has also enlisted Xoma in the biodefense effort,
giving it two contracts worth a total of $31 million to help manufacture
drugs to treat botulism. More than 45 companies, meanwhile, have
licensed a Xoma technique for making proteins in bacteria.


The first marketed drug made using that technology, Lucentis
(Genentech’s eye disease drug) was approved in June, and Xoma will be
entitled to a royalty that analysts estimate at a little less than 1 percent on
sales that could top $1 billion annually.

ILLUSTRATION: AMGEN


THE MOST SUCCESSFUL BIOTECH FIRM

An exception to the rule of unprofitable biotech start
-
ups has been Amgen.


Originally founded in 1980 as AMGen (Applied Molecular Genetics), Amgen
pioneered the development of novel and innovative products based on
advances in recombinant DNA and molecular biology.


More than a decade ago, Amgen introduced two of the first biologically
derived human therapeutics, EPOGEN® (Epoetin alfa) and NEUPOGEN®
(Filgrastim), which became the biotechnology industry's first blockbusters.


These products have improved the lives of hundreds of thousands of
patients suffering from conditions related to chronic kidney disease and
cancer.


Now Amgen is a Fortune 500 company whose business has expanded to
serve patients around the world in supportive cancer care

--

as well as

the
treatment of anemia, rheumatoid arthritis and other autoimmune diseases
such as psoriatic arthritis and ankylosing spondylitis.



AMGen (Applied Molecular Genetics Inc.) was established as a
California corporation on April 8, 1980 with George B. Rathmann as
CEO.


In 1983, a research team led by Fu
-
Kuen Lin cloned the gene for
human erythropoietin (EPO) and produced recombinant EPO, later
patented and named EPOGEN® (Epoetin alfa).


Then AMGen changed its name to Amgen and issued stock. The
Initial Public Offering (IPO) in 1983 was 2,350,000 shares at $18 per
share and raised $40 million.


In 1985, a research team led by Larry M. Souza cloned the gene for
human granulocyte colony
-
stimulating factor (G
-
CSF) and produced
recombinant G
-
CSF, later patented and named NEUPOGEN®

In 1989, the U.S. Federal Drug Administration (FDA) approved
EPOGEN® for the treatment of anemia in patients with end
-
stage renal
disease.


In 1991, FDA approved NEUPOGEN® to decrease the incidence of
infection associated with chemotherapy
-
induced neutropenia in
patients with non
-
myeloid cancers.


In 1992, Amgen sales surpassed the $1 billion dollar mark.


In 2004, FDA approved Sensipar® (cinacalcet HCl) for the treatment of
secondary hyperparathyroidism in chronic kidney disease patients on
dialysis. FDA approved ENBREL for the treatment of chronic moderate
to severe plaque psoriasis in adults. FDA approved Kepivance™
(palifermin) to decrease the incidence and duration of severe oral
mucositis in patients with hematologic cancers undergoing high
-
dose
chemotherapy and bone marrow transplant.


In 2006, Amgen acquires another biotech company, Abgenix. And
Amgen announced plans to invest more than $1 billion in new process
development, manufacturing, and finish and fill facility in County Cork,
Ireland.

CONCLUSION ABOUT BIOTECHNOLOGY INDUSTRY IN THE U.S.


The large U.S. government support of biotechnology research at
government laboratories, universities, and biotechnology firms has
been sustaining the private capital investments in biotech firms,
even beyond immediate profitability for the last 30 years.




In general for any nation, it is the government
support of science which underlies the high
-
technology capability of the country.