SEATTLE TIMES ARTICLE ON RSTA
Sunday, November 05, 2000, 12:00 a.m. Pacific
Cracking the code
by Tyrone Beason
Seattle Times business reporter
Stephen Friend co-founded Rosetta Inpharmatics in December 1996 with the radical notion of using the human genetic code to help drug companies make stronger medicines.
Back then, he might as well have wished to build a tunnel to the center of the Earth.
Most biotechnology analysts and scientists even today agree it will take the next decade or two to decipher the human genome, a crumpled spiral of chemicals that determines everything from eye color to predisposition for cancer. But what was just Friend's science-fiction fantasy four years ago has become one of this year's biotech stock successes, despite the fact Rosetta has only a handful of customers and isn't expected to be profitable for two or three more years.
For scientists in the drug-making business, though, the genome holds a potential gold mine of opportunities if they could only figure out how to read it. If you know which genes trigger the chemical chain reaction that builds to a cancer tumor, the theory goes, you can tailor drugs to stop the cascade in its tracks with pinpoint precision.
Until recently, many investors had avoided emerging biotech companies because the companies' theories were just that, and few were heading toward profitability.
Now the ideas are becoming business reality.
Rosetta, a 4-year-old company based in Kirkland, produces high-speed computer software and machines that can quickly sort, analyze and store thousands of findings about the way genes and experimental drugs interact with human cells. The technology can tell which genes are active, or turned on in a disease, and which are off.
Merck, Amgen and the Harvard University Center for Genomic Research have bought Rosetta's Resolver software for profiling genes and storing the information.
Taking advantage of this year's interest in biotech investing, Rosetta launched an initial public offering of stock Aug. 2, raising $101 million after expenses. After closing up 28 percent to $17.88 a share on its first day of trading, the stock surged as high as $38.06 a share Sept. 1.
Rosetta's IPO haul was on target with an industrywide average of $100 million per IPO in the first half of the year. But that's two or three times larger than the average biotech offering five years ago, according to a report released last month by Ernst & Young. The report said rising biotech stock prices this year have been a direct result of enthusiasm over advances in genetic research.
Off Wall Street, venture capital is also pouring in to other companies in Rosetta's field. Compaq, the world's largest personal-computer maker, said in September it plans to invest $100 million in start-up genomics companies, supplying them with cash as well as the hardware needed for their gene-analysis products. Last month, the Danish drug company Novo Nordisk spun off its Seattle-based subsidiary, ZymoGenetics, creating an independent gene-research and drug company. A group of private investors contributed $150 million in cash to the venture.
But even in the rarefied world of bioinpharmatics - the ungainly term invented to describe what Friend's company does - who you know matters as much as how many dollars and customers you have when you're trying to build a company.
Rosetta broke through so early because Friend, an Ivy League scientist, managed to position himself among the cream of Seattle's tightly knit research and investment communities. He's now Rosetta's president and chief executive officer.
"There was a high regard for Steve Friend's capabilities," said Ruth Kunath, the biotech-investment adviser for billionaire Paul Allen and one of the founding investors at Rosetta. "Steve showed he could go from the academic environment to the world of Wall Street," a transition many biotech entrepreneurs find daunting.
In the years leading up to Rosetta's founding, Friend grew close to two other pioneers in genetics - Lee Hartwell, president and director of the renowned Fred Hutchinson Cancer Research Center in Seattle, and Leroy Hood, the former University of Washington researcher and entrepreneur who helped start the government-backed Human Genome Project nearly a decade ago. By joining him in founding Rosetta, they endorsed and validated his vision, and that made people take notice.
Still, Rosetta probably would not exist if Friend hadn't gone bowling with the head of the cancer institute in 1994, or met for coffee in 1996 with Kunath, who helped arrange nearly $20 million in start-up financing. Along the way, he also learned that inkjets are good for other things besides printing color copies.
It's all about networking
Friend, a doctor whose specialty is cancers that strike children, first studied the link between genetics and disease in the mid-1980s. While working at the Massachusetts Institute of Technology, he identified and successfully cloned a gene that makes children susceptible to eye tumors.
The project, he said, left him only half-satisfied.
"The only thing that came out of this was the ability to tell patients that they had a high likelihood of getting a tumor," Friend said. There was still no way to correct or stifle the bad gene.
By 1992, Friend was working at the Dana-Farber Cancer Institute in Boston. He took a sabbatical, traveling the United States and Europe asking drug makers how they discovered new medicines. What he learned was that one of every 1,000 drug candidates makes it into clinical testing on actual patients.
Considering it takes about $500 million to develop one drug, too many research failures can devastate a young biotech company.
Researchers, he thought, needed a technique or device that would let them see the chemical changes in a cell when disease sets in and observe what happens when a drug is introduced. That way, they could weed out the least effective or most toxic drugs at the earliest stages, saving time and money.
Hartwell happened to be studying techniques for observing cell behavior using yeast cells at the Hutchinson Center in Seattle.
So in the summer of 1994, Friend called Bob Day, then director of the center, ostensibly to invite him to Harvard, where Friend also worked, to give a lecture. What Friend really wanted to do was pick Day's brain about studying genetics and cell behavior while he was in town.
Friend recalls that Day was in his "hermit phase," practically living in his book-filled office.
When Day came to Massachusetts for the lecture, Friend took it upon himself to loosen up the Seattle doctor.
They went bowling.
The two hit it off, and Day left Massachusetts eager to bring Friend to Seattle.
Three months later, Friend received a note from Day and two colleagues on Hutchinson Center letterhead.
It simply read, "Come out and you'll be OK."
The recruiting letter contained no details about salary or staff for Friend, were he to accept the offer. But he moved to Seattle anyway, leaving behind a laboratory and a team of 25 assistants for "a sub-office of someone's office" at the Hutchinson Center on Lake Union.
Friend comes from a family of established academics who found his iffy career move a little puzzling.
"Here was son, going down blind alley on wild dream," Friend said. "This was extremely frustrating for my parents."
Friend and Hartwell began working on the Seattle Project, a research effort to develop a new system for discovering drugs, using the genes that control proteins associated with diseases. They raised $10 million to fund their work.
Their research turned to microarrays - glass slides coated with the nucleotide particles that make up the DNA found in genes. Each gene carries a different sequence of these particles, like the combination on a lock, which determines a specific trait or protein.
Each slide holds thousands of DNA sequences. The sequences brighten with varying intensity when treated with chemicals and hit with fluorescent beams, revealing active and inactive genes in a given cell. Drug researchers can use the results to determine whether they have silenced a troublesome gene.
Hartwell contacted his acquaintance, Leroy Hood, then a department chairman at the University of Washington Medical Center. Hood started designing microarrays in the early 1990s when he worked at the California Institute of Technology. He founded the genomics-oriented Institute for Systems Biology in Seattle last year.
One of his researchers at Cal Tech had converted a standard inkjet-printer head, the kind found in office printers, so that it sprayed nucleotides, the chemicals that make up DNA, instead of ink. The inkjet robot was much more efficient than other models available at the time.
The team - Friend, Hartwell and Hood - was set.
Friend and Hartwell worked with Hood in Seattle on a similar device to study how protein levels, which can trigger disease when a gene tells the body to produce too much or too little of a certain kind, change cells.
The three men went on to design a prototype that could load about 50,000 to 100,000 DNA sequences onto a single slide. It could be reset to print a new set of fragments within a day, a huge advancement over arrays being developed at other companies that took weeks to design.
Cooking up a company
Biotech-investment specialist Kunath had been paying close attention to Friend and Hartwell's work in early 1996, before Hood came on board. At that point, the two men were ready to form a company to capitalize on the inkjet technology and other product ideas but needed money. She was looking to fulfill Paul Allen's desire to invest in Seattle-grown biotech companies.
In the May 1996, Hartwell arranged a business meeting with Kunath. They agreed on Louisa's Bakery in Seattle's Eastlake neighborhood, a cafe known more for plump pastries than power lunches.
Friend and Hartwell, decked out in cycling gear, rode to the cafe on their bicycles.
"I didn't know who I was meeting," Friend confesses. Kunath didn't immediately disclose her association with Allen's Vulcan Northwest. But "she already had us targeted," he said. "She said to keep her posted."
The presentation at the bakery was impressive, if rudimentary, Kunath recalls.
"I clearly remember Lee sort of sketching on a napkin the concept for the company," she said.
Over the next year, Friend, Hartwell and eventually Hood met with potential investors, including Vulcan Northwest and Olympic Venture Partners, an investment firm in Seattle.
"We felt that we really had some ideas that no one else had that would attract pharmaceutical-company support," Hartwell said. If drug makers didn't see enough value in their technology to buy it, there would be no business.
When it came down to persuading investors to back the company, the founders didn't have much to show - just 10 glass slides with DNA arrays printed on them and some data gathered from studies of yeast genes.
The team didn't get around to drawing up a PowerPoint presentation for investors until 48 hours before they sealed an $18.5 million start-up financing deal in April 1997, five months after they agreed to form the company.
"It has so much to do with who you are," Friend said, musing over the reasons a venture capitalist would give millions of dollars to three guys selling little more than cool ideas they cooked up in a lab.
Rosetta, a name borrowed from the famed stone tablet that helped scientists decipher ancient Egyptian hieroglyph, formed in December 1996 and opened for business the following summer.
Kunath, on behalf of Vulcan, agreed to be part of the deal. Today, Vulcan owns almost 13 percent of the company.
"The company is positioned very favorably in the current world of biotechnology," Kunath said. "These people can help decipher the human genome."
Friend speaks as if he's stunned that Rosetta exists at all, considering the company opened its doors in July 1997 with just a rough prototype of the inkjet device.
"We had the equivalent of a high-school-level prototype," he said. Today, Rosetta owns more than 25,000 DNA slides that have already been analyzed and are ready to use in gene experiments.
Agilent Technologies, Rosetta's manufacturing partner, has delivered its first shipment of customized DNA microarrays to Kirkland for internal use. That company is expected to start selling the slides commercially before the end of the year. Rosetta will receive royalties from sales and will use the arrays in collaborations with its own biotech clients.
Friend has settled comfortably into his role as entrepreneur, but he still seems fascinated by all things futuristic, as well as the delicate marriage of nature and technology.
The book on the reading table in his office last month was "Moon Shot: America's Race to the Moon." There were also a bowl of fortune cookies, a solid-gold drill Friend bought from Boeing for $10 that's designed to bore through titanium, a white orchid and a large iron cube, Rosetta's logo.
Rosetta now must show that its technology - refined using yeast genes - can help drug companies target new medicines more quickly and cheaply for humans.
"We did all this before anyone realized you could do it," Friend said. "There's something fundamental that could be changed in the discovery process if we do our jobs well."
Rosetta Inpharmatics
Headquarters: Kirkland
Founded: 1996
President, CEO and co-founder: Stephen Friend
Co-founders: Lee Hartwell, director of the Fred Hutchinson Cancer Research Center, and
Leroy Hood, founder of the Institute for Systems Biology.
Employees: 173
Business: Software and devices to analyze genes and the effects of experimental drugs.
Financial picture: $100.8 million raised in initial public offering Aug. 2.; $158.7 million in cash as of Sept. 30; loss of $33.2 million or $3.05 a share for the first nine months of the year, compared with a loss of $13.8 million, or $3.61 a share in the same period last year. The company has spent $14.7 million on research and development this year, nearly double what it spent by Sept. 30 last year.
Stock-price range since Aug. 2: $14 to $38.06.
Current market value: $841 million.
Tyrone Beason: 206-464-2251. E-mail: tbeason@seattletimes.com. |
