Special Report: Small Business
1992
Gene Therapy
Remember when biotech was going to make entrepreneurs rich? It's been quite a ride since then
By RODNEY HO
SOUTH SAN FRANCISCO, Calif. -- In the 1990s, investors celebrated the potential of a hot, young industry set to change the world.
No, we're not talking about the Internet. The euphoria was over biotechnology, the industry that seeks to develop commercial drugs through breakthroughs in microbiology. In 1991, the height of the biotech boom, investors flung more than $2.5 billion at companies with names such as Biomatrix and ImClone. That year, Ernst & Young predicted that total biotech revenue would swell to $75 billion by the year 2000 from about $4 billion in 1991.
But in 1992, the party abruptly ended. Early that year, the Food and Drug Administration rejected several promising drugs, including Centocor Inc.'s Centoxin, a medicine meant to fight a deadly bacteria infection common in surgery patients. Investors were stunned. It became clear that biotech companies had oversold their abilities to come up with new drugs targeted to specific problems and shorten the time it takes to develop the medications. Speculative investors, who had run up the stocks, fled. After quadrupling in value from Jan. 31, 1990, to Jan. 31, 1992, the Hambrecht & Quist Biotech 100 Index sank 43% by September 1992.
The industry didn't wither away, however. Though far fewer blockbuster drugs have made it into the market than anticipated, a number of biotech companies have held on. Their tales illustrate the difficulties the industry has faced in persuading investors that seeking the pot of gold at the end of the rainbow -- a profitable drug that saves lives -- takes time and patience.
Cor Therapeutics Inc. of South San Francisco is one of 36 biotech companies that went public during the frenzied year of 1991. Formed in 1988, Cor would have to wait another decade before it would find out whether its anticlotting drug, Integrilin, had FDA clearance to go to market. In that time, Wal-Mart Stores Inc. sold more than $600 billion of products, Garth Brooks fans scooped up more than 80 million of his records and the World Wide Web made the biotech craze seem like a hiccup.
Looking at Receptors
Cor's origins go back to 1987, when venture capitalist Lee Douglas trolled the labs at the University of California in San Francisco looking for hot biomedical ideas to invest in. There he found Rusty Williams and Shawn Coughlin, two academics who were pondering the commercial and therapeutic potential of receptors. These are substances on cell surfaces that act as docking areas for certain molecules to pass along biochemical messages. Dr. Coughlin thought that the large pharmaceutical companies weren't paying enough attention to certain targets to treat the No. 1 killer, heart disease, and that studies of specific receptors could bring about useful treatments. Mr. Douglas agreed and formed Cor with four others, including Dr. Coughlin and Dr. Williams.
One of Cor's many ideas quickly came to the forefront: a drug that prevents platelets from sticking to each other and clogging blood vessels, based on 17 years of research by a UC-SF professor and company co-founder, David Phillips. This drug benefits people that have had their arteries cleared of plaque in some way, such as angioplasty. After the plaque is swept away, the artery walls are often damaged, causing thrombosis, a condition in which platelets aggregate around the damage. This could quickly cause a fatal new blockage. Cor's drug would block the receptors that bring platelets together and prevent thrombosis after coronary surgery.
To develop the drug, two major venture firms gave Cor $2 million -- "chicken feed," in the view of Dr. Phillips, but enough for fellow scientist Robert Scarborough to test various snake venoms for the appropriate peptide that would block the clotting receptors. By late 1989, Dr. Scarborough perfected a copy of the venom peptide, which Cor would call Integrilin.
By that time, Cor already had competitors developing anticlotting drugs. Centocor, of Malvern, Pa., was in clinical trials with ReoPro, which uses a different concept to achieve a similar nonclotting result. Pharmaceutical giant Merck & Co. was developing its Aggrastat.
"It was frantic.... I knew Merck had 20 chemists on it," Dr. Scarborough says. "We had three." In this race, he adds, "I wouldn't have bet on us if I were on the outside."
Cor managed to keep pace, and by the spring of 1991, as it prepared to start human clinical trials of Integrilin, the company went public.
The odds against the company were long: Just one in 10 drugs that reach this stage gets to market. And then there was the fact that by 1991, the FDA had cleared fewer than 30 biotech-related drugs since the first one was approved in 1982. Moreover, the market for initial public offerings had stumbled, and Cor's original intention to sell more than $30 million of stock at $12 a share quickly became unrealistic.
Vaughn Kailian, a former Marion Merrell Dow Inc. executive hired the year before to be chief executive and help take the company public, found the deteriorating market conditions frustrating. The day Mr. Kailian had to decide on a price target for the company's first share offering, he was holed up in a Sheraton hotel room in Stockholm winding down from a long road show. He spent the day on his bed talking with bankers 6,000 miles away in San Francisco. Hungry and tired, he sighed and committed to an initial offering price of $7.50 a share and just two million shares. "That would last us 12 months, tops," he says. "That wasn't going to be enough."
In fact, he told investors, "We'll be back." And as luck would have it, the market stormed back over the summer, enabling Cor to sell 2.3 million more shares in the early fall at $18.25 each.
That kept Cor alive for two more years while it went through clinical trials led by the Duke University Medical Center in Durham, N.C. Cor was nothing if not opportunistic, aware the money spigots opened and closed in a heartbeat. When the market revived again in 1993, Cor went back twice that year for cash totaling more than $85 million.
By 1995, the race had its first winner. Centocor got ReoPro on the market in February. Merck was slightly behind Cor in clinical trials. In June, Cor finished its first full-blown study of 4,000 angioplasty patients. The test, which the company called Impact II, cost Cor $20 million, but it was crucial to receiving FDA approval.
Disappointing Results
Two days before Mr. Kailian was due to make a major speech at a Goldman, Sachs & Co. investment conference, he received the Impact II results at Duke: positive, but just barely. The study found the drug had helped people, but not to a massive degree. This was bad news. He brooded all the way back to San Francisco because he sensed this wouldn't satisfy the FDA.
The federal agency wasn't the only one the company wasn't going to satisfy. The news of the mediocre test results disappointed investors, who sent Cor's stock price tumbling. It quickly dropped in half to as low as $9. At the investment conference, Mr. Kailian hit the speaker's dais at midmorning and decided to ditch his entire slide presentation shortly after it began. He ordered the lights back on, read the top of a press release about the study's disheartening results, and took questions from the crowd for 35 minutes.
He tried to mollify analysts, saying he was sure the drug worked -- Cor just needed to figure out why the results weren't better. His words helped coax the stock up slightly to $10.25 that day, but investors remained lukewarm for months. Cor later discovered it hadn't given patients enough of the drug to make it as effective as it could be. Nonetheless, the FDA wanted to study the results and convened a special advisory committee of doctors. To nobody's surprise, the committee concluded Integrilin needed more study.
Timeline: Crucial Dates in Cor's History
Feb. 4, 1988: Venture capitalist Lee Douglas, with three scientists and an operations person, starts Cor Therapeutics
March 1990: Cor selects Integrilin as the drug of choice and begins animal trials
March 1990: CEO Vaughn Kailian is hired
May 1991: Cor begins human trials
June 27, 1991: Cor goes public, raises $15 million
Oct. 22, 1991: Cor gets more money, raises $35 million
Jan. 15, 1993: Raises $40.7 million in a public offering
Oct. 22, 1993: Raises $49.1 million in a public offering
April 11, 1995: Cor starts partnership with Schering- Plough to split marketing rights for Integrilin while Schering- Plough foots most of Pursuit trial costs
June 14, 1995: Cor announces first major trial results, which are disappointing
April 3, 1996: Cor applies for FDA new-drug approval for Integrilin
Feb. 28, 1997: FDA advisory committee rejects approval, awaiting next major study
Aug. 25, 1997: Second major trial results come out and are strong
Oct. 7, 1997: Cor's fifth public offering, raising $63 million
Jan. 28, 1998: FDA advisory committee gives Integrilin only a partial recommendation for use with angioplasty patients
April 1, 1998: In a surprise ruling, FDA gives Integrilin coverage for acute coronory disease and angioplasty
June 9, 1998: Integrilin hits the market, targeting hospitals
So Cor's fate rested on an even bigger study, which the company called Pursuit. This study used a higher dosage of the drug on a wider variety of patients -- including those with unstable angina, severe chest pains that often lead to heart attacks. The study, which wound up using 11,000 patients in 27 countries, was far too expensive for Cor to go it alone. So the little company hooked up with a major pharmaceutical corporation. Schering-Plough Corp. of Madison, N.J., agreed to split North American rights to Integrilin and receive more extensive marketing rights outside the U.S. In return, Schering-Plough would pay most of the cost of Pursuit.
Even with a deep-pocketed partner, Cor was running low on money by the fall of 1996. The company began pondering whether to raise more capital in a weak position or tough it out until Pursuit results were out the next year. The company's top brass was uncertain. Mr. Kailian, in what he says was the most difficult decision of his tenure, decided Cor should wait.
In mid-1997, the Pursuit results showed that patients with violent chest pains who took Integrilin were 10% less likely to die or have a heart attack than those who hadn't, a statistically significant difference in the world of biotech. If used widely, Integrilin could save thousands of lives a year. Cor thought Pursuit would give Integrilin enough credibility to receive FDA approval.
Hoping to get in the market as quickly as possible, Cor sidetracked other projects and had employees frantically compile all the necessary papers to file to the FDA by Oct. 1, 1997. That would make sure Integrilin would get on the FDA advisory committee's docket in January. Merck had already filed for Aggrastat. "This was life or death," Mr. Kailian says.
On Jan. 28, 1998, the FDA gathered the special advisory committee of doctors again to review the new data. Though the advisory committee's recommendations are nonbinding, the FDA gives them special consideration. Packed before hundreds of analysts and competitors, scientists from Cor and Duke University parried with the panel over both studies. It didn't go smoothly.
The panel was missing its principal medical reviewer, Robert Temple, who was, coincidentally, getting an angioplasty. "The committee was getting hung up on data missing from 12 patients," says Mike King, a BancBoston Robertson Stephens analyst who follows the biotechnology industry and was at the meeting. "It was surreal, Kafkaesque."
Mr. Kailian likens it to "watching sausage being made. And we were the sausage."
At the end of the day, the panel gave Cor less than half a loaf: It approved the drug for use with angioplasty patients, but not for the bigger market in unstable angina. This would severely limit the drug's overall potential. The stock price was cut in half to $9.4375.
"I was shocked," Mr. Kailian says. He got the Cor group together and told them to buck up over the next 60 days to provide a rebuttal for the FDA. A flurry of faxes ensued as the FDA pored over the data.
The Answer Is ...
April 1 arrived, deadline day for a final response from the FDA. Ellen Martin, Cor's regulatory affairs vice president, ate lunch at her desk, within earshot of the relevant fax machine. At 2:48 p.m. Pacific time, she heard the whir of the first page come over. But the first 17 pages of mostly boilerplate material didn't tell her what Cor wanted to know: Did the company have FDA permission to use Integrilin for the broadest range of patients with acute coronary disease?
After four agonizing minutes, which Mr. Kailian likened to "watching Astroturf grow," page 18 came out. The answer was yes. The FDA had overturned its own advisory committee's recommendation. Ms. Martin handed the relevant page to her boss, who gave her a bearhug, lifting her off the ground. Ms. Martin, who had been at Cor for several years, simply felt battle-weary relief.
A real celebration couldn't happen yet. As a public company, Cor couldn't release this crucial information companywide until it did so publicly. Because the market was already closed, Cor officials decided to wait until the morning. So only a handful at Cor knew that day what had happened. Many other employees gathered in the parking lot the next morning to learn the news. Cor had its press release on the newswires by 4 a.m. Pacific time and taped to all major doors at the office. Early-morning commuters would have seen Cor employees dancing in the parking lot as the early-spring sun rose.
In the euphoria, even conservative Cor officials got ahead of themselves, predicting Integrilin sales of $20 million to $40 million in its first five months. Actual Integrilin sales in that time span totaled just $12 million. Centocor, with a four-year head start, remained the market leader. And Merck ended up beating Cor to the punch by two months with its Aggrastat product. Cor's stock price remained stuck in the doldrums, staying mostly in the $7 to $15 range through early spring of this year.
Nonetheless, 11 years and more than $160 million later, Cor can proudly say it's no longer just a research-and-development company. It now has nearly 100 salespeople pounding hospital hallways for new business.
Hustle and Bustle
Cor headquarters was a bustling place one recent Friday. A dozen cardiologists flown in from around the country were visiting the facility to learn more about Integrilin. Staff members were putting the finishing touches on the 1998 annual report. Tech people were grappling with the notorious Melissa virus, which clogged the company's e-mail system. Mark Perrin, operations head, had just returned from a national sales meeting and was cheered by accelerating sales, with projected revenue of $60 million by year's end. Dr. Scarborough, vice president of medicinal chemistry, toiled away on patent applications for an oral version of Integrilin, a way to help Cor become a multiproduct company. He already has 30 patents to his name. ("I feel like a patent attorney at times," he jokes.)
Mr. Kailian, an easygoing 54-year-old married man with two adult children, typically works in blue jeans and sweaters, though he's dressed formally this day for the cardiologists' benefit.
"I only wear suits and ties for people who can write a check to the company," he says with a grin. His office is scattered with family pictures and wry mementos, such as a piece of driftwood so he can "knock on wood" whenever he says something positive. "I've actually broken it into two," he says. And there's a gift a friend gave him: a tin cup, to represent the begging he's had to do over the years for money. "You just don't know when the last dollar you raised is truly the last dollar," he says.
Cor took advantage of a friendly marketplace earlier in the decade to get as far as it has. And most other companies -- 25 of 36-- in Cor's class of 1991 survived. Several have FDA-approved products on the market. Four -- Icos Corp., IDEC Pharmaceuticals Corp., MedImmune Inc. and Sepracor Inc. -- have market capitalizations of more than $1 billion, a threshold that helps attract large investors. "If you bought the entire class of 1991 that year, you'd have a decent return today," says James McCamant, editor of Medical Technology Stock Letter in Berkeley, Calif.
But traders today are either going blue chip or chasing the hottest Internet stock, leaving smaller, cash-strapped biotech companies in the dust. There have been virtually no biotech IPOs in recent months.
Still, as the biotech industry matures, there are positive signs on the horizon. The FDA has cut down the time it takes to get drugs through the pipeline, and approved a record number of biotech drugs last year. And Ernst & Young says the next decade promises a bigger crop, with more than 300 biotech products in clinical trials for AIDS, cancer, Alzheimer's and other diseases.
In the meantime, Mr. Kailian is planning another challenge: skydiving with his son, Michael, a member of the elite U.S. Army Golden Knights parachuting team. "It should be easy," Mr. Kailian says. "I've been flying without a chute for years."
-- Mr. Ho is a staff reporter in The Wall Street Journal's Atlanta bureau. |
