Five Hurdles for Biotech
The science is hot and the stocks are up. Here's what's needed to deliver on the promise

Genentech (DNA )'s experimental colon cancer drug, Avastin, is anything but an overnight success. Thirteen years ago, one of its scientists found a gene that regulates blood flow to tumors, and started looking for a way to turn it off. It took the company five years to develop an antibody that could act as a switch in mice, and another three to fashion it into a drug. Then came animal tests, safety tests, and large-scale human trials to gauge the drug's effectiveness. And with every progress report, good and bad, Wall Street responded by pumping or pummeling the company's shares.

Right now, the pump is on. On May 19, Genentech Inc. announced that Avastin extends patients' lives when given with chemotherapy, raising hopes that it will be the first of a new class of drugs that can choke off the supply of blood to tumors. Investors pushed Genentech's stock up 45%, to $55, on the news. The trials aren't complete, and government approval isn't guaranteed, but Genentech is sanguine. "We're finding fundamentally different ways of treating people who are suffering and desperate," says Genentech Chief Medical Officer Dr. Susan Desmond-Hellmann.

Desmond-Hellmann's optimism and her company's struggles with Avastin mirror the experiences of biotech execs everywhere. Scientifically, the industry has reached a watershed: The human genome has been sequenced, as have the genomes of some microbes and animals. Every day, scientists learn more about the intricate molecular dance of life and how the process runs wild in disease. The technology to transform these discoveries into lifesaving therapies also is advancing quickly.

The medical and commercial rewards in biotech are now abundantly clear. While it will take months for Avastin to reach the market, analysts believe it could eventually pull in more than $1 billion a year. That would add nicely to the industry's revenue stream, which is already swelling. Last year, sales of biotech drugs rose 23%, to $20 billion, and they are expected to jump 25% more this year, according to consultants Bain & Co. Stocks are following suit. After a so-so year in 2002, the Standard & Poor's Biotech Index is up 19.6%, while the S&P 500-stock index, reflecting the broad market, has returned a measly 2%. And basic science is bearing fruit. In just a few short weeks this spring, for example, researchers were able to sequence the virus that causes SARS -- the first step to creating a vaccine.

Wall Street veterans hope that this year's milestones herald biotech's long-awaited turnaround. Their dream, shared by most industry executives, is to see a broad recovery in this sector. Throughout its 25-year history, the industry has suffered repeated, stomach-churning reversals of fortune -- and as a result, few biotech companies ever achieve $1 billion in sales. The reasons are manifold, but they all boil down to uncertainty and disappointment over promising experimental drugs that crash and burn. Among the most recent disappointments: an AIDS vaccine from VaxGen (VXGN ) Inc., a lung-cancer drug from Isis Pharmaceutical (ISIS ) Inc., and Transkaryotic Therapies Inc.'s remedy for Fabry's disease, which affects the heart, kidneys, and brain.

Sometimes a drug flames out because it fails to address the complex, underlying causes of a disease, or it brings unacceptable side effects. In other cases, a startup doesn't structure its trials properly, so they don't meet the Food & Drug Administration's exacting requirements. Or the company simply can't master a complicated manufacturing process. Whatever the obstacle, the cloud of doubt spreads, and investors keep their distance. That's how the industry looked at the end of last year. Biotechs raised only $8.7 billion, compared with $32.7 billion in 2000, according to Ernst & Young LLP.

What will it take for biotechs to deliver a sustainable stream of blockbuster drugs? First, they will have to go beyond narrowly studying one gene at a time and start probing the complicated interplay of genes and proteins along a disease's entire cellular pathway. That will require unprecedented cooperation across a range of sciences. "This is powerful," says Ronald M. Evans, a professor at the Salk Institute for Biological Studies in La Jolla, Calif. "The idea is to look at larger, more global questions, and understand the coordinating activities of genes, cells, and organs." Companies pioneering information tools need to curb their rivalries and establish better standards bodies. Manufacturing systems must be improved. And regulators in washington need to communicate with companies throughout the clinical-trial process, and beyond. "The science is more exciting than ever," says Amgen (AMGN ) Inc. CEO Kevin Sharer, "but the challenges are also more daunting." Here are biotech's five biggest hurdles, and how the industry can overcome them:

1) Decode the Causes of Diseases

When the first draft of the human genome was completed in 2000, it was hailed as a revolution in health care. A complete understanding of the 30,000 genes in the body, the estimated 50,000 proteins they encode, and the tiny chemical variations that make each of us different suddenly seemed within reach. Medical prognosticators declared that within a few years, we would unlock the secrets of the world's worst ills and figure out how to eradicate them. Medicine would become personalized: We would go to the doctor, have our genes screened, and get customized drug regimens that would keep us healthy throughout our long lives.

This vision wasn't flawed so much as drastically premature. The fact is, we still don't understand how most genes operate. We know they encode proteins involved in complex biochemical pathways that underlie most diseases. But so little is known about those proteins that the drugs on the market today target just 10% of them. "The genome has given us a wonderful parts list, but it's only the beginning," says Dr. Leroy Hood, president of the Institute for Systems Biology, a Seattle research group.

Hood and other scientists are championing a research approach designed to close the knowledge gap. They believe that instead of examining one gene at a time, scientists should strive to discover how the body's many different biological systems interact in an illness and affect our individual responses to drugs. Only that knowledge will lead to the goal of switching off diseases while avoiding toxic side effects.

Decoding complete disease pathways could have tremendous implications for drug research and marketing. Roger M. Perlmutter, Amgen's executive vice-president for R&D, points to the company's rheumatoid arthritis drug, Kineret, as an example. There is a small subset of patients with the disease who don't respond to any of the commonly prescribed remedies, but they do get better on Kineret. "We don't know who those people are," Perlmutter says. If Amgen could figure out which genes trigger the positive response to Kineret, it might be able to develop a test to identify those patients. That would allow Amgen to market Kineret more precisely, thus lowering costs and boosting sales and profit margins.

Genentech has experience with this model. Its breast-cancer drug, Herceptin, helps 25% of patients with the illness -- those who have too much of a protein expressed by a gene called Her2. Doctors can use one of two tests to identify women with the problem, and administer Genentech's drug. Last year, sales of Herceptin jumped 11% to $385 million.

The ability to examine all the body's systems in concert is still far off. But it is already possible to extract tips from the behavior of groups of genes. Psychiatric Genomics Inc. in Gaithersburg, Md., is studying manic depression, schizophrenia, and autism -- disorders in which multiple genes are switched on or off by a variety of factors that aren't yet understood. The company is building biochemical models of mental illnesses using diseased brain tissue, and is also looking for patterns in drug effectiveness by studying medical records of deceased patients. The goal is a new model of drug development that involves finding all the genes that change in the course of the disease, then identifying a drug that can restore the most critical genes to a normal pattern.

Companies pursuing this new, systems-based approach to research are finding that it requires a paradigm shift. To build complete models of diseases, companies must foster constant collaboration among chemists, biologists, physicists, mathematicians, and computer engineers. "Everyone used to be in their own silos," says Psychiatric Genomics CEO Richard E. Chipkin. "That doesn't work anymore. Teamwork is critical." Adds J. Craig Venter, chairman of the Institute for Genomic Research and one of the pioneers of mapping the human genome: "We need to take a far more sophisticated approach and pool our resources to gain a full understanding of disease."

2) Free the Flow of Information

As advances in supercomputing and semiconductors transform biotech labs across the world, discovery has quickened to a pace inconceivable just a few years ago. Take SARS. Just three weeks after the virus was sequenced, Affymetrix (AFFX ) Inc. in Santa Clara, Calif., put the sequence on a computer chip. By slotting the chip into a specially outfitted computer, a scientist can identify -- from a single sample of a patient's DNA -- which of the 30,000 possible mutations of the virus that SARS victim has. This will help scientists track how the virus changes over time, identify which strains pose the most danger, and, ultimately, uncover clues to developing vaccines and cures. Roche Diagnostics will use the chip to develop a SARS test it will release this summer.

Such advances aside, the pace of IT development is lagging that of genomic discovery. Roughly 1,500 disease-causing genes have been pinpointed to date. But information about them is scattered in databases all over the world -- in libraries, government research labs, and at the companies that are making the discoveries. At present, there is no common technology platform for obtaining or sharing genomics information, so biotechs are scrambling to develop their own systems for sifting through the data. This scientific Babel impedes the flow of usable knowledge.

On the one hand, this is all a huge business opportunity. IDC estimates that the market for hardware, software, and services in the biotech industry will more than double, to $34.5 billion, by 2007. Making bioinformatics work is a huge challenge, however, because there is no formal organization or institution that is mediating among all the competing players, ranging from Sun Microsystems (SUNW ) IBM (IBM ), and Hewlett-Packard (HPQ ) to biotech startups such as Lion Bioscience (LEON ) and Rosetta Inpharmatics Inc., a unit of Merck (MRK ) & Co.

Yet there is a shared sense of mission. "People must have the capability to build complex computational models and test them against the knowledge we have of living systems," says Caroline A. Kovac, general manager for IBM Life Sciences. IBM launched the unit in 2000 to develop information-technology tools for the industry. Ultimately, Kovac imagines that biotech will have its own subset of the Internet -- a massive virtual laboratory where new drug candidates can be plugged into computerized models of diseases to see how they will perform.

3) Craft Smarter Regulations

Freeing up biotechs to tackle any and all diseases may require help from Washington. Today, companies are reluctant to pursue many chronic diseases for fear they won't meet the FDA's stringent drug approval standards. The agency often requires them to show that a new drug will prevent or significantly delay worst-case scenarios such as organ failure and death. That can require years of studies with thousands of patients. It's especially difficult in complex chronic conditions such as the autoimmune disease lupus and congestive heart disease, which can cause different symptoms in each patient.

The FDA bottleneck means agony for lupus patient Lisa Amato, 39, of Avon, Conn. Her illness destroyed her kidneys, requiring a transplant and anti-rejection drugs -- which in turn triggered a bout of lymphoma. Amato recovered, but the steroids she takes to relieve her chronic aches and fever have decimated her bones. She has had two knee replacements and three hip surgeries so far. Lupus affects 1.4 million Americans, but the FDA hasn't approved a new medication to treat it in more than 30 years. "It's a nightmare. We really need new drugs," she complains.

Biotech execs are pushing the FDA and its new commissioner, Dr. Mark McClellan, to consider compromises that might speed lupus drugs and other new biotech products to market. They believe some drugs should be approved based on "biomarkers" -- signposts such as antibodies in the blood that prove that at least some patients might benefit. Surrogate markers, such as the ability to lower cholesterol or blood pressure, have already been used in the drug-approval process for heart disease and other illnesses. Further relaxing the rules might help shrink the length of clinical trials, which often drag on for more than a year. And many believe the FDA should formalize the process of tracking patients after drugs hit the market. That would make it less risky for the agency to approve drugs quickly because there would be a better system in place to spot later safety problems.

What the biotech industry needs most from the FDA is better communication throughout the trial process. It isn't uncommon for a biotech to file a new-drug application only to find that its study data don't jibe with what the agency was expecting. McClellan knows it's a problem. "Early communication and more transparency in our regulatory requirements might help avoid [delays]," he said in an April speech.

There are already signs of change. In May, the agency approved Iressa, AstraZeneca (AZN ) PLC's new drug for a deadly form of lung cancer, even though it caused tumors to shrink only in about 10% of trial patients. Its approval brings hope to biotechs pursuing drugs that might work in a small group of patients. "The fundamental problem is that everyone doesn't react the same way to every drug," says Stanley Crooke, CEO of San Diego-based Isis Pharmaceutical, which is testing its failed lung-cancer remedy in other cancers. "If the FDA refocuses on serving subsets of patients who might benefit, then we'll have more successes."

The industry would like to see other changes in Washington. In 2001, President George W. Bush banned federal funding for research aimed at developing new lines of embryonic stem cells. Such cells can be programmed to develop into virtually any type of human tissue, making them potentially powerful remedies for many diseases. Now, Congress is weighing a ban on all human cloning -- even the kind that yields stem cells without producing viable fetuses. The uncertain legislative environment has caused VCs to shun companies working in these promising areas, choking the flow of money to stem-cell startups.

Those already pursuing stem cells are finding alternative ways to keep research on track. Many are limiting their experiments to the roughly 60 stem-cell lines that existed before the federal funding ban went into place. Others have begun studying adult stem cells, which they extract from sources such as bone marrow and fat. So far, though, adult stem cells don't seem to be as flexible, so their therapeutic value may be limited. Thomas Okarma, CEO of Geron Corp. in Menlo Park, Calif., has spent many hours on Capitol Hill, trying to explain the therapeutic promise of embryonic stem cells to legislators. "They're turning their back on the relevance of the science," Okarma gripes. "We're paying the bill for much of this research now. It slows the pace down."

4) Explore New Modes of Manufacturing

Each successful biotech drug comes with a major headache: figuring out how to make it cheaply. Unlike traditional medicines, which are pure chemical concoctions, biotech drugs are complicated protein-based molecules. They're often grown in live mammalian or yeast cells in networks of costly equipment, such as fermentation tanks. The average biologic plant costs more than $300 million to build -- an expense that few companies have been willing to swallow. In fact, there is such a shortage of manufacturing space that in two years, the demand for biotech drugs could outstrip supply by more than 110,000 liters, according to Strategic Decisions Group.

Several companies are building new factories, including Amgen and Biogen (BGEN ). And they're on the lookout for technologies that would increase output without jeopardizing the quality and safety of the product. Some are even considering radical alternatives to traditional manufacturing, such as growing biotech drugs in eggs, goat's milk, or plants.

The founders of Epicyte Pharmaceutical Inc. in San Diego are placing their bets on corn. Specifically, they're engineering the plants so they produce antibody-based drugs in their seeds. One benefit: Biotechs could quickly adjust crop sizes to meet anticipated demand, and "they could use the sun as their energy source," says CEO Lloyd M. Kunimoto. He estimates that an average company producing 300 kilograms of drug per year in corn would save $65 million in manufacturing costs. Biotech divisions of Johnson & Johnson (JNJ ) and Merck & Co. are working with Epicyte to explore antibody production in plants.

There are risks. ProdiGene Inc. in College Station, Tex., had to pay a $250,000 fine to the Agriculture Dept. last year after leaves and stalks from genetically engineered corn were found in nearby soybean fields. But with new safety guidelines recommended by the FDA last September, fields of drugs may be just a few short harvests away.

5) Sustain Investors' Confidence

As the biotech industry sweats its way through this economic downturn, capricious investors want strong evidence that ideas will pan out. That's never easy, but last October, Idun Pharmaceuticals Inc. got lucky. The tiny San Diego company was one month away from running out of cash when its co-founder, H. Robert Horvitz, won the Nobel prize for discovering the genes that control cell death -- the science at the heart of Idun. Horvitz knew that understanding the pathway to cell death could lead to treatments for dozens of diseases, from Alzheimer's to cancer to AIDS. He and his colleagues were on the verge of stringing together $22.8 million in venture capital, but they feared the whole thing might fall apart, as so many biotech financings had. The VCs "wanted to know how much money they would make and how fast," says Horvitz, an investigator at Massachusetts Institute of Technology. His Nobel sealed the deal.

Many biotechs have harrowing tales to tell. Hundreds of small fry -- the very companies that are laying the foundation for breakthroughs -- are strapped for cash and shunned by investors who fear a dot-com-like crash. Big Pharma won't jump in to finance startups until they see positive late-stage trial results, and they're not willing to make oversize bets anymore. The top 10 biotech deals of 2002 were worth just $3 billion, down from $25 billion in 2001, according to PriceWaterhouseCoopers. VCs are staying away, too, because they're afraid they may never see a return on their investment. "I regard this as the bio Ice Age," says Alan G. Walton, partner at life-sciences VC firm Oxford Bioscience Partners.

A fallback option for startups is to license early-stage discoveries to deep-pocketed competitors. There is an eager market. James Mullen, CEO of Biogen Inc. in Cambridge, Mass., says he looks at several potential licensing deals a week in hopes of finding one or two gems each year. "It's a matter of reconciling the potential payoff with the estimated cost of moving the research to the next phase," Mullen says. In January, Biogen partnered with Sunesis Pharmaceuticals Inc. in South San Francisco, Calif., which is developing drugs to treat autoimmune diseases, one of Biogen's three specialties. The deal could be worth more than $60 million to Sunesis.

Licensing should only be a temporary solution, though. While it keeps the science alive, it forces innovative young companies to sacrifice potential future profits from their valuable intellectual property. Sunesis, for instance, forfeited the right to commercialize drugs that come out of the Biogen partnership. For biotechs to outgrow the licensing crutch and regain investors' interest, the industry will need to grapple with each of its other four hurdles. Without that, it may never break the cycles of hype and havoc that have dogged this sector since the 1970s. The endgame, however, will be worth the risk: In 10 years time, Amgen and Genentech -- with annual sales of $6.3 billion and $3 billion, respectively -- could be sharing the stage with half a dozen biotechs of comparable size. That means, for the first time, the newcomers would have the financial heft to sustain long-term research -- the kind that leads to blockbuster drugs.

Biotech's hopes and challenges are summed up well by George B. Rathmann, who co-founded Amgen more than 20 years ago and is now chairman of Nuvelo Inc., a Sunnyvale (Calif.) gene-discovery company. "Genomics has given us a burden of riches: thousands of genes we don't understand," he says. Yet as the pieces fall together, knowledge of DNA will open the door to personalized medicine. "We know all that is possible," he says. All that -- and so much more.