SCIENCE ADMINISTRATION FREDERICK BETZ PORTLAND STATE UNIVERSITY LECTURE 5 SCIENTIFIC TECHNOLOGY ILLUSTRATION: ORIGIN O

1. SCIENCE ADMINISTRATION FREDERICK BETZ PORTLAND STATE UNIVERSITY LECTURE 5 SCIENTIFIC TECHNOLOGY ILLUSTRATION: ORIGIN OF THE BIOTECHNOLOGY INDUSTRY AMGEN XOMA LTD

2. 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.

3. 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.

4. 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.

5. INDUSTRIAL DYNAMICS: INDUSTRIAL LIFE CYCLE HIGH-TECH INDUSTRY COMMODITY INDUSTRY MARKET VOLUME OF INDUSTRY TIME APPLICATION LAUNCH OF NEW HIGH-TECH PRODUCT PRODUCT BECOMES A COMMODITY PRODUCT MATURE INDUSTRY CORE TECHNOLOGY BECOMES OBSOLETE

6. 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.

7. RADICALLY NEW PRODUCT REALIZATION PROCESS RESEARCH UTILITY 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 FUNCTIONAL PROTOTYPE AND DESIGN STANDARDS TECHNICAL RISK COMMERCIAL RISK COST SCIENTISTS & MANAGERS SCIENTISTS & ENGINEERS & MANAGERS SCIENTISTS & ENGINEERS & MARKETING PERSONNEL & MANAGERS SCIENTISTS & ENGINEERS & MARKETING, PRODUCTION, FINANCE PERSONNEL & MANAGERS UNIVERITY LABORATORY & INDUSTRIAL LABORATORY UNIVERSITY LABORATORY INDUSTRIAL LABORATORY INDUSTRIAL DIVISION TIME

8. 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.

9. 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.

10. 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.

11. 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.

12. RADICALLY NEW PRODUCT REALIZATION PROCESS RESEARCH UTILITY 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 FUNCTIONAL PROTOTYPE AND DESIGN STANDARDS COMMERCIAL RISK TECHNICAL RISK COST SCIENTISTS & MANAGERS SCIENTISTS & ENGINEERS & MANAGERS SCIENTISTS & ENGINEERS & MARKETING PERSONNEL & MANAGERS SCIENTISTS & ENGINEERS & MARKETING, PRODUCTION, FINANCE PERSONNEL & MANAGERS UNIVERITY LABORATORY & INDUSTRIAL LABORATORY UNIVERSITY LABORATORY INDUSTRIAL LABORATORY INDUSTRIAL DIVISION TIME

13. 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)

14. U. S. Expenditures for academic R&Dby source of funds: 1990–2003

15. 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.

16. 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.

17. 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?”

18. 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.

19. 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.

20. 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.

21. U. S. Venture capital disbursements, by stage of financing: 1994–2004

22. 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)

23. U. S. R&D expenditures by source of funds: 1990–2004

24. Contracted-out U.S. industrial R&D: 1993–2003

25. METHODS OF SCIENCE & TECHNOLOGY & ENGINEERING & BUSINESS S1 O1 SCIENTIST PHENOMENA EXPERIMENT SCIENCE & ENGINEERING DISCIPLINES THEORY PREDICTION SCIENTIST/ ENGINEER S2 02 O BJECT TECHNOLOGIST T1 A1 MANIPULATION INVENTION UNIVERSITY RESEARCH AND INDUSTRIAL R & D TECHNOLOGY TECHNOLOGY DEVELOPMENT T2 A2 ARTIFACT TECHNOLOGIST E1 P1 RESEARCHER PROTOTYPE PRODUCT DEVELOPMENT NEW PRODUCT INNOVATION BUSINESS ENTERPRISE DESIGN E2 P2 ENGINEER PRODUCT C1 M1 MARKET MANAGER PRODUCTION SALES REVENUE C2 M2 CUSTOMER MANAGER

26. 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.

27. 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. 

28. 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®

29. 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.

30. 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.