An exhausted Bill Gates once flew home to Seattle from Washington after a grueling day defending Microsoft (MSFT) in its landmark antitrust trial. How did he unwind? By attending the shareholders' meeting of Icos Corp., (ICOS) a Seattle-area biotech company in which Gates holds a 15% stake and a seat on the board.
He spent four hours after the meeting talking to management about Icos' pipeline of drugs, recalls George Rathmann, the company's founder and a biotech pioneer who is a longtime friend of Gates. "He's tough on you.... If you do clinical trials on a promising compound and then don't get the results you were looking for, he wants to know why," says Rathmann, now the chairman of Hyseq (HYSQ) in Sunnyvale, Calif. "He's saying, 'There must be something wrong here with the approach we're taking.'"
Whether it's due to his philanthropic interests or another example of Gates using his tech expertise to spot the next blockbuster industry, it's intriguing that the co-founder of the world's most powerful software company has such an abiding involvement in the biotech field. In some cases, those two motivations are tied hand-in-hand. In others, friends and business colleagues suggest that Gates is driven to find a cure for the cancer that killed his mother at age 64 in 1994 and struck Microsoft co-founder Paul Allen in 1983. But part of it, of course, is that the richest person in the U.S., if not the world, diversifying his fortune and solidifying his legacy.
MOST PROFITABLE PICK. On his Web site (www.microsoft.com/billgates), the man who was instrumental in making Windows the most-used PC operating system in the world alludes to a deep personal interest in biotechnology. He doesn't fully explain his motivations, but clearly, Gates has earned the respect of many of the top scientists in the area. And given his interest in drug discovery, investors might want to keep a closer eye on Gates's biotech dabbling. With his profound curiosity and boundless intellectual energy, he seems to have a better shot than most at spotting a biotech miracle.
His interests in medical research fall into separate categories, says Rathmann: the pure investments, handled through his private investment adviser, Michael Larson of Cascade Investments in Seattle; and the charitable efforts, focused on vaccine research and cures for Third World diseases. Rathmann puts Icos in a third category, because Gates sits on the board and for many years has played a role in the company's direction. Back in the early '90s, when Icos was just getting started, Rathmann convinced Gates to join the board and later buy millions of shares in two separate, secondary stock offerings.
Icos is by far Gates's largest and most profitable biotech play to date. It's now one of the nation's largest biotech companies, with a market capitalization of $3.3 billion, and Gates has helped shepherd it through difficult periods of growth since he joined the board in 1990. His 15% stake represents one of his first leaps into the field.
The investment is paying off. Icos is awaiting regulatory approval for Cialis, a drug for male impotence that will most likely encroach on a market dominated by Pfizer's blockbuster Viagra. And Icos has projects in many other branches of medicine, from cancer to psoriasis to arthritis. The stock has climbed from $40 a share to $63 in the last year, representing a $120 million gain for Gates's 5.3 million shares, which are now valued at $330 million.
CHARITABLE DRIVE. Where else has he invested? Not surprisingly, given his personal history, in cancer research. Gates acquired 3.5 million shares of Seattle Genetics (SGE), which held an initial public offering in March. The company has three cancer drugs in clinical trials already. With the stock trading near its IPO price of $7 a share, Gates's 12% stake is worth $24 million.
More recently, Gates has enjoyed a surge in Corixa Corp. (CRXA), a Seattle biotech company researching drugs for cancer and infectious diseases. He has $50 million invested in Corixa preferred stock through a private trust, according to company reports. In addition, the Bill & Melinda Gates Foundation last year dropped $15 million into Corixa through a joint venture with a nonprofit research institute. The donation is for research into a vaccine to treat leishmaniasis, a parasitic skin disease endemic in several parts of the Third World.
Following a broad seven-month decline in the sector that lasted until April, Corixa and many other biotech companies have enjoyed a recovery of late. It closed at $20 a share on June 12, up from $6.35 in April, although far below its high of $54 in September, 2000. It's unclear how much Gates's Corixa stake has grown, but the preferred shares are tied to the value of the common stock.
"Bill has a fundamental interest in biotechnology," says Corixa Chief Executive Steven Gillis. And his interest in Corixa no doubt relates in part to the Bill & Melinda Gates Foundation's quest for new vaccines to treat Third World childhood illnesses. The foundation has donated more than $2 billion so far to vaccine development, AIDS research, and other human-health efforts.
CONVERGENCE STRATEGY. Not all of Gates's investments have proven winners. He invested in Darwin Molecular, a Seattle company co-founded by distinguished microbiologist Leroy Hood, back in 1991, before anybody had heard of genomics. The company later became Celltech, which merged with Britain's Chiroscience in 1999. But the science never fully panned out. Rathmann says the company was ahead of itself, but it gave Gates one of his initial exposures to the developing industry.
"Bill Gates recognized very early and very clearly the importance of the biotech/info-tech convergence that is transforming biology and medicine," says Hood, also a founder of the nonprofit Institute for Systems Biology in Seattle. Hood went on to become the first William Gates III Professor of Biomedical Sciences at the University of Washington -- an endowment that itself speaks volumes about Gates's desire to be recognized for his interests in medicine. "Biotechnology is intimately tied to the field in which Bill has made so many vital contributions," adds Hood, who has known Gates for years.
Gates also invested in Targeted Genetics (TGEN), a gene-therapy research company in Seattle, when it spun out of Immunex (IMNX) in 1992. Gene therapy is an experimental treatment that alters the basic units of heredity found in cells. In early cancer studies with gene therapy, researchers have tried to improve the body's natural ability to fight the disease or to make a tumor more sensitive to drug treatment.
So far, the treatments either haven't worked or have proven dangerous. The area remains shrouded in controversy, following the death of 18-year-old Jesse Gelsinger during a gene-therapy experiment in 1999. Targeted Genetics had nothing to do with that case, but its stock nonetheless has done poorly, declining from $15 to $5 a share over the past year.
FOLLOW THE MONEY. Gates got out of Targeted long ago, but he remains tied to Pain Therapeutics (PTIE), according to filings with the Securities & Exchange Commission. In 2000, he acquired 2 million shares, or 7% of the company, valued at $16 million. South San Francisco-based Pain Therapeutics is developing refined forms of narcotic painkillers. However, the company is burning through cash and doesn't have a drug in late-stage clinical trials. Its stock has slid from a high of $26 a share in 2000 to around $6 now.
Certainly, biotech investing isn't only about picking immediate winners. The trick is finding an Icos to hang your hat on. So far, Gates, has done fairly well for himself, but his interests don't always appear to be aimed at making money. With a wife and two children and a $50 billion fortune, the 45-year-old Gates is at a different stage in his life than he was in the decades in which he was building Microsoft into a software monolith. Now that CEO Steve Ballmer has taken some of the load from Gates's shoulders, he may think it's time to burnish his image as a philanthropist.
Gates couldn't be reached for this article, but as computer technology and disease research increasingly converge in the genomics revolution, his interest in biotech seems ever more prescient. Like Paul Allen, who has made significant biotech investments of his own over the years, Gates could have a profound impact on many companies for years to come. He has enough personal wealth to move markets. And people pay attention to his investments. After all, they figure, he must know a thing or two about the science if he's willing to invest or donate some of that Microsoft money. By David Shook in New York