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:

By Arlene Weintraub

With John Carey in Washington

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