Genentech's Gamble

Behind the biotech pioneer's quest to conquer autoimmune disease

In the 12 years since Arthur D. Levinson took over as CEO of Genentech (DNA), the company has released seven new drugs, including three multibillion-dollar cancer treatments. But Wall Street types are still breathing down Levinson's neck, nagging him to come up with the next big idea. On Dec. 4, the pressure intensified when advisers to the U.S. Food & Drug Administration voted against approving Genentech's colon cancer drug, Avastin, for breast cancer. The company's stock plunged 10%. The need to innovate has led other pharmaceutical CEOs to hire consultants and craft new management strategies in a desperate effort to come up with more blockbusters. This approach irks the 57-year-old ex-biochemist. "I'm sick of the word 'innovation,'" he said earlier this year.

As the drug industry grapples with patent expirations and a chronic lack of exciting drugs in the pipeline, Levinson faces a unique challenge—living up to his own track record. Genentech gave birth to the biotech industry in 1976, exploiting a new technique to produce protein-based drugs from cloned genes. Levinson started out as a cancer researcher at the company in 1980 and moved quickly up the ladder by espousing a radical set of management principles: Stay focused on the science. Tune out Wall Street's insistence on short-term profits. And leap at new drug opportunities "that other people think stink."

Sticking Power

For a time, his maverick approach produced an impressive winning streak. Soon after he took over as CEO, he briefly amped up Genentech's research spending to 50% of the company's sales—more than twice what most drug companies spend on R&D. The resulting stream of hit drugs pushed Genentech's sales up from $1 billion to $9 billion since 1999, and the company swung from a $1 billion loss that year to profits of $2 billion in 2006. Genentech's market cap soared past $75 billion, surpassing the valuations of Amgen (AMGN), Bristol-Myers Squibb (BMY), and Schering-Plough (SGP).

This year, however, Genentech has lost much of its luster. Even before the Avastin disappointment, Genentech's revenue growth had been slowing down, to 22% last quarter from 43% in the first quarter. Genentech's shares have fallen 26% off their one-year high. "We're seeing a massive deceleration of products that are relatively mature," gripes Eric Schmidt, an analyst for investment bank Cowen & Co. (COWN), who recently sent a note to clients calling the biotech "uninspiring" and "lackluster."

Levinson doesn't get ruffled by such criticism. Sitting in his office overlooking Genentech's fast-expanding campus in South San Francisco this past August, the CEO turned pensive: "I ask myself: Have we just been lucky, or do we have the foundation to continue this streak? I think it's the latter."

To prove it, Levinson is taking on one of the most treacherous areas of medicine. He's targeting diseases that arise when the immune system becomes deranged, attacking the very tissues and organs it's supposed to protect. These so-called auto­immune diseases include multiple sclerosis, rheumatoid arthritis, lupus, and more than 80 other ailments for which there are few effective or lasting treatments. Together, they afflict some 23.5 million Americans and are so disruptive for victims that they cost the U.S. health-care system $100 billion a year—nearly double the economic burden of cancer.

Insights of an Outsider

Tackling autoimmune disease is an enormous opportunity for Genentech—and the biggest gamble it has ever taken. The field is littered with failures, Levinson notes, such as drugs that don't work for huge swaths of patients or that cause side effects worse than the diseases themselves. What's more, competition in autoimmune research is growing more intense. Companies ranging from Amgen to Novartis (NVS) are vying for leadership positions, with some charting early successes in rheumatoid arthritis. A number of Genentech's first forays into this area have fared poorly, in part because there are so many new contenders.

Much of the challenge stems from the fact that scientists have barely begun to understand the cascade of biological miscues that trigger the illnesses. And even though drug companies currently rack up some $10 billion a year in sales of autoimmune treatments, the need for better drugs couldn't be more urgent. In lupus, for example, the immune system ambushes the organs, turning the liver, kidneys, or skin to mush. In multiple sclerosis, it assaults the nerves in the brain and spine. In rheumatoid arthritis, it destroys the joints. While these afflictions rarely kill, they rob their victims of everything that makes life worth living: mobility, independence, dignity. "I really wished I could die," says rheumatoid arthritis patient Nancy Kowalski, 66, a sign-language interpreter in Rockville, Md., who tried many different drugs. The medicines damaged her spine, left her exhausted, and didn't reduce the extreme swelling in her hands, shoulders, and feet. The pain was so intense she couldn't work, and her hands grew so gnarled that her granddaughter had to help with simple tasks like unscrewing the cap on her toothpaste. "I couldn't function."

Genentech's efforts to help patients like Kowalski began with the insights of a pharmaceutical outsider. British physician Jonathan Edwards had been watching the company's cancer drug Rituxan from the early days of its development through its 1997 approval to treat non-Hodgkin's lymphoma. He had a theory that the drug's method of annihilating cancer-causing cells might also ease the agony of rheumatoid arthritis. Edwards, a professor at University College of London, spent two years trying to grab the attention of scientists who were involved in developing Rituxan. First he called Idec (now Biogen Idec (BIIB)), which discovered the drug and later partnered with Genentech to co-develop and market it. Then he phoned Swiss Pharmaceutical giant Roche (RHBBY), a third partner in Rituxan's birth. (Roche owns more than 55% of Genentech's shares.)

Atypical CEO

Edwards' calls went unreturned, so he waited until Rituxan hit the market, bought it himself, and began testing it in five of his own patients in 1998. All five felt better. In late 2000 he presented the results of his trial at a conference in Philadelphia. Genentech scientists brought the news to Dr. Susan Desmond-Hellmann, the company's chief of development. She recalls being shocked at "how against the dogma it was" for a cancer drug to beat back an autoimmune disease. "It was my personal 'aha!' moment."

When Hellmann and her colleagues alerted Levinson to the Rituxan news, the CEO got so revved up that he took Edwards' report to a meeting of Genentech's board of directors. He urged them to support a full research program for Rituxan in autoimmune disease. Other CEOs might have balked at hitching an ambitious plan to such a minuscule study. But Levinson, whose background includes a PhD in biochemistry from Princeton, doesn't think like a typical CEO. While studying the research report by Edwards, Levinson's eye went straight to the "p-value"—the probability that the patients improved by pure chance and not because of Rituxan. In this case, that probability was less than 1 in 1,000. "The only way you get that good a p-value with that small number of patients is if a drug works really well," Levinson says.

The board had every reason to trust Levinson. The parade of hit cancer drugs, which by then was well under way, stemmed from his initial heavy investment in R&D, says Roche CEO and former Genentech board member Franz B. Humer. Roche has been a majority owner since 1990 but has let Genentech operate as an independent company. Roche has the option of developing and marketing Genentech's drugs overseas and, indeed, derives nearly half its sales from those products. As for Levinson's deep dive into immunology, says Humer, "We will follow Art's principle to go where science takes us"

Diving Into Immunology

Genentech had only dabbled in immunology before it discovered the hidden powers of Rituxan. With the board's blessing, Levinson launched a program to study the drug as a possible treatment for rheumatoid arthritis, MS, and lupus. And Genentech deployed a third of its 1,000 researchers to pursue new drugs to fight autoimmune disease.

Pinning down Rituxan's role required Genentech scientists to rethink everything they knew about how the body's defense mechanisms go astray. The immune system is a vast network of cells that normally work together to distinguish "self" from "other," meaning invaders like bacteria. But in diseases such as MS, the body's own cells are treated as intruders. Conventional wisdom attributes this to a malfunction of front-line defenders known as T cells, which most autoimmune drugs target. But Rituxan works by killing accomplices called B cells—a fact that gave Genentech a whole new perspective.

The scientists were aware that messing with the immune system is an inherently risky undertaking. A treatment that cracks down too hard on the body's natural defenses can leave patients vulnerable to infections. In fact, many drugs meant to treat autoimmune diseases fail to win approval from the Food & Drug Administration because the side-effect risks outweigh the benefits. This is not like cancer, where patients suffer through toxic drug therapies because the alternative is death. Autoimmune diseases strike patients in their prime, and drug cocktails designed to ease the symptoms will be taken for decades. So patients are on high alert about possible side effects, and so is the FDA. "That's a dynamic that's always in your face in immunology," says Levinson.

Cream of the Crop

Under Levinson, Genentech's culture has defied the industry norm. Its scientific journey has been guided by executives who more closely resemble the staff of an academic medical center. Hellmann was once an oncologist. Research chief Richard Scheller taught biology at Stanford University for 16 years"an unconventional résumé for such a high-ranking position. For entry-level scientists, getting a job at Genentech is like being admitted to an Ivy League graduate program. The company favors scientists who have published papers in medical journals, and candidates must explain their work in hour-long presentations before a five-person hiring committee. "We don't just want someone who will do a good job," Scheller says. "We want someone who could win the Nobel Prize."

Levinson himself is still in the thick of scientific decision-making. When newly hired researchers defend their early-stage research in meetings, he often drops in to pepper them with questions. It's rare for pharmaceutical CEOs to get so deeply involved in research that isn't anywhere close to yielding marketable products, Scheller says. Adds Vishva Dixit, vice-president for discovery research, "He'll send us e-mails at 2 a.m. about some journal article, and he'll say: 'Have you read this paper? Look at figure 5, panel E.' He's the CEO, and he's sitting at night, pondering science. That's an awfully powerful message to the rank and file."

In 2003, Levinson and his crew got an early, painful glimpse of how big a challenge they may be facing in auto­immune disease. The company released a drug called Raptiva to treat the autoimmune skin disease psoriasis. It worked well enough, but some patients suffered flare-ups when they stopped taking the drug. Genentech didn't know why and hadn't kept track of patients in clinical trials after they went off the medication. The problem made it difficult to compete with Amgen, Johnson & Johnson (JNJ), and Abbott Laboratories (ABT), all of which subsequently introduced psoriasis treatments that proved superior. Genentech's scientists later observed that Raptiva worked best in treating psoriasis that strikes the hands and feet, but it was too late"doctors had already deemed Raptiva an inferior choice.

Tailor-Made Drugs

As they watched Raptiva struggle to gain traction in a competitive market, Genentech's scientists vowed to change how they studied other drug candidates for autoimmune disease. Now they carefully track patients after they leave clinical trials. And they've begun looking for clues that will help them "personalize" new drugs to groups of patients that are most likely to respond, Hellmann says—in essence, applying what they learned with Raptiva earlier in the development process.

To better match patients with drugs, Levinson took the odd step of hiring away five autoimmune specialists from a single lab at the University of Minnesota last year. They are experts in searching for "biomarkers," molecular signals that reveal the unique makeup of each patient's disease. While the pool of patients for each personalized drug is small, such treatments can be lucrative. For example, only 30% of breast cancer patients carry the markers that qualify them for Genentech's drug Herceptin, yet the treatment is worth $1 billion a year. But autoimmune diseases are more challenging, says rheumatologist Timothy W. Behrens, who was the lead biomarker expert scouted from the University of Minnesota. Lupus, for one, "can involve skin, brain, lungs, heart, kidneys," he says. "Every lupus patient I've ever treated is unique."

The economics of a personalized approach are fragile. Suppose a new lupus drug works for only 20% of patients with that condition. Can Genentech use the small patient pool to justify charging sky-high prices? The answer should be yes, insists Levinson. But Genentech has come under fire in Congress for overpricing its drugs. By nature a private person, Levinson loathes lobbying, yet he recently made several trips to Washington to lecture lawmakers on the high costs of developing biotech drugs. He worries that Congress may make "stupid decisions" to cap drug prices "based on an incorrect understanding of the economics of the industry."

Identifying biomarkers might also help Genentech screen out patients who are susceptible to side effects. In February, 2005, while Genentech was still developing Rituxan for MS, its partner, Biogen, released its own heralded MS drug, Tysabri. It looked like a surefire success—right up the point when patients started to die. The culprit was a rare brain virus that may have been able to infect patients because their immune systems were weakened by Tysabri. "It was so unexpected," recalls Dr. Michael Panzara, chief medical officer of Biogen's neurology business. "We think we're so smart about autoimmune disease. Then something like this happens and we have to rethink everything." Genentech promptly redesigned its Rituxan trials, building in extra patient checkups in hopes that physicians would spot dangerous side effects fast. (Biogen is on the block and is expected to fetch more than $20 billion, largely because of its stakes in Tysabri and Rituxan.)

Early Success

It is still early days for Rituxan in autoimmune disease, but there have been some important milestones. On a Saturday in the summer of 2006, the MS research team gathered in a conference room to review early results of a key Rituxan trial. As they studied MRI scans of patients' brains, they were amazed to discover that the signs of the nerve-ravaging disease had dropped by 91%. "I can forever remember sitting in this room and watching a story unfold that we really hadn't seen before," recalls Craig Smith, a medical director at Genentech.

Rituxan was approved to treat rheumatoid arthritis in February, 2006, and has captured 10% of the market. For patients such as Nancy Kowalski, the sign-language interpreter, the drug has been a lifesaver. She got her first infusion in March, 2007. While the needle was still in her arm she glanced at her hands and couldn't believe what she was seeing. "The swelling was going down." Kowalski has gone back to work.

Genentech will announce key Rituxan data in lupus and MS next year, and it's working on some completely new approaches to autoimmune disease. The mandate, as always, is to consider ideas others might overlook. "There's this tremendous herd instinct out there," Levinson says. "That's a great opportunity, because often the crowd is wrong."

    Before it's here, it's on the Bloomberg Terminal.