A biotech executive with a rare gene for profitability wants to discipline an often rowdy industry

JAMES MULLEN AND THE BIOTECHnology industry arrived on the scene together by chance in 1980. That year he landed his first job out of college, as a chemical engineer for what is now GlaxoSmithKline, and at about the same time the pioneering biotech firm Genentech sold its first shares to the public. Now Mullen, 44, and the biotech industry are coming of age together-only this time it’s no accident. As the CEO of Biogen, Mullen is helping force the issue with his proposal last week to merge his company with IDEC Pharmaceuticals in a $7 billion deal that would create the world’s third largest biotech firm. The idea, says Mullen, is to “bring business discipline to science and medicine.” In other words, he wants to inject a sobering dose of planning and budgets into an industry that has more hype than earnings in its bloodstream.

Mullen’s vision didn’t immediately play well with biotech investors, many of whom prefer the promise of blowout growth to steady profits. Shares of both companies dropped sharply. Who needs another giant drug company pumping out me-too pills, focusing on stuff it already makes and pinching pennies to deliver a steady income? Biotech’s allure since the benchmark Genentech IPO 23 years ago has been its promise to deliver wonder drugs that will cure feared ailments like cancer and Alzheimer’s. Yet with an exhaustingly long list of failed products and failed companies in its brief past, the industry each year grows closer to losing sway with the moneymen who fund its research. Even though biotech stocks have been moving up this year, among critical pre-IPO investors like venture-capital funds “there’s a lot of fear,” says Alan Crane, CEO of Momenta Pharmaceuticals, an early-stage drug-discovery firm. “There’s a lot of concern about losing your money.”

Mullen’s focus on diverse products, production synergies and profitability at the proposed Biogen IDEC, where he would be CEO, is already part of the culture at top industry players Amgen and Genentech. So he’s got a blueprint-and a lot to work with. Biogen’s Avonex for multiple scle-rosis and IDEC’s Rituxan for non-Hodgkin’s lymphoma each generate more than $1 billion in annual sales, and both companies are solidly profitable. Yet “the combination will create more value than either could as separate entities” says William Rastetter, CEO of IDEC, who would get the title of executive chairman after the merger. The focus on managing will probably spill down as more treatments reach the market and more biotech firms start writing in black ink. A wave of mergers could sweep the industiy, though that might be several years away.

There are about three dozen biotech firms that regularly make money today. That number could triple by 2007, says Viren Mehta, principal at Mehta Partners, a global health-care investment group. Turning the corner on profits is more critical than ever, because large drug companies have tired of taking big risks in biotech and tend to shun early-stage re-search in favor of safer investments in drugs near approval or already approved. Bristol-Myers Squibb made a disastrous $2 billion investment in 2001 in ImClone Systems, which suffered costly setbacks with its cancer drug Erbitux before that drug had a breakthrough this year. With Big Pharma playing it safe, steady-earning biotech leaders are the ones with the wherewithal- and the disposition-to partner with cash-strapped firms developing promising treatments.

That’s certainly Mullen’s plan. He gave up ambitions of being a medical doctor in college, then quit the pill business at Glaxo to get in on “the hot emerging business” at Biogen in 1989. Now he hopes to be remembered as the CEO who hurried business sense to the industry “without snuffing out innovation.”

He’s a nuts-and-bolts guy who came up on the operations side, not as a scientist. His big coups at Biogen were beefing up manufacturing capacity and creating the industry’s most extensive sales force. So he’s well suited to the task he has set himself.

But even if his deal goes through (Genentech is seen as a competing suitor for IDEC) and even if he manages to instill a new level of management intensity in the industry, biotech will remain a dicey game. Only one drug in 5,000 screened makes it to market, and even seasoned health-care investors are reluctant to handicap the process. “We’ll take the risk that a company fails to exe-cute its plan once it has a drug approval,” says Stuart Weisbrod, chief investment officer of Merlin Biomed, a health-care hedge fund. “What we don’t want is the risk that their product doesn’t work.” The uncertainty of drug research-it can take 12 years to bring a new medicine to market-is what drives the industry’s volatility.

Biotech stocks soared in 1990-91 amid a flood of early-stage drug hype and IPOS. The vast majority of the drugs and companies soon failed, and the stocks crashed. Another bubble surfaced in 1999- 2000. While everyone was focused on the run-up in Internet stocks, biotech shares rose twice as fast, largely driven by excitement over the mapping of the human genome. In the 18 months before March 2000, the American Stock Exchange’s biotech index rose 563% while the NASDAQ rose 238%. Both plunged in the next two years.

Now biotech is hot again. Since the stock market started to find its footing last July, biotech shares have risen 57%. Another bubble? Not necessarily. Many of the companies have marched steadily closer to bringing products to market. Medlmmune’s inhalable flu preventive FluMist was approved two weeks ago. In May, Genentech’s colon-cancer drug Avastin stunned scientists with its effectiveness in trials and is widely expected to be approved soon. Dozens of other products are in the works. “We’re starting to see the fruits of biotech research,” says Kenneth Carter, CEO of Avalon Pharmaceuticals, which is working on three cancer drugs.

The excitement owes much to a friendly turn at the Food and Drug Administration (FDA) under new commissioner Mark McClellan, formerly a practicing internist and Stanford University economist who is on a mission to get lifesaving drugs through the review process safely and quickly. He believes that poor communication between the FDA and firms seeking drug approval adds months to reviews0and costs companies millions of dollars. He took over in November and immediately steered Millennium Pharmaceuticals’ cancer treatment Velcade to a fast-track approval. One can’t overestimate “how important the PDA’S change in attitude has been ” says Kris Jenner, manager of T. Rowe Price Health Sciences Fund.

The fear in speeding new drugs to market is that too little will be done to ensure that they are safe. But the cost savings of a smoother process leave more resources for monitoring drugs after they’re in use-and for reacting quickly if problems arise. “We don’t want to do anything that increases the risk patients face,” McClellan says. “We’re the gold standard for safety, and we’re going to stay that way.”

It all adds up to big changes in an industry prone to speculative excess. Investors still shouldn’t touch these stocks outside a mutual fund or without diversifying across at least five companies. Given the sharp run-up this year, Weisbrod’s hedge fund has cut its biotech holdings a third, and six top executives at Genentech recently sold $36 million of the stock. The relatively stodgy feel of the Biogen-IDEC deal has still other growth investors running for the hills. It’s all part of growing up-and part of Mullen’s plan. – With reporting by Eric Roston/Washington and Unmesh Kher and Barbara Kiviat/New York

Pushing Faster Drug Approval

New FDA commissioner Mark McClellan is clearing a path for quick approval of drugs with the most promise, like these:

OKAYED BY FDA

* Xolair, for asthma, from Genentech. Approved June 20

* FluMist, a nasalmist flu vaccine, from Medlmmune Vaccines, Approved June 17

* Velcade, for bonemarrow cancer, from Millennium Pharmaceuticals. Approved May 13

IN THE PIPELINE

* Avastin, for colon cancer, by Genentech

* Erbitux, for colon cancer, by ImClone Systems

* Exenatide, for Type 2 diabetes, by Amylin Pharmaceuticals

* Ranexa, for chronic angina, by CV Therapeutics

Copyright Time Incorporated Jul 7, 2003