Valium was the subject of thousands of stories in newspapers, magazines, and on television over a five-year period starting in 1975.1 There were specials about the litigation between Roche and the federal government, the boom in illegal street use, and advance looks at how rivals were planning to dethrone Valium. A pharma story unrelated to the benzodiazepines received little coverage in comparison because most news editors considered it too technical for a lay audience. The embryonic biotech industry was laying the groundwork for technology that would have far greater long-term consequences for the pharmaceutical industry than which mild tranquilizer was American’s best-selling drug.
A year into the voluntary moratorium on rDNA research, the fears had started receding about the likelihood that genetic testing might unleash an end-of-the-world virus. What was missing were guidelines for lab safety and containment. The National Institutes of Health finally stepped into the void. It took until July 1976, almost two years after the lockdown on genetic testing, before it released “Guidelines for Research Involving Recombinant DNA Molecules.”2 That detailed parameters for genetic laboratory testing and research. Since the NIH had no authority to regulate the industry, its guidelines were voluntary. When the National Academy of Sciences’ Committee on Recombinant DNA Molecules endorsed the NIH guidelines, however, it was enough to lift the research and testing moratorium.
Some in Congress thought that no matter how small the odds that the new technology might produce something catastrophic, regulations should be mandatory. There were soon sixteen competing bills, most offering variations on creating a new biotech czar and department inside Health, Education, and Welfare. Dr. Donald Fredrickson, who had become the head of the NIH in 1975, lobbied the Carter White House to oppose any legislation. “Let’s try to do it through a voluntary system,” he pleaded. A committee appointed by the White House agreed. Fredrickson was relieved: “They recognized that you cannot regulate science by statute.”3
Prior to the mid-1970s, only nonprofits were eligible for NIH research grants. Even then they came with a string attached: the NIH micromanaged the laboratory research it funded. It assumed that oversight was the best way assure that taxpayer money was well spent. By 1975, a new NIH administration was convinced that such tight control was detrimental to creative scientists.4 Soon, the rules changed and allowed a “light touch” for research oversight. For the first time it also allowed private, for-profit companies to apply for research subsidies.5 The changes were perfectly timed for the advent of biotechnology.
While the NIH played as significant a role in kick-starting the industry as did venture capitalists and academic research centers, the new science also remade the NIH into a powerhouse federal agency. Nixon’s “war on cancer” in the early 1970s had bumped up its budget by a third but biotechnology helped it morph into the world’s largest biomedical/genetic engineering lab. Within a decade of lifting the moratorium, the NIH comprised three thousand scientists overseeing biotech research in more than a thousand labs. And it still managed to give away most of its money to university and hospital research. Its budget had ballooned from $1 billion in the mid-1970s to $37 billion in 2019, a growth rate ten times faster than the budget-bloated Defense Department.6
The NIH even added an incentive to grants made to universities in biotech and genetic research. The schools would have the first option to patent any discoveries that had commercial potential. They could then license the patents to pharmaceutical firms and the earned royalties went to the schools.7
Some early biotech start-ups did not depend on federal funding. Just before rDNA research had restarted in 1976, a twenty-nine-year-old Silicon Valley venture capitalist, Robert Swanson, called Herbert Boyer, a biochemistry professor at the University of California at San Francisco.8 Swanson was a partner in a Silicon Valley venture capital firm that had been cofounded only four years earlier by former executives from Hewlett-Packard and Fairchild Semiconductor.9 Swanson hoped Boyer might have some ideas about how to commercially exploit the rDNA research he had co-discovered with Stanley Cohen. Boyer and Cohen had applied for a patent on their rDNA work.10 That was controversial since some universities and scientists contended that the results of academic research should be available to all. To deflect the criticism, the two scientists assigned their rights to their respective schools, Stanford and the University of California at San Francisco (UCSF). The patent was pending when Swanson called.
Boyer’s medium-sized lab at UCSF was one of the world’s most advanced in researching rDNA. He had little interest then in the commercial challenge of figuring out how to get biotech advances from the lab to the marketplace. Swanson, however, implored Boyer to meet for ten minutes and discuss it. When they got together, they talked for three hours, sharing ideas about how ongoing biotech research could transform the pharmaceutical industry. By the time they finished, the duo had decided to form the first biotechnology company. It would exploit the rDNA technology in the Boyer-Cohen pending patent.11 Each invested $500 to “formalize” their agreement. Boyer even had an idea of what to name it: he took the first three syllables of GENetic ENgineering TECHnology to form Genentech.I12
Genentech did not seem formidable when it opened for business that April. Although Swanson’s venture capital firm had contributed $100,000, the company had no lab equipment or assets, not even a secretary.13 It had big ideas, though. A few months earlier, MIT biochemist Har Gobind Khorana, a Nobel Laureate in 1968 for his research on the genetic code, had synthesized the first artificial gene.14 Boyer knew that a different UCSF lab than the one he worked in, as well as Harvard’s Biology Laboratory, were using rodent insulin as a hormone in advancing their own gene sequencing research. Was it possible that one of those projects might find a way to create synthetic human insulin? An article in Science that fall suggested that genetically engineered insulin was possible by splicing an insulin gene into a self-replicating bacterium. Although it sounded simple, Boyer knew it was extremely ambitious.
Three research teams were in a race to be the first to develop a marketable synthetic insulin. Genentech was the underdog. Harvard’s Biology Lab was run by Walter Gilbert, an eminent physicist who was one of the pioneers in DNA sequencing. The UCSF team was directed by Howard Goodman and William Rutter, both noted biochemists. Rutter was the department’s chairman.
Although Genentech had to play catch-up with its rivals, Boyer knew the field was so new that their lead could not be too great. Boyer and Swanson tapped their $100,000 reserve. They reached out to two organic chemists at Southern California’s City of Hope National Medical Center. The duo, Japanese-native Keiichi Itakura and Arthur Riggs, had been working on rDNA technology since its inception. They were immersed in a difficult project to synthesize somatostatin, a peptide hormone that was less complicated to modify than was insulin.
Boyer did not know that Itakura and Riggs had applied for an NIH grant for their gene research. When the NIH passed on their proposal they signed a contract with Genentech so they could continue their work. They convinced Boyer and Swanson that while there was no commercial market for somatostatin, their research could provide the technical road map for successfully synthesizing insulin. Instead of moving to Genentech’s bare-bones headquarters, the duo stayed at their Los Angeles–area lab.
Boyer had not picked the duo by chance. He was well aware of the status of genetic research projects under way at major universities. He was confident that Itakura and Riggs were further along than the competition at Harvard or UCSF. Still, Boyer and Swanson did not want to take any chances. Genentech made its first full-time hires in late 1976 (it had a dozen employees by year end). David Goeddel, a twenty-five-year-old biochemist, had just earned his PhD in biochemistry when he became the company’s third employee. Dennis Kleid, a twenty-nine-year-old organic chemist who had been working on DNA cloning at Stanford, became employee number five. They were both assigned to be the hands-on Genentech component of the Itakura and Riggs team. That meant commuting from their homes in the Bay Area to Los Angeles, at the cost of sleep, regular meals, or time with their families.
In the spring of 1977, the Itakura team produced purified synthetic somatostatin DNA. It took another couple of months for them to refine a year-old technique and slash the time needed to synthesize the hormone from years to weeks.15 By midsummer, they inserted their synthetic human protein into E. coli bacteria. It was a first. Boyer understood its importance. The process was completely synthetic and did not rely on any human genetic material. That meant it was exempt from the incredibly burdensome safety regulations established by the NIH for experiments involving human genetic cloning. The precautions covering containment and disposal were so strict that such experimentation had been almost exclusively the province of the Defense Department’s biowarfare labs.16 The costs for adhering to those guidelines was prohibitive for Genentech and would have spelled an abortive end to their insulin project.
Instead, by early 1978 Boyer was ready for Genentech to move to the next stages of research and testing. The breakthrough on synthetic somatostatin had the added benefit of bringing in a fresh wave of venture capital.
Genentech’s rivals were not sitting idly by. Walter Gilbert, the physicist who ran Harvard’s insulin rDNA project, had become one of the founding partners of Biogen, a Swiss-based firm that described itself as a “pharmaceutical company with an emphasis on breakthroughs in biology.” Biogen had deep pockets from three venture capital firms and almost immediately signed an agreement to underwrite the Harvard research.17II
The University of California at San Francisco lab signed an ambitious funding agreement with Eli Lilly, the patent holder on human insulin since the 1920s. Not only was Lilly interested in synthetic insulin, but the contract also paid for parallel UCSF research into human growth hormone.18 Lilly sent some of the University of California team to one of its labs in France where human genetic testing was permitted. The experiments failed due to accidental contamination.
In August 1978, Genentech’s Dennis Kleid visited one of Lilly’s insulin manufacturing plants on the outskirts of Indianapolis.
“There was a line of train cars filled with frozen pancreases,” he recalled later.19 The stockpile of cattle and pig pancreases was not surprising. Eight thousand pounds of pancreatic glands were necessary to produce a pound of insulin. The plant manager told Kleid that translated into about 23,500 animals. Lilly, which required about 56 million animals annually, was desperate for a synthetic insulin. Although they had signed a deal with the University of California, Boyer was confident that if Genentech made the breakthrough, Lilly would jump to license it.
Boyer was right. The Genentech team overcame a series of seemingly intractable laboratory hurdles and finally, on August 28, inserted the human insulin gene into E. coli bacteria. They synthesized enough for testing and sent it to Lilly. The report that returned was cause for celebration: Genentech’s artificially created insulin was the identical twin of human insulin. Even better, it produced fewer allergic reactions than the animal-based product. Lily agreed to fund further Genentech research.
Still, it was not clear whether the Genentech insulin would become a usable drug or if it was just a scientific milestone with no practical use. No one had figured out how to manipulate the bacteria so it could yield fifty to sixty times what it ordinarily produced. That was required to convert it into an affordable, commercial product. After having seen firsthand the amount of animal pancreases used to manufacture insulin, Kleid was downcast. He told Swanson he did not think it was possible to get the required yields.
That became Genentech’s priority for 1979. The breakthrough came with the development of a potent “control gene.” That gene sent a signal to the intestinal bacteria and made it replicate rDNA insulin at record levels. Lilly was so confident in Genentech’s synthetic insulin that it agreed to shepherd the drug through FDA approval and also began building two pilot manufacturing plants to prepare for what was certain to be a green light from the FDA.
The deal between Lilly and Genentech marked a turning point in the pharmaceutical industry. Lilly’s licensing agreement permitted it to manufacture and market the recombinant insulin. It paid all the enormous costs to bring it to the market. Genentech had no financial risk. It only collected royalties on whatever sales Lilly made.
In 1980, Genentech had its IPO. At that point it still did not have FDA approval for its star discovery and had no income. What it did have, however, as internet companies would a decade later, were incredibly high investor expectations for a product they understood almost nothing about. Its offering was the most successful and frenzied IPO in a decade. It took only twenty minutes to sell out the million shares offered on its first trading day. The share price hit $88 during the day’s trading before closing at $56, double its offering price of $35.
The Genentech-Lilly licensing contract served as a road map for other biotech firms that wanted to get a foothold in the pharmaceutical industry. The chief barrier to entry into the drug business had always been the huge start-up costs, a minimum on average of half a billion dollars.
In 1982, the FDA approved Genentech’s synthetic insulin and Lilly began selling it the following year. It was an instant blockbuster.
Genentech was only the first of what would become a tsunami of biotechnology firms. More than 180 biotech start-ups opened in the year after the Genentech IPO, all hoping to produce a product that became a winning rDNA lottery ticket.20 Scientists from top universities led the way with many of the start-ups that promised they would be “molecule to market” companies. Venture capital money flooded the sector. At a meeting of investors who were stumbling over one another to write checks to biotech start-ups, Paul Berg, who got a Nobel for his rDNA studies, asked, “Where were you guys in the ’50s and ’60s when all the funding had to be done in the basic science?”21
The early successes convinced many venture capitalists that investing in biotech was an easy way of making enormous profits. Wall Street underwriters lined up to bring biotech companies public. A leading broker at Goldman Sachs told The New York Times, “There’s not enough to go around.”22 Next was Cetus, with its promise of an interleukin-2 inhibitor to reduce the chance of the body rejecting an organ transplant. Its IPO brought in $120 million, valuing the no-product start-up as a half-billion-dollar firm. At the time it was the “biggest industrial IPO in US corporate history.”23 Several dozen other biotech firms went public through the remainder of the decade, raising on average $20 to $30 million each.24
The companies invariably promised complex science innovations that sounded exciting on paper but which no one, not even the firms themselves, could be certain were possible. Few on Wall Street who bought biotech shares as fast as they were offered understood what was meant by “antibody-based formats,” “cytotoxic potential of T-cells,” or “connective tissue mesenchymal precursor cells.” So-called momentum investors did not have to comprehend how it all worked, they just needed to have a market that traded up in a straight line. Many investors made so much early money that they dismissed the possibility the industry might ever have a correction, much less a bear market. Investors were buying companies that had no revenues based on a shared belief that in the future they might earn immense profits in a pharmaceutical industry and scientific medical world that most people were incapable of imagining (like the internet boom the next decade). The bull run in biotech was not slowed when Jack Bogle, the father of index investing, warned, “The first rule investors should understand is that what goes up must come down.”25
Even some venture capitalists, without the sophistication of Swanson at Genentech, had little idea of the value of the company into which they were making substantial investments. What they did know, and what encouraged them to write checks, was that over the next decade half of the Nobel Prizes in Medicine went to researchers on the frontier of genetic engineering and biotechnology. In addition to Paul Berg’s award for his genetic engineering research, scientists at Basel’s Werner Arber University and Johns Hopkins later shared the Nobel for creating the first genetic map and Stanley Cohen got it for his discoveries of nerve and epidermal growth factors. Genentech, meanwhile, had projects under way on growth hormones, hepatitis vaccines, interferon, and a hormone that stimulated the body’s disease-fighting cells. Advances in biotechnology demonstrated the importance of monoclonal antibodies, discovered in 1975, in enhancing the immune response to some cancers. That research opened a window to a new class of targeted drugs that held the promise of having as big an impact in the future as penicillin and lifesaving antibiotics had in the last century.
It is impossible to predict the specific trip wire that will send investors fleeing from a hot sector in panic. In 1987, when the FDA initially refused to approve Genentech’s Activase designed to dissolve blood clots, the stock lost a billion dollars, a quarter of its value, the next trading day (Activase won FDA approval in 1996).26 Investors lost faith in the many promises of a biotech miracle as the group fell into a crushing three-year bear market during a bull market for other American business sectors.27 III 28
In 1990, Genentech set a then record when it sold a 56 percent stake to Roche for $2.1 billion. Nineteen years later, the remaining 44 percent of Genentech cost Roche $47 billion. By then, a remarkable two thirds of Roche’s revenues came from biologic cancer drugs developed by Genentech. Only twenty years earlier, Roche’s benzodiazepines had accounted for the same oversized share of the company’s revenues. The difference in Roche’s best-selling drugs in those two decades made evident the transformative impact of biotechnology.
I. The Boyer-Cohen patent was issued in 1980, after six years of contentious debate. That was the year the Supreme Court ruled on the case of a patent application for a genetically modified organism that absorbed crude oil cleanups. The Patent Office had rejected the application, but the Supreme Court overturned that, ruling that since the organism was “man-made,” it could be patented. It was reminiscent of the 1940s battle by Merck for a patent on streptomycin, which the Patent Office had first denied as a “product of nature.” The Boyer-Cohen patent became the most successful in pharmaceutical history. During its seventeen-year life span it was licensed to 468 companies, including premier drug firms such as Lilly, Merck, and Amgen. It was the basis for groundbreaking drugs in treating heart disease, cancer, diabetes, and HIV/AIDS. Stanford, which managed the patent and the University of California, has earned $320 million in licensing fees as of 2019.
II. Biogen became one of the most successful biotech firms. A year after its creation, its researchers cloned the first biologically active human interferon, and the company made a lucrative licensing deal for worldwide rights with Schering-Plough. That same year it was the first to synthesize hepatitis B antigens that would later be critical in developing a screening test for blood and plasma. And in 1980, Walter Gilbert won the Nobel Prize for his pioneering research in DNA sequencing.
III. The biotech industry is littered with instances in which investment banks issued buy recommendations and days later the bottom fell out of the share price because of some bad news about the company’s drug. Even some of the savviest biotech venture capital investors can become infatuated with a product that sounds dazzling. A recent high-profile example is Theranos, a start-up built around a patented blood-testing device that was touted as the heart of “the laboratory of the future.” The media cast its founder, Elizabeth Holmes, as the biomedical industry’s equivalent of Apple’s visionary Steve Jobs. Theranos attracted $700 million from some of the biggest private investors, all of whom were advised by industry specialists. Walgreens’s pharmaceutical division was a major investor, as was a Stanford biotech dean. Only after Theranos, valued at $9 billion at its peak, crashed, was it disclosed that not one of the investors had asked for audited financial statements from an independent public accounting firm. In June 2018, the U.S. Attorney for the Northern District of California indicted Holmes and the company’s president on multiple counts of wire fraud. Their trial is scheduled for August 2020.