Genentech's Gamble

Behind the biotech pioneer's quest to conquer autoimmune disease

by Arlene Weintraub

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.