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Genentech's Medicine Man


On Mar. 14, hundreds of angry Wall Street analysts converged on The Pierre hotel in New York and demanded answers from Genentech (DNA) Inc. CEO Arthur D. "Art" Levinson. The biotech company's experimental drug, Avastin, had failed a key trial in breast cancer in September, 2002, causing Genentech's stock to nose-dive 14%, to $27.50, in one day. Why, analysts wondered, would Levinson dream of spending a penny more to develop a product that was clearly dog? "They said I was stupid," Levinson says. "It was like I was a charlatan selling snake oil."

The CEO isn't one to gloat. But as he prepares to file for Food & Drug Administration approval for what could be the most important drug in Genentech's history, he can't resist. Late-stage trial data released in May showed that Avastin significantly extended the lives of patients with colon cancer. Analysts now hail the drug as a potential billion-dollar-a-year blockbuster. The agency will receive Genentech's filing on Avastin by the end of September.

Avastin is just the latest in a series of coups for the world's oldest biotechnology outfit, which was founded in 1976 in South San Francisco. In June, the FDA approved Genentech's Xolair, the first biotech drug to treat asthma. On Sept. 9, an FDA advisory committee unanimously recommended approval of the company's psoriasis drug, Raptiva, which should hit the market by December and could one day be worth more than $400 million a year.

In short, Levinson could be on the cusp of a rare pharmaceutical trifecta. If Avastin is approved by mid-2004, as expected, Genentech will have launched three new products in a year, all of which offer entirely new methods for attacking the diseases they target. Genentech's sales of $2.7 billion already make it the second-largest biotech after Amgen (AMGN) Inc., with $5.5 billion. Analysts say its revenues could surge to $5 billion by the end of 2005, and profits could hit $1 billion. In anticipation, investors have bid up Genentech's stock 164% this year, to $87 -- more than twice the gain of the Morgan Stanley Biotech Index.

Clearly Wall Street is placing a massive bet on Levinson, who began his career at Genentech as a scientist 23 years ago. Investors are counting on him to guide the company as it approaches an historic crossroads. Genentech is shedding its status as a scrappy startup and seeking to become a consistently profitable pharmaceutical powerhouse. If Levinson pulls off this difficult transition, it will be the strongest signal yet that the industry Genentech helped create more than 25 years ago is finally delivering on its promise -- that it can generate a steady stream of novel drugs to conquer once-untreatable illnesses.

What investors may not realize, though, is that Levinson's thorniest challenges lie ahead. Avastin may look like a sure bet, if only because of the sheer lack of life-extending drugs on the market for colon cancer, which strikes 147,500 patients per year in the U.S. But the FDA has a long history of demanding additional data on products that were supposed to be slam-dunks. What's more, Genentech's $45 billion market cap assumes Avastin will be approved for other cancers, too, and that drugs further back in the pipeline will hit the market on time, analysts say. And in the asthma and psoriasis markets, where Genentech is a rookie, Levinson will face intense competition, not to mention the chore of persuading health plans to cover new drugs that could cost tens of thousands of dollars a year per patient.

To succeed, Levinson has to perform a perilous balancing act. He'll need to devote more resources to sales and marketing, while funneling enough into the research pipeline to propel growth beyond 2004. With the stock trading at its highest level since early 2001, there is no room for screwups: One bad decision, and investors could bail. "Clearly there's tremendous potential, but it has to translate to commercial success," says Kris H. Jenner, portfolio manager of the T. Rowe Price (TROW) Health Sciences Fund, which owns shares of Genentech. "The worry is, can Genentech execute?"

If Levinson's management of Avastin so far is any gauge, the 53-year-old scientist should be able to guide Genentech through this minefield. The drug was born from a theory that tumors can be starved by blocking the formation of blood vessels that feed them (table). In the development phase, there were years of disappointments that would have prompted most pharmaceutical CEOs to abandon the drug. But Levinson is no average CEO. When Wall Street soured on Avastin after the breast-cancer trials late last year, Levinson stood his ground, certain that good science would bring results. Behaving like a scientist, he continually reminded analysts that all cancers are different, and he steered them to promising data from an early colon-cancer trial.

Although Levinson hung up his lab coat years ago, he's still more personally involved in the science of Genentech than most top pharmaceutical execs. When scientists report on their research at weekly review meetings, Levinson often shows up unannounced and peppers them with detailed questions. "Sometimes the junior people get intimidated," says Richard H. Scheller, executive vice-president for research.

Even when Levinson relaxes at home, he crackles with goal-focused energy. In the kitchen of his suburban San Francisco home recently, he talked about his long tenure with the biotech bellwether. As he dashed from the stove to the microwave, his glasses fogged with steam wafting off his creation of pasta mixed with smoked chicken and goat cheese. Cooking, he explains, is a lot like science: You mix and match ingredients until you come up with that perfect concoction.

THE SCIENCE GEEK

Levinson has been a science geek for as long as he can remember. Born and raised in Seattle, he spent weeks at a stretch poring over books on physics and astronomy sent by his uncle, a librarian. As a junior at the University of Washington, he was leaning toward a career in medicine or astronomy when he became obsessed with the idea of trying to answer biology's toughest question: What causes cancer? That led to a PhD in biochemistry from Princeton University in 1977. Moving to the University of California at San Francisco, he worked in the lab of J. Michael Bishop and Harold Varmus, who would later share the Nobel prize for their discovery that certain viruses can capture genes from normal cells and convert them to cancer-causing genes. There, Levinson published a groundbreaking paper that demonstrated part of the biochemical chain reaction that causes cancer.

At UCSF, Levinson was an intense and somewhat quirky scientist. For a lab photo, Levinson once showed up dressed as a hunter, complete with toy rifle and pith helmet. His point: You need a hunter's instincts when pursuing the causes of cancer. And Varmus remembers being stunned when Levinson, an amateur computer whiz, volunteered to equip the lab with its first set of desktop computers. He even gave seminars to the scientists on how to use them. "Art is an imaginative thinker with very broad technical interests," Varmus says.

In 1980, Levinson met Genentech founder and UCSF professor Herbert W. Boyer, who offered him a chance to be one of the startup's first scientists. Some of Levinson's colleagues accused him of selling out. "He took a bit of grief, because he could have gotten an academic appointment just about anywhere," Boyer recalls. "He was that good." Undaunted by the criticism, Levinson took Boyer up on his offer. From the start, he thrived in Genentech's work-hard-play-hard culture, where scientists in cut-off jeans and torn shirts worked hundred-hour weeks, then blew off steam by playing pranks on each other and carousing at the company's raucous Friday afternoon parties.

One of Levinson's first goals after joining Genentech was to find a better way to manufacture biotech drugs. The standard production method back then -- growing them inside e coli bacteria cells -- didn't work for some products, including a hepatitis vaccine Genentech was developing. So Levinson decided to try making the drug in mammal cells. After a painstaking process of trial and error, he figured out how to coax ovary cells from Chinese hamsters to churn out the drug.

When Levinson went to Genentech's accountants with his idea, they snubbed him. It would cost too much, they figured, as no one had attempted to make biotech drugs in mammalian cells except in tiny quantities for research. "I thought their calculations were fraught with problems," Levinson recounts. So he went over their heads to the chief of manufacturing, William D. Young, who embraced the idea. "The process he developed was incredible," recalls Young, now CEO of ViroLogic (VLGC) Inc., a South San Francisco biotech. Although Genentech licensed out the hepatitis vaccine, the company used Levinson's method to make its other drugs. Mammalian-cell manufacturing eventually became standard in the biotech industry.

BOUNDARIES AND CONTROLS

Co-workers have come to admire another side of the CEO: financial whiz. Levinson taught himself about Wall Street as a college student and began dabbling in stocks to supplement his meager income as an academic scientist. He joined Genentech just before it went public, in October, 1980. All employees were offered 200 shares each at a 15% discount to the pre-split initial public offering price of $35. Levinson -- the only guy in the lab who understood markets -- gave his fellow scientists a tutorial and urged them to buy all 200 shares. The next day, as the stock skyrocketed to $88 in under an hour, he advised them all to sell. "He sold; I didn't," laments former Genentech scientist David V. Goeddel, now CEO of Tularik (TLRK) Inc., also in South San Francisco. "It was clear he knew what he was talking about."

Through most of his life, the disheveled and disorganized Levinson didn't strike many people as management material. But his bosses pushed him up through the ranks, convinced that his deep experience in the lab and infectious enthusiasm for what goes on there would be an asset to the company. "Art understands the heart of this business," says Franz B. Humer, Genentech board member and CEO of Roche Group (RHHVF) They named him head of research in 1990. The promotion prompted Levinson's son, Jesse, then 7, to suggest that someday Dad might run the place. "He laughed at the idea," says Jesse, now 20. "He was a scientist, and he loved what he was doing."

There was little to love about the CEO position when Levinson was thrust into it in 1995. The former chief, G. Kirk Raab, had resigned under a cloud when the company revealed that he had asked Roche for a personal loan guarantee. Genentech was also smarting from federal criminal charges that it had promoted its human growth hormone for uses not yet approved by the FDA. (Genentech later pleaded guilty and paid a $50 million fine.) Levinson called an all-employee meeting and made an emotional plea that everyone ensure Genentech would never face such accusations again. "I completely love this place," Levinson says. "It was very tough for me to see us getting beat up."

He began establishing boundaries and controls. All sales materials, for example, would have to be reviewed by Genentech's legal and regulatory departments. What's more, realizing that Genentech couldn't tackle all of medicine, he focused resources on developing revolutionary treatments in three areas: immunology, cancer, and vascular biology -- the study of blood vessels and their role in disease.

While colleagues and investors give Levinson high marks today, Genentech under his watch has not been free of missteps. The company made a serious error with Raptiva. As the drug entered late-stage trials, Genentech decided to ramp up production by taking over the manufacturing task for Xoma (XOMA) Ltd., which had been making it until that time. But the new version of the drug had a slightly different molecular structure than the original. In April, 2002, Genentech announced it would have to delay its FDA filing for six months so that it could collect data proving the new drug was comparable to the original.

Now Genentech is facing an all-out fight in the psoriasis market. Cambridge (Mass.)-based Biogen (BFEN) Inc. beat Genentech to the punch with a new drug it launched in January. Amgen, Johnson & Johnson, and Abbott Laboratories (ABT) are expected to jump into the market, too. Genentech's plan is to bombard dermatologists with pitches highlighting Raptiva's advantages: It kicks in faster than the other drugs, and patients can easily inject it themselves. But Genentech refuses to run television ads trumpeting its products directly to consumers. Instead, Levinson prefers to let doctors explain complex drugs to patients. "These ads with people running through flowers and dancing are distasteful," he says.

"IT'S GOING TO BE TOUGH"

Genentech's discomfort with TV could put it at a disadvantage to competitors such as Amgen, maker of the blockbuster drug Enbrel. That product has yet to be approved to treat psoriasis, but Amgen is already collecting potential patient names via a Web site and a psoriasis-related magazine that Amgen has been promoting in national TV ads. "Genentech is going up against the best in the business, in markets where it has no track record," says Gary M. Stibel, founder and principal of the New England Consulting Group. "It's going to be tough."

Moreover, the new drugs will be costly, potentially making Genentech a lightning rod for insurers and politicians who have been griping about rising health-care costs. The price tag on the asthma drug, for example, is about $1,000 a month, while older treatments such as steroid inhalers cost just $300 a month. Although most health plans have agreed to cover the product, they require patients and doctors to fill out lengthy questionnaires before determining who can get it. "They're making us jump through hoops because the price is just so high," says Dr. Brian Smart, chairman of the asthma and allergy center at DuPage Medical Group in Glen Ellyn, Ill.

Even when grappling with pricing and other complexities, Levinson preserves his sense of humor. In an infamous prank two years ago, he hazed incoming research chief Richard Scheller by orchestrating a ruse in which all the top managers pretended Genentech was actually going down the drain. At Scheller's first management meeting, each executive presented fake overhead slides, complete with charts and tables, showing how poor the company's prospects were. Levinson lamented that the board would surely fire him momentarily. "They really had me," says Scheller, who had left a tenured professorship at Stanford University to join Genentech. Scheller got back at the CEO by placing a 6-foot-tall cutout of Levinson dressed as Star Trek's Spock at the door of an off-site meeting and distributing hundreds of smaller copies to executives.

In the world of Big Pharma, Levinson remains an oddball. He shuns the CEO spotlight, rarely accepting invitations to speak at industry events. He would much rather be at Genentech peering at chemical assays or at home tinkering with his telescope and talking science with his wife and two children. When his son and daughter were young, Levinson used Legos to teach them about DNA, and he recreated the solar system with tennis balls and a flashlight. "He's just like a little kid," says his wife, Rita.

These days, when he needs a break from the ever-mounting pressures, he rigs up his digital camera to his backyard telescope and takes photographs of faraway stars. "Some people look at the sky because they like to marvel at how small we are," he says. "I'd rather marvel at how much we've learned and the possibilities that are still out there." Now, it's time for this scientist-turned-CEO to prove that he can keep Genentech's star from falling.

By Arlene Weintraub


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