Scientific Methods
Genentech's steady focus on research yields a plump bottom line
Paul Moran's eyes light up as he points out the brand-new compound-screening machine at a 550,000-square-foot Genentech research center. The pricey apparatus resembles a phone booth and will be able to sift through over 1 million points of data in a day. It's just one of many indulgences the biotechnology company lavishes on its close to 1,000 researchers. The scientists not only have access to state-of-the-art equipment but can also spend work time on personal projects and attend seminars given by visiting scholars. "Here we have the luxury of checking out ideas," says Moran, a senior research associate.
Make no mistake, though. Genentech may have scholarly trappings, but there's nothing academic about its bottom line. While the drug development industry is plagued by myriad ills, the 31-year-old company, a biotech pioneer, has been churning out new therapies and expanding sales from its South San Francisco headquarters. Genentech has moved beyond its specialty of making gene-based cancer drugs, branching into immunology and tissue-growth therapies. In 2006, it won eight Food and Drug Administration approvals for new products and new uses for existing treatments, even as the agency has toughened standards. Last year Genentech earned $2.4 billion, up from $1.4 billion in 2005. Genentech is "the single most successful company in bringing new products" to market, says Steven Burrill, CEO of biotech investment firm Burrill & Co.
The $92 billion value of its shares in the market now places Genentech in the same league with drug giants like Merck, which often buy research rather than produce it. But Genentech has no plans to lose the intense focus on science that got it this far. It is stepping up basic science programs to make sure they don't get lost in the scramble for profit as it evolves into a bigger corporation. Meanwhile, the company is using newfound wealth to broaden its search for discoveries outside its Bay Area buildings. Staying hungry will "keep [Genentech] from stagnating," says Rodman & Renshaw analyst Michael King. "There are going to be some blowups, but that's where the big finds are-not in doing what the next guy is doing."
Genentech executives believe the company has prospered by writing its own rules. Many doubted that current CEO Arthur Levinson, who has a Ph.D. in biochemistry from Princeton and headed Genentech's research labs, could manage a huge company. And senior managers run their own labs. Having those dual roles is uncommon at major drug companies, but Genentech executives think "being in the trenches" puts them in the best position to make new discoveries. In contrast, Pfizer CEO Jeffrey Kindler has a law degree and previously led Pfizer's legal team.
Picky. Success has bred self-confidence in Genentech's science-based methods. Executives don't see growth impeding what they believe is a superior workplace culture. "I don't understand why it has to change," says Richard Scheller, executive vice president of research. "Research could have grown even faster if we found people to meet our standards." Overall, the company's ranks have swelled from 3,900 employees in 1999 to 10,500 this year. The company receives 15,000 unsolicited resumes a month but will leave positions open for months to find the right candidate.
Researchers flock to the chance to exercise scientific freedom and make use of prime equipment. But they have to work hard to prove their worth. Genentech's rigorous atmosphere mimics pressure-cooker graduate programs. Keeping the focus on basic science, the company actively monitors its employees' record of publishing in top journals. An executive committee meets for at least six hours a week to grill scientists on their research proposals. Levinson usually pops in. Even though he's on the committee, Vishva Dixit, vice president of early discovery research, is daunted when presenting his own findings. "I know I will be raked over the coals," he says.
Dixit admits driving his own cancer research lab hard, resulting in high turnover. "I tell them if you are only going to work 40 hours a week, why bother to start?" he says. Dixit himself works seven days, 100 hours a week. "I roll out of bed, waiting to get to the lab." When faced with researchers who don't share his passion, he suggests, "Why don't you go to law school?"
As a senior manager overseeing innovation, Dixit fosters off-site meetings and retreats to make sure scientists from different disciplines mingle and share findings. He also handles the company's large-scale, 25-year-old postdoctoral program, a rarity among large drug companies. Genentech hosts about 90 postdoctoral fellows for about four years each, allowing them to pursue research of their choice. The work doesn't often translate directly into drug discoveries, but the investment is worth it, says Scheller: "We embed them within the research group, so it keeps people current in modern technology and broadens their thinking."
Genentech started doing its own thing in 1976, after high-tech investor Robert Swanson called up University of California-San Francisco gene-splicing researcher Herb Boyer. They met over beers and decided to start the first company to market DNA products, a scene immortalized in bronze on the company's now sprawling 125-acre campus. In 1980, Genentech raised $35 million in its first public stock offering. It went on to make the first insulin from human rather than pig cells and later developed human growth hormone. When Nobel Prize-winning scientist Michael Brown first visited Genentech in 1983, it operated out of a spartan rented warehouse, with a windowless maze of labs he likens to a rabbit warren. "They didn't care about windows and looking out at the bay," says Brown, who resigned as a company adviser in 2006 after 23 years. "But people were so excited about the technology. The idea that one could produce human proteins was such a novel concept that these people felt they could tackle anything."
Tough times. Early stumbles humbled Genentech, however. In 1987, it predicted sales of Activase, a drug that dissolves blood clots in heart attack victims, would top $1 billion. But the FDA delayed approval of the drug and later found serious side effects. By the mid-1990s, Activase sales hovered at only about $300 million. "I think that the culture was really threatened in the late 1980s," says David Goeddel, the company's third employee, who retired in 1993. Researchers left, as the company's focus turned toward sales. "The research atmosphere was not as good," says Goeddel. "People weren't working around the clock because it was the most exciting thing to do."
Looking for help, in 1989 Genentech raised $2.1 billion by selling 60 percent of its shares to Switzerland's Roche Holding. (Roche eventually bought up the rest of Genentech's shares and relaunched it as a publicly traded company, under the ticker symbol DNA.) Roche allowed Genentech to keep its independence, providing it met financial goals. The extra cash invigorated the research atmosphere, says Goeddel.
In 1992, Genentech completed Founders Research Center, now full of high-tech toys like the compound-screening machine. With its bay views, it's a big step up from the warehouse. Little touches keep the growing number of researchers mingling. Wireless-equipped break rooms dot each hallway. Lab corridors have wooden ledges where employees can set their coffee cups to stop and exchange ideas.
But science still was taking a back seat under Kirk Raab, a marketing expert from Abbott brought in as CEO in 1990 to fortify Genentech's business side, says Goeddel. Raab was eventually forced out, and in 1995 Levinson took over. "Everyone said, 'How the hell is he going to run a company?'" says Burrill. "If you look at Genentech today, it's a tribute to what he's done."
Cancer. Levinson, 56, doesn't have the usual trappings of a company CEO. The scientist prefers jeans to suits. He made $3 million last year, modest by today's CEO standards. He shuns publicity and doesn't like to stray far from the Genentech campus. Levinson came from academia, like most top Genentech managers. That background helps them to better evaluate research. "Because we are card-carrying scientists, we're more likely to bet on the right horse," says Dixit. Levinson looked at Genentech's research strengths and decided the company needed focus. He transformed Genentech into a cancer drug company.
Under Levinson, Genentech has tried to keep its scientists inspired. Pictures of cancer and other patients are displayed at company headquarters and throughout Genentech's annual report. At the company's 30th-anniversary bash last year, with performances by the Foo Fighters and the Eagles, Levinson had four patients speak, along with Nobel winner and DNA pioneer James Watson.
Genentech's emphasis on empowering researchers paid off with Avastin, now Genentech's second-most-profitable drug, approved in 2004 for colon cancer and later for lung cancer. Napoleone Ferrara did the research into starving tumors of their blood supply on his personal time at Genentech. And last year saw the approval of Lucentis, also based on his research, for a form of macular degeneration that can lead to blindness. The new lines helped Genentech, as Avastin itself suffered setbacks with the delay of key breast cancer trials.
Levinson has looked outside the company for research, breaking with the "not invented here" attitude of early researchers, who believed all the important work was being done at Genentech, says former employee Nick Simon, now managing director of Clarus Ventures. Genentech developed its first $1 billion drug, Rituxan, for non-Hodgkin's lymphoma, with a company called IDEC. That drug later proved successful with severe rheumatoid arthritis. Last year, Genentech agreed to acquire its first company, Houston biotech Tanox, its partner on the asthma drug Xolair.
The Toyota example. The CEO has also reshaped areas like marketing and manufacturing. Unlike at many drug companies, sales staff specialize in only one product instead of a slew of them. The company's in-house drugmakers visited a Toyota factory last year in search of ways to boost efficiency. Even pranks are serious business. When marketing employees presented a mock annual report cover filled with snapshots of Genentech's numerous costume parties, executives made it the back cover of the actual 2005 report.
Winds carry the smell of doughnuts from a nearby factory, Genentech's only remaining neighbor, to researchers at its campus, where sidewalks are shaped like DNA strands. That's not the only thing stoking Genentech's appetite. With the bar set high by Genentech's banner 2006 results, the company is hungry to find new discoveries. Its ambitious plans include gaining 15 new approvals and stocking its pipeline with 20 new molecules by 2010. To do so, it needs to find good science wherever it can. Genentech nearly doubled research and development spending over two years, plowing back two thirds of its profit, or $1.6 billion, in 2006. Construction is a constant background noise at headquarters as new research labs go up. The company plans to double its South San Francisco footprint within a decade.
With biotech research flourishing around the world, Genentech sends teams far and wide to visit universities and smaller companies to check their work. Last year, it signed 50 deals, including the one with Tanox.
With success, Genentech has developed swagger, making the company a tempting target for critics. Outsiders do seem to think Genentech is arrogant, Dixit admits, adding that "we can rub people the wrong way." But at the end of the day, he adds, "we're just a bunch of nerdy scientists."
THE TOP SELLERS
Leading Genentech drugs, 2006
Rituxan: $2.1 billion
Approved to treat non-Hodgkin's lymphoma in 1997 and severe rheumatoid arthritis in 2006.
Avastin: $1.7 billion
Approved to treat colorectal cancer in 2004 and lung cancer in 2006.
Herceptin: $1.2 billion
Approved in 1998 for breast cancer.
Xolair: $425 million
Approved in 2003 to treat asthma.
Tarceva: $402 million
Approved in 2004 to treat lung cancer and in 2005 for pancreatic cancer.
Overall U.S. sales: $7.1 billion
This story appears in the February 19, 2007 print edition of U.S. News & World Report.