Investors Dream of Genes

Genentech, a pioneer in daring DNA research, goes public

The list of products by Genentech, a four-year-old San Francisco-based firm, reads like a cornucopia of blessings for mankind. It includes a hormone that may stimulate human growth, mass-produced human insulin that could reduce the cost of treating diabetes, and interferon (TIME, March 31), which may be used to treat everything from cancer to the common cold. Shares of Genentech are expected to go on sale soon on the over-the-counter market, and investors are queuing up to buy what some believe will be one of the strongest new issues of the '80s. A few brokers are already touting Genentech as the next Polaroid or Xerox. Says Financial Analyst Peter Smith of E.F. Hutton: "The expectations of the people doing research are mighty exciting. But for now we are selling sizzle--there is no steak around now."

As Genentech itself states in its prospectus, the stock involves a high degree of risk. It is also likely to have a very high price-to-earnings ratio. The offering price is expected to be $25 to $30 per share, even though Genentech earned a meager 1-c- per share during the first half of 1980 for its private backers. The reason for all the excitement among analysts is that Genentech is one of four leading companies in the world doing recombinant-DNA research, a phenomenon that has had the scientific and investment communities elated for several years. Genentech is the first of the four firms to offer its stock to the investing public.

Recombinant DNA, or gene splicing, is a kind of modern alchemy. Scientists obtain DNA for a desired product, such as human insulin, and insert it into the DNA of a laboratory strain of a common intestinal bacterium. The bacterium, following directions from the new DNA, then produces the insulin. Scientists believe that the technique can be used to form a number of healthcare, agricultural and industrial products more cheaply and easily than ever before (see MEDICINE).

There has been concern, however, over the safety of the new technique. At one point, researchers were so worried about the potential hazards of microbes' escaping from the laboratory and causing new illnesses that they formulated a set of safety guidelines to control experiments. These guidelines have been refined by the National Institutes of Health.

Genentech was founded in 1976 by Herbert Boyer, a biochemistry professor at the University of California at San Francisco and a pioneer in recombinant DNA, and Robert Swanson, a financier who finds backers for new companies. Almost immediately, the firm began announcing a series of breakthroughs. The first, in 1977, was the production of a brain hormone called somatostatin, which may be used to treat certain hormonal disorders. In 1979 the company developed thymosin alpha1, which is now being tested by the National Cancer Institute for possible treatment of certain types of brain and lung cancer. Genentech's gross revenues have risen from $856,335 in 1978 to $3.5 million for the first half of this year.

With their success, Genentech's founders have also generated controversy in the scientific community. The company has worked closely with the University of California, sharing laboratory space and sometimes employees. When Genentech's manufacture of the human-growth hormone duplicated results published by university staff members, there were accusations that the company was secretly using the research. Genentech agreed last June to pay the university $350,000.

Other genetic-engineering companies have found large established firms to bankroll their research efforts rather than going to the stock market for capital. Berkeley-based Cetus, the oldest and largest of the firms, raised money by selling a microorganism it developed for penicillin production to Schering-Plough, a drug and cosmetic company. It also obtained backing from National Distillers & Chemical Corp. for a method to speed the manufacture of ethanol, which can be used with gasoline to make gasohol.

Genex Corp. of Rockville, Md., another fast-rising entry in the field, was founded three years ago by Molecular Biologist Leslie Glick and another professional raiser of venture capital, Robert Johnston. Though the company is secretive about its projects, Bristol-Myers revealed that Genex is working for it on the production of interferon.

Biogen S.A., which is based in Geneva, Switzerland, was the first firm to develop bacterial interferon. Founded in 1978, it is operated by a multinational board of directors and scientists. Schering-Plough last year invested $8 million in Biogen in return for exclusive worldwide manufacturing and sales rights to three of its products. Biogen has also found a second way to make interferon and is working on chemicals to cure foot-and-mouth disease, hepatitis and malaria.

Genentech, like the other major genetic-engineering firms, faces serious problems in profiting from its research. Obtaining approval for new products from the Food and Drug Administration is expensive and timeconsuming. Notes Cetus President Peter Farley: "The lag time between discovery and marketing for a pharmaceutical product is five to 20 years." In addition, the four tiny DNA pioneers will be competing soon with such multinational giants as Du Pont, Upjohn and General Electric. Although the U.S. Supreme Court decreed this summer that new life forms could be patented, the U.S. Patent and Trademark Office has yet to rule on any of the 100 or so recombinant-DNA patents already submitted.

Thus while brokers are heralding the birth of a new growth stock, scientists are more circumspect. Says Walter Miller, a University of California researcher: "To buy stock in these companies right now would require an enormous leap of faith and an assumption about which company will be most successful." Nevertheless, investors are expected to rush to grab the first shares of Genentech.

This file is automatically generated by a robot program, so viewer discretion is required.