Faded Genes

Slow start for bioengineering

Like a highly touted rookie who does nothing but strike out once the baseball season begins, genetic-engineering companies are having trouble living up to their early billing. A year ago, they were among the hottest companies on Wall Street. Stock in Genentech, the first of the leading firms to offer its shares to the public, jumped from $35 to $89 during the opening few minutes of trading in October 1980.

Many of the wonder-drug companies, though, are not finding easy profits in their test tubes. In February, Bethesda Research Laboratories, of Gaithersburg, Md., laid off 180 of its 460 employees and canceled many of its long-term research projects. Also in February, Collaborative Research Inc., of Lexington, Mass., was forced to cut the price on its initial stock offering from the $17 it had hoped for to $11. In late March, Southern Biotech Inc., of Tampa, temporarily did not pay some management salaries and reduced research projects because it was running low on cash.

Nearly 200 U.S. companies are now trying to use the new technology of gene splicing to make products that may some day be able to do everything from boosting crop growth to treating cancer. Many were started with just a few million dollars in venture-capital funds and a handful of researchers. They are now finding that promised commercial developments are hard to achieve, and are running short of money. Says Industry Analyst David Paisley, a Merrill Lynch vice president: "What you are seeing now is a shakeout that will lead to the survival of the fittest."

In their eagerness to enter a glamorous industry, some firms began developing new products without thinking about what customers would buy them. Says Cetus Corp. Vice President William Amon: "There are far more technical opportunities than there are sensible market opportunities." Other new ventures ran into quality control problems when they mass produced drugs that were being made only in a laboratory test tube. Notes Genentech President Robert Swanson: "A number of companies have severely underestimated the enormous effort and specialized skills required to take a technical breakthrough and put it in a bottle ready for market."

Like many new fields in the early stages of development, there are now simply too many firms trying to capture the same market. These include new, well-financed companies like Genentech and Cetus, big drug companies like Merck and Eli Lilly, plus a host of smaller, undercapitalized firms. Observes Jonathan Ziegler, vice president of Sutro & Co., the San Francisco brokerage house: "There is duplication of effort on a grand scale in this industry. Probably 150 of the 200 companies are working on the same five products."

With the prospects for quick payoffs fading, venture-capital firms that have been the Daddy Warbucks of the industry are tightening their purse strings. They are now slow to provide more money to companies for research. Says Brooke Byers, a partner in the San Francisco firm of Kleiner, Perkins, Caufield & Byers, which helped start Genentech: "It's no longer promise but products that companies are to be judged on." Some experts believe that 90% of the new firms may run out of money years before their products are ready for market.

When it was founded 16 months ago, DNAX of Palo Alto, Calif., easily raised $5.5 million. The company, though, is now spending nearly $4 million annually on research, and it does not expect to see any profits for at least another six or seven years. Dr. Alejandro Zaffaroni, the founder and acting president of DNAX, admits that he expects to find it difficult to raise additional capital and that he may eventually be forced to sell out to a larger partner.

Both scientists and investment advisers still believe that genetic engineering has a good long-range potential. The first new products, including human insulin and a vaccine for newborn calves and pigs, are expected to appear on the market soon. Big profits, however, are still years away. A study released this month by SRI International, a California think tank, found that miracle drugs like interferon, which may be used to treat cancer, will not be available in commercial quantities until 1990. Development of agricultural products that could be used to increase food production may take even longer. Thus the investment payoff from such wonder products is still far in the future.

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