Genetics Institute, Inc.

87 Cambridge Park Drive
Cambridge, Massachusetts 02140
U.S.A.
(617) 876-01170
Fax: (617) 868-1024

Public Company
Incorporated: 1980
Employees: 870
Sales: $88 million
Stock Exchanges: NASDAQ
SICs: 8731 Commercial Physical Research

Genetics Institute, Inc., (GI) is a biotechnology firm engaged in the research, development, and commercialization of pharmaceuticals through recombinant DNA and other genetic technologies. The company has developed drugs to make the blood of hemophiliacs clot, as well as substances that stimulate the production of red and white blood cells, and proteins that enhance bone growth. Despite its successes in the laboratory, GI has been hampered by the lengthy regulatory requirements for testing new drugs, and by patent disputes, in its quest for profitability in the hotly competitive biotechnology industry.

GI was founded in December of 1980. The company grew out of the desire of the then-president of Harvard University to exploit the commercial possibilities of work being done in the university’s biological laboratories. Under the sponsorship of the Harvard Management Group, a number of scientists met at the Chicago airport Hilton in the summer of 1980 to discuss a venture. Although the meeting was not a roaring success, the group nonetheless decided to continue its attempts to found a “Bell Labs” of biotechnology, where cutting-edge science would yield products with commercial uses. Through genetic engineering, the scientists hoped to create protein-based substances for use in medical therapies. These products would then be licensed to other companies, so that GI could concentrate its efforts on investigation in the lab, rather than marketing and sales.

In September of 1980, Harvard’s faculty voted against the university’s involvement in a commercial venture, but the two principal scientists involved, Dr. Mark Ptashne and Dr. Thomas Maniatis, decided to forge ahead on their own, and set out to raise the necessary funds. By the end of the year, the two had convinced a consortium of four venture capitalists to chip in a total of $6 million to start the new firm. With the money in place, Ptashne and Maniatis invited half a dozen other scientists to come aboard, and began the search for a chief executive officer. This role was filled by drug company executive Gabriel Schmergel, who signed on in April, 1981.

GI’s first order of business was to fill out its staff and obtain suitable lab space. The company recruited five additional scientists, including three MIT postdoctoral students Ptashe met at a party. On June 1, 1981, GI ceased operating out of Ptashe’s home, as employees moved into laboratory facilities in a building that had formerly been Boston’s Women’s Lying-in Hospital. GI’s space, spread over five floors, included delivery and recovery rooms, as well as the old morgue, in addition to rooms designed as laboratories and offices.

In these temporary quarters, GI sought to research and develop new biological products for use in health care, agriculture, and industry. Among the company’s first efforts was a very ambitious and arduous program to develop a recombinant form of factor VIII, the blood component that enables clotting, for people with hemophilia A, or classic hemophilia. GI set out to find and clone the gene that produced factor VIII, in order to use the gene to engineer a rapidly growing cell line in Chinese hamster ovary cells, then to produce human factor VIII, and to use this cell line to produce factor VIII in 2,500-liter cell culture tanks. The factor VIII project was undertaken with funding from the Baxter Travenol Laboratories, Inc., which marketed blood clotting factors made from donated human blood, which carries with it the associated risks of transmitting blood borne viruses such as hepatitis and AIDS.

Using substances derived from the blood of pigs, GI researchers began to search for a factor VIII gene. By the summer of 1982, the scientists’ efforts had stalled as they ran out of the precious porcine factor VIII used in their experiments. Contacting its supplier, GI “negotiated with them to scale up to ten hogs from two,” in producing the substance, as company scientists later told the Wall Street Journal. By the end of the year, GI learned that a team at another biotechnology firm was also working to develop recombinant factor VIII, and the company intensified its efforts in a race to conclude its work first. At this time, GI also strengthened its partnership with Baxter Travenol, when the company purchased $4.9 million of GI’s stock, to acquire a minority interest in the company.

GI also began to seek funds and physical space for projects other than the factor VIII effort. In addition to its agreements with Baxter Travenol, GI received funding from a Japanese firm, Chugai Pharmaceutical Company, and a Swiss company, Sandoz, Ltd. GI eventually licensed Sandoz to conduct human tests and to file for FDA approval for a new protein that speeded white blood cell production, called GM-CSF.

In October, 1983, the company entered into collaboration with the Allied Health and Scientific Products Company. In return for $5 million to $15 million of funding over three years, Allied earned exclusive rights to any recombinant-DNA based diagnostic products for medical uses that GI developed in its labs. In addition, Allied purchased $10 million of GI stock. The companies planned to focus their joint venture on tests for sexually transmitted diseases, cancers, and certain viruses. Allied assumed responsibility for conducting clinical trials of any substances produced, along with manufacturing and marketing them.

By the end of 1983, GI had started to see progress in its efforts to develop human blood clotting factor VIII. The company announced that it had isolated and cloned part of the gene for factor VIII, an important step towards producing the substance for testing, and eventually, clinical use. GI’s competitors in San Francisco, however, were in hot pursuit, as the two groups rushed to be the first into print with their final results. At the end of August, 1984, GI submitted a comprehensive write-up of its efforts to the prestigious British biology journal, Nature, and in late November, the journal published its results as well as those of its competitor.

In July, 1984 the company announced an agreement with a Japanese company, Chugai Pharmaceuticals, to develop recom-binant erythropoietin (EPO). This product is a protein that acts to regulate production of red blood cells in the body and can be used to treat severe anemia, such as that found in kidney dialysis patients. Another biotechnology firm, Amgen, was producing the drug in commercial quantities in conjunction with its Japanese partner on this project.

In October, 1984, the first GI employees moved into new company facilities, constructed specifically for GI in Cambridge, Massachusetts. The entire company had made the move out of Boston by summer of the following year. At that time, GI embarked on its first overseas venture, forming a branch office in Japan. In addition to this geographic expansion, the company also turned its attention to fields outside the medical arena. In November, 1984, GI purchased one-third of a company called United Agriseed, and four months later it announced that it would form a joint venture to develop biological insecticides.

In the following year, GI sold stock to the public for the first time, offering 2.875 million shares of common stock in May, 1986. Proceeds from this sale yielded $79 million. With the capital produced by this move, the company announced that it would build a $25 million plant in Andover, Massachusetts, to manufacture products made through recombinant DNA technology.

In September, 1986, GI entered into an agreement with another drug company, Burroughs Wellcome. With the biotechnology arm of this company, GI set up WelGen manufacturing. This company was slated to manufacture pharmaceuticals derived from advances in biological sciences. WelGen, of which GI owned half, planned to build its $40 million plant in Rhode Island.

In early October, 1986, GI unveiled interleukin-3, which it hoped would help speed up blood cell production in patients who had undergone radiation and chemotherapy. Tests in humans were slated to begin in the following year. Despite these advances, GI failed to turn a profit by the end of the year. The company notched losses of $4.5 million in 1986, following a loss of $1.7 million in the previous year, and it was predicted that GI would remain in the red until 1990.

In July, 1987 GI’s efforts in the field of EPO seemed to pay off when the company received a U.S. patent on purified EPO, based on material derived from human urine. In October of that year, Amgen was awarded a patent on the DNA sequence encoding EPO, and then sued GI for infringement of this patent. GI, in turn, filed a countersuit.

In addition to the developments involving EPO, GI also announced that it had created a new form of tissue plasminogen activator, or TPA, which it believed would help to dissolve blood clots that cause heart attacks. In a joint venture with a company called NeoRx, GI also sought to develop a new class of cancer drugs.

At the end of 1987, GI announced that it would withdraw from the plant biotechnology business by selling its 27 percent stake in United AgriSeeds, Inc. to the Dow Chemical company for about $12 million. In addition, GI sold its proprietary technology for the production of a bacterial parasite pesticide to the Ecogen company. With these moves, the company refocused its energies exclusively on the development of therapeutic substances for use in humans. Despite this solidification, GI continued to suffer financial losses, even though its revenues increased. At the end of 1987, company losses had reached $10.4 million.

By 1988, GI’s fate had begun to rest as much on the activities of lawyers as on the efforts of scientists. The company found itself hampered by legal complications in moving forward with almost all of its most promising development products. In February, 1988, GI won a summary judgement that EPO produced by competitor Amgen infringed on GI’s homogenous EPO patent. More than six months closer to putting its product on the market, Amgen persisted in its legal quest to exclude the GI-licensed EPO from the marketplace. Because GI had licensed its patents for the drug to its Japanese collaborator, Chugai Pharmaceuticals, Inc., the company stood to earn royalties on only 5 to 10 percent of its sale. Seeking to end the legal strife, GI and Chugai strove unsuccessfully to settle the dispute with Amgen out of court.

In July, 1988, GI won another victory when it was granted a broad-based patent for its work on genetically engineered factor VIII, which promoted blood clotting in hemophiliacs. In the next month, however, GI found itself back in court, when Genentech sued the company for infringement of its patent for TPA, or tissue plasminogen activator. GI responded to this move by filing a countersuit against Genentech, alleging unfair competition.

In January, 1989, GI announced that it had formed a partnership with the Syntex Corporation, a drug company, to develop substances to fight rheumatoid arthritis, cancer, and other diseases. In the same month, the company won a further battle in its patent wrangle with rival Amgen, when a judge from the International Trade Commission refused to block imports of EPO from Japan. Three months later, in March, 1989, GI agreed to cross-license its factor VIII clotting factor with Genentech, thereby avoiding yet another suit over patent infringement. Both companies, and their partners, agreed to bring their own products to market independently, and not to challenge each others’ rights in court.

The legal struggle over EPO continued throughout 1989, taking another twist in December, when a federal judge ruled that both GI and Amgen had valid patents related to EPO. This decision was seen as a victory for GI, since it left open the possibility that the company could file an injunction to stop its competitor from producing the drug. Nevertheless, both sides appealed the court’s ruling. In November, GI had been awarded a patent for genetically engineered interleukin-3, which helped in the formation of human blood cells. Several other of the company’s therapeutic substances were moving through clinical trials toward the market.

GI suffered a legal reversal in April, 1990, when a jury ruled that the company had infringed on three patents held by Genentech for TPA, its anti-heart attack drug. Just nine days later, GI was set back in its attempts to win FDA approval for its form of EPO so that it could bring the product to market with its partners. Although a lower court had ordered Amgen, GF’s competitor, to temporarily cross-license its product with GF’s, a higher court suspended this order, allowing Amgen to further delay the arrival of GF’s EPO to the market.

Legal tangles notwithstanding, GI continued to move ahead with the development of new products. One of the most promising of these was bone morphogenetic protein 2 (BMP-2), a genetically engineered human protein which appeared to activate the natural process of bone growth. Using this substance, GI scientists were able to stimulate bone growth in laboratory animals, and hoped to transfer this process to humans.

In March, 1991, GI lost a crucial battle in its legal dispute over EPO, when a Federal appeals court upheld the Amgen patent but invalidated GF’s patent as not enabled. This came as a serious blow to the company, which had hoped to capture a significant portion of the American market for the drug. In addition, GI had completed building a factory in Andover, Massachusetts, to manufacture other products. GI, which had lost $29 million in 1990, had hoped to begin turning a profit on the basis of its licensees’ U.S. sales of EPO, and those expectations were dashed by the court’s decision. GI asked the U.S. Supreme Court to overturn the decision. But in August, 1991, the company took a special charge against its earnings, and set aside $11 million to cover any damages that might be awarded to Amgen. At this time, Amgen also gained a $25 million attachment of GI’s real estate holdings, pending future damage awards in the case.

One month later, GI announced that the American Home Products Corporation would purchase 60 percent of the company, for $666 million. With this move, GI acquired a significant fresh new source of income to support its research activities. In October, 1991, GI’s appeal to the Supreme Court in its dispute with Amgen over EPO came up empty when the justices refused to review the lower court’s decision. Two months later, in December, 1991, the U.S. Patent Office put the final seal on the matter when it followed the legal precedent and ruled in favor of Amgen’s right to three U.S. patents for EPO.

Despite this decisive setback on the question of American sales of EPO, GI’s drugs based on this technology, named Recormon and Epogin, are being sold in Europe and Japan. GI’s efforts in other areas had also begun to show fruit by 1992. The company’s genetically engineered anti-hemophiliac factor, named “Recombinate AHF” was approved for sale in the United States, Canada, and Sweden. In mid-1993, Recombinate AHF received the Committee for Proprietary Medicinal Products (CPMP) recommendation for approval, placing it in the homestretch for market introduction in the European Committee. This was the second time that GI’s factor VIII product received approval ahead of its San Francisco rival’s product. Since GI made the drug concentrate from which Recombinate was manufactured, the company stood to share significantly in its success.

Also in mid-1993, Baxter settled a patent infringement lawsuit concerning Recombinate AHF that was brought against it in 1987. This settlement, along with GI’s settlement with Amgen of all outstanding EPO patent matters in May of 1993, removed much of GI’s patent litigation uncertainties. Along with the introduction of GI’s recombinant factor VIII product in several countries, this marked a turning point in the company’s fortunes.

In addition to the revenues it gained from Recombinate AHF, GI earned royalties on the sale in several European countries of another substance, GM-CSF, trade-named Leucomax AM-CSF, which enhances blood cell growth in cancer patients. In addition to these three products, from which GI received royalties on sales, three other proteins had been developed and licensed to other drug companies for development and marketing. Worldwide sales of these products in 1993 are anticipated to be $450 million.

Three additional drugs to which GI maintained U.S. marketing rights, including BMP-2 (bone growth), a macrophage colony stimulating factor designed to fight cancer and lower cholesterol, and interleukin-11, reached the stage of clinical trials by the early 1990s. The latter substance was licensed to the Genetic Institute/Yamanouchi joint venture in November, 1992, for testing and marketing in Japan.

Late in 1992, GI withdrew from a previous partnership when it sold its share in WelGen, its Rhode Island manufacturing venture, to its partner, Burroughs Wellcome, for $24 million. GI invested these funds in the expansion of its own manufacturing facilities in Andover, Massachusetts. In addition to this upgrading, GI acquired a building in Cambridge to house its Small Molecule Drug Discovery program, an effort that emerged from the Syntex collaboration but was expanded with Wyeth-Ayerst, a subsidiary of American Home Products.

In early 1993, GI expanded its geographical reach when it opened a small European office in Paris. In addition, the company moved ahead in its clinical trials of its BMP-2, which promised to help speed bone growth and healing. In March, 1993, GI received its eighth U.S. patent in this field. With a potential market value of hundreds of millions of dollars, observers warned that rights to a bone growth factor could touch off another bitter legal dispute.

As it moved into the mid-1990s, GI strove to become a fully integrated discoverer, developer, manufacturer, and marketer of biopharmaceuticals. Although its efforts kept it on the cutting edge of genetic engineering, more than 10 years after its inception the company had yet to achieve a position of steady profitability, as large investments in research remained potential, but not yet actual. With promising products nearing marketability, and a steady stream of new discoveries in the pipeline, GI hoped to see its scientific efforts reap financial rewards in the coming years.