Assessing the History and Value of Human Genome Sciences Received: May 23, 2013
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Case Study Assessing the history and value of Human Genome Sciences Received: May 23, 2013. Accepted: September 3, 2013. Laura M. McNamee is Research Associate in the Center for Integration of Science and Industry and Adjunct Assistant Professor of Natural and Applied Science at Bentley University. Her research focuses on patterns of sustaining and disruptive innovation in biotechnology, the impact of technology life cycles on drug development, and business models for the biotechnology industry. Fred D. Ledley is Director of the Center for Integration of Science and Industry and a Professor in the Department of Natural and Applied Sciences and Department of Management and at Bentley University. He has served on the faculties of the Baylor College of Medicine and Howard Hughes Institute, and also as a founder and senior executive of several biotechnology companies in gene therapy and personalized medicine. His research focuses on the interface between science and business, as well as strategies for accelerating the translation of scientific discoveries to create public value. ABSTRACT Human Genome Science (HGS) aspired to dominate the emergent field of genomics by discovering expressed gene sequences and developing therapeutic and diagnostic products based on proprietary genes. While HGS’ accomplishments fell short of their own lofty expectations, by the time HGS was acquired by GlaxoSmithKline, the company had extensive intellectual property and had launched a product with >$1 billion market potential. Nevertheless, HGS’ acquisition price was less than the total capital investments in the company. This work examines HGS’ history and accomplishments in the context of the business plan described by the company at their IPO. We focus specifically on the company’s valuation over time, which was highly correlated with general market indices, but negatively correlated with metrics of technical or clinical progress. The history of HGS points to the challenge of accounting for the value created by a science-based business plan. Earnings-based metrics, present value calculations, and “fair value” assessments did not account for HGS’ progress in executing their stated business plan. This work highlights the critical need for accounting practices that credit value to the progress of translational science and enable investors to profit from such investments. Journal of Commercial Biotechnology (2013) 19(4), 3–10. doi: 10.5912/jcb.619 Keywords: Genomics; drug development; value; investment; biotechnology; accounting GlaxoSmithKline (GSK) in 2012 for $3.6 billion,1 the INTRODUCTION company could claim many accomplishments, but had uman Genome Sciences (HGS) was not a ultimately failed to fulfill its own lofty expectations. The company with normal ambitions. At its found- story of HGS is an exemplar of the ambitions and aspi- ing in 1992, HGS aspired to dominate the newly rations of the biotechnology industry in general, and its Hemergent field of geno mics by being the first to sequence denouement provides insight into the challenges that and patent all of the genes expressed from the human prevent this industry from fulfilling its promise. What genome and develop a pipeline of therapeutic and diag- happened to HGS? What was its value? What can the nostic products based on these genes. The company’s biotechnology industry learn that will be of value in the outsized ambitions were advertised in elaborate annual future? reports, which featured Greek gods and saints as met- aphors for the company’s search for knowledge and fight against disease. By the time HGS was acquired by A SHORT HISTORY The history of HGS begins with Craig Venter’s ambitious Correspondence: Fred D. Ledley, Bentley University. proposition that all of the genes expressed by the human Email: [email protected] genome could be discovered by shotgun sequencing of OCTOBER 2013 I VOLUME 19 I NUMBER 4 3 expressed messenger RNA sequences, termed “expressed provided HGS with financial and technical support, and sequence tags” (EST). In 1992, two investors, Alan integrated HGS’ intellectual property and methods into Walton and Walter Steinberg, who were among the their partner’s internal development programs. When first to recognize the commercial potential of Venter’s the consortium agreement expired in June 2001, an HGS approach, arranged for the founding of two organi- press release noted that “Consortium members have zations. The Institute for Genetic Research (TIGR), a identified approximately 460 research programs for the non-profit scientific enterprise led by Venter, would creation of small molecule, protein, and antibody drugs, undertake high-throughput sequencing of ESTs. Human involving about 280 different genes. We believe there is Genome Sciences (HGS), a commercial enterprise led substantial value in these partnerships” by William Hazeltine, would provide financial support The first clinical trials with proteins discovered for TIGR, and have commercial rights to its discoveries. through EST sequencing began in the late 1990s. In Within a year, HGS completed a landmark partnership 1995, HGS initiated clinical development of repifermin, with SmithKline Beecham, which provided additional a recombinant Keratinocyte Growth Factor-2 protein capital investment, research funding, and experience in (KGF-2), to accelerate the healing of ulcers. In 1998, it drug discovery and development. initiated clinical trials for mirostipen, a recombinant In 1993, HGS filed for its IPO. The Company’s S-1 Myeloid Progenitor Inhibitory Factor-1 protein (MPIF-1) filing described the company’s goals as: “The Company’s for the treatment of neutropenia. Also in 1998, a third principal objective is to discover rapidly and obtain pro- candidate product, a gene therapy incorporating the prietary rights to a substantial portfolio of novel genes gene sequence for Vascular Endothelial Growth Factor-2 and to commercialize products based on those genes protein (VEGF-2) to treat atherosclerosis, was spun either alone or in collaboration with corporate part- out to a newly formed gene therapy company, Vascular ners.”2 The strategy, as described in the S-1 filing, was “to Genetics. None of these trials would proceed beyond identify rapidly the majority of the genes that comprise Phase 2 (Table 1). In addition to using newly discovered the human genome through partial sequencing and to gene sequences and their gene products as therapeutic select for further development those genes which have entities, HGS entered into a partnership in 1999 with potential commercial value.” Already by 1993, the S-1 Cambridge Antibody Technology to develop mono- stated that “…the Company believes it has, together with clonal antibodies that would inhibit the function of the TIGR, identified approximately 25,000 human genes gene products discovered by HGS. (including approximately 20,000 novel genes) of a total As the stock market started its exuberant climb of 50,000–100,000 genes believed to exist.”2 in 1999 and Craig Venter joined Francis Collins at the The relationship between TIGR and HGS was ter- White House to announce completion of the Human minated in June 1997, and Venter turned his attention Genome Project in 2000, HGS was well positioned to to sequencing the entire human genome through his capitalize on investor enthusiasm for genomics. The association with a new company, Celera Genomics. By company had more than 100 issued patents, a robust then, more than 162,000 non-overlapping ESTs had clinical development pipeline, multiple corporate part- been sequenced. Of these ESTs, 82% were thought to ners, and a high profile in the scientific and business represent the transcripts of previously unknown genes.3 community. The company raised a total of $1.4 billion HGS’ 1998 annual report summarized its gene discov- dollars through two secondary offerings in 2000, and ery efforts thus: “Between 1993 and 1995, HGS’ scientists closed Q3 2000 with a market capitalization in excess isolated messenger RNAs corresponding to what is esti- of $8.5 billion. This financing bonanza allowed HGS to mated to be more than 95 percent of all human genes.”4 grow to over 1100 employees and purchase Principia The report also described an emphasis on a “functional Pharmaceutical for $150 million. This acquisition pro- genomics” program, which included gene expression vided HGS with an expanded clinical pipeline of 20 profiling to “analyze gene expression of each of the more candidate products based on existing, patent-expiring than 11,000 newly discovered secreted protein genes” biological products as well as a technology applicable to as well as “high-throughput, robotic-cloning method pharmaceuticalizing gene products identified through to produce small amounts of each newly discovered HGS’ gene discovery platform. Despite its formidable secreted protein” and the analysis of 12,000 genes using technical position and strengthening clinical pipeline, this method.4 the end of the “dot.com” bubble caused HGS’ stock to On the business development front, HGS assembled collapse. By the end of 2002, the company’s market capi- a “Human Gene Consortium” of pharmaceutical compa- talization had dropped to $1.1 billion, only 13% of its nies including SmithKline Beecham, Schering-Plough, peak value (Figure 1a). Takeda Chemical, Synthelabo, and Merck KGaA, to part- HGS had limited revenues from 1993–2008, mostly ner in drug discovery and development. These companies from research relationships, and continued to invest 4 JOURNAL OF COMMERCIAL BIOTECHNOLOGY