Genentech Is Founded

The founding of the biotechnology company Genentech was a key event in the commercialization of this field of research.

Summary of Event

Genentech was the largest and most well-known of the early efforts to commercialize biotechnology research. The company has been described as laying the foundation for the biotechnology industry. In addition to its pioneering role in commercializing biotechnology, Genentech achieved a major feat by using public financing to fund clinical trials of drugs. Genentech
Recombinant DNA technology
[kw]Genentech Is Founded (Apr. 7, 1976)
[kw]Founded, Genentech Is (Apr. 7, 1976)
Recombinant DNA technology
[g]North America;Apr. 7, 1976: Genentech Is Founded[02370]
[g]United States;Apr. 7, 1976: Genentech Is Founded[02370]
[c]Organizations and institutions;Apr. 7, 1976: Genentech Is Founded[02370]
[c]Science and technology;Apr. 7, 1976: Genentech Is Founded[02370]
[c]Genetics;Apr. 7, 1976: Genentech Is Founded[02370]
Swanson, Robert
Boyer, Herbert Wayne
Raab, Kirk

In the early 1990’s, the biotechnology industry was in its infancy, but the products it had generated indicated the industry’s potential. Biotechnology has the potential to produce drugs that can cure diseases such as cancer and acquired immunodeficiency syndrome (AIDS), increase the yields of agricultural products, and even make computers faster using “biochips.” Continued growth of the biotechnology industry is likely to revolutionize the operations of drug and pharmaceutical producers, chemical companies, and farms.

Biotechnology is defined as the application of biological organisms, systems, or processes to manufacturing or service industries. Of the collection of technologies that together make up the realm of biotechnology, the one that is most discussed is genetic engineering. The true potential of biotechnology was unleashed when James D. Watson Watson, James D. and Francis Crick Crick, Francis worked out the double-helix structure of DNA DNA (deoxyribonucleic acid), the chemical blueprint for all living creatures. The fact that DNA reproduces itself opened the possibility of making DNA do what people wanted it to do. If genetic instructions for the manufacture of a desirable protein could be identified and inserted into the DNA of a living cell, then that cell would be able not only to manufacture the protein but also to pass on that ability to future generations of cells. Techniques for transferring genes from organisms into bacteria were first developed in the early 1970’s. At that time, university laboratories were conducting much of the biotechnology research that was being undertaken.

Robert Swanson, a venture capitalist working for the firm of Kleiner Perkins Caufield & Byers, Kleiner Perkins Caufield & Byers[Kleiner Perkins Caufield and Byers] had a bachelor’s degree in chemistry and a master’s degree in management. Swanson was intrigued by the commercial potential of recombinant DNA and was following research efforts in this area. In 1976, he read a paper on recombinant DNA by Herbert Wayne Boyer, a researcher who was working at the University of California. Swanson arranged a meeting with Boyer to discuss the commercial potential of techniques Boyer had developed. From January to April of 1976, Boyer and Swanson made more detailed investigations of specific technological and market opportunities. On April 7, 1976, Swanson and Boyer incorporated Genentech, each taking twenty-five thousand shares of common stock in return for the cash and assets of their partnership. Kleiner Perkins provided $200,000 of seed capital in exchange for twenty thousand shares.

Genentech’s goals were to select products that were in great demand and to engineer microorganisms specifically to produce those products. The founders believed that any product produced by a living organism would eventually be within the company’s reach.

In the next two years, Genentech played a pioneering role in product development. In August, 1977, a little more than a year after the company was founded, Genentech scientists cloned DNA in a bacteria culture to produce somatostatin. Somatostatin This was the first human protein ever produced in a microorganism. In August, 1978, Genentech and City of Hope Medical Center City of Hope Medical Center in Duarte, California, jointly announced that they had produced insulin Insulin using biotechnology. This product was licensed to the Eli Lilly Eli Lilly and Company pharmaceutical company and was the first product using recombinant DNA technology to reach the market, under the trade name Humulin. Humulin

To continue its research efforts and commercialize technology, Genentech needed more funds than the company could raise internally. Swanson hired a sales and marketing force to sell the company itself, and on October 14, 1980, Genentech offered its shares publicly, even though it had no product ready for sale. Shares were issued for $35 apiece at 10:00 a.m., and the price had hit $86 by the afternoon. Genentech used proceeds from the stock sale to fund clinical trials of a drug, becoming the first company to do so. Previously, similar research and development partnerships had been associated primarily with real estate development and oil and gas development.


Genentech’s efforts had significant impacts on the performance of Genentech itself, the founding of other biotechnology firms, and the operations of giant drug and pharmaceutical firms. In addition, biotechnology went on to spawn related new technologies, such as rational drug design.

By 1992, Genentech’s research had aided in the development of seven of the thirteen biotechnology-based pharmaceuticals on the market. Genentech was the first biotechnology company to take three of its own products from the laboratory to the marketplace, a record of success the company continued to replicate in subsequent years, with numerous drugs aimed at the treatment of cancer, heart disease, and kidney diseases. Genentech’s commitment to research is demonstrated by its pattern of investing approximately half of its revenues in research—three times the average investment among pharmaceutical companies and the highest among firms in the biotechnology industry.

Genentech’s performance was steady but not spectacular. Contrary to expectations, none of its first three products was a runaway success. Each of the three—the Protropin Protropin human growth hormone (hGH), the Activase Activase tissue plasminogen activator (t-PA) blood clot dissolving agent, and Actimmune Actimmune interferon gamma—faced its own problems.

In 1985, Genentech received approval from the Food and Drug Administration Food and Drug Administration (FDA) to market its first product, Protropin. Genentech applied for “orphan drug” status and obtained it, as there were only ten thousand children in the United States who lacked the natural hormone and would not reach full height without it. As a result, Genentech received tax incentives and exclusive marketing rights to the drug for seven years. (The intent of the Orphan Drug Act of 1983 Orphan Drug Act (1983) was to provide incentives to drug companies to research cures for rare illnesses.)

Eli Lilly developed a different version of the growth hormone, and the FDA granted orphan drug status to that drug as well. When Genentech sued to block the approval for Lilly’s product, the courts found against Genentech, stating that Lilly’s drug was sufficiently different from Genentech’s to make orphan status for both reasonable. The case raised several fundamental issues. Analysts questioned whether a highly profitable drug, or one with potential applications outside the small group of primary patients, should be eligible for special status. The growth hormone could have much wider applications as a wound-healing drug or could be used to treat people of short stature unrelated to a hormone deficiency. By 1991, Protropin had annual sales of $185.1 million and showed steady growth.

In early 1987, Genentech applied to the FDA for approval of Activase t-PA, which is used to dissolve blood clots during a heart attack. Streptokinase Streptokinase (sold by SmithKline) was already used for the same purpose. Initial tests comparing Activase with Streptokinase suggested that Activase was twice as effective. This improved performance was reflected in its price: Streptokinase was $200 to $300 a dose, and Activase had a projected price of $2,200 a dose. Genentech’s application to market Activase was rejected by the FDA, in part because tests had been conducted on a pool of fewer than two hundred patients. Genentech’s excellent public relations mobilized public opinion, and the FDA approved the marketing of Activase when Genentech reapplied six months later, in November, 1987.

The initial euphoria about Activase started to fade, however, as reports came in about excessive bleeding in patients using Activase. In view of the increased risk, many doctors did not believe the performance difference between Activase and Streptokinase justified the higher price. Activase appeared to be an improvement, but not a breakthrough. Sales of Activase in 1988 were approximately $180 million. By 1991, sales of Activase were only $196.5 million, and in 1992 sales fell to $182.1 million. Genentech’s problems were compounded by the introduction of competing products.

Genentech received approval for its third product, Actimmune interferon gamma, in 1990. This drug is used to treat an inherited immune system impairment called chronic granulomatous disease. Few people have this disease, so sales of the product were only $1.7 million in 1991 and $2.9 million in 1992.

In the pipeline were increased applications of the three existing products as well as new products to treat patients with cystic fibrosis and breast and ovarian cancer, an AIDS vaccine, and a drug to reduce pain during childbirth. On February 3, 1990, Genentech announced the sale of a controlling stake to Roche Holding Ltd., the Swiss parent of giant drugmaker F. Hoffmann-La Roche and Company. This move resulted in an infusion of $492 million in cash that would be used to support research. Kirk Raab took Swanson’s place as chief executive officer, and Swanson became chairman of the board of directors. This change signaled a shift from entrepreneurial and visionary management to more traditional corporate control.

By 1993, about six hundred biotechnology companies had been founded, nearly all of them in the United States. Among them were Applied Biosystems, Chiron, Life Technologies, Centocor, Cetus, and Amgen, all of which met with considerable success. The growth of biotechnology products has been steady rather than spectacular, however. A decade after Genentech’s launch, industry sales reached approximately $700 million. About $300 million was accounted for by diagnostic tests, with the remainder coming from sales of drugs and vaccines. In the early years of the twenty-first century, Genentech continued to be the standard-bearer for the biotech sector to which it gave birth.

The commercial performance of biodrugs was initially disappointing partly because expectations were so high. Many drugs that seemed promising ended up having dangerous side effects or were only useful in the treatment of rare diseases. Biotechnology-based pharmaceuticals were also limited by their delivery systems. Most of these drugs had to be injected, because they would be absorbed by the stomach wall if swallowed. Development of versions that could be taken orally promised to expand the market for these drugs.

Biotechnology-based drugs have numerous advantages over synthetically produced drugs. For example, most biodrugs have fewer side effects than do synthetic drugs. In addition, finding suitable synthetic drugs can be a major challenge, as researchers must expose hundreds or thousands of chemicals to cells to see if there is any effect. The success rate is very low in this haphazard type of research. Biotechnology has a higher success rate because it starts its search for a cure based on what biologists know about a disease and how the body fights it.

Biotechnology has influenced the way traditional drug and pharmaceutical firms treat synthetic drugs, giving rise to what is called rational drug design: Instead of the hit-and-miss screening traditionally used, scientists use recombinant DNA and other genetic engineering tools to make large quantities of natural proteins, then use them as research tools for designing better synthetic products. Genentech
Recombinant DNA technology

Further Reading

  • Elkington, John. The Gene Factory: Inside the Genetic and Biotechnology Business. New York: Carroll & Graf, 1985. Very useful source for information on the potential benefits from the biotechnology industry.
  • Hamilton, Joan. “Genentech’s Custody Case over an Orphan Drug.” BusinessWeek, March 23, 1987, 39. Discusses Genentech’s problems with marketing Protropin.
  • _______. “The Search for Superdrugs.” BusinessWeek, May 13, 1991, 92-96. Provides information on possible extensions of biotechnology.
  • McKelvey, Maureen. Evolutionary Innovations: The Business of Biotechnology. New York: Oxford University Press, 1996. Examines the commercial development of biotechnology, focusing on comparison between Genentech and a Swedish firm. Features figures, bibliographic references, and index.
  • Mahar, Maggie. “The Genentech Mystique: How Much Science, How Much Hype?” Barron’s, January 11, 1988, 8-9, 20-31. Provides information on Genentech’s founding and its launch of Activase.
  • Quinn, James Brian. “Genentech, Inc. (A).” In The Strategy Process: Concepts, Contexts, and Cases, edited by Henry Mintzberg and James Brian Quinn. 2d ed. Englewood Cliffs, N.J.: Prentice Hall, 1991. Presents a good summary of the founding and initial years of Genentech.
  • Robbins-Roth, Cynthia. From Alchemy to IPO: The Business of Biotechnology. Cambridge, Mass.: Perseus Books, 2000. Comprehensive history of the biotechnology industry includes discussion of Genentech.
  • Wyke, Alexandra. “The Genetic Alternative: A Survey of Biotechnology.” Economist 307 (April 30, 1988): s1-s18. Informative survey covers the development and future of the biotechnology industry.

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