Centocor Inc. History

Address:

244 Great Valley Parkway
Malvern, Pennsylvania 19355
U.S.A.

Telephone: (215) 651-6000
Fax: (215) 651-6000

Public Company
Incorporated: 1979
Employees: 550
Stock Exchanges: NASDAQ
Operating Revenues: $67.2 million
SICs: 2835 Diagnostic Substances; 2836 Biological Products except Diagnostic

Company History:

Centocor Inc. is a biotechnology company that develops and markets products to treat infectious, cardiovascular, and autoimmune diseases and cancer. It is also engaged in a number of other biotechnology research projects. Centocor, which was among the first start-ups in the biotechnology industry, entered the mid-1990s hoping to profit from products it had been developing and seeking to bring to market for more than a decade.

Centocor was founded in May 1979 by a group of scientists and entrepreneurs lead by Michael Wall. Wall graduated from the Massachusetts Institute of Technology with a degree in electrical engineering. Early in his career, during the 1950s, he worked for several electronics start-up companies. In the mid-1960s he switched to biology and, with some partners, founded a company called Flow Laboratories. In 1969 the group sold their company for $3 million to General Research Corp., a Virginia biomedical concern. General Research kept Wall on to help run the company for ten years. During that time he became interested in the burgeoning field of biotechnology.

Biotechnology can be simply defined as the manipulation of living organisms or biological components at the molecular, subcellular, or cellular level to create marketable products. Such products include bacterial and virus vaccines, toxoids, serums, plasmas, and various microbiological substances, as well as in vitro and in vivo diagnostic substances. The modern biotechnology industry was inspired by the 1953 discovery of the structure of DNA, which led to an understanding of the process by which proteins are produced by cells. It wasn't until the 1970s, however, that rapid progress was made in biotechnology.

In 1973 two U.S. scientists discovered the process of recombinant DNA, whereby a piece of DNA is snipped from one gene and spliced into another gene. This discovery demonstrated that scientists could genetically alter microorganisms and produce mass amounts of proteins that occur naturally only in small quantities. In the seven years following that breakthrough, a handful of biotechnology startups were formed to develop marketable biotech drugs and products. In 1975 researchers produced the first monoclonal antibodies, which are essentially cloned cells that can be used to attack foreign toxins, viruses, and cancer cells.

Inspired by major biotech breakthroughs, Wall left Flow General (or Flow Laboratories) in 1979 to start a biotechnology company called Centocor, planning to use biotechnology to develop diagnostic medical tests. The proposition was ambitious because the diagnostic testing market at the time was dominated by healthcare giants like Abbot Laboratories and Warner Lambert. Those companies generally developed proprietary tests to run on their own analyzers, which they sold to laboratories, blood banks, and hospitals. To compete directly in that market, Centocor might have to invest hundreds of millions of dollars to develop and promote its own analyzers.

Wall and fellow executives evaded the cost barrier by designing diagnostic tests that could be processed on other company's analyzers. Centocor then sold the tests to distributors, which were usually companies that sold their own analyzers. Abbott Labs, for example, eventually purchased Centocor's proprietary test for gastrointestinal and ovarian cancer. Centocor also kept costs down by minimizing in-house research expenses. In contrast to other biotech start-ups, which typically funded expensive original in-house research with venture capital, Centocor used its limited cash reservoir to piggyback off of discoveries made in university, government, and even private laboratories. When Centocor found a promising discovery for which it saw a marketable use, it would buy the technology and allow its in-house team of Ph.D.s, which numbered 25 by the mid-1990s, to develop the breakthrough into a marketable diagnostic test.

"You can have a garage full of Ph.D.s working on a project," Wall said of his research philosophy in the May 6, 1985, Forbes, "and nine times out of ten some guy across the street is going to come up with the discovery that beats them all." Besides saving money on original research, Centocor's strategy also allowed it to reduce the time necessary to get its products from the laboratory to the marketplace. In the case of the ovarian cancer test that Centocor sold to Abbott, for example, Wall learned in 1981 that researchers at the Dana-Farber Cancer Institute in Boston had isolated antibodies that could detect ovarian cancer cells. Centocor began funding the project and two years later employed the antibody in a test kit utilized to detect cancer cells.

During the early 1980s Centocor succeeded in bringing products to market and looked as though it might show a profit, which was no small feat in the biotechnology industry. Indeed, the commercial biotechnology sector had exploded during the early 1980s, largely as the result of a Supreme Court ruling that allowed genetically engineered bacterium to be patented. The ruling ensured that biotech innovators would be rewarded for their efforts if they developed a commercially viable treatment or cure. Millions of dollars poured into the industry as investors sought to profit from the promised onslaught of wonder drugs that would soon spring from biotech labs. The reality by the mid-1980s, however, was that many biotech companies had succeeded in burning through millions of dollars in research and development cash without producing a single significant commercial product.

Centocor capitalized on the excitement about biotechnology during the early 1980s by offering its stock to the public in 1982, bringing $21 million to Centocor's balance sheet. The company showed its first meager profit in 1984, and by 1985 was generating about $20 million in annual revenues and $2 million in net income, although its revenues were coming from research contracts and investment income, as well from product sales. Furthermore, the company was still sitting on about $18 million of the cash captured in its initial public offering.

Centocor's future looked bright going into the late 1980s. In addition to expected sales gains for the two tests already on the market, Centocor had been developing and was preparing to introduce tests for breast, liver, and lung cancer, among other ailments. Importantly, Centocor was also engaged in the research and development of therapeutic products that used monoclonal antibodies to deliver such agents as radioisotopes and chemotherapeutic drugs. Although profits fluctuated, Centocor managed to post successive revenue gains during the late 1980s: sales grew to $27 million in 1986 before jumping to $55 million in 1988 and then to $72 million in 1989. As revenues swelled, so did the Centocor organization, adding a manufacturing facility in the Netherlands and bringing its global work force to more than 400 by the end of the decade.

Centocor's work force and facilities expansion during the late 1980s reflected the company's intent to evolve from a creator of diagnostic tests to a developer, manufacturer, and marketer of drugs. Indeed, Centocor management hoped to parlay its profitable base of diagnostic tests into a research and development engine for monoclonal antibody products. The goal was to patent pivotal new drugs and then manufacture and bring them to market, making Centocor a full-fledged pharmaceutical company. Products being developed by Centocor during the mid- and late 1980s included Myoscint, which could diagnose heart attacks, and Fibriscint, which could diagnose deep-vein blood clots. Centocor executives knew that if they could succeed in getting FDA and European approval for its drugs, the payoff could be huge.

Centocor's flagship research project during the late 1980s and early 1990s was Centoxin, a drug that the company had started developing in 1982. Centoxin was designed to treat gram-negative sepsis, a bacterial infection that kills 80,000 people annually in the United States alone. An estimated 200,000 cases of gram-negative infection is diagnosed each year in the United States. Symptoms of the infection are a fever and drop in blood pressure, which is often followed by septic shock that leads to organ failure and death. The infection is usually spawned by trauma like major surgery. Centocor was enthusiastic about Centoxin because the estimated market potential for the drug worldwide in the early 1990s was between $1 billion and $1.5 billion annually. The drug, therefore, promised to launch Centocor to the status of a major pharmaceutical company.

Having completed most of its in-house development and testing, the company began restructuring its operations in the early 1990s in anticipation of FDA and European approval of the breakthrough drug. In 1990 alone, Centocor increased the staff at its Malvern headquarters from 340 to more than 500. To fund growth and investment in Centoxin, the company set about raising hundreds of millions of dollars in cash through stock offerings and by selling investment interests. It used much of the cash to begin building a large sales network and manufacturing facilities to sell Centoxin and its other drugs. By 1992 the Centocor organization encompassed a work force of about 1,500, including 300 salespeople and staff at production facilities in the United States and Europe.

Primarily because of costs related to the Centoxin project, Centocor posted income deficits of more than $300 million in 1990 and 1991, combined. The company was, apparently, betting its future on the success of Centoxin. Unfortunately, in April 1992 Centocor nearly lost that gamble when the FDA said that Centocor's data for Centoxin didn't demonstrate the drug's effectiveness. Executives were stunned. Realizing the urgency of the situation, a committee of directors headed by Chairman Wall quickly restructured the company's management. Among other major changes, James E. Wavle, Jr., president and chief executive of the company, resigned. Centocor spent the next few years shuttering idle production facilities and releasing two-thirds of its 1,500-member work force.

The delay in getting Centoxin to market meant that the company had, at least temporarily, lost its chance to join the ranks of the big pharmaceutical companies. "What they are giving up is the possibility of being an independent, fully integrated pharmaceutical company," said analyst David Webber in the May 4, 1992, Philadelphia Business Journal. Centocor management acknowledged the setback but countered criticism, claiming that the company had other products in its research pipeline and would eventually find a way to get its investment back out of Centoxin. Still, investors were alarmed. In January 1993 Centocor announced that it had halted its crucial clinical trial on Centoxin and had also ceased selling the drug in Europe, where the drug had been approved for some applications. The announcement brought a spate of shareholder suits alleging false claims and misrepresentation by the company.

Centocor posted ugly income deficits of $196 million, $74 million, and $127 million in 1992, 1993, and 1994, respectively. Meanwhile, the company's market value plunged from $2.3 billion to a meager $250 million. Centocor management refused to concede defeat. The company had still had $150 million in cash to get it by after the Centoxin blow was dealt in 1992. Besides slashing costs, Centocor quickly entered into an alliance with pharmaceutical giant Eli Lilly, which paid $50 million for a five-percent stake in the company. Lilly also agreed to help Centocor get Centoxin through the approval process. Centocor relinquished the worldwide marketing rights to Centoxin in exchange for half of the drug's future profits. It also effectively promised to give Lilly the marketing rights to another of its major drugs, ReoPro, if Centoxin failed to be approved.

Centoxin did fail to be approved. Surprisingly, test data eventually showed that patients taking Centoxin actually had a higher death rate than those taking a placebo. With Centocor on the brink of bankruptcy, Lilly threw its weight behind ReoPro, a cardiovascular drug used primarily in high-risk angioplasty. In June 1994 the FDA recommended ReoPro for approval. The drug, which would be marketed by Lilly, was expected to generate annual sales of $250 million by 1997. The accomplishment came just in time to save Centocor from collapse. In fact, in mid-1995 the company expected to show an annual profit for the first time since 1989. Buoyed by the success of its alliance with Lilly, Centocor began seeking other alliances to market its drugs.

In mid-1995 Centocor's major product initiatives included: ReoPro; CenTNF, a therapeutic product designed to treat rheumatoid arthritis and inflammatory bowel diseases; and Panorex, a cancer-fighting drug. The company was also developing and selling various diagnostic products and tests related to ovarian cancer, syphilis G, pancreatic cancer, breast cancer, gastric cancer, lung cancer, and other afflictions. With manufacturing operations in the Netherlands, the United States, and the United Kingdom, the company employed about 550 workers.

Principal Subsidiaries: Centocor B.V. (The Netherlands); Centocor U.K. Limited (United Kingdom); Nippon Centocor K.K. (Japan).

Centocor Inc. History

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