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Expert Financial Analysis and Reporting

Recombinant DNA: The Foundation Upon which the Biotechnology industry was Founded


As I previewed in Announcing A Strategic Change in Coverage Approach at SmithOnStocks , I am taking a new approach to research commentary that will lead to much broader company coverage but with the tradeoff that the analysis will be more strategic and less focused on detailed analysis of individual companies. Before discussing individual companies, I think it is important to have a general sense of the explosion in biotechnology advances that have changed the face of the world pharmaceutical industry over the last forty years and those that are emerging to do the same over coming decades.

As a first initiative, I have written notes that describe two broad technological breakthroughs that have created the biotechnology industry and three new ones that are emerging which promise to profoundly affect the future. My first article is on recombinant DNA which is the cornerstone of the foundation upon which the biotechnology industry was built. My next note will be on monoclonal antibodies which is the technology that is driving current industry research and global revenue growth. These technologies arose in the 1980s and 1990s and are firmly established.

What I am focused on and I also will write about are three technologies in the early stages of translating research hopes into commercial reality. These are gene therapy, RNA interference (short interfering RNA and antisense oligonucleotides) and stem cell therapy. One important takeaway is how long it takes for these technologies to become mainstream in biopharma business models. As you will see in subsequent notes, if these three new technologies develop along timelines comparable to recombinant DNA and monoclonal antibodies, they will have a modest impact in the next five or maybe ten years, but in 20 years, resultant products will dominate product development.

I will try to identify companies operating in gene therapy, RNA interference and stem cell therapy that will ride the development wave as Amgen, Biogen and Genentech (now part of Roche) did with recombinant DNA and monoclonal antibodies. My initial work leads me to believe that there could be 20 or 30 or more companies that have home run investment potential when looked at from the standpoint of where they will be in ten years. I hope to pinpoint some of these and help you to focus on those that you believe are most promising. I would note that three of the first four companies to successfully commercialize gene therapy- Kite, Spark and AveXis- have each been acquired. A fourth company, Juno, that is about to commercialize a product was also acquired. Three of these acquisitions occurred just before product approval and Kite was acquired very shortly after approval.

The Scientific Discovery Occurred 50 Years Ago

Recombinant DNA technology is the foundation upon which the modern biotechnology industry was built. It enables researchers to insert a human gene into a host cell, usually bacterial (most often E. coli) or mammalian or even an insect. The human gene is then translated by mechanisms naturally present in the host cell to produce the protein coded by the gene. The host cells can then be expanded through cell cultures into many billions of cells, resulting in a biological system for producing human proteins on a large scale.

The first publications describing the successful production and intracellular replication of recombinant DNA were published in 1972 and 1973, from Stanford and UCSF. In 1980 Paul Berg, a professor in the Biochemistry Department at Stanford, was awarded the Nobel Prize in Chemistry for his work on nucleic acids with particular regard to recombinant DNA.

Therapeutic Applications

At the time, scientists knew or came to know that some diseases were the result of the inability of the human body to produce enough of a certain protein. The most well-known example is the inability of type 1 diabetics to make insulin. They also knew that certain human proteins had the potential to be effective drugs for treating diseases such as:

  • erythropoietin for stimulating red blood cell production in patients with chronic kidney disease,
  • interferon alpha for hepatitis C, and
  • interferon beta for multiple sclerosis.

The quandary was that they could not be produced in meaningful quantities. Recombinant DNA technology was the solution.

The Biotechnology Industry Emerges

Genentech and Biogen were founded in the late 1970s and Amgen in 1980 to commercialize products based on recombinant DNA technology.

  • In 1978, Genentech first produced biosynthetic human insulin in E. coli bacteria using recombinant DNA techniques. The technology was licensed to Eli Lilly and the FDA approved the product (trade name Humulin) in 1982. Genentech also developed the commercially less important human growth hormone for dwarfism that was approved by the FDA in 1985 and other smaller products.
  • Amgen developed Epogen (erythropoietin) and received FDA approval in 1982. It was licensed to Johnson & Johnson for international sales and Amgen marketed it in the US. Amgen followed with the introduction in 1991 of Neupogen (filgastim), which stimulated neutrophil production and was extremely important for preventing infections in patients receiving chemotherapy. Both became blockbusters.
  • Using Biogen’s technology, Glaxo received approval for a recombinant hepatitis B vaccines in 1986. Biogen developed interferon alpha for the treatment of hepatitis C viral infections and licensed worldwide rights to Schering-Plough which received FDA approval in 1995. The much more commercially important Avonex (interferon beta) was approved by the FDA in 1996 for the treatment of multiple sclerosis; Biogen marketed this drug on its own.

Genentech, Amgen and Biogen were the three pillars upon which the biotechnology industry was built. I was an analyst at Smith Barney in the early 1980s covering the pharmaceutical industry and I was first analyst to cover Amgen when Smith Barney led their initial public offering in 1983. I also called on Genentech before Hambrecht & Quist brought them public in 1980. I remember very well the skepticism of the major pharmaceutical companies about recombinant DNA technology at the time. The consensus view was that it was primarily a production tool for producing proteins in large quantities and as a research tool for studying proteins. The major drug companies did not have much interest in the 1980s and indeed even into the 1990s.

The disinterest of the large pharmaceutical companies had some basis. Indeed, of the early products of Genentech, Amgen and Biogen only Humulin, Epogen, Neupogen and Avonex evolved as blockbusters. Meanwhile, the pharmaceutical industry was churning out blockbuster drug after blockbuster using established small molecule drug discovery. This lack of competition from big phama allowed the then small companies Genentech, Amgen and Biogen to dominate biotechnology research and development. They were able to attract capital and research talent that allowed them to expand their reach into another emerging technology-monoclonal antibodies. This was a natural evolution as monoclonal antibody molecules are produced with recombinant DNA.

We now know Genentech, Amgen and Biogen as the three largest biotechnology companies. Some of the pharmaceutical companies that scoffed at them are no longer around as independent entities, most have been acquired and are parts of larger companies. It was not easy going for any of these three companies in the early years. Genentech actually ran into financial problems so that in 1990 it was forced to sell a majority stake to Roche. If the truth be told, Genentech was not very successful in developing products based on recombinant DNA technology. However, it was quick to recognize the potential of monoclonal antibodies, which has been much, much more important from a commercial standpoint.

The business model of biotechnology was alien and strange in the 1980s and 1990s. Companies could spend several years developing drugs and during that time would have no sales and would have huge cash burns. Investors were perplexed as how to value such companies and why you would invest in them. However, the success of Genentech, Amgen and Biogen showed that this was a valid business model. The result was that this allowed entrepreneurs and venture capitalists to reach for the stars and dare to tackle commercialization of new scientific discoveries. This spirit has caused an explosion of scientific research that has led to today’s biotechnology industry with its thousands of individual companies.

Recombinant DNA Technology Simply Explained

Let me try to simplistically explain from my layman’s standpoint how recombinant DNA technology works.

  • It begins with the identification of the gene of interest. This can be done in several ways which enable scientists to determine the amino acid sequence of the protein of interest. The corresponding gene can then be synthesized.
  • After the gene is isolated, it must be inserted into the host cell using a suitable vector, i.e. a DNA molecule containing the gene that can be integrated into the genome of a cell and is then replicated when the cell divides. In bacteria, plasmids are often used as vectors to insert human genes. Bacterial cells do not contain their DNA in a nucleus like eukaryotes (us humans). They have a circular piece of DNA called the plasmid that is located in the cytoplasm. Working outside of the bacterial cell, the plasmid from that cell can be genetically engineered to incorporate a human gene. A cut is made in the plasmid with an enzyme which makes cuts at specific sites. The human gene is inserted into the plasmid at the cut and sealed with ligase. The result is a molecule that contains both bacterial and human genetic material (a chimeric). There are other types of vectors that can be used and other host cells like mammalian or even insect cells. I won’t attempt to go into these.
  • The next step is to move the vector into the host cell. This can be done through a variety of methods such as electroporation, microinjection, liposome mediated gene transfer, silicon and several others. This is done in the laboratory in which a colony of the cells that are going to be transformed have been grown. For example, E. coli cells might be grown in a Petrie dish.
  • In the E. coli cell colony, there will then be three types of cells- non transformed bacterial cells without any change; transformed bacterial cells with an unaltered vector; and most importantly the transformed bacterial cell now containing the recombinant vector. The latter are then separated using a number of techniques which I won’t go into.
  • The final step is to dramatically expand the cell line that is now expressing the human gene in fermentation tanks and then to separate and purify the human protein. In this example the E. coli has become a bacterial factory. All of this is very complicated and a discussion is beyond the scope of this note.


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