Biotech Labs Birth New Drugs — and New Fortunes
Drugs that help millions of people have lifted stocks of the firms that own them and made millionaires of many scientists and doctors behind them
Friday, June 24 2016 15:54 EDT
Paul A. Friedman, like many travelers shuffling through airport security lines, sometimes daydreams about owning a private jet.
Dr. Friedman is one of the lucky ones who could afford it. Over the past few years, the former associate professor at Harvard Medical School sold $146.1 million worth of shares in Incyte Corp. He headed the firm as chief executive from lean times through the successful launch of a drug to treat a rare cancer.
Despite the windfall, he continues to drive his 2009 Audi. “We live in the same place, my wife and I,” said the 73-year-old physician, who retired as CEO in 2014 and remains a company director.
New drugs that extend or improve the lives of millions of people — and the potential of ones still in development —have lifted stocks of the biotechnology companies that own them and created a new class of millionaires from many of the scientists, doctors and investors behind them.
Biotech leaders have joined hedge-fund and tech executives in the U.S. corporate winner’s circle, riding the success of new high-price drugs and investor enthusiasm for the high-risk business. Some have bought fancy houses. Others, like Dr. Friedman, say not much has changed from lives spent in labs.
Organic chemist Norbert W. Bischofberger, the longtime research and development chief at Gilead Sciences Inc. —and a co-inventor of Tamiflu—sold $320.3 million worth of company stock through 2015. Yet his wife had his old car towed and replaced with a new Toyota after he balked at getting a new one. “The conversation,” he recalled, “went something like, Wife: ‘We should get a new car for you.’ I: ‘There is nothing wrong with the one I got.’ ”
Drugs conceived in biotech labs have advanced the treatment of such illnesses as hepatitis C, cystic fibrosis and some cancers. Many grew out of new insights into the genetic causes and biological processes of disease, aided by years of government and private research.
An analysis of corporate filings by The Wall Street Journal found that executives and directors at the 100 largest biotech companies sold stock valued at $8 billion in the industry’s bull market last year.
The payouts marked a dramatic peak for an industry that five years earlier was in the doldrums, with venture capital investments and initial public offerings nearing historical lows. Stock sales by biotech directors and executives averaged 1.2billionannuallyfrom2004through2011,adjustedforinflation,growingtoanaverage2.3 billion a year from 2012 through 2014.
The average annual market value of biotech companies in the S&P Composite 1500 more than tripled from 180billionin2010,to594.2 billion this year, according to data from S&P Dow Jones Indices.
Biotech was aided by low interest rates in the U.S. that drew investors to riskier, high-return ventures. The health-care law also helped by adding millions of people to insurance rolls, expanding the potential customer base with many people getting prescription drug coverage for the first time.
Scrutiny of drug prices and fear of government price controls have contributed to a recent slump in biotech stocks, with the NASDAQ Biotechnology index down 26% since January. “Every little company, every idea attracted capital,” said Geoffrey C. Porges, a senior biotechnology analyst at Leerink Partners LLC. “As a result, we probably overfunded the industry.”
Most of the new, patent-protected drugs have few rivals and scant limits on price, a sky’s-the-limit prospect that continues to draw investors to biotech firms with approved medicines — and to those only promising them.
Stock sales by executives and directors at money-losing biotech companies totaled $2.67 billion last year, or a third of all sales analyzed by the Journal, as investors seeking a stake in the next potential blockbuster sent the value of these firms soaring.
Merger fortunes
2015 was a record year for mergers and acquisitions. Some of the biggest windfalls went to shareholders of acquired biotech companies. Robert W. Duggan, former CEO of Pharmacyclics Inc. topped the list: 3.46billionincashandstockwhenthefirmwasacquiredbyAbbVieInc.for21 billion.
Mr. Duggan hadn’t worked in drug development before he bought into the money-losing Sunnyvale, Calif., biotech firm in 2004. Four years later, he used his 29% stake to take control of the company. At the time, in September 2008, Pharmacyclics had a market valuation of 53millionand,since1991,hadrecordedlossesof340 million.
In 2013, Pharmacyclics received approval from the Food and Drug Administration for its first drug, Imbruvica, which has since become a popular treatment for the most common type of adult leukemia. Studies found it slowed progression of the disease with fewer side effects than older drugs.
With a yearly per-patient price tag around 100,000,Imbruvica’sglobalsaleswere548 million in 2014, its first full year on the market, and rose to more than $1 billion last year.
“It shows if you get it right and make a modest investment, you can come out quite well,” said Mr. Duggan, who had put about 50millionintothefirm.Othercompanyexecutivesanddirectorsmade419 million in the deal.
At Receptos Inc., whose lead drug hasn’t moved beyond late-stage studies, 14 executives and directors received a total of 540.5millionfortheirstockwhenthecompanywasacquiredlastyearbyCelgeneCorp.,for7.2 billion.
Sheila Gujrathi, the former chief medical officer at Receptos, received $75 million for her shares when the deal closed. Dr. Gujrathi, 45 years old, was one of the few women among biotech’s biggest earners last year.
“If you go into medicine, you don’t grow up thinking you could be a multimillionaire,” she said. “To find myself in a position where I have a substantial amount of wealth, yes, it’s surprising and life-changing.”
Biotech is distinguished from software and other strands of tech because it often takes hundreds of millions of dollars and a decade or more to learn if a new drug treatment succeeds. The cost of developing, say, a smartphone app is so low that anyone with the coding skills can make and sell one.
Even a promising drug can fail after years of investment during late-stage studies, and most biotech companies expect years of losses.
“The normal state of the industry is to be struggling to demonstrate that they’re making money, desperately trying to convince people it’s not just a bunch of risky science experiments,” said Dr. Porges, who completed medical school before entering the drug industry.
Regeneron Pharmaceuticals Inc., based in Tarrytown, N.Y., was founded in 1988 and had accumulated 1.27billioninlossesbeforegettingFDAapprovalinNovember2011forEylea,atreatmentforage−relatedvisionlossthatannuallycosts11,000 to 16,000.EyleasalesintheU.S.lastyearreached2.68 billion.
Company shares grew 16-fold from 2011 through 2015 —the best-performing stock in the S&P 500 over that period.
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