What questions does he need to answer and how is he going to get the information?

In the summer of 1990 Genzyme hired Nancy Levy to head up a new business area. Genzyme was interested in furthering their presence in the diagnostic test market by selling directly to end users of diagnostic kits and were looking for someone to lead the charge. Genzyme already supplied bulk diagnostic materials to manufacturers. They also provided some unrelated testing services through their own clinical laboratories. In addition, Genzyme made a few kits for the research market. The expansion to assembling and selling the kits directly into the clinical lab market, therefore, was seen as a minor step because they already sold the materials for others to make kits. Genzyme felt, therefore, that only one person was needed to make a business of clinical diagnostic products and so they were not planning on providing dedicated R&D resources to the segment. In these years, the bulk of Genzyme's R&D and manufacturing resources were being used to develop their fledgling cardiovascular pharmaceutical products.

The Biotechnology Industry

During the 80's, a new wave of technology hit the pharmaceutical industry. Genetic engineering, the process of moving genetic information contained in deoxyribonucleic acid (DNA) from one living cell to another, allowed scientists to create human proteins such as insulin and growth hormone in the laboratory. The DNA of simple organisms, such as bacteria, could be manipulated to produce human proteins cost-effectively. These organisms could be grown on a commercial scale in large fermentation tanks using technology derived from the food industry's production of beer and from traditional pharmaceutical production of antibiotics. Carefully selected, these human proteins could treat diseases previously untouchable by traditional chemical pharmaceuticals.

The 90's held even more potential. U.S. sales of biopharmaceuticals in 1991 were expected to climb to approximately $1.2 billion, based on sales of only 12 products.1 Three of these were generating revenues of $250-300 million.2 In 1991, genetically engineered products, many of them developed by small firms but manufactured and marketed by the giants of the pharmaceutical industry, comprised a $4.5 billion business.3 As more products came to market, this industry was expected to reach $8 billion by the year 2000.4 But, the applications for biotechnology were not limited to pharmaceuticals. Including the widening applications in fields such as agriculture, energy, environmental protection and others, the President's Council on Competitiveness projected a $50 billion market by the year 2000 for the U.S. biotechnology industry.5

Developing and eventually offering a drug for sale in the marketplace posed a number of hurdles for companies. One of the biggest hurdles for the 1,100 U.S. biotech companies in 1991 was finding money to support the large research and development costs. It is estimated that more than $10 billion was invested in biotech research and development in the 80's, but the cumulative sales generated by that investment was only $1 billion.6 Often the success or failure of a company hinged on the development of a single product. Bringing a drug to market took a minimum of 8 to 10 years and cost at least $75 to $100 million. To attract investment, these companies sold the promise of future products and applications, and investors gambled on the payoffs from these promises.

In 1991, biotech companies had raised $2.1 billion in initial public offerings and additional stock shares.7 Approximately 25 biotech companies had gone public in 1991. Biotech firms nationally gleaned only $483 million through public offerings in all of 1990.8 The success of these public offerings was driven not only by confidence in any specific company but more importantly by perceptions of the industry as a whole and the ability of biotech management to "sell" the financial markets on the viability of their ideas for new products.

In their enthusiasm and inexperience, biotech management tended to underestimate development times. On the other hand, Wall Street had difficulty truly understanding this new technology and nobody could quite predict what would happen when these products hit the market. So, the financial market for biotech companies became very volatile, jumping around with every piece of good and bad news reaching the press. Key among the milestones used to judge a company's progress was the movement of their products through the defined steps in regulatory approval.

Biotechnology drugs, like all drugs, must have FDA approval to be sold in the U.S.; several stages of testing and review were required which significantly delayed market introduction. Because demonstrating a successful march through FDA approvals was essential to financial stability, most companies publicly announced the achievement of each step. The first major milestone was the preparation of an IND in which the company (sponsor) asked permission to begin human studies (clinical trials) based on submission of laboratory and animal testing as well as manufacturing process and control data. Clinical trials were conducted in stages (Phases I-III), first using volunteers, then using patients, and each time using successively larger numbers of people. All the data would be finally compiled into a massive application known as an NDA or PLA for full approval to market. The FDA had instituted several programs to expedite drug approval for particularly promising new drugs; these programs were often applied to biotechnology drugs. One was designed to shorten the approval time for treatment of serious or life-threatening diseases. It allowed the combination of the second and third phases of clinical studies if results from the first stage were promising. At each phase of development, risks were still high that the product would not move to the next phase and only one in five new drug applications would ultimately be approved for sale.9

Another source of risk was the application for patents. The time required for approval of a biotechnology patent was 26 months, versus 19 months for other technologies. Part of this was due to the sheer volume of applications (18,500 applications were pending in September, 1990) and part was due to the complexity of the products and the lack of standards for comparison.10 In addition, educating patent examiners to deal with this new technology also caused delay and ambiguity over issued patents that would require resolution in the courts over many years.

Beyond the time delays, patents were just one step towards intellectual property protection. Even among industrialized nations, no common patent standard existed. The European Community had not yet addressed this subject. The murky legal environment meant that biotech companies faced the risk that their years of development and investment might be pirated in the global market. In developing countries, even less regard was given to patents.

Finally, a certain amount of moral skepticism existed. To many people, experimentation with genes and movement of DNA from one species to another was morally wrong. Questions arose as to where the line would be drawn . . . would this lead to human engineering? The possible health and environmental risks were also of concern and may remain unknown for several decades. To what extent would biotech companies be liable should problems arise?

As a result of the high price of research and development, the time lag required to bring products to market, and the frustration of constantly seeking funding, corporate partnering became common in the biotech industry in the late 1980's. Many firms were teaming with the pharmaceutical giants, such as Roche, SmithKline Beckman, Schering-Plough and Johnson&Johnson, to share the costs and ensure long-term viability (see Exhibit 1). In exchange, some biotech companies were surrendering equity. Others gave up manufacturing rights. Benefits to the smaller firms included access to greater R&D resources, marketing and distribution expertise, and manufacturing facilities.

All in all, development of pharmaceuticals by biotechnology companies in the 1980's was a high risk, high pay-off business. Many companies who did not want to "sell their souls" to a large partner, looked to other kinds of non-drug products where their technology might produce revenues sooner to help support their pharmaceutical programs. One of the most promising short-term possibilities seemed to be in selling diagnostics kits to clinical laboratories, especially where technology from their pharmaceutical research and development could be exploited. So Genzyme was not alone in their expectations of their new product manager and, in fact, had more experience in diagnostics than most biotech companies at that time.

The Diagnostics Segment

Products in the diagnostic segment of the healthcare industry were those used to analyze fluids drawn from the body. Biotechnology provided the tools to allow the performance of many diagnostic tests more accurately and cost-effectively. The market need for diagnosis to become more precise, accurate and timely, drove many new diagnostic applications. In some cases, biotech improved upon existing tests and could reduce the waiting time required to receive results, often to just a fraction of the original waiting period. In other cases, biotechnology could measure something entirely new that would assist a physician with diagnosing or monitoring disease. Over all, diagnostic sales worldwide totaled more than $5 billion, with new diagnostic tests based on biotechnology accounting for a fifth of the total.11

Diagnostic tests derived from biotechnology could utilize monoclonal antibodies, clones of human white blood cells produced in the laboratory, or DNA probes, which were used to snag strands of patient DNA from very small samples. Whatever the method, since the testing takes place outside of the body, there was no direct risk to the patient. So, because these diagnostic products were not invasive, the FDA could approve them much quicker than ingested drugs. Approvals by regulators could take as little as 90 days. This allowed companies to believe they could achieve a relatively quick return on their research and development efforts.

Several companies were focusing on diagnostic kits for infectious diseases, particularly venereal diseases such as chlamydia and herpes, where markets were expected to be extremely large and growing. Kits such as these sold at less than $500 and could be used to analyze 20-100 patient samples at a retail charge of $30-60 each by the clinical service laboratory. Kits for mononucleosis were also in development. Other firms were focusing on cancer diagnosis. One had even developed a salmonella test to spot contamination in food; the potential market for salmonella testing in the food industry was $50 million a year.12 The test would reduce the time for testing for "salmonella poisoning" under current methods from one week to one day.

Marketing Clinical Diagnostics

Diagnostic products had different levels of FDA approval testing to pass depending on the "newness" of the application. In any case, the approval process was much simpler than for drugs or other devices because the products were used, not on people per se, but on people's products --- on serum, plasma, urine (Exhibit 2). Because the products were not invasive the individual patient was not at risk. The risk was mainly that the wrong diagnosis might be made.

The easiest products to get approved were those that had already existed in some form. For those products, the emphasis was on improving the current product into more user-friendly kits. Because the medical utility was already known, many small changes could be rapidly developed and approved into a saleable product. However, product life was often short, sometimes only 2-3 years. With pre-existing technology, a "510 K" application could often be filed with the FDA, which took approximately three months for approval. The application stated the intended product and the medical claims of its success, instructions for use and performance characteristics relative to previous products for a similar use. These diagnostics could be brought to market in two years: about four months to modify the technology, a year and a half for clinical trials, and then three months for FDA approval.

The prospects for those products not already in existence were much more uncertain. A company developing new products would need to be sure that there was a medical need for the test in addition to documenting that the test performed accurately.

Without FDA approval, new diagnostics could only be sold in the U.S. as research products. This could provide limited funds to keep the business running and begin the marketing drive. Genzyme had such a business unit. Sometimes this group would persuade a major university hospital lab to test its product with real patient samples in a clinical trial. To then gain FDA approval of unprecedented products, a Pre-Market Authorization (PMA) application was filed with all the data, which could take two years or more for FDA review. The more extensive PMA application was required if the diagnosis related to life-threatening diseases such as cancer, or if no similar testing had previously been done. The company also had to comply with Good Manufacturing Practices, regulations which required much more documentation and control which added significant costs compared to manufacturing only for the research market.

Selecting specific new market applications was not easy, especially since there were thousands of potential candidates, and there were many ways to look at them. Market researchers reviewed the scientific data that were already in the medical literature and tried to focus on potential products with large markets or at least a clear niche market. They could also look at performance data from the lab and seek opinions of physicians or users in the marketplace on medical potential. They needed to predict whether the test would provide medically useful information that would lead physicians to create a demand.

The actual selling of diagnostic products required developing multi-pronged sales and marketing approaches to several distinctly different groups in order to penetrate the market successfully. Strategies had to be developed for each of the participants in a complex buying decision, including physicians and their professional associations, hospital clinical laboratory directors and purchasing agents, reference laboratories, and third party payers (government, private insurance, health maintenance organizations). Lab directors in hospitals were often reluctant to consider new diagnostics until they received considerable demand from the in-house physicians they served. Concurrent with selling to physicians, technical and pricing information also had to be provided to the lab directors to prepare them for incoming physician requests.

A key customer was often the clinical reference laboratories, who served both hospital and other institutional laboratories as well as handling individual physicians' outpatient specimens. Most hospital laboratories also sent clinical specimens to larger or specialty reference labs when either tests were ordered that they did not perform in-house, or as overflow during peak working hours or during understaffed hours (e.g., midnight shift). These reference laboratories often played a critical role in the dissemination of new products as a result of their desire to position themselves at the forefront of diagnostic technology. This positioning included providing educational and marketing materials to their clients, and so they could help create demand for new diagnostic products. In addition, they often assumed a consulting role on new technologies for physicians, hospitals, and laboratory directors.

So, selling clinical diagnostic products was a complex process. The first sell had to be to the physicians because they would create the demand and place pressure on the laboratory. The labs responded to physician demand, buying the product after they had been asked for it a number of times. Selling to doctors was more like pharmaceutical selling and it was expensive. Pharmaceuticals had the seventeenth highest ratio of marketing expenses to sales of any industry, largely because of efforts to educate physicians. A company had to produce quality materials, provide educational programs, and staff with highly technical people to make the case. Much of the selling was educational. A large part of the sale was explaining to people how the diagnostic test was going to help in the diagnosis and how the patient was going to get treated.

Selling the doctor was only the first step because the lab directors also had to be sold so that a supplier came to mind when the doctor wanted to place an order for a certain test to be performed on his patient's samples. That could mean multiple sales calls because the brand retention of a lab director was low due to the large amount of calls they received on a number of issues. The selling job here was labor intensive and resembled more the selling of a commodity product.

A company also had to sell the payer --- the insurance companies and the health care financing administration so that they would reimburse for it. Neither the lab director nor the doctor was interested in reimbursement, but delays in this area often significantly affected market penetration of new products.

Many biotech companies did not have the resources to hire an adequate sales force and those that did could not cover all the potential markets that their technologies might allow them to enter. They often had to rely on others to perform the education and sales function. This was part of the explanation for the large number of alliances listed in Exhibit 1.

One way to market was with OEM (Original Equipment Manufacturer) companies where a manufacturer gave them the product and the OEM packaged and sold it any way they wanted under their own label. In this case the developing company would have no control over the selling. The OEM may ask the manufacturer for information, but the purchaser sells the products in their own way.

Another way to market was to use distributors. A manufacturing company would provide marketing information and strategy. The distributors had direct contact with physicians and users. Sometimes questions arising in the field were forwarded back to the developing company, sometimes not. Distributors often carried many products and some would get more attention than others. The product manager of the developing company must be sure that his distributor or partner was targeting their efforts to the right places and that incentives for the distributor were consistent with his own sales goals.

Genzyme's Diagnostic Products and Services

Genzyme already had a service division providing specialized reference testing services to hospitals, clinical laboratories, physicians and health maintenance organizations across the U.S. The primary thrust in 1990 of the service division was on cancer and fertility testing. While the market for these services was small, it was growing rapidly, and Genzyme was committed to expanding their volume via aggressive marketing through a direct sales force, acquiring additional service sites, and the introduction of additional specialized testing services.

The OEM division in Genzyme also sold bulk diagnostic enzymes to manufacturers of reagents and clinical diagnostic kits. These materials were used in diagnostic kits (such as blood sugar) by routine non-specialized clinical laboratories. The company also sold research products such as hormones, growth factors and related products to academic, industrial and governmental laboratories both in the U.S. and worldwide through its research products division. (See Exhibit 3 for a flow chart of the various segments within clinical diagnostic products.)

The Product Manager

Genzyme hired Nancy, who had been an R&D project manager at another biotech company to be the product manager. Nancy held a Ph.D. in microbiology and had been an academic researcher for several years before switching to industry, where she began as a researcher but became increasingly involved with marketing and bringing products to market. Genzyme's mandate to her was to identify what to do, figure out how to do it, and then make it happen. She had great enthusiasm for the chance to grow a business and hit the ground running. Within a month, she had identified five potential products from her personal knowledge of infectious disease and began to prepare market estimates and to interview possible distributors. The R&D group at Genzyme, however, had no experience in infectious disease and were cool toward Nancy’s ideas, although she tried to persuade her colleagues that their technology could be applied to infectious disease testing. The regulatory group worried that maybe the FDA would require a PMA instead of the shorter 510 K approval.

Then, her division director stopped into her office. As she described her ideas, her director's eyes studied the floor and he mumbled something about patents and proprietary position. He suggested she look toward the service division to see whether any of their technology could be developed into kits for sale to other specialty labs. She wondered silently whether this might not only allow but encourage other specialty laboratories to compete directly with Genzyme's reference testing services. So she asked for a meeting with their business manager to brief her on their customers and competitors. The week before this briefing however, the research-products product manager introduced himself at the sandwich vending machine in the lunchroom and raised the possibility of developing some of his hormone research products into diagnostic kits. He thought he could raise his prices and achieve much better margins if he could only get FDA to approve a 510 K. What did the new product manager think? Well, she thought, maybe it would mean earlier revenue than if she pursued the long clinical studies required for a PMA for her infectious disease products.

A few days later, Genzyme's annual company meeting was held. This was different from the company weekly beer bust where she was starting to put the names and faces of the division managers together; the whole company sat together in an elegant salon of a nearby hotel. She had not yet met the pharmaceutical division head but was very impressed with the description of the development pipeline for new cardiovascular therapies. Smoothly, in thanking the pharmaceutical VP for her presentation, the CEO edged into more sensitive ground, the financial analysis. As Nancy looked on in envy at the resources committed to the pharmaceutical group, her own budget seemed pretty meager. But when the CEO ever more urgently described the "burn rate" compared with their cash reserves, she felt relieved that she wouldn't have to survive the kind of pressure that was clearly on the pharmaceutical group. The CFO, a middle-aged veteran of the computer industry who had joined Genzyme last year, began describing the next 5 years projections, year by year. By year 3, he was using the words "shortfall" and "anticipated further financings". She thought of her products. If only her products could provide some revenue for year 4, the projected pharmaceutical launch in year 5 would take care of the future. "I wonder if I could get just one of the researchers in pharmaceuticals to think about diagnostic applications of their cardiovascular program..."

Questions:

1. What are the advantages of starting a company inside a bigger company?

2. What are the disadvantages of starting a company inside a bigger company?

3. What level of resources has the new product manager been given?

4. What should be her first steps?

Draft March 4, 1993, by John H. Friar of Northeastern University