Miracles are supposed to be easy. Throw a few goodies with long, indecipherable names into a test tube and millions of dollars are supposed to bubble up, as if by magic. That was biotechnology in 1982, or so it seemed.
By 1990, miracles were hard to come by. Biotechnology companies were having trouble making either products or money come out of test tubes. They had an even harder time extracting money from public capital markets. Some companies that looked like sure winners in 1982 or 1983 were struggling.
By 1995, it's all supposed to be easy again. Wall Street is touting the 1990s as "the decade of commercialization" for the biotech industry, when companies formed in the last decade will finally move products onto the market. All the troubles of the late 1980s and 1990 will, in theory, be forgotten.
Dr. Hans Mueller knows all about miracles -- and near-misses. As president and chief executive of Nova Pharmaceutical Corp., Baltimore's best-known company in the race to fulfill biotech's delayed promise, he has witnessed the industry's entire growth curve. Nova has been up. More recently, Nova has been down. And Dr. Mueller is trying to lift it up again.
Nova benefited from the heady euphoria of the early 1980s. Founded in 1982, the company once was ranked with biotech pioneers such as Genentech Inc. and Amgen Inc. that have since gone on to bigger things. Nova's stock once traded as high as $23. Wall Street was dazzled by the Nobel Prize-winning scientist who was a consultant and by the presence of former President Gerald R. Ford on the company's board.
"Nova certainly was a top 10 company at one point," says Jonathan Frank, a securities analyst for Swiss Bank Corp. Investment Banking in New York.
Things got tougher by last year. An important early product didn't work in clinical trials, SmithKline Beecham Corp. canceled a scheduled $24 million investment in joint ventures with Nova in January 1990, and last year's invasion of Kuwait by Iraq sent the stock market into the tank, forcing cancellation of a $25 million preferred stock offering designed to replace the SmithKline money.
Nova lost $14.2 million on revenues of $36 million in 1990. Its stock traded around $3 earlier this year before rebounding to close at $5.50 Friday. And the company isn't likely to make a profit for several years.
"They've had a fall from grace and they haven't returned," says Mr. Frank. "Analysts have focused on the top 10 for the last 18 months and Nova has been left out." Why? "Lack of good clinical trial results," he says.
Baltimore's civic fathers hope Dr. Mueller can return the company to its former stature. They want Nova to become a cornerstone of the Baltimore-Washington corridor's nascent biotech industry -- the big company that puts the area on the map and generates business for smaller players, the way drug giants such as Merck, Schering-Plough and Warner-Lambert have done near their New Jersey headquarters.
"What I've come to realize about Nova is that as the region tries to capitalize on its research base, you need companies of some size and stature," says Thomas J. Chmura, deputy director of the Greater Baltimore Committee. "If you simply look at the biotech-related companies that have products in the pipeline and have the staying power to go through the ups and downs, Nova is the best. . . . The key is them turning the products that are in the pipeline into sales."
Indeed, that is the rub. Companies such as Amgen and Genentech have done it already. Nova hasn't. Even Dr. Mueller acknowledges that Nova hasn't met Wall Street's rosy expectations. "We're locked into a second tier of biotechnology companies," he says.
Biotech companies generally need about 10 years to get rolling, to develop products and to close in on profitability. Nova is actually a rational drug development company rather than a true biotechnology outfit. Such companies use computer models and other high-tech methods to develop drugs from chemicals. Unlike classic biotech companies, their work doesn't necessarily involve the alteration of genetic material.
Because of Nova's approach, analysts expect the company to progress more slowly. The company is now approaching its 10th year. In the next few years, the world will find out what Nova really has.
"There were cycles. Every company has cycles. Nobody always wins," Dr. Mueller says. "But the ability to deal with defeat separates the men from the boys. We're here to stay."
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When most people look out the window of Sandoz Inc.'s U.S. headquarters in East Hanover, N.J., they see a tacky suburban landscape: an ugly red-and-gray office building across Ridgedale Avenue, an intersection once named one of the 10 most polluted in Morris County because of the traffic, and the often-flooded Whippany River.
When Hans Mueller looked out that window in the mid-1980s, he saw an industry ready to start without him.
"I was a member of the executive committee, I traveled first class. Why would I want to change that?" recalls Dr. Mueller, a 50-year-old biostatistics researcher with a reserved manner. He had joined Sandoz, which is based in his native Switzerland, shortly after getting his Ph.D. from the University of Berne. He found the answer both in his own skills as a biostatistics expert and in the industry he saw developing.
"I've always been good at building things," Dr. Mueller says. A biostatistician figures out probabilities -- often about things on which he or she isn't really an expert. "You need to learn the other person's discipline. . . . I know whether it makes sense or not."
On the face of it, he was crazy to leave a stable company where he'd worked for more than 15 years to move to Nova, a tiny start-up formed to commercialize research into brain receptor technology. The basic idea behind that technology: Allowing new drugs to work by blocking the action of hormones or other chemicals on brain cells.
But it looked as if the pieces might fit together.
Nova's then-President Donald G. Stark had once been his boss at Sandoz. Dr. Mueller also knew, as he says today, that "key inventions are often made by very few people," and Nova had one of the best in Dr. Solomon Snyder, a Johns Hopkins neuroscientist who was (and is) chairman of the company's scientific advisory board. And Dr. Mueller realized that not many people were involved in receptor technology, leaving a potential market niche for Nova.
Dr. Mueller jumped to Nova in 1985, and became CEO in 1988. No one had promised him the job would be easy. And it wasn't.
Any start-up company that has to get through a decade before developing a product has a never-ending need for cash. Like many biotech companies, Nova raised cash by making deals with big corporate partners. Among the first was a 1984 deal with Marion Merrell Dow Inc., under which Nova sold stock to the larger company and did research for products Marion wanted to develop. In another deal, Nova sold stock to Hoescht Celanese Corp. But the biggest partnership of all was with SmithKline Beckman Corp.
Under that 1988 agreement, Nova got $26 million in cash from SmithKline in exchange for Nova stock and warrants to buy more -- as well as 50 percent of a joint venture to develop drugs based on bradykinin antagonist technology. Bradykinins are proteins that are believed to bind with cells to cause pain. Bradykinin antagonists block the effects of bradykinin. At the time, Nova thought bradykinin antagonists held the key to drugs to treat the common cold, a potentially huge market.
The deal also gave SmithKline 60 percent of a joint venture to develop central nervous system drugs -- an outgrowth of brain receptor technology -- which Dr. Mueller said was a weak point of SmithKline. And it obligated Philadelphia-based SmithKline to invest $24 million more in Nova in 1992.
In that deal, like similar deals between biotech start-ups and well-financed companies, Nova gave up part of its future for money it needed to get from here to there. But by last year, two major disasters had hit.
First, in 1989, the bradykinin antagonists didn't work against the common cold in clinical trials. Nova is now investigating whether they will be effective in treating asthma, and whether a stronger bradykinin antagonist will work against cold symptoms. But the worst was yet to come.
SmithKline was taken over by Beecham PLC, the British pharmaceutical company. The company's name changed to SmithKline Beecham, but more than that changed. SmithKline Beecham wanted out of the deal with Nova.
"Needs changed because Beecham has a really respectable CNS [central nervous system] project," Dr. Mueller says.
Nova made a couple of moves. It arranged a backup deal with SmithKline before agreeing to terminate the 1988 agreement. And it started planning a $25 million offering of convertible preferred stock, a form of debt that the owner can convert into common stock at a set price.
But then Saddam Hussein invaded Kuwait, with nasty consequences for Wall Street. Companies like Nova, which have no earnings and won't make money for years, get hit the hardest when the market's confidence wanes. The stock offering was put on hold.
That money hasn't been replaced, even though the financing environment for biotechnology companies has warmed up considerably since the war ended. Asked whether Nova planned to launch a stock offering to replace the funds, Dr. Mueller wouldn't say. It was the only question, in fact, that he wouldn't discuss at all.
"I'm surprised they haven't," Mr. Frank says. "Everyone else has." In the meantime, the restructured deal with SmithKline allows Nova to make money in other ways. The deal lets Nova market four of SmithKline's established psychiatric drugs, the best known of which is Thorazine, used for treating psychosis -- and Nova can keep 60 percent of the profits.
"We basically traded their second investment of $24 million for two things -- getting research products back and getting the products," Dr. Mueller says. "Over 5 1/2 years, our cash flow from those products will be more than $20 million. And for that, I don't have to issue any stock. From that point of view, it was one hell of a good deal."
Dr. Mueller says selling the four psychiatric drugs has important side benefits as Nova prepares to move from a technology-driven research shop to a market-driven company. One benefit: Nova got a part-time sales force of 80 people with the deal.
But there are also drawbacks. The four drugs' patent protection has expired, and they are subject to heavy competition by generic substitutes. Even Dr. Mueller concedes that the joint venture loses 60 percent of the prescriptions for the drugs at the pharmacy, as pharmacists substitute cheaper generic equivalents. And the sales force is made up mostly of retirees and housewives who work part-time.
"It's not what you would consider a premier business," says Linda Miller, an analyst with PaineWebber Inc. in New York. She thinks the sales force will help the company's transition some, but adds, "you have to question how much leverage it provides."
The partnership with SmithKline places Nova's management on a path that other biotech companies have followed.
Nova's management is essentially two-track: One track generates some revenue and experience now; the other concentrates on developing new products for marketing further down the road.
The four psychiatric drugs are one component of the short-term track. The other is a business called NovaScreen, in which Nova scientists test compounds for other companies, to screen and ++ identify substances that have potential to help in making drugs. Dr. Mueller said Nova needed to develop NovaScreen to do its own work, so selling the service to generate cash was just entrepreneurial flair. The service brought in about $2.5 million in revenue last year.
"It's not strategic in the long term," Dr. Mueller says. "But it's very important today."
Contract businesses such as NovaScreen and the SmithKline deal can keep Nova in business indefinitely. But they aren't going to make Nova the big company that Hans Mueller planned when he left Sandoz. And they will never make Nova a cornerstone of the regional biotech industry.
The money that new drugs can generate will make the money from the old drugs and from NovaScreen look meager. There are just two catches. First, the new drugs aren't ready yet. Second, they must work.
Nova is concentrating on two broad classes of drugs, some to treat inflammation and others aimed at curing central nervous system disorders. It is also working on delivery systems for other drugs, including a brain implant called Gliadel that allows surgeons to put chemotherapy drugs directly in the brain of a cancer patient when a tumor is removed. Putting the chemotherapy right where it's needed should cut down the side effects that chemotherapy patients suffer, Dr. Mueller says.
Gliadel is one of only two Nova products that has made it as far as late-stage clinical trials in humans -- a crucial step in commercializing any drug. The other is a chemotherapy drug called Pergamid that kills cancer cells in bone marrow without destroying the body's ability to produce red blood cells.
Yet even those drugs could take years to win U.S. Food and Drug Administration approval. Nova won't speculate on when any of its products might reach the market.
Other major drugs are still in early phases of development. The drugs that use bradykinin antagonists to fight the inflammation that comes with asthma are also in earlier clinical trials. And major proprietary central nervous system drugs -- the reason Nova was founded -- are either in preclinical development or still in the research phase.
"Any products that Nova may develop from its receptor technology are not likely to be commercially available until the second part of this decade at the earliest," Nova's most recent annual report says.
That's why Wall Street still thinks Nova is a speculative stock, even nine years after the company's founding. That's why Hans Mueller, who owns a good chunk of the stock himself, agrees that it's not a great investment for widows and orphans. Nova's anti-inflammatory and central nervous system drugs, which probably will be the biggest hits if they reach the market, are the furthest away.
But there are still a lot of things that could go awry, says Ms. Miller of PaineWebber. Both central nervous system drugs and inflammation therapy are attracting some of the biggest drug companies. "The big players are the household names," she says. "They may not have the exact same applications. Presumably Nova will have a better mousetrap, but Nova will have to get out there and market."
Dr. Mueller said Nova doesn't need all its products to be hits. Just one or two would be nice.
"Amgen made it on the basis of one or two drugs," he says. He should know -- he bought some Amgen stock at around $15 a share; that stock, adjusted for splits, is worth about 15 times that much today. "The importance of a drug being approved is enormous."
Just one drug could be all it takes to make Nova a supernova.
Dr. Mueller is philosophical about the fall from grace -- he thinks Nova grew up in the public eye because it went public so soon after it was founded. Early investors got a nice return on the original stock, which was rock bottom cheap because there really wasn't much of a company behind it.
So the stock sits around $5 while one-time peer Amgen is in the stratosphere. Hans Mueller says he can live with that for now. He says it was worse when the company was at $23 a share in 1986, with no product sales and no earnings in sight for years into the future.
Dr. Mueller says, "I was a hell of a lot more sleepless then than now."
SUMMARY
Nova Pharmaceutical is trying to recapture its high-flying stature of the 1980s, with the good wishes of Baltimore officials who want Nova to be a cornerstone of the region's nascent biotechnology industry.
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