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Executive Summary

R&D costs for Proleukin (human biosynthetic interleukin-2) are approaching $75 mil. by a conservative estimate, Michael Ostrach, Cetus' general counsel and senior VP for law-administration, told a Foresight Seminar Dec. 11. The basic research on the interleukin-2 product began at Cetus in June 1982 and has cost the company $10 mil., Ostrach estimated. The preliminary work included the steps needed to "identify relevant DNA, design a protein (if you're not happy with the one nature provided),...and construct a stable production organism." Development, characterized by Ostrach as "processes for making the product, scaling up the production process, and then formulating the product," took another $20 mil. Preclinicals took a further $20 mil., including at least 1,000 in vitro and 300 in vivo animal studies. * Increasing demands for animal work for a biotechnology product have been a source of frustration for Cetus, Ostrach indicated. "The relevance of the results in animal species" of a human immunotherapeutic "is sometimes questionable...and yet it is a requirement many times imposed on us, to provide additional animal data," he said. Phase I clinicals for Proleukin cost about $10 mil. The Proleukin safety studies in terminally ill cancer patients were problematic, the Cetus exec pointed out, because "when you're immunotherapeutic product, a protein which is found in the immune system, and is a key mediator of that system, it's not unexpected that you're going to get poor results, when indeed that immune system is basically non-existent...a fair amount of time is spent in in vivo studies, which again aren't relevant because it's in the wrong patient population. Nonetheless, that is a requirement." Cetus will have spent $15 mil. by June 1990 on Phase II-IV trials, bringing the full R&D costs to the $75 mil. figure. The first U.S. indication being sought for the product, in a product license application now pending at FDA, is for metastatic renal cell cancer. Cetus hopes for that approval by the middle of 1990. Further clinicals are continuing on indications for AIDS and advanced cancers of the breast, colon, skin and lung. Ostrach estimated that a year's delay in the approval would cost the company an additional $35 mil. Proleukin "is our lead product," he summed up "if this product is not finally introduced, Cetus will not survive." The $75 mil. R&D figure does not include ancillary costs such as the cost for a new manufacturing facility ($30 mil.) or the expenses associated with building a marketing effort ($15 mil.). Adding those costs into the equation for calculating the cost of develop Proleukin takes the figure up to $120 mil. Ostrach further noted that adding in a factor for the cost of capital of about 10% pushes the total close to $150 mil. "Of course, we wish that that [10%] was the cost of capital. We have to provide investors with approximately a 25-35% return," Ostrach maintained. A simpler way to look at the cost of Proleukin, Ostrach suggested, is to take all of Cetus' expenses during the development. Because Proleukin is the company's first commercial drug project, "you could take all the money we have spent in our therapeutic program in that time -- $370 mil. -- that is it takes $370 mil. to get one product in a ten-year period." The costs of capital to the biotech industry are high, Ostrach maintained. "We do not get our money from products on the market...we have to go to the investment arena to solicit investment in our company. The [biotech] industry itself is estimated to have raised $5 bil. with this kind of research since 1976...The challenges of raising this kind of capital are pretty daunting. Imagine going to an investor and saying, I'd like to spend over $100 mil. on a product, spend it over a ten-year period. It may be approved, it may work." When Cetus needed money in 1983, Ostrach noted, "we raised it through an R&D partnership, our goal was to provide an expected return to those investors of 40%, and indeed, Proleukin is one of the products in their investment we not only have to support this normal 25-35% to our stockholders, but we have to pay, we hope, 40% to the members of the partnership." High costs and the demand for high returns directly shape the biotech product pipeline, Ostrach indicated in response to audience questions: "You have to have a larger and larger market to support profitability...It's very clear in my company. We're very reluctant to look at a project which is not expected to have at least $100 mil. annual sales." He predicted that "in another five years" that threshold may increase to $200 mil.

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