Lots of biotech companies today say they want to be great for a long, long time. But which of today’s companies are actually doing it? Which ones are truly visionary, and built to last?
These questions have been on my mind since I re-read “Built to Last: Successful Habits of Visionary Companies” in preparation for an Xconomy event in San Francisco on Dec. 9. The classic book by James C. Collins and Jerry I. Porras came out in 1994. The authors spent six years identifying and studying the common characteristics of companies that had long runs at the top of their industries.
Any time you pick up a book that’s 20 years old, some things will sound dated. Names like Boeing, Disney, Ford, HP, IBM, Merck, and Walmart are held up as exemplars in this mid-1990s context. Many have suffered damage to their reputations, which made me wonder how well they were truly “Built to Last.”
Then again, if you look at the criteria the authors used for what makes a “visionary” company, there were (and probably still are) powerful concepts at work in those companies that never go out of style. The authors laid out six criteria for what makes a great, enduring company, and asked readers to think of a handful of companies they know today that pass the test.
Here are the criteria Collins and Porras used:
1. Premier institution in its industry
2. Widely admired by knowledgeable businesspeople
3. Made an indelible imprint on the world in which we live
4. Had multiple generations of chief executives
5. Been through multiple product (or service) life cycles
6. Founded before 1950
I bring this up now because biotech has been going through something of an identity crisis the past decade. When the industry was getting started in the 1980s and 1990s, most companies aspired, more or less, to be the next Merck (without the stuffy parts of pharma company culture).
Things are different today. People now know how long it takes, how risky it is, and how expensive it is to develop a new drug, device, or diagnostic test. Despite a couple years of go-go returns in the public markets, many investors are afraid of/intimidated by biotech. The financial world today is obsessed with short-term gains. Many investors don’t want to bet on some hope for the “next Genentech” in hopes of making returns 20 years from now. They want to make money next quarter, they expect a bigger return, and they want less risk.
Now that first-generation biotech powerhouses like Genentech and Genzyme have been swallowed up by larger pharmaceutical companies, we’re left with a smaller pool of biotech companies that are built with aspirations to long-term greatness, and with the product diversity and cultural resiliency that goal demands. Over the summer, I lamented that Onyx Pharmaceuticals—one of the few mid-sized biotech companies that could have been an industry pillar for years—chose to be acquired by Amgen. For today’s column, I thought it would be fun and interesting to try to apply the Collins/Porras criteria to see which of today’s biotechs appear “visionary.” I’m going to ignore the “founded before 1950” part because the industry didn’t exist then.
Here are three examples of companies that I think Collins and Porras would consider “visionary” if they were doing a study of biotech today.
Gilead Sciences: the Foster City, CA-based company (NASDAQ: GILD) built itself through acquisitions into the world’s largest maker of HIV drugs in its first act. The company’s second act—spread over the last decade—is all about diversifying into promising new fields like hepatitis C and cancer. Those ideas are now well on their way to fruition, with a couple of important new drugs on deck for approval at the FDA.
For sure, Gilead isn’t the most admired company in basic research, and it has done a couple of ill-advised acquisitions. But it is No. 1 in HIV treatment, and changed the world by helping turn HIV from a terminal diagnosis into a manageable, chronic disease for people in developed countries. It is widely admired for its business acumen and execution. John Martin is the only CEO the company has had during this growth phase, so it hasn’t yet proven it can successfully handle a transition of power. Gilead’s valuation looks frothy to me—$114 billion market cap, and a price-to-earnings ratio of 41 for the trailing 12 months. But is it built to last? Undeniably.
Illumina. The San Diego-based maker of genetic analysis instruments (NASDAQ: ILMN) is the dominant player in genomics, the maker of lab instruments and consumable reagents that biomedical researchers and diagnostic companies rely on every day. This is a technical, competitive, fast-moving field at the intersection of biology and technology. Many companies have tried and failed to attack Illumina on a number of fronts. Few in the public recognize its name, but as the key enabler of the era of genomic medicine, Illumina is in a position to have a greater impact on the world over the next 20 years than any one drug company.
Culturally, it is widely admired (and in many circles, feared and loathed) for its aggressiveness. When its independence was threatened by a hostile, low-ball takeover bid from Roche, it fought back and won. A little more than a year later, it continues to crush Wall Street sales forecasts, and its stock has doubled since the failed takeover bid. Still, Illumina has only been around 15 years. A single CEO, Jay Flatley, has led the company to this enviable perch, so it hasn’t yet proven that it can sustain greatness after he leaves, like, say, GE has done with multiple generations of CEOs. But Flatley, 60, has recently been adding a lot of depth to his management team, which increases the company’s ability to tackle multiple opportunities at once, and provides an opportunity to develop the person who will run Illumina after he’s gone.
Genomic Health. The Redwood City, CA-based company (NASDAQ: GHDX) is widely admired in diagnostics because it proved to skeptical insurers that diagnostics aren’t just cheap commodities anymore—they provide information about health that’s quite valuable. Genomic Health has continued to thrive and grow under two CEOs—Randy Scott and Kim Popovits. It is now rolling out new iterations of its original OncotypeDx product that predict the risk of recurrence for patients with prostate and colon cancer, proving it’s not a one-hit wonder in breast cancer. By showing the way in molecular diagnostics, Genomic Health has inspired other entrepreneurs to think big about how new instruments can be used to better predict and prevent disease before doctors have to turn to high-priced and often-toxic therapies. The company could be highly profitable tomorrow if it wanted to be, but instead it chooses to get by on low margins while continuing to invest in the future. It’s a sure sign of a company with a view toward long-term excellence.
There are a whole lot of other companies that might not check every box on the list of “visionary” companies, but they do appear to have the diversification and resilience to be “built to last.” Companies like Amgen, Celgene, Biogen Idec, Regeneron Pharmaceuticals, Vertex Pharmaceuticals, Alkermes, and BioMarin Pharmaceuticals all have strong diversified product lineups and pipelines to last for the long run. Mid-sized companies that depend heavily on a single hit product—Alexion Pharmaceuticals, Cubist Pharmaceuticals, Seattle Genetics, Medivation, Pharmacyclics, Incyte—still have more work to do before they can claim they are truly built to last (remember Ariad?).
Despite the trend toward more lean and mean investor-friendly “virtual” companies, there are still some small development-stage biotechs that aspire to long-term greatness. Members of this group—Alnylam Pharmaceuticals, Infinity Pharmaceuticals, Agios Pharmaceuticals, Sarepta Therapeutics, OncoMed Pharmaceuticals, Epizyme to name a few—all need to prove they can first get a single product over the FDA finish line and persuade insurers to pay for it before they can execute on their grander long-term visions.
But no company accomplishes anything big without first dreaming big. The biotech industry is fortunate to still have some companies that dream about more than next year’s big acquisition/transaction. They dream about, as Collins and Porras said, making “an indelible imprint on the world.” That’s something worth all the time, money, and risk that come with the territory in biotech.
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