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new revolution : ; r ~ r~:^~ 1;,.~~,E~ ;-Turning a hot'science into a going indus- trial venture has proved'to be tougher than expected for Cetus Corp., a new enefi en i- f biolo ic l and kind g g g o a cs ~~ neering company in Berkeley, Calif. .Though annual revenues have now , pushed over the $2 million mark, profits have been minimal. But Cetus is about to •reap income from royalties on a contract that may boost annual revenues by $1 million. And it has a running start in what may be a big new business by the 1980s. tr 3 °~s>s.:rac_ •,tl~' "The most dramatic technological revolution of the next 25 years willl be . based on biological science," predicts . Ronald E. Cape, a bioehemist-turned- `` businessman and a cofounder of Cetus. ` Cape started Cetus five years ago with :':' Peter J. Farley, a physician and business school graduate, to exploit new discov- eries and processes that were emerging in genetics and microbiology. Research in those fields has earned more than half the Nobel Prizes in medicine in the last 20 years, but so far the work has not had much direct industrial' impact. Cape thinks _ that' such impact will come soon-first in pharmaceuticals and then in many other industries, including chemicals and mining. Recruiting a team. The use of enzymes and' living organisms in industrial pro- •I cesses is old hat~-much of the world's ethyl alcohol, for example, is made by fermentation But that technology, more of a practical art, is far removed from the chemistry of chromosomes and the meaning of genetic codes. So the first task for Cape and Farley was to assemble a staff from among scientists at the forefront of knowledge in the new genetics. That turned out to be the easiest part of the job to date. Says Farley; "It's like owning the first computer company and trying to attract' mathematicians." In- cluded in the tiny company's array of directors and advisers are two Nobell laureates: Joshua Lederberg, a pio- neering geneticist from Stanford Uni- -versity, and Donald A. Glaser, a physi- cist and microbiologist from the Univer- C lsity of California. Others are Stanley N. Cohen, a leader inithe techniques of gene. manipulatlion; Arnold Demain~ an expert in industrial fermentation from Massa, chusetts Institute of Technology; and British geneticist David A. Hopwood. Farley and Cape: After five lean years, their automated lab starts earning royalties. ~~.Z,- .. ~."--.. _+....r...r.-.--....:~ _ .,..-,.....~..,~.. •,,,The star-studded roster helped Cetus colorimetric analyses, bioassays, and to raise its first' venture capital, in two private placements totaling $5 million. But that cost Cetus 28% of its 115,000 shares, and it was scarcely enough to support a pioneering development effort im an industry populated with major high-technology companies. "The name of the game,'.' says Cape, "was to survive and prove ourseLves." . For survival~ the company chose to focus first on a field familiar to all pharmaceutical companies-screening natural, bacteria and molds, such as the penicillins, in a search for mutants that produce new antibiotic compounds or that' are more efficient producers of known drugs. Normally, that is a tedious task: Technicians select bacteria that Cetus exploits recent : discoveries in genetics and microbiology : have been exposed to radiation or to chemical compounds that cause genetic changes, smear them onto the surface of nutrient' gels, incubate them, and pick off the dot-sized bacterial colonies that result. These are cult'ivated' again in flasks. Then the soup that is left must be tested for antibiotic effectiveness. Better bugs.Cetus aimed to improve the process by using analyticat techniques developed! for use in the most advanced microbiological research-in particular, methods arising from Glaser's work in growing mutant strains of bacteria. By reengineering Glaser's processes, Cetus was able to speed the job of screening and testing. It keeps its special equip- ment under proprietary wraps, but essentially its researchers pour a mu- tant'-rich culture into a lab-sized ma- chine that automatically grows, sorts, and nurtures the bacterial colonies. To assay the potency of the chemicals that the cultures produce, Cetus can run more than a dozen other tests. The tests are all automatic, and some are run by computer cont'roh _..~ ~ , The speed is impressive. W'hile most large pharmaceutical houses run about 500 such tests a week, Cetus can put 10,000 to 100,000 cultures through its equipment im the same period. "We're not numbers limited," says Farley. But Cetus' highly productive machines did not result in customers lining up outside the door. Nor did they lead to a raft of products that Cetus itself could make. Hard contracts. One problem that Cetus did not understand at first was the diffi- culty of scaling up productiom from test tubes to a 50,000-gal. automated process unit of the kind used by drug companies. "They didn't know what they didn't know," says one of the company's early customers. "We were naive about the problems of scale-up," Farley cqncedes. "We didn't realize that finding mutants was only half the game." Loath to patent its systems and reveal its knowhow, moreover, Cetus decided'to keep its methods in tightly guarded secrecy. That put off many prospective customers who wanted to know exactly what they were paying for in dealing with a companyy with no track record. However, Cetus was convinced it had something no one, else could duplicate. It demanded not only heavy front-end' payments-over $500;000 for all proj- ects-but also royalty payments from work that' proved successful. Now such stubbornness may pay offr Cetus expects to start collecting about $1 million a year very soon from~ a customer that is using a Cetus-bred microorganism to increase production, of an unpatented - and thus cost-sensitive-antibiotic by 15%. That and other successes have bolstered the company's credibility in the pharmaceutical industry. "This is a numbers game, and apparently Cetus :- "=Reprinted fromJanuary 17, 1977 Business Week-Copyright ® 1977 MoGraw•Hill, Inc. 1221 Avenue of the Americas, New York N:Y 10020 Allirights reserved , . . - ..~. • ~ ~ - -". , . . . . . -.. .

. plays it very well," says Raymond P. T Lanzillotta, a senior microbiology re- searcher at Syntex Corp. When it comes to the services that Cetus has performed for them, cus- tomers are generally even more tight- lipped than Cetus itself is about its own ' know-how. Most customers demand a strict nondisclosure clause in their contracts. Says a senior executive of a major drug company that negotiated one ' first of Cetus contracts, but still does ~., not want to be identified: "With their scientists and 'black-box' technology, they've been able to build! a bridge between fundamental 'and applied science and automate certain processes _~:- for the first time. They can do in hours ~~:r what it takes the pharmaceutical indus- try days or weeks to do." Another phar- maceutical executive takes a different perspective, crediting Cetus' ability to Producing chemicals, . : t+ r vitamins, proteins, and fuels such as methane process microorganisms as "the kind of competition you have to be concerne& with." . . . _ New ventures. Evem with its small reve- nues, Cetus has been able to bank about half of its seed money and break even on operations, while recycling 10% of its revenues into its own research and development'. Now that their company has started to gain a reputation in the pharmaeeuticali industry, where cus- tomers are familiar with the technology, Farley and Cape hope to branch out in, three new' directions: spreading to other industries that can use biochemical processes, developing proprietary products of their own, and devoting at least a quarter of the company's energiess to the leading-edge technologies of mo- lecular biology and gene manipulation. i . Cape and Farley believe that' in 2 to 10 years, microorganisms will play a far greater role in industrial chemistry than the kinds of fermentation techniques now in use. The more productive bugs could be either natural mutants or specially tailored bacteria developed from, an understanding•of the intricacies of the genetic code. And the prospects for their use cover a wide range: They may produce chemicals from renewable resources at low temperatures and pres- sures, such as acetic acid from starches; make vitamins and proteins from agri- , cultural waste; and help develop new . energy sources, such as methane from - organic refuse, alcohoU from cellulose, and oil from depleted wells. It mayalso ; be possible to develop microorganisms ; that will concentrate metals from tail- ings and low-grade ores that are now uneconomic to exploit. A risky future. The Cetus staff sees its most exciting future possibilities in the controversial field of direct gene manip-~ ulation-experimenting with recombi• nant DNA, the carrier of the genetic code. The promise of major breakthroughs is bright, and progress in basic research in gene stitching and synthesis has been remarkably rapid in the last few years. But the company faces considerable risks. "There is no way to pursue recom• binant DNA programs on a shoestring," Cape cautions. "We can't afford'~ to be scientific heroes but business flops." A suitable containment facility alone for that kind of work costs more than $1 million. Beyond the funding problem, there iss a raging public controversy about the hazards in research that is aimed at Cape: 'The name of the game was to survive and prove ourselves' producing new and perhaps lethal niu- tant microorganisms. Although not yet •' required to do so, Cetus plans to follow the same rigorous research guidelines that the National Institutes of Health~ requires for alli government sponsored work involving recombinant' DNA. But more stringent rules may come. t.ate last year a Congressional symposium in. ,:;i Washington heard, some scientists go so far as to recommend a total ban on recombinant DNA work. And federal agencies and Congress alike are explor- ing whether the government' has any ' i existing power to register or monitor such work. "Legislation on this matter has to come,"' says C. Joseph Stetler, president of the Pharmaceutical Manu- facturers Assn. .".There has to be somee government involvement." 1r. ~~ ..4.vt-F More startups. The risks in the field of genetics may well work to the advantage of smaller firms such as Cetus, which have less to lose. "Cetus is addressing the major innovations in an area in which industry has been quite backward in the last 25 years," says adviser Leder-; berg; Adds Cetus director Glaser. "It is scandalous that no practical conse- quences have come from a better under- standing of DNA." - -: • V :f;,,~, ~_s-A: The practical consequences are proba- bly, not far away. Most pharmaceutical houses and many blue-chip chemical. firms are either doing active work im genetics in their own labs or sponsoring it in~other institutions so theycan keep a close eye on it. More new companies like ' Cetus are popping up, such, as neigh- boring Genentech Inc., formed in San Francisco last year by Professor Herbert Boyer of the University of California Medical School and a group of venture capitalists. - Just how far-reaching the results will be is difficult to foretell. Says Cetus' Cape: "We're all on the first page of Genesis in this field." . „~. . .