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Monday, February 23, 2004 - Page updated at 12:00 A.M.



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Now, it's all serious business as ZymoGenetics grows new culture

By Luke Timmerman
Seattle Times business reporter

DEAN RUTZ / THE SEATTLE TIMES
Amy Thompson, manager for media preparation at ZymoGenetics, opens a 1,000-liter tank in which a nutrient is created for producing Thrombin, one of the company's first drugs to be ready for human testing.
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ZymoGenetics used to be ruled by scientists who looked over Lake Union dreaming about medical breakthroughs. It was common to spend one day a week on random scientific curiosity. One scientist took the opportunity to study the metabolism of woodchucks.

But that freewheeling two-decade run — an era of discoveries that led to the world's most common insulin for treating diabetics — is moving further into the past. Three and a half years after leaving the nest of its wealthy European parent company and two years after going public, a more demanding, strategic, Wall Street-pleasing "new Zymo" has evolved.

The cultural transformation is dramatic: When ZymoGenetics went public in February 2002, it had 315 employees. About 250 were doing basic research, largely studying how cells behave in lab dishes, and a few others were working on the step-by-step human trials and manufacturing needed to create a new drug. The company did the research and left the rest — what it considered more perspiration than inspiration — to its parent, Danish insulin maker Novo Nordisk.

But now, through internal shuffles, minor layoffs, resignations and outside recruiting, the company has 365 employees, with 165 in research — and 110 in development, who consume two-thirds of the budget. The company identity is no longer staked on its collection of patents on potential gene-based drugs.

It wants everyone to know it has done what it said it would do: push its first three tangible drug candidates into human testing during 2003 and remain on track to sell its first pharmaceuticals by as early as 2006.

Wall Street is impressed. ZymoGenetics stock has risen more than 80 percent in the past year, touching $18 a share, with market value flirting with $1 billion.

But the changes have been upsetting internally. For a research enterprise that got what it wanted with $500 million in subsidies from its parent in the '80s and '90s, it now has to live on a budget dictated by Wall Street's moods, which have been mostly bearish.

Employees are asked to make fewer color photocopies. Employee performance is now graded — an anathema, a General Electric-like notion to veteran scientists who used to come and go when they pleased.

Time away from lab grows

ZymoGenetics


Founded: 1981
Located: Seattle, South Lake Union
Employees: 365
Chief executive: Bruce Carter
Ticker: ZGEN
Top shareholders: Novo Nordisk Pharmaceuticals (41 percent), Warburg Pincus Equity Partners (14 percent), Apax Partners (5 percent), Wellington Management (4 percent), Eastbourne Capital Management (2 percent), Deerfield Management (2 percent) Cooper Hill Partners (1 percent), Washington Mutual Advisers (1 percent), TD Asset Management (1 percent) George Rathmann (1 percent), JW Seligman & Co. (1 percent), Vanguard Group (1 percent)
Cash and investments: $300 million at the end of 2003; it projects a net loss of $85 million to $95 million this year.
What it does: Develops genetically engineered protein drugs for bleeding disorders, cancer and autoimmune diseases.
Some scientists complain that they spend more time in committee meetings and drafting and re-drafting reports and less time exploring the frontiers of biology. The people who built the company worry about job security and occasionally feel insulted. New hires in development are sometimes paid more because their skills are in higher demand.

ZymoGenetics' Chief Executive Bruce Carter, a 60-year-old British-born biologist who likes to quote Winston Churchill, says balancing the interests of researchers who that made the company's reputation with those of the developers who will cement its future is one of his most critical jobs.

Carter, who is well-liked inside and outside the company, said employees occasionally complain about the changes.

"(But) people are recognizing that now this is a business," Carter said. "People's attitudes are changing. Our future is in our own hands now, and we have to do this on our own."

But he quickly adds that it's a vexing challenge:

"If you ask me exactly how I balance it, I don't think I know. I don't think anybody knows."

ZymoGenetics became a public company to see whether it could make its own fortune from its science and possibly equal or top its rivals from the early days of biotech in the 1980s. Its peers from that time — Amgen, Genentech, Biogen and Immunex — stayed mostly independent, went on to create hit drugs with help from partners and were rewarded with rocketing stock prices.

Those companies did it largely by making expensive, risky bets on potential blockbuster drugs and saw them pay off in cancer, multiple-sclerosis and rheumatoid-arthritis treatment. Some — particularly Biogen and Immunex — suffered when they couldn't show investors they had more gems in the works.

ZymoGenetics chose a different tack when it went public two years ago. Its first drugs chosen to enter human testing, Factor XIII and Thrombin, are proteins to treat bleeding disorders and post-surgical bleeding. The company concedes the two don't have blockbuster potential. The two products have been in its portfolio for years and were not plucked away for development by Novo Nordisk.

DEAN RUTZ / THE SEATTLE TIMES
Bob Dedinsky, a scientist in bioprocess development for ZymoGenetics, checks in on a 100-liter bioreactor at the company's Lake Union facility.
Carter said they were chosen because they are small enough to be manageable for a small company still learning to develop drugs and because they are less risky. Both drugs are projected to reach the market by late 2006, relatively quickly by drug-development standards. If all goes according to plan, they could provide a boost for the company's potential blockbusters in early development.

"The first one out of the chute, you really don't want it to fail because then your stock can fall in half, and it's more difficult to raise money," Carter said.

The strategy has not won over everyone. Fariba Ghodsian, a biotech analyst for Castle Creek Lifescience Partners, a Beverly Hills, Calif., hedge fund that has traded in and out of ZymoGenetics, said the company needs to think bigger.

"They have a good management pedigree and they've got great science, but when you look at their pipeline and the products they've chosen, it isn't very exciting," Ghodsian said. "They're niche markets, and for a company with this kind of valuation, you'd expect some larger markets."

Others see the strategy as savvy. Delafield Hambrecht analyst Quynh Pham said ZymoGenetics has impressed investors and boosted its credibility by resisting the urge to overhype its products and by delivering precisely on its word — a rarity in biotech.

She also gives the company credit for building a $25 million small-scale manufacturing plant at South Lake Union where it can control the delicate drug-making process as it moves from lab to factory. Manufacturing has tripped up many biotechs.

"It's early for them, but they've done just about everything right," Pham said. "Everyone's really just waiting on them to see clinical results."

ZymoGenetics has pinned its loftier ambitions — to become "an unacquired Immunex," as Carter says — on another protein in human testing, TACI-Ig, to treat the root causes for lupus, rheumatoid arthritis and possibly multiple sclerosis and cancer. Another candidate, IL-21, is to enter human tests this year. Those drugs will take years to show evidence of effectiveness in people and to drum up investor enthusiasm.

The company is so deeply wedded to its strategy, Carter said, that it is selling development rights for a promising stroke treatment to a giant drug company because it would be too big an undertaking for ZymoGenetics to handle.

The workers

DEAN RUTZ / THE SEATTLE TIMES
Neil McDonnell, senior director for program management, acknowledges a "healthy tension" between research and development at ZymoGenetics but says understanding is growing between the two sides.
One of ZymoGenetics' new managers in development, Neil McDonnell, was recruited out of Immunex when it was taken over in 2002. He says he joined the company mainly because it had a lot of potential candidates for development and enough cash to do it right. He sees similarities between ZymoGenetics and a young Immunex in terms of scientific mentality and camaraderie.

He acknowledges a "healthy tension" between research and development but said he's been able to break some of the ice by insisting that researchers keep attending meetings of developers who are carrying their work forward.

"Researchers think, 'We're the ones doing the cool science and making discoveries, and developers have a machine with a crank on the end and approvals come out the bottom,' or they think development is for people who can't cut it as researchers," McDonnell said. "But in a year and half here, I've had people say to me, 'Developers do get to use their brains.' "

Don Foster, vice president of cytokine biology and a 17-year company veteran, said scientists are finding their way in the reinvented company. They want to make sure they have a compelling scientific case that will fit into the company's development plans before they try to persuade management to go for it, Foster said.

The drive for independence has made Zymogenetics sharper, he said.

"Financial concerns put pressure on people, and keeping people motivated is not bad," Foster said. "It was safe and secure here before, and we had fun, but it feels more fun to work here now. It's more exciting.

"For better or worse, we get to drive our own future, and people here are confident. We believe we've created things in the last 12 years that are some of the best things anybody's done."

Luke Timmerman: 206-515-5644 or ltimmerman@seattletimes.com


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