Letter #287: Arthur Levinson (1996)
Genentech President & CEO, Apple Chairman, and Calico CEO | Letter to Stockholders
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Arthur Levinson is a Cofounder and the CEO of Calico Labs (an Alphabet company) and the Chairman of Apple’s board. Prior to being named CEO of Calico and joining Apple’s board, Arthur was the CEO of Genentech and served on Google’s board. Arthur started his career at Genentech, first as a research scientist, then VP of research technology, VP of research, SVP of research, SVP of research and development, before finally being named CEO and then Chairman. He was hired at Genentech by Herb Boyer out of UCSF where he was a postdoctoral researcher with Nobel Prize winners J. Michael Bishop and Harold Varmus in the department of microbiology.
Today’s letter is Arthur’s first shareholder letter as CEO of Genentech. In this letter, he shares why although the year was a transition year with regards to their leadership, relationship with their majority shareholder, and the successful resolution of several lingering controversies, it was also a year that reaffirmed their core values, which would guide their current and future progress. He shares his top priorities as President and CEO, alongside the development of a fundamental strategy with four core components: 1) maximize sales, 2) accelerate and expand product development, 3) increase the pace of strategic alliances, and 4) increase financial returns. Arthur ends by explaining how their four point strategy is built upon a number of real assets: people, products, pipeline, and available capital—as well as a realistic assessment of the competitive environment, emphasizing the importance of staying nimble and acknowledging that their strategies will evolve, and reasserting that their core values will remain the same.
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Letter
1995 was a year of transition for Genentech in terms of leadership, our relationship with our majority stockholder, Roche, and the successful resolution of several lingering controversies. But it also was a year of constancy-one in which we reaffirmed our core values of science, compassion, integrity, entrepreneurial spirit, open communications, and excellence. These values form the essence of Genentech, and sustain our culture. As we make the many changes necessary for growth as a larger-scale company, it is these values that will continue to guide our current and future progress.
I am both happy and honored to have been asked to lead the company forward. In my 16 years with Genentech I have seen the company go public; market our first product, Protropin, in 1985; launch four additional new products; build a prolific product pipeline; increase our employee base from about 50 to more than 2,800; enter and sustain several very promising R&D; strategic alliances; and develop a very successful relationship with Roche. What motivated me to come to Genentech - its science and its culture - are constant motivating forces for me today.
My top priorities as president and CEO are to hone our strengths and apply them in a disciplined and decisive way to build Genentech's value for stockholders. In this manner we can aspire to be the company we want to be at the turn of the century and beyond - continuing to operate in a substantially independent fashion as a fully integrated pharmaceutical company. With strong 1995 earnings and revenue growth, a healthy R&D; pipeline, cash available for product in-licensing, a vibrant research organization that continues to develop novel therapeutics, and an immensely talented group of employees, we have what we need to build the company's value to make that goal possible.
We have maintained our operational identity since our relationship with Roche began in 1990. Our new arrangement with Roche allows us to continue to pursue what we do best - discover, develop, manufacture and market pharmaceuticals for significant, unmet medical needs - while removing the complexity and cost of international development and marketing from our business. At the same time, we benefit from Roche's well-developed marketing strength outside the United States. This strength will benefit both our currently marketed products and our newly emerging products Roche chooses to develop and market ex-U.S. In 1995 we received a strong vote of support for our expanded relationship with Roche from our non-Roche stockholders. This adds to our confidence and confirms our direction for continued success. Despite our stated preference for continued independent operations, I will not divert Genentech's attention needlessly to the possible outcome of Roche's option to "call" or non-Roche stockholders' option to "put" that will determine whether the company remains publicly traded. We know we cannot control whether Roche exercises its option to purchase the outstanding special common stock of the company between now and 1999. Nor can we ever control market conditions. Instead, I will focus on building the value of the company and positioning Genentech for ongoing success, regardless of the scenario that unfolds by 1999. At the turn of the century we expect to have both a strong bottom line and a strong late-stage pipeline with excellent growth prospects.
How will we accomplish this? In 1995 we developed a fundamental strategy that has four critical components. They are: 1. Maximize the sales of our marketed products; 2. Accelerate and expand product development; 3. Increase the pace of forming strategic alliances; and 4. Improve financial returns.
Maximizing sales of our marketed products will come both from increasing our market share and/or the market size for these products, and from developing them for additional indications. Our marketed products generated $635 million in sales in 1995, and we expect these products to drive our revenues significantly in the coming years.
I am enthusiastic about our overall progress on the new indications and second generation improvements we are developing for our marketed products, outlined in our pipeline poster in this report. As a disappointing reminder that the business of science has inherent risks, in 1995 an independent monitoring board recommended that the Phase III trial of Pulmozyme® in patients with acute episodes of chronic obstructive pulmonary disease be stopped due to a lack of demonstrable benefit shown in the interim analysis of the study. (This does not affect Pulmozyme's use for treating cystic fibrosis, for which it has a proven record of safety and efficacy.) But we also received a confirmation that strong science can lead to success. In 1995 we received positive results of the Phase III clinical study by the National Institute of Neurological Disorders and Stroke using Activase® to treat acute ischemic stroke. We will submit a Product License Application to the Food and Drug Administration for this new indication in 1996. We also received in 1995 approval to market the first liquid form of growth hormone, Nutropin AQ .
Key to our efforts to maintain and grow our current markets is our ability to adapt to the changing health care reimbursement environment, where a major emphasis is being placed on cost containment and value for money. In 1995 we bolstered our managed care department by adding more than 20 managed care specialists to our field sales organization. In 1996 we will continue to augment this organization as needed to best serve the interests of our customers. And we are integrating health economic and outcomes analyses and research throughout our product development process.
We also are putting a full effort behind the entirely new products in our development pipeline so we can realize their benefits for patients and their value to Genentech stockholders as expeditiously as possible. And we will accelerate the rate at which we choose high-potential, late-stage research projects for development; we plan to have moved three or four projects with a clear potential for success into development by the end of 1996. DNase for lupus nephritis, just recently moved into the clinic, is an example of these new development projects.
Our third strategy - supplemental to backing fully Genentech's own pipeline - is to acquire rights to products being developed by others where there is a good scientific and commercial fit. An exciting example of the type of alliance we intend to pursue is the collaboration we began in 1995 with IDEC Pharmaceuticals to develop IDEC's anti-CD20 monoclonal antibody (called C2B8) for non-Hodgkin's B-cell lymphomas. This project is currently in Phase III clinical trials. We expanded our collaboration with IDEC in 1996 to include a complementary radioisotopic version of this treatment, called IDEC-Y2B8, to target the more severe forms of B-cell lymphomas.
These three strategies - maximizing sales of our marketed products, accelerating and expanding product development, and increasing the pace of forming strategic alliances - lead to our fourth strategy, improving financial returns. To focus on product development, we expect to increase the absolute amount of our R&D; expenditures. But as our revenues increase, we expect R&D; expense as a percentage of revenue to decrease by 1999. Through careful expense management in all areas, we foresee bringing more revenues to the bottom line and increasing stockholder returns over the next few years. But some new expenses make sense: I am convinced that using a portion of our available cash resources to fund carefully selected acquisitions of quality products that present good near-term commercial opportunities is a wise investment.
Our four-point strategy to build the value of the company is based on real assets - our people (for whom we are enhancing our commitment to their professional growth), our marketed products, R&D; pipeline and available capital - and on a realistic assessment of the current competitive environment. As we move forward, our strategies will evolve. But our core values will remain constant, as they did in 1995; as they were when the company was founded in 1976. Genentech is changing as it needs to and staying the same as it should.
I want to thank my fellow stockholders and employees for your continued vision and support for who we are, and what we may yet accomplish. Our strategies are our map in our journey toward further success. But what will propel us there is our passionate belief in science, our mission to help people through medicine, our commitment to the highest standards of behavior, our entrepreneurial spirit, our open and honest environment for communication, and our continuing pursuit of excellence.
Sincerely,
Arthur D. Levinson, Ph.D.
President and Chief Executive Officer
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