In June of 1997, Dr. William S. Haseltine, chairman of the board and chief executive officer of Human Genome Sciences, Inc. ("HGS"), sat at his desk pondering the future of the biotechnology industry and the role his company would play in it. Haseltine, a 52-year-old biochemist, formerly of Harvard University, had been a successful scientist and businessman, with eight seven biotechnology start-ups to his name including HGS. In the five years since first issuing public common shares, HGS has experienced successhad been successful in its original goal of identifying and patenting a number of human genes. The new challenge facing the company was the development of marketable drugs based upon its genomic research, both through partnerships with other pharmaceutical companies and independently. Dr. Haseltine had overseen the company’s efforts to sequence these of genes that made up the human body and felt that most of the human genome had already been sequenced either by HGS or its competitors. In an effort to further commercialize the company’s research, Dr. Haseltine was now considering ways to move his company forward, by building upon its accomplishments. Most of HGS’sHGS’ original genomic innovation had been developed as a result of or in collaboration with The Institute for Genomic Research ("TIGR"), a not-for-profit institute headed by Dr. J. Craig Venter. TIGR was founded consecutively with and largely funded by HGS. HGS continued to owe about $40 million in future payments to TIGR under the terms of a ten-year research agreement between the two organizations. Dr. Haseltine was preparing to make recommendations to his board of directors regarding changes the industry had witnessed during the prior five years, methods by which HGS could profit from its significant research investment, and whether TIGR should continue to be a significant part of those plans. 

Human cells manufacture thousands of different proteins for cell structure, growth, and function. A gene is a chemical blueprint, or a set of coded instructions, for the manufacture of a cell protein. An organism’s genome is its complete set of genes. The human genome contains approximately 100,000 genes which are encoded in a complex molecule known as DNA. Each cell of the human body contains copies of an individual’s DNA - all of the genetic information necessary to code an entire human being. Sequencing refers to the "decoding" of an organism’s DNA, determining the sequence of chemical subunits of DNA called , nucleotides. Another challenge for industry participants is identifying and extracting the relevant DNA segments, or genes, which code for particular proteins. Only three to five percent of the DNA in a human cell consists of genes which code for proteins. An expressed gene is one which is turned on by the cell for protein production. Isolating and sequencing the active DNA segments, or expressed genes, and determining the function of the proteins are key goals of genomic research. 

Traditional pharmaceutical companies have focused on a particular disease state and worked backwards to determine the cause, the underlying chemical processes, and possible targets for drugs capable of preventing, eliminating or reversing the effects of the targeted disease. The traditional trial and error process by which random natural and synthetic compounds are screened for medical applications is labor-intensive and time-consuming. The use of computers and robotics to automate and speed accelerate up the process of drug-screening is revolutionizing drug discovery. Compared with the traditional pharmaceutical approach, biotechnology presents an entirely different means for understanding disease, and has the potential to speed drug discovery and innovation. Biotechnologists strive to define the role of gene expression in disease in an effort to develop drugs that target proteins or genes linked to disease. 

DNA sequencing is a complex process, but technological developments such as computers, robotics and semiconductors have made rapid, large-scale, automated gene sequencing possible. Since genes vary by individual, enormous data-processing capabilities are required to search for genetic patterns within a species. While genetic maps of simple organisms such as fruit flies and bacteria have been completed, the mapping of more complex genomes is estimated to take years. The National institutes of Health ("NIH") currently participates in a worldwide collaboration of efforts to map the human genome in detail. This collaborative effort is projected to take fifteen years to complete. 

HGS approaches genomic research in a different manner than many other industry participants. Rather than focusing in detail on one particular gene, HGS rapidly identifies as many genes as possible, attempting to gain proprietary rights to the partial sequences, and then focuses on fully sequencing and further developing those genes which appear to have commercial potential. The company catalogues the relative abundance and location of genes discovered, and then compares multiple copies of the same gene across normal and diseased samples and locations (organ, tissue, cell).  

By examining differences in gene expression, i.e. the resultant protein products, the company identifies targets for further research. Comparison across normal, developmental and diseased states allows the company to identify missing or defective protein(s) which characterize a disease and give insight into the disease’s progression. In terms of drug discovery, cross-comparison of genes constitutes a novel method of selection, essentially reducing the size of the haystack in which the company searches for its proverbial needles, athe key proteins by which modern medicine may intervene in disease.  

A gene sequencing company’s commercial success is dependent in part on its ability to obtain patent protection on genes discovered. The company applies for patent protection on partial sequences, and subsequently, on those genes that it fully sequences. However, companies such as HGS do not expect to obtain full-length gene sequence information on many of the genes they partially sequences and patents.

Given the public interest and public nature of gene research, the government has several major roles in this industry. In addition to funding research, the government also serves as regulator and approver of legal, ethical and social implications of biotechnology. 

The patenting process is complex due to a number of factors. 1) Gene sequencing patents have been subject to ethical debate. 2) There is a significant backlog of patents for gene sequencing in the U.S. 3) There exists uncertainty regarding the defendability of partial gene sequence patents. 4) There are complex legal issues regarding overlap and integrity of patents. 5) There are lengthy and time-consuming proposals for review of patents filed by competing companies and the government. 6) As the number of patents regarding genomic research increases, the risk of not obtaining patents increases because there is less control over prioritization of claims. 

There are certain court decisions indicating that disclosure of a partial gene sequences may not be sufficient to support the patentability of a subsequent full-length sequence required to protect resulting products and applications. Defendability is most often in question where the biological function of the full-length gene has not been identified. For example, in June 1991, the NIH filed patent applications seeking protection for a substantial number of genes based upon partial gene sequences. The U.S. Patent & Trademark Office rejected the claims and the NIH did not appeal the decision. 

Publication of data also complicates the question of what is proprietary and non-proprietary. For example, TIGR has traditionally released sequences to Human cDNA database, a human genetic database to which academic scientists and non-profit researchers have full access. The publication of data limits the scope of the commercial patent claims and potentially makes some information unpatentable.

Once patents are filed and products are developed from full-length gene sequences, all companies are required to subject new products to the U.S. Food and Drug Administration’s ("FDA") rigorous approval process. The process begins with preclinical testing that involved in vivo testing in animals to assess its safety and performance. If a company receives satisfactory results from these tests, which it can perform internally or contract out to an independent testing lab, the company files and Investigational New Drug ("IND") application containing the test results with the FDA. The next phase of testing, which requires at least two years, involves three phases of human clinical testing for the new product. In Phase 1, the new drug is tested on a small sample of healthy humans. In phase 2, the drug is tested on a small sample of patients afflicted with the drug'’ targeted disease. In phase 3, the drug’s commercial formula is tested on a large sample, usually 1,000 to 3,000 patients. If a drug proves to be safe and effective throughout al three phases (about 20% historically satisfied the FDA’s requirements), then the company prepares a Product License Application ("PLA") for a biologic compound and submits it to the FDA for review. The FDA’s approval process from this point is about two years. 

In summary, the clinical testing and approval process lasts at least five years and accounts for about 40% of total research, development and commercialization for a single product.

HGS, founded in 1992, is dedicated to the research and development of novel proprietary pharmaceutical and diagnostic products based on the discovery and understanding of the medical use of genes. The original principal objectives of the company were to quickly discover and develop proprietary rights to a substantial number of novel genes with the ultimate intention of commercializing medical products based upon those genes in such areas as therapeutic proteins, gene therapy, antimicrobial agents, antisense drugs, metabolic enzymes, vaccines, and diagnostics (see Exhibit 4 for a description of these product categories). 

Initially, In 1993 the company’s focus was primarily upon the identification of genes with commercial potential using its advanced proprietary bioinformatics system, in obtaining intellectual property rights to its discoveries, and in leveraging the clinical testing competencies of other companies to develop products from promising gene discoveries. In 1993, HGS stated that it intended to achieve these objectives through the following specific strategies: "identify proteins which characterize a disease and give insight into its progressions; rapidly sequence human and other genes; apply for patent protection at each stage of the development process; establish collaborative arrangements with corporate partners." 

While HGS has not manufactured or marketed any applications of its technology, HGS has traditionally demonstrated strength in its speed of information processing and implied potential for fast product development. The company believes its large libraries of sequencing data (600 libraries containing descriptions of 95% of genes found in normal human tissue) and bioinformatics systems it has in place give it a competitive advantage in rapidly identifying, establishing the utility of, and ultimately patenting as many genes as possible. Bioinformatics refers to the use of computers to process, analyze, store and retrieve biological information.  

By early 1997, through use of automated, high-speed gene sequencing technology, HGS had generated over one million partial gene sequences which, the company believed, corresponded to most of the expressed genes in the human body. By the same time, the company had isolated and characterized several hundred full-length genes, had expressed and purified over one-hundred potential therapeutic proteins, and was evaluating six therapeutic protein candidates in pre-clinicalpreclinical trials (see Exhibit 3 4 for a description of these candidates)).. Additionally, HGS had filed patent applications for over 190,000 partial human gene sequences; the validity of partial gene patents remained uncertain, however. As of June, 1996, HGS had been granted five U.S. patents covering full-length gene sequences but had no products approved by the U.S. Food and Drug Administration ("FDA") for patient use. 

In keeping with its original strategy, HGS demonstrated success in recruiting partners in the pharmaceutical industry to work toward developing marketable products from HGS’sHGS’ innovations. An example of such an agreement iswas the exchange of a $125 million cash infusion commitment from in HGS from SmithKline Beecham Corporation ("SmithKline") for an equity stake in HGS and certain first rights to develop and market products based on human genes discovered by HGS (see Role of Collaboration in Commercializing and Creating Innovation at HGS – Distribution and Commercialization, below). Such collaborative agreements have provided the vast majority of HGS’sHGS’ revenues to date (see financial statements, Exhibit 1, and schedule of revenues, Exhibit 2). In addition to these revenues, the company had funded its operations through three successful equity offerings from 1993 to 1997 (see Exhibit 5 for a summary of these offerings).

By early 1997, HGS stated that its "activities have progressed to focusing primarily on research and development of therapeutic product candidates" rather than a focus primarily on rapidly sequencing the human genome. Indeed the company confirmed that "there is a finite number of genes in the human genome, and the company believes that the majority of such genes have been identified by the company or others conducting genomic research and that virtually all will be identified within several years." HGS, therefore, began to shift its emphasis from identifying and obtaining intellectual property rights of the genes that make up the human genome , HGS’ strategy in 1993, toto more concerted commercialization strategies – both through partnerships and, for the first time, internally: 

This amended approach to capitalizing upon its innovations is visible in contrasting the company’s stated strategy in 1993 versus its strategy in 1997, which focused more broadly on applying its innovations through clinical testing and commercialization: 

From the beginning, collaborationsSince its origination, collaborations played an important part in HGS’sHGS’ growth, development, and access to complementary assets – ranging from its immediate affiliation with TIGR to source genetic research to its early distribution agreement with SmithKline which has provided a significant portion of the company’s revenue to date to new partnerships intended to provide the company with a source of pre-clinicalpreclinical and clinical testing of potentially-marketable products to be developed partially or fully in-house. 

Sourcing Research and Innovation 

From its beginning, HGS was tied through collaboration to TIGR, the not-for-profit organization dedicated to genetic research, as a significant source of scientific innovation. H HGS stated in 1993 that "the vast majority of the genes identified by the company to- date have been identified from sequencing performed by TIGR. The company has recently expanded its internal sequencing capacity and presently has a sequencing capacity greater than that of TIGR. However, the company still remains dependent on TIGR to meet its gene sequencing requirements and to achieve certain sequencing-related funding milestones [with SmithKline]." TIGR was formed by Dr. J. Craig Venter who was, according to HGS, "instrumental in developing methods for rapid gene discovery based on partial sequences." Wrote the Washington Post:

HGS and TIGR were jointly founded in 1992 with the help of the late Wallace H. Steinberg [former member of the board of HGS], chairman of the venture capital firm Investment Capital Corp. Steinberg wanted to get his hands on a new rapid DNA sequencing technology developed largely by Venter in the late 1980s while he was at the National Institutes of Health. This technology would allow scientists to quickly sequence the chemicals in the 60,000 to 150,000 human genes… The hope was that Venter’s scientific shortcut would in turn speed up the discovery and production of drugs. That’s where HGS came in. Venter had no desire to run a business, so Steinberg set up TIGR as a nonprofit institute where Venter could do research without being hassled by worried investors. At the same time, Steinberg established HGS as a separate commercial partner of TIGR and recruited Haseltine to run it. 

In exchange for access to TIGR’s technology and exclusive intellectual property rights to its research, HGS agreed to pay TIGR $85 million over the ten-year period ending September 2002. As of early 1997, $44 million of HGS’sHGS’ obligations under this contract had been paid. Under the terms of the agreement, TIGR retained the right to direct its research activities independently from HGS and was not obligated to conduct research in areas of interest to HGS although, barring some kind of negotiated agreement, HGS was obligated to continue funding its obligations to TIGR through the life of the agreement.HGS. 

Also as part of the agreement, TIGR entered into certain non-disclosure obligations regarding the results of its research. HGS stated early in 1997 that it had recent disagreements with TIGR concerning the scope of these non-disclosure agreements: 

David Lipman, director of the National Center for Biotechnology Information, a part of the National Institutes of Health, said, "Craig Venter was running a nonprofit research institute where he wanted everyone to have access to his data, while Haseltine wanted to build a commercial entity – and if control over some information would give him an edge, he would control it." 

Under terms of the HGS-TIGR agreement, TIGR was required not to disclose its findings to any party other than HGS for at least six months. However, a recent change in governmental regulation appeared to force research organizations partially-financed through federal funding, such as TIGR, to release its scientific discoveries within 48 hours rather than six months, severely diminishing HGS’ ability to file for patents on those discoveries. Venter has complained that he and HGS’s lawyers constantly argued over releasing TIGR’s discoveries. "My own creativity and that of other scientists here [is] being stifled," said Venter. Haseltine disputed Venter’s allegations, however. "It was never the case that he was threatened by lawyers," Haseltine said. "We [work] with him in a positive and cooperative manner to accelerate publication of his work."

Product Development and Commercialization

HGS recognized a need to build product development and commercialization capabilities in order to develop and market products from its gene research. Leveraging upon its leadership position in gene discovery, HGS has been able to partner with pharmaceutical and biotechnology firms to strengthen and develop its internal product research, development, commercialization and marketing capabilities. The partnering agreements are similar in structure. Typically, HGS provided information related to gene discoveries to the partnering companies who have used the information to develop products. In return for gene technology, HGS receives license fees, research and development payments, equity payments, and royalties on the development and sale of products by the partners.  

In March 1993, HGS, Plant Genome Sciences (PGS) and Industrial Genome Sciences (IGS) entered an agreement such that HGS granted PGS/IGS royalty-free, worldwide, exclusive licenses to the Company’s technology in exchange for receipt of royalty-free, worldwide, exclusive licenses to developments made by these corporations. This initial agreement established a formula for HGS to seek similar arrangements with others. 

In May 1993, HGS entered into a collaborative agreement with the SmithKline Beecham Corporation. Under the terms of this agreement, HGS would receive $125 million in payments and royalties for meeting product development milestones while SmithKline secured an equity stake in the company and exclusive rights to develop and commercialize therapeutic and diagnostic products based upon the genes discovered by HGS. In addition, HGS would be required to disclose to SmithKline all human gene technology developed and would be entitled to royalties from products developed and sold by SmithKline. Under the agreement, HGS and SmithKline would be entitled to co-promote the products developed. 

In an effort to internationally broaden distribution and marketing efforts, the HGS/SmithKline partnership entered into an option and lease agreement with Takeda Chemical Industries, Ltd. of Japan in June 1995. In exchange for a $5 million option premium and future royalty payments, Takeda received the right to develop and commercialize products for Japan based on both the HGS/SmithKline human gene technology and HGS proprietary products.  

In May 1996, the HGS/SmithKline collaborative agreement was modified so that HGS could designate six therapeutic proteins at any one time for exclusive development and commercialization. This modification further allowed the HGS/SmithKline partnership to enter collaborative agreements with other pharmaceutical companies allowing for improvement in the speed and breadth of product research and development. In June/July 1996, the HGS/SmithKline partnership entered into collaboration arrangements with Schering-Plough, Synthelabo S.A. and Merck KGaA. These agreements provided HGS/SmithKline with $140 million, to be received over an initial five year research period, milestone, research, and royalty payments in exchange for rights to research, develop and commercialize therapeutic products based upon the HGS/SmithKline human gene technology.

Manufacturing and Marketing

In keeping with its shift from genetic discovery to research commercialization, HGS stated that its "long range plan is to establish [internal] manufacturing capabilities to allow it to meet its clinical trial and commercial manufacturing requirements." Again the company stated that it would rely on collaborations in the short-term to satisfy its manufacturing needs. HGS engaged a third party manufacturer to supply such materials in accordance with current good manufacturing practices ("cGMPs") and other regulatory requirements and to deliver its products in a timely and consistent fashion. 

Additionally, HGS announced its intention to build a cGMP-compliant pilot scale production and process development facility for the preparation of clinical trial quantities of its therapeutic proteins. The company estimated the cost of the 80,000 square foot facility to be $40-45 million with construction to begin in mid-1997 and to end twelve to eighteen months later. Haseltine said of the proposed facility, "Construction of a drug manufacturing facility represents a critical step in HGS’ history. We are now making the planned transition from drug discovery to drug development and testing. The products made in this new facility will be used in clinical trials to assess their safety and efficacy in addressing serious unmet medical needs. The facility will also be used to manufacture materials to support early sales of products in North America." 

In addition to manufacturing capabilities, any HGS products receiving FDA approval would require significant marketing. Again, the company planned to utilize agreements with existing collaborators or other third party firms to satisfy these potential needs.

There is a finite number of genes in the human genome and the race to identify and sequence these genes is expected to be over complete within the next several years. Many parties are currently involved in genomic research, including the NIH and foreign-government-financed institutes, university laboratories, not-for-profits like TIGR, and the current universe of pharmaceutical and biotechnology companies. Sequencing techniques vary across these entities, but the resulting genomic maps and sequencing data are inherently similar. Since As intellectual property rights patent law has not been have not been fully developed for early phases of gene research (see discussion in Regulatory Environment section, below), HGS runs the risk of not gaining obtaining proprietary rights to patent protection for its genetic findings findings as long asif no commercially- feasible product based on the associated gene or its protein exists to protect.  

The company relies on Applied Biosystems to supply its commercially available gene-sequencing equipment and chemical reagents. TIGR developed the rapid gene-sequencing technique used by HGS. Thus, trade secrets which are important to HGS’ business have been developed and/or are owned by TIGR; and meaningful protection of these secrets may prove difficult. Furthermore, new, faster gene sequencing machines embodying new and superior technology could render the gene sequencers or process used by the company obsolete.  

Competitive research, product development capabilities (testing as well as commercialization and manufacturing), financial, scientific, marketing and human resources capabilities are key areas in which HGS and its collaborators must compete. The A biotechnology company’s success will can be determined by its dependent upon its internal capacity, or ability to negotiate with key partners, for product development, preclinical development and testing, clinical, regulatory, sales and marketing resources. .Limited experience in product development activities currently forces many biotechnology firms to rely on collaborative partners and third party clinical research organizations for commercial product testing on potential manufacturing capabilities. Such collaborators are often engaged in competing product development efforts, however, and conflicts of interest may arise.. Several issues arise exist in considering a company’s alliances, such as negotiation of terms, control, and future reliance and potential conflicts of interest. For example, HGS has committed to one manufacturer to supply its therapeutic proteins in quantities appropriate for preclinical testing and development. 

HGS currently has no FDA-approved products for patient use and its potential commercial products are still in an early phase of development. Having identified certain genes with potential commercial value, efforts must focus on developing a commercially feasible (and protectable) products based on the gene or the protein expressed by the gene. Very few gene-based products have been developed and commercialized to date. 

Currently, the company’s divisions are organized around relevant pre-clinical product development functions. The Molecular Biology Division identifies and isolates genes, sequences genes, and identifies possible functions. The Protein Expression Division is primarily concerned with producing protein candidates in acceptable forms and quantities for testing. The Cellular Biology Division tests the activity of the purified proteins, assessing their relevance to unmet medical needs. The Pharmacology Division focuses on protein-based drug development and testing. 

Increasing public access to genomic research findings, public-interest funding of human genome research, and high risk/return potential characteristics typical of healthcare applications may attract many possible entrantsadditional industry entrants. Potential products based on genes identified by the company could face competition from companies developing gene-based products and from companies developing other forms of treatment for diseases caused by or related to genes identified by the company. Other treatments may be more economical, render a gene-based or protein-based product obsolete, or demonstrate superior efficacy. 

Among the factors which discourage competitive entry are regulatory barriers, capital requirements, and multi-tiered capabilities. Regulatory barriers to entry, such as patents and proprietary rights to genes and gene products are uncertain. Significant capital expenditures are required for sequencing equipment, computers, robotics and access to established databases of genetic information. Significant tacit knowledge is also required to exploit these resources and to handle dynamic industry developments. The complex, multi-tiered capabilities required for genetic research, product development and commercialization generally dictate a multi-faceted organization with broad capabilities. Companies with unique experience in a particular functional skill area and/or experience in creating and profiting from alliances have a competitive advantage over new industry entrants. 

A number of additional challenges and risks are characteristic of pharmaceutical product development including: 1) The underlying technology or resulting products may be found to be ineffective or toxic, and as a result may fail to receive regulatory clearances or timely approval. 2) The need for social acceptance and scientific experience with biotechnology-based products may also slow approvals and marketability of these products. 3) The products may be difficult to manufacture on a large scale or may be uneconomical to market. For example, while the cost of sequencing a single gene has decreased significantly with advancing technology, the cost of sequencing an individual genome remains relatively high versus the cost of traditional chemical-based drug therapy. 4) The proprietary rights of third parties may preclude HGS and its collaborators from marketing products. Because so many players are involved in genomic research, it is likely that others will claim rights to the same gene(s) HGS has closely examined. 5) Third parties may bring superior or equivalent products to market. 6) Rapid technological development may render the products, services or processes of HGS obsolete. 

Biotechnology companies have traditionally depended heavily on collaborators for complementary assets necessary to manufacture and market products. Companies rely on receipt of milestone and royalty revenues from collaborators in order to provide the cash flow necessary for ongoing R&D efforts. Each collaborator is engaged in its own product development efforts, and conflicts of interest may arise between collaborators and HGS characterized by the pursuit of existing or alternative technologies or the development of similar or competitive products. 

Biotechnology companies generally compete in one of two Human applications of biotechnologymarket segments: contain two major market segments: diagnostics and therapeutics. Therapeutics can be further divided into carbohydrate-based and protein-based products. HGS competedes within the protein-based therapeutics market. Many Most biotech biotechnology firms relied rely heavily on partners for the network externalities necessary to successfully develop and launch in a large, competitive geographic market. In fact, Bill Tobin, CEO of Biogen, Inc. stated, "…of the 1,300 or 1,400 U.S. biotech biotechnology companies, exactly three have been able to get a product to market under their own label and stay independent." 

The three companies were Amgen Inc., the world’s largest biotech biotechnology company, with 1996 sales of $2.24 billion; Genzyme Corp., a highly diversified pharmaceutical company with a significant biotechnology base; and Biogen Inc. which, after selling several previous discoveries and gaining substantial returns from royalties, finally ultimately released and marketed its own drug – Avonex for multiple sclerosis – in 1996.  

There were other significant competitors such asinclude Genetics Institute, Inc., Genentech Inc., and Chiron Corporation. These companies that offered branded products . and These companies were are owned or partially -owned by large pharmaceutical partners, specifically, American Home Products Corporation, Hoffman-La Roche and Novartis AG, respectively. Each of these companies was exposed to has faced strong competitive forces that that have drivendrove itthem into partnerships, litigation and new capital structures to defend patents, increase shareholder wealth and cash flows necessary for its survival. 

A gene sequencing company’s commercial success is dependent in part on its ability to obtain patent protection on genes discovered. The company applies for patent protection on partial sequences, and subsequently, on those genes that it fully sequences. However, companies such as HGS do not necessarily expect to obtain full-length gene sequence information on many of the genes they partially sequence and patent.

Given the public interest and public nature of gene research in the United States, governmental regulation plays several major roles in this industry. In addition to funding research, the federal government also serves as regulator and approver of legal, ethical and social implications of biotechnology. 

The patenting process is complex due to a number of factors including ethical debates over patenting human genes; the significant backlog of patents for gene sequencing in the U.S.; existing uncertainty regarding the defendability of partial gene sequence patents; complex legal issues regarding overlap and integrity of patents; lengthy and time-consuming proposals for review of patents filed by competing companies and the government; and the increasing risk of not obtaining patents because control over prioritization of claims continues to diminish as the number of patents regarding genomic research increases. 

Certain rulings have indicated that disclosure of a partial gene sequences may not be sufficient to support the patentability of a subsequent full-length sequence required to protect resulting products and applications. Defendability appears to be most often in question where the biological function of the full-length gene has not been identified. For example, in June 1991, the NIH filed patent applications seeking protection for a substantial number of genes based upon partial gene sequences. The U.S. Patent & Trademark Office rejected the claims and the NIH did not appeal the decision. 

Publication of data also complicates the question of what is proprietary and non-proprietary. For example, TIGR has traditionally released sequences to Human cDNA database, a human genetic database to which academic scientists and non-profit researchers have full access. The publication of data limits the scope of the commercial patent claims and potentially makes some information unpatentable. 

Once patents are filed and products are developed from full-length gene sequences, all companies seeking U.S. product approval are required to subject new products to the FDA’s rigorous process of review. The process begins with preclinical testing that involves in vivo testing in animals to assess product safety and performance. If a company receives satisfactory results from these tests, which it can perform internally or contract out to an independent testing lab, the company files and Investigational New Drug ("IND") application containing the test results with the FDA. The next phase of testing, which generally requires at least a two year period, involves three phases of human clinical testing for the new product. In phase 1, the new drug is tested on a small sample of healthy humans. In phase 2, the drug is tested on a small sample of patients afflicted with the targeted disease. In phase 3, the drug’s commercial formula is tested on a large sample, usually 1,000 to 3,000 patients. If a drug proves to be safe and effective throughout al three phases (about 20% have historically satisfied the FDA’s requirements), then the company prepares a Product License Application ("PLA") for a biologic compound and submits it to the FDA for review. The FDA’s approval process from this point averages approximately two years. 

In total, the clinical testing and approval process generally lasts at least five years and accounts for about 40% of total research, development and commercialization for a single product. 

Amgen Inc.

Amgen, Inc. of Thousand Oaks, California was founded in 1980 as Applied Molecular Genetics, Inc. It was headed by George Rathmann, PhD who had previously served as a vice president of R&D at Abbott Laboratories. After pursuing many applications of biotechnology, the firm concentrated its efforts increasingly on developing human therapeutics and sold off its business for its non-biotechnology diagnostics and reagents in 1981. In 1983, the company changed its name to Amgen and raised $270 million in its initial public offering. 

Amgen’s major products, Epogen and Neupogen, which were FDA approved in 1989 and 1991, respectively, were still the largest selling biotherapeutics on the market in 1996. These two product launches made Amgen transform from a research institution into a commercial business.  

In 1990, Amgen filed suit against Genetics Institute for patent infringements against Epogen. Both companies had valid patents for the same molecule, but for different methods of producing it. After the companies spent a combined total of more than $100 million in litigation, the courts ruled in favor of Amgen in March of 1991 and banned GI from selling its product in the United States. Amgen still reported strong earnings into the first quarter of 1996 driven by strong sales of Epogen. However, both of its major patents, Epogen and Neupogen, were to expire around the beginning of the next decade. 

TSI Corporation / Genzyme Transgenics

TSI Corporation of Worcester, Massachusetts was founded in 1987 as Transgenic Sciences, Inc. by a group of six scientists who chose to research in the newly created field of transgenics, which was a rDNA technique that involved taking a gene out of one species and putting it into another. It hoped to use this technique to develop genetically altered animals for use as "bioreactors" – producers of commercially viable human proteins. 

These biorectors led the company to the development and acquisition of testing services that flourished domestically and abroad, garnering TSI the position of fifth largest pharmaceutical testing firm in the world. Additionally, the company’s scientists determined that the company’s genetically altered animals could become human disease models so that treatments for humans could be tested on them. The first disease model was ready in 1994, the same year that TSI merged with one of its main competitors, Genzyme transgenics. Although TSI/Genzyme Transgenics had been a going concern since the merger, it was plagued with financial difficulty since 1994. It left the Biotech Research Park in Worcester for a location with lower taxes. It had raised its revenues from $4.5 million in the fourth quarter of 1994 to $8.8 million in the first quarter of 1996, however. 

In June of 1996, Genzyme Transgenics announced that it would conduct a study of the expression of a monoclonal antibody in the milk of transgenic animals for Boehringer Mannheim GmbH of Germany in exchange for milestone payments. The study would test the validity of commercially producing the monoclonal antibodies, which are proteins that can find and attach to specific cell targets.

Chiron Corporation

The Emeryville, California-based firm was the second largest Biotech in the world behind Amgen in 1996. CEO Edward E. Penohet, PhD oversaw the Chiron’s 49% acquisition by Novartis in 1994, which more than double Chiron’s size. With this new arm, the company now was a competitor across five areas: diagnostics, opthalmics, therapeutics, vaccines and technologies. It also boasted expertise in diseases such as HIV, hepatitis, cardiovascular diseases and cancers.  

Chiron developed its products with the help of more than 300 collaborations with companies and universities. As late as 1996, the Genetics Institute gave gene sequence library access to long-time rivals, Chiron and Genentech. Under the terms of the deal, the two companies would be offered the opportunity to buy thousands of protein samples at modest cost in return for sharing development and marketing of any resulting drugs with the Genetics Institute. Agreements like this enabled Chiron to fill its products pipeline, which generated over $1 billion in revenue in 1996. 

While Chiron was to keep its traditional stock structure when undertaking this agreement and its subsequent new areas of innovation, Genzyme, Genzyme Transgenics’ parent company, was issuing ‘tracking stocks’, for each wholly-owned division: tissue repair, molecular oncology and general. This new structure allowed for both the incentivization of division managers and the lack of dilution of the original stockholders.

A Microarray Technology Access Program collaboration brought together Molecular Dynamics, Inc., which supplied instrumentation, Amersham International, which supplied matched reagents and consumables, and Chiron, which supplied funding and expertise in exchange for early access to resulting technologies. The access program enabled the companies to measure of expression levels of many genes in a single experiment, in order to understand the role that genes play in helath and disease, and thereby aid product development.

Product Development and Commercialization 

HGS recognized a need to build product development and commercialization capabilities in order to develop and market products from its gene research. Leveraging upon its leadership position in gene discovery, HGS has been able to partner with pharmaceutical and biotechnology firms to strengthen and develop its internal product research, development, commercialization and marketing capabilities. The partnering agreements are similar in structure. Typically, HGS provided information related to gene discoveries to the partnering companies who have used the information to develop products. In return for gene technology, HGS receives license fees, research and development payments, equity payments, and royalties on the development and sale of products by the partners.  

In March 1993, HGS, Plant Genome Sciences (PGS) and Industrial Genome Sciences (IGS) entered an agreement such that HGS granted PGS/IGS royalty-free, worldwide, exclusive licenses to the Company’s technology in exchange for receipt of royalty-free, worldwide, exclusive licenses to developments made by these corporations. This initial agreement established a formula for HGS to seek similar arrangements with others. 

In May 1993, HGS entered into a collaborative agreement with the SmithKline Beecham Corporation (SmithKline). Under the terms of this agreement, HGS would receive $125 million in payments and royalties for meeting product development milestones while SmithKline secured exclusive rights to develop and commercialize therapeutic and diagnostic products based upon the genes discovered by HGS and an equity stake in the Company. In addition, HGS would be required to disclose to SmithKline all Human Gene Technology developed and would be entitled to royalties from products developed and sold by SmithKline. Under the agreement, HGS and SmithKline would be entitled to co-promote the products developed. 

In an effort to internationally broaden distribution and marketing efforts, the HGS/SmithKline partnership entered into an Option and Lease Agreement with Takeda Chemical Industries, Ltd. of Japan in June 1995. In exchange for a $5 million option premium and future royalty payments, Takeda received the right to develop and commercialize products for Japan based on both the HGS/SmithKline human gene technology and HGS proprietary products.  

In May 1996, the HGS/SmithKline collaborative agreement was modified so that HGS could designate six therapeutic proteins at any one time for exclusive development and commercialization. This modification further allowed the HGS/SmithKline partnership to enter collaborative agreements with other pharmaceutical companies allowing for improvement in the speed and breadth of product research and development. In June/July 1996, the HGS/SmithKline partnership entered into collaboration arrangements with Schering-Plough, Synthelabo S.A. and Merck KGaA. These agreements provided HGS/SmithKline with $140 million, to be received over the initial 5 year research period, milestone, research, and royalty payments in exchange for rights to research, develop and commercialize therapeutic products based upon the HGS/SmithKline human gene technology. 

Collaborative relationships have provided research, product development, and marketing resources that HGS internally lacked.  

Manufacturing and Marketing 

In keeping with its shift from genetic discovery to research commercialization, HGS stated that its "long range plan is to establish [internal] manufacturing capabilities to allow it to meet its clinical trial and commercial manufacturing requirements. Again the company stated that it would rely on collaborations in the short-term to satisfy its manufacturing needs. HGS engaged a third party manufacturer to supply such materials in accordance with current good manufacturing practices ("cGMPs") and other regulatory requirements and to deliver its products in a timely and consistent fashion. 

Additionally, HGS announced its intention to build a cGMP-compliant pilot scale production and process development facility for the preparation of clinical trial quantities of its therapeutic proteins. The company estimated the cost of the 80,000 square foot facility to be $40-45 million with construction to begin in mid-1997 and to end twelve to eighteen months later. Haseltine said of the proposed facility, "Construction of a drug manufacturing facility represents a critical step in HGS's history. We are now making the planned transition from drug discovery to drug development and testing. The products made in this new facility will be used in clinical trials to assess their safety and efficacy in addressing serious unmet medical needs. The facility will also be used to manufacture materials to support early sales of products in North America." 

In addition to manufacturing capabilities, any HGS products receiving FDA approval would require significant marketing. Again, the company planned to utilize agreements with existing collaborators or other third party firms to satisfy these potential needs. 

HGS currently has no FDA-approved products for patient use and its potential commercial products are still in an early phase of development. Having identified certain genes with potential commercial value, efforts must focus on developing a commercially feasible (and protectable) products based on the gene or the protein expressed by the gene. Very few gene-based products have been developed and commercialized to date. 

Currently, the company’s divisions are organized around relevant pre-clinical product development functions. The Molecular Biology Division identifies and isolates genes, sequences genes, and identifies possible functions. The Protein Expression Division is primarily concerned with producing protein candidates in acceptable forms and quantities for testing. The Cellular Biology Division tests the activity of the purified proteins, assessing their relevance to unmet medical needs. The Pharmacology Division focuses on protein-based drug development and testing. 

Commercialization of HGS’ capabilities will entail a number of challenges and risks which are characteristic of pharmaceutical product development. 1) The underlying technology or resulting products may be found to be ineffective or toxic, and as a result may fail to receive regulatory clearances or timely approval. The need for social acceptance and scientific experience with biotechnology-based products may also slow approvals and marketability of these products. 2) The products may be difficult to manufacture on a large scale or may be uneconomical to market. For example, while the cost of sequencing a single gene has decreased significantly with advancing technology, the cost of sequencing an individual genome remains relatively high versus the cost of traditional chemical-based drug therapy. 3) The proprietary rights of third parties may preclude HGS and its collaborators from marketing products. Because so many players are involved in genomic research, it is likely that others will claim rights to the same gene(s) HGS has closely examined. 4) Third parties may bring superior or equivalent products to market. 5) Rapid technological development may render the products, services or processes of HGS obsolete. 

Dr. Haseltine gazed out the window of his corner office overlooking Maryland’s I-270 Technology Corridor, considering the remarks and recommendations he would make to his board of directors. HGS had been founded to sequence and patent the human genome for commercial medical application through the use of new technologies largely created by Dr. Craig Venter of TIGR. By many counts, HGS had been successful in these activities but now faced a changed operating environment in which little of the human genome remained to be patented and the value of HGS’sHGS’ accomplishments would ultimately be realized through the development of marketable new drugs. 

How long would the company’s lead in research and bioinformatics allow it a competitive advantage over its new competitors which were often better-funded and which may possibly gain swifter access to sophisticated new gene sequencing technology? Should the company continue to rely primarily on collaborations with other firms to commercialize its discoveries or should it break-free of these obligations, developing new products internally? Was the company’s planned $40 million investment in manufacturing and clinical-testing capabilities a logical investment considering the absence of experience in these fields? Would the funds be better spent on new sequencing technology? Should the company remain a genomic-research-based organization or should it attempt to become a pharmaceutical company? And finally, what should Haseltine propose to his board regarding the company’s relationship with TIGR, the firm from which much of HGS’sHGS’ core technology and genetic sequencing data came, but whose purely scientific interests had recently appeared to be at least partially in conflict HGS’sHGS’ commercial interests? And, if Haseltine were to recommend an alteration to the agreement between the two organizations, how should he propose to handle the issue of the future $40 million due from HGS to TIGR?

Source: HGS Annual Reports

Source: HGS Annual Reports

Source: HGS Annual Reports

Source: HGS Annual Reports

Therapeutic Proteins – Therapeutic proteins are proteins that in their natural or modified from can be used to treat diseases. Current recombinant therapeutic proteins in clinical use by other companies include interferon, insulin, human growth hormone, DNAse, GM-CSF, and erythropoietin. 

Gene Therapy – Newly discovered genes may be inserted into a patient’s cells, where feasible, to produce therapeutic proteins or to replace defective or missing genes. 

Drug Screening -- New proteins (e.g., receptors) can be incorporated into panels of similar proteins to test drug candidate compounds for therapeutic activity. Amore complete set of related target molecules can improve the efficiency and specificity of drug screens. 

Antimicrobial Agents – The identification of genes expressed by microorganisms during resting, vegetative and pathogenic states of infection may identify candidate targets for new antibiotics. 

Antisense Drugs -- Knowledge of the sequence of new genes permits the development of antisense drugs which regulate the production of proteins. 

Metabolic Enzymes -- New enzymes isolated from humans or other organisms may be useful for the synthesis and manufacture of new and existing drugs. 

Vaccines – Identification of genes expressed in microorganisms and parasites or by humans during pathogenic states, such as cancer, can lead to the development of vaccines, including therapeutic vaccines. 

Diagnostics – Identification of gene products expressed in human tissues during different states of disease, or expressed by microorganisms, can yield components of diagnostic tests.

Source: December 1993 Prospectus

The current set of HGS’ six pre-clinicalpreclinical therapeutic protein candidates includes:  

Keratinocyte growth factor-2 is a novel human protein that selectively stimulates the growth of skin and mucosal epithelial cells. The drug may be useful for the treatment of skin wounds and ulcers and may also prevent chemotherapy-induced damage to the lining of the mouth and intestine.  

Myeloid progenitor inhibitory factors 1 and 2 are two novel human proteins that reversibly suppress the growth of bone marrow precursor cells. These drugs may be used to protect the bone marrow from damage during chemotherapy.  

Monocyte colony inhibitory factor is a novel human protein that prevents the differentiation of monocytes to macrophages. This protein may be useful for the treatment of macrophage-mediated autoimmune diseases such as rheumatoid arthritis and lupus.  

Monocyte attractant protein is a novel human protein that attracts white cells to sites of tissue injury. This protein may be useful for speeding the repair and preventing the infection of open skin wounds.  

Fibroblast growth factor-10 is a novel human protein that protects motor neurons from destruction caused by experimental trauma. These experimental models have been used to identify agents which may have use in preventing or treating neurodegenerative diseases, such as Lou Gehrig’s Disease.

Source: HGS Annual Report, 1996

Source: Bloomberg

Antisense Technology: A molecular method that uses short DNA sequences to precisely inhibit the synthesis of a target protein associated with particular diseases by binding to either the mRNA or DNA coding for the protein. 

Bioinformatics: The use of computers to process, analyze, store and retrieve biological information.

Coding Sequence: The set of nucleotides in either DNA or mRNA that become expressed as the amino acid sequence in a protein. Coding sequences are organized in groups of three nucleotides, triplet codons, so that there is a direct, one-to-one correspondence between a triple codon and an amino acid. 

Complementary DNA ("cDNA"): DNA sequences that are made by specialized enzymes that copy RNA templates into DNA by reverse transcription. These cDNA can be single- or double-stranded, and ore often may using messenger RNA as a template. 

Enzymes: Proteins that perform catalytic functions in living cells. 

Gene: The segment of DNA sequence in a chromosome involved in producing a polypeptide chain (protein). Genes include regulatory sequences preceding and following the coding sequence. In higher organisms, genes are often segmented into coding (exons) and noncoding (introns) sequences. 

Gene Expression: The process of conversion of a DNA sequence (gene) into a specific protein. This process has two major steps, referred to as transcription (the formation of RNA) and translation (the formation of protein). 

Genome: The total sum of genes and additional DNA present in the chromosomes of a particular organism. Thus, the complete set of DNA sequences present in the twenty-three chromosomes of a human is referred to as the human genome. 

Messenger RNA ("mRNA"): A single RNA chain that can be decoded into a protein and serves as an intermediate in gene expression. 

Protein/Peptide: A polymer consisting of amino acids connected by peptide bonds. Peptides themselves may be biologically active as proteins, having distinct physiological roles in living cells. 

Receptor: A protein bound within or on cell membranes which selectively binds to a specific chemical substance (such as a neurotransmitter or drug). Receptors are part of the mechanism by which cells communicate.

Chairman and Chief Executive Officer

William A. Haseltine, Ph.D., is the Chairman and Chief Executive Officer of Human Genome Sciences, Inc., a leading company in the discovery of human and microbial genes for the prevention, detection, treatment and cure of disease. Dr. Haseltine holds a doctorate from Harvard University in Biophysics. He was a Professor at Dana-Farber Cancer Institute, Harvard Medical School and Harvard School of Public Health from 1976 - 1993. He is Editor-in-Chief of the Journal of AIDS and is on the editorial boards of many other scientific journals. He has been awarded more than 50 patents for his discoveries and has over 250 publications. Dr. Haseltine also has many years of experience with biotechnology companies. Since 1981, he has founded seven companies, each in a different area of medicine. As Scientific Director of HealthCare Ventures, he helped establish an additional 20 biotechnology companies. In 1996, Dr. Haseltine received the Ernst & Young 1996 Greater Washington Entrepreneur of the Year Award in the field of biotechnology.

President and Chief Operating Officer

Melvin D. Booth has been President and Chief Operating Officer and a director of the Company since July 1995. Prior to this time, Mr. Booth was with Syntex Corporation and its subsidiaries from 1975 to 1995. Mr. Booth was the President of Syntex Laboratories, Inc. from 1993 to 1995 and served as a Vice President of Syntex Corporation from 1992 to 1995. From 1992 to 1993 he served as the President of Syntex Pharmaceuticals Pacific. From 1991 to 1992 he served as an area Vice President of Syntex, Inc. From 1986 to 1991 he served as the President of Syntex, Inc., Canada. He has been active in U.S. pharmaceutical industry organizations and is also a past Chairman of the Pharmaceutical Manufacturers Association of Canada. Mr. Booth holds a Certified Public Accountant certificate.

Senior Vice President, Research & Development

Craig A. Rosen, Ph.D., joined the Company in December 1992 as Vice President for Research and Development and a director of the company and has served as Senior Vice President, Research and Development since December 1994. From 1987 to December 1992, Dr. Rosen was employed by the Roche Institute of Molecular Biology, serving as Chairman of the Department of Gene Regulation from 1991 to December 1992 and in varying positions in the Department of Molecular Oncology and Virology from 1987 to 1991. Dr. Rosen is the author of approximately 130 publications and an editorial board member of several scientific publications. Dr. Rosen holds a doctorate degree in Microbiology from the University of Rhode Island.

Senior Vice President, Business Development

Arthur Mandell has served as Senior Vice President, Business Development since March 1997. He has responsibility at HGS for strategic collaborations and partnerships as well as all commercial functions. Mr. Mandell was most recently a Principal of the consulting firm, ZS Associates, and General Manager of the West Coast office located in Menlo Park, California. He founded and rapidly expanded the west coast office focusing on the strategic and commercialization challenges of pharmaceutical and biotechnology companies. Prior to joining ZS Associates in 1995, Mr. Mandell was Regional Vice President overseeing Business Development and Market Planning for the Pacific Rim, Mexico, and Canada. He spent over 13 years at Syntex Corporation where he held a number of senior management positions in strategic planning, business development, new product planning, product marketing, and financial management. Prior to joining the pharmaceutical industry, Mr. Mandell was at Intel Corporation in Silicon Valley where he developed budgeting processes, material planning systems, and decision support models for finance and engineering.

Senior Vice President and Chief Financial Officer

Steven C. Mayer has served as Senior Vice President and Chief Financial Officer since September 1996. Prior to joining the Company, Mr. Mayer was Vice President and Chief Financial Officer of GenVec, Inc., an early-stage gene therapy company from 1995 to 1996. From 1991 to 1995, he served as Vice President (subsequently Senior Vice President) and Chief Financial Officer of TheraTech, Inc. Mr. Mayer holds a masters degree in Business Administration from Stanford University.

Senior Vice President, General Counsel and Secretary

James H. Davis, Ph.D., has served as Senior Vice President, General Counsel and Secretary since May 1997. Dr. Davis was most recently with the intellectual property law firm of Finnegan, Henderson, Farabow, Garrett and Dunner, L.L.P., where his practice focused on providing an integrated analysis of legal issues affecting the commercialization of new technologies, including intellectual property rights, regulatory compliance and licensing. Prior to joining Finnegan, Henderson in 1995, Dr. Davis served as General Counsel, Vice President of Research and Development and a Director of Crop Genetics International Corporation, which he had joined in 1988 as General Counsel and Vice President of Development and Regulatory Affairs. Earlier in his career, Dr. Davis was a Partner with Weil, Gotshal & Manges, which he joined in 1986, with a practice principally concentrated on counseling and litigation relating to environmental, health, food, drug and cosmetic issues. From 1983 to 1985, he served with the U.S. Environmental Protection Agency. Dr. Davis holds a doctorate degree in Organic and Theoretical Chemistry from the California Institute of Technology and a law degree from the University of Virginia.  

Vice President, Human Resources

Susan Bateson McKay has served as Vice President, Human Resources, of the Company since January 1997. Prior to joining the Company, Ms. Bateson McKay served as Director of Human Resources and Administration at Finnegan, Henderson, Farabow, Garrett & Dunner, L.L.P. from May 1994 to December 1996. From 1983 to 1994, Ms. Bateson McKay was employed by J.P. Morgan & Co. Incorporated, and was appointed Vice President, Human Resources in 1985. Ms. Bateson McKay holds a masters degree in Business Administration from New York University.

Vice President, Medical Affairs

Arthur C. Louie, M.D., joins HGS from Pro-Neuron, Inc. and Pro-Virus, Inc., where he had been Medical Director since 1994. He was responsible for developing strategic clinical plans and directing the clinical management and regulatory affairs staff. Prior to joining these companies, Dr. Louie had been with Chiron Therapeutics, from December 1987 to June 1994, where he was Director, Clinical Development, responsible for the management of clinical trials, authorship or review of U.S. and European registration documents, and the design of clinical trial protocols. He was one of the key executives responsible for the successful development and approval of Chiron¹s Proleukin IL-2. Dr. Louie earned a B.A., in biology, from Haverford College, and graduated from New York University School of Medicine. His postgraduate work includes an Internship and Residency in Internal Medicine at Bronx (NY) Municipal Hospital, a Fellowship at the National Cancer Institute and a Medical Oncology fellowship at Stanford University Medical Center and is the author of more than 25 scientific publications. Dr. Louis is a Fellow of the American College of Physicians.  

Source: HGS Homepage

 Instructor’s Note 

The Human Genome Sciences ("HGS") case focuses on a company’s ability to commercially capitalize on innovation in the face of a number of changing environmental factors. HGS faces a shifting base of innovation, from a scientific research orientation to product development and commercial application of its scientific knowledge, a dynamic industry environment, and a search for methods by which the company may build the complementary assets necessary both to continue its innovation stream and to commercialize the resulting innovations. 

Source of Innovation and Relationship with TIGR. The case timing is June 1997 and HGS management is considering its relationship with The Institute for Genomic Research ("TIGR"), a research-based institution created to allow its founder, Dr. J. Craig Venter, to perform research based on an innovative gene sequencing technique he developed while at the National Institutes of Health ("NIH"). As Dr. Venter’s interests were purely scientific, HGS was founded as a commercial enterprise to fund Dr. Venter’s research and to gain commercial access to his innovation. Dr. Venter’s technology allowed its user to use automated, high-speed techniques to identify and hopefully patent various components of the human genome, a goal which HGS was largely successful in accomplishing. At the time of the case, however, HGS finds itself in a strategic quandryquandary due to the finite nature of the human genome (humans are comprised of a limited number of genes) and much of the genome has already been sequenced and patented. In light of the diminishing potential of continued human genomic discovery, HGS is forced, therefore, to consider ways in which it may continue to create value for its shareholders beyond its original goal of rapidly identifying and patenting human gene sequences. 

Industry Environment. HGS finds itself in the position of a diminishing competitive advantage for a number of industry-related reasons. As additional patents on the human genome will become more rare (due to the genome’s finite nature), opportunities for HGS to leverage its core technology become decreasingly abundant. Opportunity shifts from accumulation of data to capability to exploit the data.  

HGS’sHGS’ sequencing machines are not proprietary and new, faster technologies/sequencing methods, e.g. gene chips, have become available to which other firms or governmental-agencies may have greater access. HGS believes that its bioinformatics system and its ‘head-start’ in gene sequencing provide a source of advantage; however the company’s bioinformatics system is not patented and the potential of additional entrants may threaten its ability to retain the advantage provided by its lead in the industry. HGS necessarily must focus on product development rather than research. HGS must assess how radical these technological developments are and define the implications for the company’s core competencescompetencies. Finally, shifts in the regulatory environment appear to provide additional challenges to the company. A NIH partial gene patent was overturned by the U.S. Patent Office (but not appealed by NIH) and may imply that the substantial number of partial gene patents for which HGS has applied may not be enforceable. Additionally, a change in governmental regulation now forces TIGR to release its scientific discoveries within 48 hours rather than six months, severely diminishing HGS’ ability to file for patents on those discoveries. 

Complementary Assets. HGS has traditionally relied upon collaborative agreements to obtain the complementary assets necessary both to innovate (through its collaboration with TIGR) and to commercialize its innovations (through a number of agreements with other biotechnology and pharmaceutical companies such as its agreement with SmithKline Beecham). HGS now must redefine its position in the value chain carefully as its original innovative advantage (access to rapid gene sequencing technology) is of decreasing value, and its ability to commercialize its innovations is limited by the company’s reliance on partnerships. HGS has already assigned the rights to a number of its innovations to other pharmaceutical companies and lacks experience and assets necessary to manufacture medical products or to perform the large-scale testing to assess the feasibility of commercial medical products.  

HGS continues to struggle with how to manage its alliances in such a way that it might develop the required complementary assets without sacrificing its ability to profit from its innovation. HGS is addressing these concerns in a number of ways including the funding of a new $40 million manufacturing facility and amending its agreement with SmithKline to allow HGS to substitute other pre-clinicalpreclinical product candidates it develops for those candidates to which SmithKline already has rights, thereby increasing its flexibility to select products for internal production. 

ADD 7 lines on what happened 

Actual Conclusion of HGS-TIGR Issue. HGS and TIGR terminated their agreement in the summer of 1997, halfway through its original life. Under terms of the settlement, HGS was absolved of the responsibility to make approximately $38 million in additional payments owed to TIGR under terms of the original agreement and sacrificed its rights to additional research performed by TIGR. In return, TIGR was granted the right to publish the results of its research, a right it immediately exercised by posting on the internet one of the single largest amounts of genetic research ever released. In addition, TIGR agreed for four years not to enter into commercial agreements with other companies to create therapeutic proteins and associated diagnostic tests being developed by HGS at the time of the separation.