Stock Talk TMF Interview With ZymoGenetics'
CEO Bruce Carter

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With Tom Jacobs (TMF Tom9) (TMF Tom9)
December 14, 2000

What if we told you that Rule Breaker portfolio holding Human Genome Sciences (Nasdaq: HGSI) had a top competitor that you'd never heard of? They do, and it's ZymoGenetics, a privately held Seattle biotech drug maker forging ahead to create protein therapeutics. The company is flush with $150 million from a recent private placement spin-off from its former parent, Danish drug giant Novo Nordisk (NYSE: NVO).

TMF spoke recently with CEO Bruce Carter, who said: "We're an odd company because we've been around for some time really, but no one has ever heard of us because we were owned by another company, and there was a tendency to secrecy." No more. Here's the edited transcript of the Dec. 8 conversation:

TMF: Could you briefly outline ZymoGenetics' business plan for us?

Carter: We're completely focused on a search for protein therapeutics and we're trying to find those protein therapeutics using bioinformatics to mine the DNA databases that are being made available. In fact, I think we were very early to see the opportunity. Today 19 of the top 20 pharmaceutical companies have access to Incyte's [Incyte Genomics] (Nasdaq: INCY) sequence databases, but in fact we, ZymoGenetics, were the first people to gain access to Incyte's DNA sequence databases to mine the protein therapeutics by bringing them in-house.

TMF: Why the focus on protein therapeutics?

"The Holy Grail of the pharmaceutical industry is exclusivity. You really want to be the only person selling a drug."
Carter: Two reasons. The Holy Grail of the pharmaceutical industry is exclusivity. You really want to be the only person selling a drug. Of course, you have patents in medicinal chemistry -- but it has not prevented other people from coming in with drugs that are copycats. So you see today perhaps 20 ACE-inhibitors [to lower blood pressure], 17 calcium antagonists [to regulate blood pressure], lots of serotonin re-uptake inhibitors [to treat depression] but there is only one original erythropoietin [Amgen's (Nasdaq: AMGN) blockbuster drug Epogen, a therapeutic protein] on the market today.

So you get exclusivity from proteins and you don't worry then if Merck (NYSE: MRK) merged with Pfizer (NYSE: PFE), because that size gives no advantage because they can't sell you a drug.

TMF: I see. Now that does make patenting very important. How does ZymoGenetics stand as far as protein patenting?

Carter: Well, we've really studied this because we thought we were good, but I felt it was very important that we saw where we were relative to the competition, because otherwise you could fool yourself. Because patent applications are secret for 18 months after filing, I can only analyze up to 18 months ago. If I do that and I take all the proteins that we believe have the potential to be the protein therapeutics of the future -- whether filed in Japan, or in Europe, or the U.S. -- we reckon that more or less, in terms of who was the first to file on proteins, Human Genome Sciences has about 23% of the world's total, Zymo has about 15% of the world's total, Genentech (NYSE: DNA) has around 9% of the world's total, and no one else has more than 5%.

What we try to do is be as objective as possible and we will only look at who was the first to file. We must not be subjective and say "well that patent's rubbish, so we'll throw that out." We try to count all the votes.

TMF: [Laughing.] That answers another question, which was how you stand in comparison with competitors. I mean, I think that lays it out pretty starkly.

Carter: We definitely see ourselves in the top three and we see our competitive situation certainly not deteriorating relative to the others because as we analyze it quarter by quarter, our situation gets slightly better rather than worse.

TMF: Now, the current drugs on the market, if you could talk about a few of them -- the partners associated with them and are they protein drugs, or are you shifting towards that from having another focus in the past? That's a long question.

Carter: All the things that came from discoveries made at Zymo that are on the market today -- are all protein drugs. Now remember we had, until quite recently, been owned by Novo Nordisk, and the insulin and the glucagon sold by Novo Nordisk -- we invented the yeast process by which these molecules are made. So somebody in Russia who's receiving insulin from Novo Nordisk is getting it from a process that comes from ZymoGenetics.

And in addition, there's a drug called Factor VII, which is a blood-clotting factor, which Novo is selling which was really discovered here between Zymo and the University of Washington. The Johnson & Johnson (NYSE: JNJ) product Regranex, actually all the patents are licensed from ZymoGenetics .... and we have two things in the clinic with partners. [Japan's] Kirin [Brewery] and Amgen (Nasdaq: AMGN) have thrombopoietin [reduces risk of bleeding in chemotherapy patients] in the clinic that was licensed from Zymo, and Celltech Chiroscience [a unit of CellTech Group (NYSE: CLL)] has a monoclonal antibody... in Phase II clinical trials for restenosis [post operative arterial clogging].

And of the biotech companies, only Genetech and maybe Amgen might claim to have the same number of products stemming from their protein discoveries on the market today.

TMF:
You have no drugs currently in your own clinical [human] trials. Do you have any that are about to enter them?

Carter: We anticipate clinical trials for two drugs in the year 2002. One of them, you might say, is not a bioinformatics-derived one; it's Factor 13 and it's the last enzyme in the blood-clotting cascade. Tom, if you think of a blood clot, it's like cotton wool and what Factor 13 does is it causes cross links in those cotton-wool fibers. And because it's cross linking, it makes that clot much tougher, so in a situation like a trauma or post-operative bleeding episode, you can make the clot stronger and prevent re-bleeding.

At the same time, we have another molecule which we think is going to be important in autoimmune diseases [such as one form of lupus].

TMF: Well, the markets for those are self-evident. All right, let's look at the Novo Nordisk relationship. Can you explain briefly, what happened when and why ZymoGenetics left Novo Nordisk?

"We anticipate clinical trials for two drugs in the year 2002."
Carter: Okay, Novo's increasingly very focused on diabetes. What we started to do, you know with mining these databases, we quickly discovered we were finding things that lay well outside diabetes.... So if we discovered something that's going to be in the cancer area and we thought we can't handle it, we'd be better off to go to somebody else and not to Novo. But at the same time by having it separate, Novo is not bearing the entire burden of Zymo, so with the resources freed up they could maybe buy another diabetes product from another biotech company. It gave both of us flexibility.

We wanted to make sure that we had enough money in our coffers that we weren't immediately having to go back to the marketplace, so we wanted to raise $150 million in a private placement, which we have done, and we now have sufficient money to take us through four years [and] to determine our own future by whether we need more money or not, and when to look for it.

TMF: So to survive for four years with a figure like $150 million in cash, given your expenses, one might assume that you're producing significant current revenues?

Carter: Correct. We get certain revenues already from Novo and will continue to do so for at least four years. We believe [we have] a lot of intellectual property -- more than we can possibly handle ourselves. We hope to choose certain things which we think we can handle and are extremely interesting, but if we just can't go with it or somebody else is better off to deal with it, we're hoping we can license that out or in some way share it. And the revenue generated will help us develop our own pipeline.

TMF: Okay. [A question from a Motley Fool community member, FushiTarazu]: What's the future relationship with Novo? Will they be likely to fund you again in the future?

Carter: Well, you know Novo will be paying us because it will have certain rights to [our] products [for] four years outside North America, defined as Mexico in addition to the U.S. and Canada. We're looking forward to Novo taking some of our drugs outside North America because Novo is the largest producer of proteins in the world, so that means that we have access to somebody as a potential manufacturer of proteins.

TMF: Well, unlike many biotech companies that are forced to go public to stay alive, you are in a pretty healthy situation, but it looks like investors will have to wait patiently before they have the opportunity to invest in you.

Carter: We believe that we've got the flexibility to make our own decisions rather than have them forced upon us.

TMF: Very good. Anything else you'd like to add?

Carter: The main thing about ZymoGenetics -- we are a dark horse, no one has ever heard of us. In this sort of race to grab land [patent and market therapeutic proteins], we are in the top three players. When the dust all settles, it will become apparent that those three are Genentech, ZymoGenetics, and Human Genome Sciences.

TMF: Hopefully with a nice patent portfolio producing a royalty stream.

Carter:
That we devoutly hope.