In Conversation: Human Genome Sciences' H. Thomas Watkins

H. Thomas Watkins is the CEO of Human Genome Sciences Inc (HGS). HGS exists to place new therapies into the hands of those battling serious disease. On March 9, 2011, the FDA approved BENLYSTA, a specialized drug to treat Lupus. He talks about leadership and operational challenges of becoming a fully commercial biopharmaceutical company.

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About Tom Watkins

H. Thomas Watkins joined HGS as Chief Executive Officer and a Director in December 2004, and was also named President in December 2005. Mr. Watkins came to HGS with nearly twenty years of experience at Abbott Laboratories and its affiliates in the U.S. and Asia. He joined Abbott in 1985 and held various executive positions in the Pharmaceutical Products Division, Diagnostics Division and Health Systems Division prior to serving as President of TAP Pharmaceutical Products, Inc., from 1998 to 2004. Mr. Watkins began his career in 1974 with Arthur Andersen & Co., and was a management consultant with McKinsey and Company, Inc., from 1979 to 1985. Mr. Watkins holds a bachelor’s degree from the College of William and Mary, and a master’s degree in business administration from the University of Chicago Graduate School of Business. He is a member of the Board of Directors of Vanda Pharmaceuticals, Inc., the Biotechnology Industry Organization (BIO), the U.S. Chamber of Commerce, and the National Symphony Orchestra. Mr. Watkins currently serves as Chair of the Life Sciences Advisory Board of the State of Maryland.

Following is a condensed version of Professor Ram Ganeshan’s (RG) conversation with Tom Watkins (TW).

RG: Can you tell us how the Business Model at HGS has evolved over the years?

TW: HGS founded in 1992 and went public in 1993. I’ve been with the company since 2004. The business model we were following in the late nineties was research and discovery of drug candidates based on genomic discovery techniques. The idea was to do a Phase I clinical trial and then potentially out-license this large body of drugs to a number of companies, partner to develop them.

RG: You are now…

TW: We are now a classic biologics drug developer, manufacturer, and commercialization company. Pretty much got out of the research, the raw discovery business.

Biotech companies have found, since the market crashed in 2000-01, that if you start in the research or discovery end of the business and forward integrate into development, manufacturing, and commercialization, you are going to run out of money. So you have got to make some choices. We found that we had to wind down or significantly cut back the research operation with the objective of taking a few drug candidates all the way through clinical trials to commercialization to see if we could get anything on the market.

We had at one time, 400 people in research in the company. Now we have about 50.

We now have a strong development group that manages the clinical studies for the drugs through Phase I, Phase II, and Phase III. Over the years we’ve shifted the skill set from early stage research to the later stages of drug development and manufacturing. So I’d say the core strengths of the company are clinical development, manufacturing, and increasingly commercialization. We just built our first sales force in the last in 6 or 7 months for marketing the lupus drug BENLYSTA. We’ll actually co-market it with Glaxo Smith Kline (GSK) -- they’ll handle about half of the commercialization in the US.

RG: You co-market BENLYSTA with GSK – how is that working?

TW: I think it is working pretty well. The challenge is marketing a specialty drug – a new one in over 60 years -- that's going to rheumatologists to treat a particular condition, Lupus. Although GSK has big commercial resources, in this particular area -- rheumatology -- they are limited. I think the nature of the challenge is to leverage their experience in areas that they already know well, like selling to manage care, while we are both learning how to call on doctors in this particular area.

Until recently we have never manufactured to commercial standards. GSK does not have a big biologics commercial manufacturing organization. Its relatively small, they do a lot of small molecule pill, tablet, and capsule manufacturing, so we feel like we’re pretty good there. In Europe, why are we building an organization in three countries when they’ve already got it? More of a strategic reason -- our company will hopefully have products beyond this one and this partnership allows us to get a little of a foothold in those countries.

RG: Tell us a little bit about your supply chain…

TW: Biologic drugs are living cells. They are either IV’s or injectable, you cannot put them in a capsule or a pill. We make the bulk drug which comes out as a powder, send it off to a contract manufacturer in Kansas that does a fill finish which is pretty standard in our industry. And then they send it to a distribution channel some of which Glaxo Smith Kline (GSK) runs.

RG: So the bulk drug is the end product for you?

TW: the bulk drug is the end product for us.

RG: Meaning you actually sell that bulk drug before it’s packaged?

TW: No we transfer, the contract manufacturer does it under our control. They package it and we still own the inventory and then we sell it to the distribution chain. It is not technically sold until it goes to a wholesaler or distributor. So even going into the GSK warehouse it is still under our general control.

RG: Your commercial organization then creates the demand?

TW: We would distribute through the distributor or a specialized wholesaler. These are drugs that are infused in the doctor’s office. So our reps are going to a rheumatologist, creating the need and then they order it from the special wholesaler.

RG: What about the supply side, how do you get your raw materials?

TW: Commercial suppliers of media and other components manage all that.

TW: So your core competence would be the process to make the drug.

TW: Yes. Our process development organization works closely with the manufacturing to make sure the process is optimized, consistent and that proper procedures are followed.

RG: What is the biggest challenge operationally? How would you go from discovering a new drug to mass-producing it?

TW: Two things, you have to ramp up the quantities that you are making. During clinical trials the doses are small, maybe 1600 liters. The manufacturing scale we are making now is 20,000 liters, so you have to scale it up and make sure yields remain very high.

Second, we have to be consistent -- because a batch of 20,000 liters, costs you a million dollars, you cannot lose a batch. Since the plant has to be inspected by the FDA and they look at all process records, you can’t tweak the process during the course of manufacturing.

RG: How do you match supply and demand?

TW: The cycle time for a single batch is 6 months. For BENLYSTA, we got results from the final clinical trials in July of 2009 and November of 2009. In July 2009, it was very clear that the drug was going to be successful. So we started manufacturing it 24/7 -- took our facility and ramped it up to 3 shifts. And that was in August and September of 2009, 18 months before we were selling the product. So we took risks there. The second thing we did last July, recognizing how big the demand was likely to be, we went out and signed with a major contract supplier so we would have back up capacity by the middle of 2012.

RG: Can this product be in inventory?

TW: Yes, it has a shelf life of several years at the bulk stage. Once you fill it goes down a little bit. But it is a pretty long life.

RG: So the risk of making too much is you just hold it.

TW: Right.

RG: How do you decide on the portfolio of drugs?

TW: It is an interesting but not always perfect process. We go through a regular portfolio review of, at all stages, drugs that are pre-clinical where we haven’t put them into human trials.

Back in the nineties, back in our early research days, we found and discovered many genomic targets which are little pieces of cell matter that appear to be implicated in some disease process, usually cancer or immunology. Back in 2005 when we slowed down the research area a lot of those targets were put in the freezer and we stopped the work. In 2008, we’ve gone back on a limited basis and identified about 50 of those we’d like to develop further. So we have got a group of 50 and we are going down sequentially the ones we think are the highest priority. That’s way early in the process. Those will not be drugs on the market until 2020. There are other drug candidates that are in Phase I or Phase II clinical trials that we just keep monitoring. When we get to the end of a trial and the data looks good, we take it to the next stage. If it does not, we kill it.

You have to figure out a low risk, low cost way to go to the next level. We don’t just look at them internally; we put them through rigorous peer reviews on the outside. We’ll empower a group of scientific experts in a particular therapeutic class, call them expert panels, bring them in for 2 days to scrutinize the data to see if it is worth moving forward. We’ll go to our Board with a number of scientific experts and they’ll chew it over. So the decision to go to the next phase of development is a big decision. You sort of bet the company.

The other major drug program we had when the Lupus drug was coming along, was called Zalbin. It was a Hepatitis C drug we got through Phase III and submitted it to the FDA and it never got approved. So we spent hundreds of millions of dollars on it.

RG: So they didn’t like the results?

TW: Yes, there was concern. You have to prove two things in clinical trials. You have to prove that the drug is effective and safe. And it’s a tradeoff. The higher the efficacy the more likely it will have side effects. On the other hand, the lower the efficacy is, relative to existing therapies, you better have an excellent safety profile. This drug had good efficacy, not that much better than what was out there, but the FDA had concerns that there were some pulmonary side effects. They were not willing to put it on the market. And that is the tradeoff they have to make. We disagree but at the end of the day we decided it’s not worth investing more. So it’s a very high-risk business, at every stage of the process your costs go up roughly by an order of magnitude. For this lupus drug we spent $300 million dollars in just the last phase of development between 2006 and 2009 and GSK spent the same amount. So $600 million was spent just in the last three years. The motto in our business is if you’re going to kill a program, kill it early. And the temptation of everybody in the science, in our company, any company, is to do one more trial…

RG: But by the time you spent the 300 million dollars, you knew it was going to be a success, right?

TW: Well, for the lupus drug, Wall Street thought it had a very low likelihood of success because we failed to reach the endpoint of Phase II trials and because no other lupus drug had been successful for a long time. The only reason they let us do it was because the Hepatitis C program sitting next to it was viewed as highly likely. It turned out to be exactly the opposite. So you don’t always know, you have to make risk decisions with the best information you have. Our logic was, we took these two programs into Phase III, they’d been there about a year, and we said we’re betting the company on these two programs. If one of them succeeds we’ll be fine, highly successful. If neither one them succeeds, we’ll have to reboot the company around something different.

RG: That’s what I was thinking, it’s almost like you’re betting the company.

TW: But that is what you do in the business when you’re starting, which we were. You have a lot of cash but you’re betting. We had to shut down a lot of little programs to bet on a few. So it is a very interesting, high-risk business. People always ask why do drugs cost so much? And I say two things they don’t want to hear: you put investor capital at very high risk in this business, so when you succeed your investors expect to be paid back at high returns. And the second is it takes hundreds of millions of dollars and 10,12, 15 years to get a drug from the beginning to the end.

RG: What has been your biggest leadership challenge?

TW: When I got to HGS, it was transforming from being basically an extremely high quality science company to a business. Projects were funded on the basis on science and not on revenue potential. So we killed many projects -- really good science -- but it wasn’t clear we could make any money on them. And that was sort of cold water on an organization that had really developed good capabilities. So my first year and half of the company you either loved what we were doing or your hated it depending on where you came from. Our turnover hit 35%. About half the senior management team changed and so did three quarters of the board, but that’s what we knew we had to do.

Then when clinical results started coming out it was managing Wall Street’s perception. We were a $10 dollar stock priced company for a couple of years then we went to $0.52 at one point, then we went to $20, now we are about $28 a share. So the challenge was to manage these enormous swings in the perception of what the company’s prospects were, in a fairly short amount of time. This was all overlaid with the financial crisis at about the same time. It was hard to keep the team together, it was hard to keep employees focused and tell Wall Street that we were on track.

The challenge recently has been managing down the euphoria, because BENLYSTA since 2009 has been perceived to be an enormous drug. And then your team starts to worry that expectations are so high that we can’t make any mistakes. And no team performs well when they’re that way. You got to say relax, do your best; we’re going to have some results that are not perfect. So there’s been a lot to keep us busy. But it’s fun, it’s exciting people, it’s innovation. I think keeping your heads about you the whole time is the most important thing, keeping a balance, not going off the deep end.

About Human Genome Sciences, Inc

Human Genome Sciences, Inc. is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Their lead products in development are BENLYSTA (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.

Contact: Ram.Ganeshan[at] or RamGaneshan on Twitter.