Deep Pockets + Intense Research + Total Control = The Formula -- Bothell Biotech Icos Keeps The Pipeline Full Of Promise

During his 18 years as a pioneer in the biotechnology industry, George Rathmann has seen plenty of promising products fail in clinical trials before they reached the marketplace.

It happened four times before his first biotech start-up, Amgen, came up with a winner, a hormone marketed under the name Epogen to treat anemia associated with kidney disease.

So he isn't taking it for granted that the Viagra-like anti-impotence drug being tested by his current company, Bothell-based Icos, ultimately will be a success.

Behind Rathmann's grandfatherly white beard and his aw-shucks answers to some pointed questions lurks the shrewdness of a poker player.

"You can't fall in love with your product," he says. Far better, he believes, to play the field and develop a number of drugs, each with multiple uses.

The 70-year-old executive's business strategy can be summed up this way: Raise lots of capital, do the scientific research required to develop a stable of products, keep control of the product line and move the most promising drugs to market quickly.

Few biotech companies have developed a broad portfolio of experimental products as quickly as Icos has since it went into business in 1990. Human tests are under way on four drugs that may offer relief from 20 medical conditions, including psoriasis, pancreatitis, hemorrhagic shock and multiple sclerosis.

But it was a single product that rocketed Icos to national prominence three weeks ago, when Business Week touted the company's experimental drug IC351 as a medication with the potential to treat impotence more effectively and with fewer side effects than Pfizer's blockbuster drug Viagra.

"People are looking to see if there are any biotech companies with a next-generation Viagra-type product. I think that Icos has the most promising compound of this type," says Matthew Murray, a biotech analyst for institutional brokerage Lehman Brothers.

Icos was named after icosahedron, the 20-sided geometric shape of a retrovirus. But stockholders say the four-letter name may prove to have another meaning: "I came out smiling."

Still more than two years away from approval by the Food and Drug Administration, IC351 boosted Icos' stock value by 30 percent in one day.

With 10 million to 20 million American men experiencing impotence, Rathmann sees a potentially huge market. "It's a $3 billion drug, absolutely, sure. It's a minimum of three," he says of the market for the new impotence drugs.

IC351 works much like Viagra. Both drugs inhibit an enzyme that prevents blood-vessel walls from relaxing. When the drugs allow the vessel walls to relax, more blood flows into the penis, causing an erection.

IC351, like Viagra, can be dangerous if ingested by a person taking a heart medication such as nitroglycerine. The FDA has reported 16 deaths among users of Viagra but maintains the drug is safe if used as directed.

The Icos medication may have at least one advantage over Viagra. Laboratory studies suggest IC351 is more narrowly targeted on the desired enzyme, phosphodiesterase type 5, or PDE5. Because Viagra is less specific, it also inhibits the related enzyme PDE6 in the retina of the eye, causing some users to see a bluish tinge or to have a heightened sensitivity to light.

It is not clear whether consumers would view the Icos product as superior to Viagra because it doesn't affect vision. Even if the two drugs proved to be roughly equivalent, Icos executives believe the market is large enough to support two highly successful products.

Phase 2 trials involve administering the drug to men who haven't had an erection for years. Rathmann hopes to begin investigating health benefits and safety in a Phase 3 study this fall.

After completion of Phase 3, Icos may apply for FDA approval to market the drug. With several products in Phase 2, it is uncertain which is most likely to reach market first. No Icos products are available yet for sale.

Icos is at least two years away - and probably more - from turning a profit. Yet the company has won the respect of securities analysts for its experienced management, strong scientific staff, broad product line and ability to raise capital.

Since opening its research laboratories in Canyon Park, Icos has focused on developing drugs that disrupt the process of inflammation such as those involving platelet-activating factor, which plays a role in conditions ranging from acute lung inflammation to severe asthma. Scientific director Michael Gallatin quipped at a recent meeting that impotence "doesn't sound like an inflammatory disorder to me."

In fact, the key to developing products at Icos, Rathmann says, is a strong research program that looks first at the underlying causes of inflammation rather than at specific disorders. IC351 wasn't developed because Icos was looking for a treatment for impotence but because researchers wondered how they could manipulate an enzyme that regulates a range of functions within cells.

So far, Icos researchers are aware of 15 varieties of the PDE enzyme, including the one that affects male erections. That variety also may help treat angina, hypertension and congestive heart failure. Scientists are studying what happens when other varieties of PDE are inhibited.

The idea behind the company came from two of Seattle's most successful biotech entrepreneurs, Genetic Systems founder Robert Nowinski and Immunex co-founder Christopher Henney. Nowinsky and Henney assembled a board that included IBM Chairman Frank Cary, General Foods chief executive officer James Ferguson, and former Citicorp/Citibank Chairman and CEO Walter Wriston.

At the urging of funding partner PaineWebber, the Icos founders recruited Rathmann, a legend in the biotech industry, as chairman. A scientist with a Ph.D. in physical chemistry, Rathmann had been an executive at Litton Medical Systems and Abbott Laboratories before founding the most successful biotech company to date, Thousand Oaks, Calif.-based Amgen.

Rathmann was impressed not only by the caliber of the board, but by Icos' scientific staff, which included scientists he had unsuccessfully tried to hire at Amgen. After Nowinski left Icos in 1991, Rathmann became president and chief executive officer. Henney left Icos in 1995.

The Icos founders had raised $28 million in a private placement when they heard that Microsoft Chairman Bill Gates, who had endowed the University of Washington's Department of Molecular Biotechnology, was looking for a promising biotech company in which to invest. They invited Gates to dinner, where they explained the concept behind Icos. He invested $5 million and joined the board.

Gates' investment helped give Icos the largest start-up financing of any biotech company to date. Icos went public in 1991, raising $36 million, but the deep pockets of Gates and Rathmann (who held $150 million worth of Amgen stock in 1992) have continued to fund the company's research.

During a follow-up public offering in 1992, a year after the company went public, Rathmann bought $2.7 million worth of stock and Gates bought $1.35 million. Two years later, Icos found little interest in an offering to existing shareholders. The twosome again came to the rescue, with Rathmann buying $2.5 million and Gates buying $9.2 million of the $23 million offering.

Gates' 5 million shares represent 12.6 percent of Icos' total market value, or about $94 million. Rathmann owns 5.3 percent, worth about $40 million.

Gates has a reputation among Icos executives for engaging in technical discussions about the company's scientific discoveries and their possible applications. "He will ask the dumbest question in the world because he wants to make sure he's not confused. Then he'll ask the smartest question in the world," Rathmann says.

Icos has grown from 65 employees in one building to 277 workers in four buildings, but one thing hasn't changed: The vast majority of employees are directly involved in research and development.

Muffins can be found outside the research labs, where food isn't allowed. Signs over researchers' work stations bear messages such as: "Back off, I'm a scientist."

For Rathmann, it is science that fuels the biotech endeavor. When Amgen was in its infancy, he recalls, "I said it was a science-driven organization. Several of the board members gave me a raking-over: `We're not going to represent ourselves as a science-driven organization because that's going to tell investors we're only interested in spending money. We're market-driven.'

"I thought, `How can I deal with this?' I finally said we're a market-driven, technology-based or science-based organization. I always had to say the `market-driven,' which conveys an incorrect impression of biotechnology."

With four drugs now in Phase 2 clinical trials for nine medical treatments, Icos expects to launch Phase 3 studies of at least two products this year. Executives are studying how to raise the millions required to fund the rapidly rising cost of human testing.

The company could seek more equity investment or it could seek to reduce its costs through agreements with larger corporate partners. Icos has signed agreements with a number of partners but, thanks to generous backing from investors like Rathmann and Gates, has been able to maintain an unusual degree of control over its product line.

"What strong financing enables a company to do is keep the value of discoveries within the company for the common shareholder," says Andrew Heyward, a biotech analyst for Ragen MacKenzie. "You will find a whole range of companies out there that have basically sold their rights and have very little in the way of future potential; in other words, they're no longer in charge of clinical trials, they're no longer in charge of marketing of their product."

Icos expects to manufacture its products in Bothell, initially in one of its existing buildings and eventually in a new manufacturing plant. But there is a potential down side to self-financing in place of partnerships with larger companies. By continually increasing the number of outstanding shares, Rathmann's strategy of maintaining control of products has diluted the stock value, says Jim McCamant, publisher of the Medical Technology Stock newsletter.

Despite his concern, McCamant remains bullish on Icos. His analysis of the market potential of IC351, picked up by Business Week, triggered last month's sudden flurry of interest in the company.

"If you look at the diseases they're exploring, you can see we're talking billions of dollars, not hundreds of millions," he says.

One line of products, the monoclonal antibody Hu23F2G, is being tested for its ability to treat up to 110,000 cases of multiple sclerosis annually, 125,000 trauma victims in danger of hemorrhagic shock and 1.5 million patients struck with a heart attack. Physicians testing the drug at Harborview Medical Center are excited about its apparent effectiveness in potentially fatal trauma cases.

Another antibody, ICM3, is being tested for possible distribution to the million Americans whose psoriasis doesn't respond to topical therapy.

IC351, the small molecule that inhibits PDE, was developed by pharmaceutical giant Glaxo under an agreement providing for the two companies to jointly market the product and split profits 50-50. But Glaxo allowed the agreement to lapse in 1996 because the drugs likely to be developed weren't in the company's core markets.

Glaxo's decision to drop its stake in PDE inhibitors means Icos has total control over the impotence drug, with Glaxo in a position to receive only a relatively small royalty stream.

Keith Ervin's phone number is: 206-515-5632. His e-mail address is:

---- Icos ----

Founded: 1990. Total employees: 277. Patents: 30. Patents pending: 146. Net loss, first quarter: $8.6 million. Stock price: $18.688. Market value: $746 million.