The World's Most Successful Failure

Article excerpt

Byline: Mary Carmichael

Iceland's deCODE has discovered more genes than any other company on earth. If only it could turn a profit.

During the late 1990s, it was an article of faith that the decade ahead would be the Age of Biotech, an era when science would unravel the mysteries of DNA to determine the causes--and potentially the cures s--of the world's most common ailments: heart disease, cancer, mental illness. But even in an industry accustomed to hype, one company stood out: a small Icelandic startup called deCODE. In 1999 The New Yorker ran a glowing 10-page profile with a portrait of Kari Stefansson, the company's charismatic founder, climbing the DNA double helix like a ladder. DeCODE, it said, had "a scientific instrument of unparalleled power." Over the next 10 years, deCODE discovered so many genes linked to diseases that its only competitors were top U.S. labs lavishly funded by the National Institutes of Health. What it didn't find, however, was a business model that made sense--a common problem in the speculative, science-driven world of biotech. That, plus the global financial crisis, caused it to burn through $676 million, and last November it went bankrupt.

DeCODE's story is dramatic, but these days it's a common narrative arc. The recession has been tough on every company, but it's been particularly virulent toward startups, which usually lack profits and capital, giving them little margin for error when revenue falls and credit tightens. Typically, when a startup goes bust, it's gone forever--but deCODE hopes to be the exception. In the last two months, it's been recapitalized by outside investors, and now the company is emerging from bankruptcy with new leadership and a new strategy. There's still much that can go wrong: its new model isn't proved; there are early signs its new CEO's strategy may conflict with its visionary founder, who remains on the scene; and the company's culture, which has always shown more reverence for science than for profits, will need an overhaul. But in an environment where few companies of its size get a shot at resurrection, deCODE's second act is shaping up to be one of the biotech industry's most interesting experiments.

To say that deCODE launched big is like saying its home country of Iceland gets a bit chilly. As a group, Icelanders are closely related, which means when they get sick, there's a limited subset of genes that can be blamed. They also keep extensive genealogical records. Stefansson's insight was to put their genes and genealogy together and search the results for the roots of disease. Initially, he hoped to analyze the medical histories of all 277,000 of his countrymen through an exclusive government deal. That plan alarmed some bioethicists, who accused the company of profiteering and putting its subjects' privacy at risk. (Stefansson's dismissal of their concerns in The New Yorker as "a horrendous crock of s--t" probably didn't help his case.) Ultimately, the plan was ruled unconstitutional. Still, deCODE was able to gather genetic information from 140,000 Icelandic volunteers, and its database made it one of the world's top players in biotech.

What deCODE did with its data was the first step toward its financial downfall, though no one suspected it at the time. The company's original plan had been to focus on making diagnostic tests, but investors were lukewarm tothat idea. Diagnostics, which use genetic material (like a cheek swab or blood sample) to test for the presence of certain genes, are tricky to bring to market, and at the time, the technology for making them was somewhat primitive. The way venture capitalists saw it, drugs were a more proven route to profits. If deCODE could discover even one gene with a large effect on a common condition like heart disease, the thinking went, it would provide an obvious pharmaceutical target and a way to rake in cash. So in 1998, deCODE signed a $200 million drug-discovery deal with F. …