Can Amgen Follow Its Own Tough Act?Larry Armstrong
For years, Amgen Inc. wallowed in anonymity, one of dozens of biotechnology startups laboring in the shadows of the fledgling industry's Big Four. Early on, superstar Genentech had cloned all the impressive genes, Biogen and Cetus boasted rosters of eminent international scientists, and Genex had won coveted contracts to manufacture NutraSweet for G. D. Searle & Co. Nearly all of them seemed to have a better chance than Amgen to grow into huge, independent drug machines.
But today, it is Amgen that has emerged as the world's premier independent biotech company. Following the Food & Drug Administration's approval on Feb. 21 of its second gene-spliced drug, which stimulates the production of white blood cells to fight the infections that often accompany chemotherapy, Amgen's stock surged to an all-time high of 105 1/4. That gave the company a market value of more than $4.5 billion, 50% above that of its nearest rival, Genentech Inc., which last year became a unit of Swiss drug giant Roche Holdings Ltd.
PROTEIN RUSH. Amgen's operations are already more profitable than Genentech's, and analysts expect the Thousand Oaks (Calif.) company to earn $20 million on revenues of $350 million for the fiscal year ending Mar. 30. That will nearly all be from sales of its first product, anemia-fighter Epogen, which was launched 20 months ago. Next year, sales of the new drug, Neupogen, could reach $200 million, nudging Amgen over the $500 million mark and ahead of Genentech in sales. "Genentech was always the darling," says James L. Vincent, chairman of Biogen Inc. in Cambridge, Mass. "But when you ask who has done the best job in building a long-lasting success, Amgen takes the award."
Now comes the hard part: sustaining its growth. The trick is to build alarge enough revenue base to fund the $100 million and up in research and development it takes to bring each new drug to market. The problem, Amgen executives concede, is that they don't have enough promising new products already in the pipeline to propel the company ahead during the late 1990s. Still, that doesn't keep them from basking in some momentary glory. Amgen's two winners are genetically engineered copies of naturally occurring proteins that induce the bone marrow to produce more blood cells. Erythropoietin, or EPO, which is Epogen's technical name, is used instead of the blood transfusions often needed by kidney dialysis patients. The FDA granted EPO monopoly status for dialysis under the Orphan Drug bill, a law that guarantees companies exclusivity in small drug markets. So, Amgen treats more than 90% of the estimated 90,000 eligible patients.
Neupogen will have broader appeal. Formally called G-CSF, for granulocyte colony stimulating factor, it stimulates the production of certain infection-fighting white blood cells, called neutrophils, to replace those killed by chemotherapy. Analyst Denise M. Gilbert of County NatWest Securities USA, a London-based brokerage, estimates that annual sales for Neupogen and similar drugs could reach $750 million in the next two years. Amgen will compete with a drug called Leukine, for which Seattle-based Immunex Corp. is soon expected to win FDA approval. But the go-ahead will only be for use with bone-marrow transplants, a narrow market. So, says Gilbert, Neupogen will be "enough to sustain Amgen's growth until the mid-1990s."
TIGHT TARGETS. That will be especially true if Amgen can give the drug new uses. "Each will have the same effect on sales as a new product," says Amgen Chairman Gordon M. Binder. For instance, the company has started trials of G-CSF for burn cases, where patients have a normal level of neutrophils but are in danger of getting a bacterial infection. Amgen will also explore whether Neupogen can help patients after they have contracted infections such as pneumonia.
Serendipity generally plays a big role in drug discovery, but Amgen's success is no accident. Originally called Applied Molecular Genetics, the company was founded 11 years ago by scientists and venture capitalists who put at the helm George B. Rathmann, a business-minded scientist who ran R&D with strict timetables and goals. While some biotech companies spent millions to identify and develop many new compounds, sometimes with little regard for their market potential, Rathmann targeted just a few.
Rathmann also raised enough early funding so that Amgen wouldn't have to license off its best discoveries to keep going. And he invested early and heavily in manufacturing and marketing, betting the company on a $20 million factory three years before EPO was approved so as to be able to launch it quickly. "Amgen demonstrated that it's not how many drugs you come up with that counts, but how many you get through clinical trials, the FDA, and onto the market," says Michael Gordon, manager of Fidelity Select Biotechnology Fund, a big investor in Amgen.
Rathmann signed on almost by accident. In 1980, while vice-president of R&D at Abbott Labs, he was planning a sabbatical to study molecular genetics in the lab of molecular biologist Winston Salser at the University of California at Los Angeles. Salser, it turned out, was lining up scientists for Amgen's scientific advisory board, and he recruited Rathmann as chief executive. Right off the bat, Rathmann raised $19 million, the largest first-round financing for any biotech venture until last year, when he retired as chairman to raise $33 million at ICOS, another startup. The Amgen investors were amply rewarded: On Feb. 6, Abbott cashed out its $5 million investment for $210 million, a 45% compound annual growth rate over 10 years.
J&J JINX. Such results weren't produced without struggle, though. During the first three years, with no products in sight, the kitty grew perilously low and discouragement set in. Binder, then chief financial officer, estimated that Amgen would be broke by September, 1983. In search of investors, Rathmann approached a score of Japanese companies, scoured Europe, and tried to interest the big U. S. aerospace and engineering companies that had put money in other biotech ventures. Every major drugmaker turned him down, even Johnson & Johnson, which later bought some marketing rights for EPO. Amgen's presentation fell on the second day of the Tylenol disaster, which killed seven people. Recalls Rathmann: "The executives just sat there glassy-eyed." Reluctantly, Amgen readied a public offering. On June 17, 1983, it raised $41 million by selling 2.3 million shares at 18. The stock price didn't see 18 again for three years.
In the meantime, though, big things were happening. In October, 1983, Amgen scientist Fu-Kuen Lin cloned EPO, perhaps the first time any company but Genentech had cloned a human protein. Sweeter still, both Genentech and Biogen had abandoned the search for EPO. "Suddenly, we felt there was no problem we couldn't solve," says Philip J. Whitcome, former director of strategic planning at Amgen and now president of Neurogen Corp., a Branford (Conn.) neurobiology startup. Just as suddenly, partners appeared. One of the first was Japan's Kirin Brewery Co., which sketched out a joint venture with Amgen over an April weekend in 1984.
Kirin ran the animal tests on EPO. And it made a critical contribution to Amgen's manufacturing technology, which uses so-called roller bottles to swish nutrients over the living, gene-spliced cells that produce the proteins for the drug. Experts had contended that Amgen would never be able to scale up roller bottles into a production technology. But, says Rathmann, "Kirin knows bottles." It came up with an automated roller-bottle handling machine. For a $12 million initial investment, it ended up with 50% of the joint venture that receives worldwide royalties on EPO sales. The collaboration has continued: Kirin-Amgen Inc. also owns the patents for G-CSF.
R&D PINCH. Other Amgen deals haven't gone as smoothly. In 1989, it was sued by J&J's Ortho Pharmaceutical Corp., the U. S. marketing partner for EPO, over allegations that Amgen wasn't helping to get FDA approval for nondialysis uses. The case is in arbitration, and once it is decided, analysts expect the damages owed by both sides to offset each other.
Amgen also is embroiled in a patent-infringement dispute over EPO with Genetics Institute Inc. In the worst-case scenario, Amgen could lose its exclusive patent and face competition from GI in the dialysis market. But it would likely end up with royalty-free cross licenses, so "there would be no dollar impact," concludes County NatWest's Gilbert.
Amgen's far more pressing dilemma is: What next? While the company concentrated its resources on back-to-back blockbusters, many observers think that other R&D got short shrift. "Amgen is now living on George Rathmann's legacy: two wonderful products," says Genentech President G. Kirk Raab. "Unlike Genentech, it does not have a lot of products behind those two."
Even Amgen executives are hard-pressed to point to major new products for the last half of the '90s. Amgen is working on tissue-growth factors, which could speed up healing of bedsores and wounds. But neither Amgen nor Chiron Corp., which is looking into the same class of drugs, can yet show dramatic gains in clinical trials. Amgen also hopes to start trials this year on a "stem-cell factor" protein that treats bone marrow damaged by radiation or chemotherapy. It would be similar to Neupogen, but stimulate production of a broader array of blood cells.
To fill its pipeline, Amgen is licensing products from smaller biotech companies. Last September, it agreed to invest $26 million in Regeneron Pharmaceuticals Inc., a neurobiology startup in Tarrytown, N. Y., in part to fund R&D on two nerve-growth factors, chemicals that influence the growth of brain cells. The two companies set up a joint venture to develop any resulting drugs, which might help treat such disorders as Alzheimer's and Parkinson's diseases.
FEW OBSTACLES. But products from that collaboration are at least a decade away. In the meantime, Binder must find a way to finance development work while still meeting his goal of keeping Amgen independent. "We aren't looking to sell to a big pharmaceutical company," he says. "We have to be one of them." One problem is that he must achieve this without Rathmann, who built and motivated Amgen's research team and focused the company on its early targets. He must also do it without Harry F. Hixson Jr., the veteran Abbott general manager who matched Amgen's drug development to market needs. Hixson abruptly resigned as president on Feb. 8. He had hoped to run the company but was passed over when Binder was made CEO in October, 1988. Critics think Amgen will need to import top talent from other drug companies if it is to become a major player in the industry.
Nevertheless, with two star products on the market, Binder, a former Ford Motor Co. financial manager, sees few obstacles that Amgen can't overcome. In fact, he figures that it can easily be a $1 billion company within five years. To help reach that goal, he is tripling capital spending this year, to $210 million, and expanding R&D to keep spending at 26% of annual revenues. Binder also expects to keep making investments in other small companies, with a total of $90 million earmarked for that purpose over the next four years.
Amgen is trying to buck some long odds. Since World War II, only one major drug company, Syntex Lab Inc., has eluded suitors. Genentech was forced to seek a merger with Roche because its clot-busting drug, TPA, didn't live up to expectations, so it couldn't afford to bring to market the drugs it had in development. Huge drug-development costs have even forced companies with revenues of $5 billion and up into mergers. It could turn out that winning the title of biotech's No. 1 independent was far easier than it will be to keep it.