Amgen Nurses Itself Back To Health

Its top drugs are on track, and investors are happy

A year ago, biotechnology giant Amgen Inc. was in the doldrums. Its premier drug, the blood cell stimulant Epogen, was under pressure from Medicare, which picks up the tab for most patients and was trying to cut back on the drug's usage. Amgen's pipeline of candidates for new drugs, never a torrent, had slowed to a trickle. And the company's stock price was near its low for the year. Once the golden child of the biotech revolution, Amgen was being talked about more as an orphan, a bargain takeover for a big pharmaceutical company on the prowl.

Today, however, the Thousand Oaks (Calif.) company looks a whole lot healthier. While the threat of future reimbursement challenges from tightfisted governments remains, it got some stingy Medicare guidelines reversed. That has returned Epogen to double-digit growth: In January, Amgen announced that 1998 net income rose 34%, to $863 million, on revenues up 13%, to $2.7 billion. And late last year, the company got a surprise boost when a panel of arbitrators opened up markets worth billions of dollars to a next-generation Epogen. The new product could hit the market as early as late 2000.

Amgen's turnaround resulted from equal doses of good management and good fortune. Thanks to a little of both, existing products and extensions should ensure five years of strong earnings growth. But Amgen continues to face some serious challenges. About 92% of last year's sales came from Epogen and Neupogen, its two big hits. Unless the company can use this fleeting opportunity to develop some new blockbuster drugs, it could find itself right back where it was a year ago.

For now, however, no one is happier than Amgen's investors. Since the favorable arbitration decision in December, they have bid up the stock from 44 to 67 on a split-adjusted basis. J. Peter Skirkanich of Fox Asset Management bought more than 2 million shares of the company in 1997, when Amgen's shares were trading below 25, adjusted for the split. "We figured there was a lot more room for an upside surprise than a downside one," he says. "Well, we got our pleasant surprise." Chief Executive Gordon M. Binder has to be pleased, too. He pocketed a paper profit of $37.4 million last year by exercising Amgen options.

"ALL MAYBE." The bio-tech industry, including Amgen, has shown a surprising weakness when it comes to developing products. "I would have predicted that we would see a dozen blockbuster drugs from the industry by now, but that hasn't happened," says George B. Rathmann, the chief executive who guided Amgen from its 1980 beginnings to 1990, when he left to found ICOS Corp., another biotech startup. Since launching Neupogen in 1991, Amgen has gotten only one product approved by the Food & Drug Administration: a me-too treatment for chronic hepatitis that took 12 years from clinic to market.

Biotechnology got off to a fast start in the 1980s by producing synthetic forms of proteins with known medical uses, such as insulin. But the easy opportunities have been exploited, and now the industry must undertake the much tougher job of finding uses for the drugs companies create. It's a lot more like conventional pharmaceutical research, with a commensurate lower batting average. "We're going to win some; we're going to lose some," says CEO Binder. "It's all maybe." And biotech companies have a lot less cash to spend than big drugmakers. Amgen will spend a hefty 28% of revenues on research and development this year, but its total outlay--$750 million--pales when compared with the expected $2.5 billion budget at Pfizer Inc.

Limited by uncertainty and what it can spend in the laboratory, Amgen has worked diligently to protect the pair of billion-dollar blockbusters it already has. Epogen, which was launched in 1989, induces the bone marrow to produce more red blood cells and is used to fight anemia. Today, almost 220,000 kidney dialysis patients in the U.S. receive Epogen three times a week, eliminating the old need for weekly blood transfusions. Neupogen stimulates production of infection-fighting white blood cells and is used by chemotherapy and AIDS patients.

Amgen has kept the pair of big drugs on the growth track with smart lobbying and aggressive marketing. Last year, sales of Epogen grew by 19%--more than double the 7% increase in new dialysis patients--largely because the company managed to reverse a threat by the federal government to deny reimbursement for certain patients. Using more accurate measures of hemoglobin levels and a new National Kidney Foundation study, the drugmaker actually persuaded the government to increase reimbursements.

New micromarketing initiatives have bolstered the drugs, too. For Epogen, Amgen trained a staffer on the spot at more than 1,000 dialysis centers to make sure dosing levels are as high as recommended. For Neupogen, Amgen is using physicians' own patient records to get them to use the drug preventively, rather than wait until a chemotherapy patient develops an infection.

Amgen is paving the way for continued dominance by developing sustained-duration versions of its warhorses. Neu-pogen will be followed by a version that would allow once-weekly rather than daily injections. A long-acting version of Epogen was initially threatened by a 1985 agreement with Johnson & Johnson in which then-cash-starved Amgen signed away most rights to Epogen. But on Dec. 11, an arbitration panel ruled that the new version of Epogen was not covered by the deal, giving it a shot at becoming Amgen's third billion-dollar drug.

BIG TARGETS. Of course, rivals are not sitting still. J&J is working on its own long-lasting version of Epogen. And Transkaryotic Therapies Inc. (TKT), a Cambridge (Mass.) startup, may have found a way around Amgen's Epogen patents with a competing drug that's nearing FDA consideration. Amgen has sued for patent infringement, and, says CEO Binder, "the odds are in our favor." TKT denies that it infringes on Amgen's patents.

Amgen is also working to improve its batting average on new drugs. The company has focused more on remedies that, unlike its current drugs, treat diseases, not the side effects of therapy. In doing so, it's targeting some big markets, such as arthritis and obesity, where even a modest hit could ring up big profits. And with a high stock-market valuation and a $1 billion cash hoard, it no longer has to grow everything at home. Amgen is looking to purchase late-stage products and even struggling companies. By sticking to its knitting, the takeover target has become the predator--and seems to have bought some more time to fill its pipeline.

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