Can Amgen Go Toe-to-Toe with the Big Boys?

Its $16 billion Immunex purchase hasn't convinced the Street

When Amgen Inc. (AMGN ) CEO Kevin W. Sharer finalized his company's $16 billion acquisition of Immunex Corp. (IMNX ) on Dec. 17, he did more than create a biotech giant with $5.5 billion in projected 2002 sales. He also ratcheted up a rivalry with Amgen's biggest partner--and foe--Johnson & Johnson (JNJ ).

With its new anemia drug Aranesp, Amgen is already trying to grab share from J&J's blockbuster Procrit. And now with Immunex in its corner, Amgen will nab the $750 million rheumatoid arthritis drug, Enbrel, which competes head-to-head with J&J's Remicade. "We are entering markets that are intensely competitive," says Sharer, a 10-year Amgen veteran who took over the top spot in May, 2000.

To justify his acquisition--and earn his place in the big leagues--Sharer must now prove Amgen is capable of going toe-to-toe with giant competitors like J&J. He also must solve an Enbrel manufacturing shortfall that threatens the drug's growth while building up weak pipelines at both Amgen and Immunex. And he has got to do all that while integrating the biggest acquisition in biotech history, a task that will inevitably cause some distraction.

Wall Street is nervous. After a rough ride through most of 2001, investors pushed Amgen's shares up 17%, to $69, this fall after the Food & Drug Administration approved two new Amgen drugs: Aranesp in September and Kineret, for rheumatoid arthritis, in November. They were the first drugs out of the Thousand Oaks (Calif.) company's pipeline in a decade. But its shares have fallen 10%, to $58, since news of the Immunex deal broke on Dec. 13. Investors were clearly disappointed that the purchase will dilute earnings until at least 2004. "There's a lot more risk now," says Samuel W. Murphy III, senior securities analyst for American Express Financial Corp., an Amgen investor.

A particular area of concern is the dogfight with J&J. The advantage of Immunex' Enbrel is that it relieves the debilitating pain of rheumatoid arthritis and doesn't require the toxic chemotherapy drugs that typically are taken with J&J's Remicade. But Enbrel is in short supply, and it will be at least a year before Amgen has enough capacity to fill demand. With more than 350 sales reps pounding the pavement for Remicade, J.P. Morgan Chase & Co. analyst Michael Weinstein estimates J&J's market share has jumped from 35% in early 2001 to about 50%. And soon after Amgen gets Enbrel production up to demand, it's likely to face competing drugs.

Even before the deal, Amgen had its hands full. The new Aranesp, a potential blockbuster, competes with J&J's $3.5 billion anemia treatment Procrit, which J&J licensed from Amgen in 1985. Aranesp should be a formidable foe: It can be injected much less frequently than Procrit. Still, J&J has put big dollars behind Procrit, doubling the drug's sales force to 600 over the past three years and spending $33.4 million on consumer ads in the first eight months of 2001. "It's a marketing battle and J&J has more might," warns Viren Mehta, analyst with Mehta Partners LLC.

Amgen is fighting back. Analysts expect it to increase its marketing and administrative spending from about 22% of sales in 2001 to at least 25% in 2002. The money will likely go to build its salesforce and launch ads. Amgen is also suing J&J, claiming the company is violating its Procrit license by pushing the drug as an anemia remedy for kidney patients on dialysis--territory owned solely by Amgen. An arbitrator will hear the case early in 2002, and some believe the suit may result in a multibillion-dollar blow to J&J. "J&J could be vulnerable," says Larry N. Feinberg, managing partner at Oracle Partners LP, a hedge fund that owns Amgen shares.

Even if Amgen prevails against J&J, Sharer will struggle to solve a fundamental challenge: a weak pipeline. He says Immunex strengthens Amgen's efforts to develop new treatments for inflammatory disease, cancer, and other conditions. But "the near-term pipeline is sparse" for Amgen and Immunex, says Lloyd S. Kurtz, a health-care analyst at Harris Bretall Sullivan & Smith. Yet another reason Sharer will have his hands full in transforming Amgen into a pharmaceutical powerhouse.

By Arlene Weintraub in Los Angeles and Amy Barrett in Philadelphia

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