Amgen: Will Bigger Be Better?

Its Immunex deal will make it dwarf other biotechs -- and make aggressive growth targets tough to hit

By Amy Tsao

The $16 billion purchase of No. 3 biotech company Immunex (IMNX ) by industry leader Amgen (AMGN ), announced on Dec. 17, seems certain to reverberate throughout the biotech business for months to come. The merged giant, with $5.5 billion in annual revenues, will so dwarf any other biotech outfit that its mere creation could set off a wave of consolidation among larger biotechs that hope to compete.

Yet nowhere will the impact be felt more keenly than within the new company itself. By gobbling up Seattle-based Immunex, Amgen says it hopes to boost its annual revenue growth from the low 20% range to the low 30% range, and its annual profit growth from around 20% to perhaps 25%. Only problem is, those goals are based on assumptions that many long-time observers of the two companies find hard to accept.

With the deal's announcement, Wall Street knocked Amgen's stock down some 10%, to about $58, and it ended 2001 at $56.44 as Dec. 31 was a bad day for biotechs after Imclone said approval of its colon cancer drug was delayed. And skeptics are cool on Amgen, even at its reduced price. Dennis Harp of Deutsche Banc Alex. Brown has cut his rating on the stock to buy from strong buy on a hunch that the targets Amgen has set for itself are too ambitious.

Of course, Amgen, which is headquartered in Thousand Oaks, Calif., could show up the naysayers. All it needs do is take the list of doubts the deal's critics have put forward and dispel them one by one:

Can It Push Key Products?

A successful union -- one that delivers on Amgen's financial targets -- will depend largely on whether two new drugs, one from each company, can meet Amgen's high expectations. One task will be to prove that Enbrel, an Immunex drug that treats rheumatoid arthritis and will rack up sales of about $775 million in 2001, can quickly ramp up to $1 billion a year in revenue. Amgen management predicts that Enbrel will hit $3 billion in 2005. But Deutsche Banc's Harp thinks $2.4 billion is more realistic. "To get to $3 billion assumes a compounded annual growth rate on Enbrel of 40% year-over-year," he says. "I thought I was being pretty aggressive at 30% annual growth."

Plenty of pieces have to fall into place for Enbrel to reach its potential. So far, sales have been impeded by manufacturing limitations, though those will ease when a new plant opens sometime between the fall of 2002 and early 2003. The Food & Drug Administration is now reviewing Immunex' request to use Enbrel for treating psoriatic arthritis. And testing of the drug is ongoing for other inflammatory diseases, such as the chronic skin disease psoriasis and rheumatoid arthritis of the spine.

However, additional approvals are by no means guaranteed. Last March, Immunex stopped tests of Enbrel as a treatment for chronic heart failure after data showed the drug was ineffective -- and its stock tumbled to a 52-week low.

New rivals to Enbrel may cut prices to steal market share

Even as the new Amgen tries to broaden the uses of Enbrel, other companies are getting closer to introducing competing drugs. It's almost certain that, by 2005, Enbrel will have to share the market with several similar drugs from the likes of Abbott Labs and Celltech (CLL ). "These are not inferior products," says Weidong Huang, an analyst with Times Square Capital Management in New York. "They are all equally good." And it's likely that the new contenders may cut prices to steal market share -- and thus threaten Amgen's revenues from Enbrel.

In the meantime, Amgen must make a hit out of its successor to Epogen, the drug used to treat anemia that accounted for $1.9 billion of the company's $3.6 billion in total revenue in 2000. The new drug, called Aranesp, has fared well since its U.S. marketing launch in early October. And for the third quarter of 2001 -- during which Amgen was beginning to sell Aranesp in Europe -- combined sales of Aranesp and Epogen were $520 million, up 5% from Epogen-only sales a year earlier.

Can It Stay Focused?

Observers note that Amgen can't afford to let the Immunex merger sap energy from the marketing push for Aranesp, which is just getting underway. "The merger is muddying waters ahead of the Aranesp launch," worries Leslie Marino, senior managing analyst at Dreyfus Corp. "I'm not sure why they needed to do something of this magnitude (the Immunex purchase) right now."

Amgen will also have to prove that it won't develop the blind spots that often characterize behemoth companies. "Bigger isn't always better," notes John Emerson, vice-president and research director at the corporate advisory firm Gartner Group. As companies grow larger, Emerson adds "it's difficult to maintain innovation" -- one reason that so many established drugmakers have partnered with biotech startups in recent years.

Like it or not, the reformulated Amgen will begin to resemble traditional pharmaceutical companies in other ways. Increasingly, it will face relentless pressure to keep annual growth rising by double digits -- harder to do the larger a company gets. Already, "I look at Amgen as a pharmaceutical company, with all the trappings of [that business]," says Dana Ono, director of venture-capital firm Venture Investment Management Co. in Boston.

Amgen will need new products to keep growth strong. But its pipeline of drugs in development, outside of potential new approvals for Enbrel, will still look thin -- even with the addition of Immunex, says Huang of Times Square Capital.

Can It Minimize Risk?

That highlights what may become Amgen's other big challenge: Living with its new risk profile. Biotech stocks are always a gamble of sorts, but investors have come to depend on a certain level of performance from a bellwether such as Amgen. "People who own Amgen [shares] have been going the safest route in biotech," Huang says.

However, investing in the new Amgen, he adds, will mean "going for a higher growth rate at the expense of a higher risk profile." In short, "we'll see a different set of investors from those who owned it before," Huang predicts -- investors who will expect a higher reward for their risk.

The merged company will have a lot working in its favor: Similar cultures, reasonably close locations, and two executives who are eager to prove their experiment can work. Kevin Sharer at Amgen will be CEO of the united company, while Immunex CEO Ed Fritzky will join the board after the deal is completed. Still, it's likely to take all the razzle dazzle these two can muster to convince investors that this merger was a bright idea.

Tsao covers the pharmaceutical industry and co-writes The Biotech Beat column for BusinessWeek Online in New York

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