Fear Steals the Day from Amgen

Despite a better-than-expected earnings report, the biotech's stock drops as its decision to delay release of clinical-trial data fuels concern

A year ago, Amgen (AMGN) Chief Executive Kevin Sharer got a chilly reception from Wall Street when he predicted that the world's largest biotech might grow at only single-digit rates in 2005. The mood should have been more upbeat on Jan. 26, when he announced to investors in New York that 2005 sales actually rose 18%, to $12.4 billion, and earnings jumped 55%, to $3.7 billion.

Earlier fears that Medicare reimbursement changes might deter prescriptions for Aranesp, Amgen's high-flying anemia drug, weren't realized. The company expects double-digit sales and earnings growth in 2006. "We're optimistic about the future," Sharer told the crowd. But he was quick to add, "We have our challenges."

The challenges, not the optimism, stole the spotlight for some investors. Amgen's stock dipped 4.7%, to $71.90, on the day of the meeting. Analysts were disappointed that Amgen decided to delay releasing interim clinical-trial data on panitumumab, a colon-cancer treatment. Those data will provide key insight into how Amgen will fit into a market crowded with tough competitors, including Genentech's (DNA) Avastin and ImClone Systems' (IMCL) Erbitux (see BW Online, 1/25/06, "ImClone: Hammered on the Block?").


  Amgen has predicted that panitumumab will eventually bring in $2 billion in annual sales, but the data will dictate how much pricing power Amgen has. If the drug is good enough to be used as a frontline defense against the disease, it could carry a price tag of about $10,000 a month. If it's more appropriate for use as a last resort, the price might be closer to $4,000 a month, sales and marketing chief George Morrow explained during the investor meeting. "There are a lot of questions," he said.

Panitumumab is important not only because of its market potential but also because it may represent Amgen's next blockbuster opportunity. One of the company's biggest challenges is that its anemia franchise -- which represents 48% of annual sales -- is facing competition from so-called follow-on biologics, the biotech industry's equivalent of generic drugs. Follow-on versions of Epogen, Amgen's flagship anemia product, could start appearing in Europe late this year, and "we'll see the full brunt of it in '07," Sharer said.

Amgen's ability to diversify beyond anemia will determine whether the biotech can sustain its red-hot growth over the long run. In a phone interview after the meeting, Sharer said the decision to withhold the data wasn't related to fear of tipping Amgen's hat to the competition. "The trial didn't enroll at the rate we expected," he explained. "I understand people are disappointed, but we expect it's more important to do the trial properly."


  To boost its product pipeline, Amgen announced that it will increase spending on research and development by as much as 40% in 2006. R&D as a percentage of sales will jump to 22% or more this year, from 19% in 2005. "Our logic is to balance the short- and long-term potential," Sharer said. "We think we have a big opportunity to serve patients and shareholders."

Amgen expects to launch 54 new clinical trials of drugs in its pipeline -- a much more aggressive plan than last year's program, which included 38 new trials. Much of Amgen's research attention will be focused on panitumumab, as well as denosumab, a promising treatment for bone disorders such as osteoporosis. Even though denosumab is likely a few years away from hitting the market, Amgen is already gearing up for a major marketing attack against Merck's (MRK) Fosamax. Because of harsh side effects, 70% of patients who start taking Fosamax drop it within a year, Morrow told investors. Early results suggest denosumab could be much easier to tolerate.

Chris Loder, a Merck spokesman, says he hasn't seen the Amgen research that yielded the 70% dropout figure, but he insists that "Fosamax remains the most-prescribed medicine worldwide for the treatment of osteoporosis. It has well-documented tolerability and safety from clinical trials involving more than 20,000 patients." Loder adds, "Side effects have been usually mild and generally have not caused patients to stop taking Fosamax."


  Despite the pipeline-spending increase, Amgen isn't forsaking its commitment to the anemia market. On the contrary, it's working hard to distinguish its second-generation anemia remedy, Aranesp, from the upcoming low-cost competition. Aranesp is a long-acting version of Epogen, so it's more convenient for patients than the original formulation. Amgen recently introduced a new method for injecting the drug, called SureClick. The prefilled pen-like syringe delivers the drug in an easy-to-administer burst through the skin.

"It's a great way to differentiate ourselves against the follow-on biologics," Morrow said. In addition, Amgen is testing Aranesp in new patient groups, such as those suffering from chronic heart failure.

It also will need to address questions regarding how to market the drug. Will Amgen take to the airwaves with Aranesp the way it has with its hit Enbrel, used to treat rheumatoid arthritis and psoriasis? Amgen learned firsthand the importance of direct-to-consumer advertising last year, when the U.S. Food & Drug Administration asked it to withdraw ads claiming that Enbrel is a "breakthrough." Amgen Chief Financial Officer Richard Nanula in an interview after the meeting said, "That's a claim they don't like us to use." The revamped ad campaign recently debuted.


  But being off the air for several months clearly hurt Enbrel: Morrow said there was "some softness" in the psoriasis market, where Amgen gained only one percentage point of market share in the fourth quarter. Amgen estimates that 1.5 million psoriasis patients have not yet tried any biotech treatment, so the potential for growth is significant. And the recent launch of the Medicare Part D drug benefit could bring in millions of new patients, in both the psoriasis and rheumatoid-arthritis categories.

Despite the slide in Amgen's stock price, analysts remain optimistic. The median price target on the stock is $91. Analyst Christopher Raymond of Robert W. Baird & Co. says the stock could get a boost in June from the American Society of Clinical Oncology's annual meeting. It's possible Amgen could use that forum to provide data on panitumumab, as well as a number of earlier-stage cancer drugs in its pipeline. "These guys have kind of come full circle," Raymond says. "Three years ago, they were the ones with no pipeline. Now they have arguably the best pipeline of the large-cap biotechs."

As for Sharer, he's not taking lightly the challenges of managing Amgen's growth. "We want to stay small and hungry," he says. "Small means we can do things more quickly and have a tolerance for risk. Hungry means we don't rest on our laurels." Having surpassed expectations for 2005, Amgen's facing a fresh set of challenges -- and a tough crowd on Wall Street that's sure to scrutinize the biotech's every move.

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