Biotechnology Venture Born in Investors’ Crucible
Imagining the genesis of a high-technology company, people usually see a pair of homespun geniuses building a better mousetrap in a suburban garage. The company is run from the kitchen table for a while until it attracts some capital, and then the fledgling business takes off.
Not Amgen.
Founded in 1980 by some Northern California venture capitalists, Amgen is a Newbury Park genetic-engineering company born of money in search of an investment. It hasn’t yet yielded much of a return, but as biotechnology companies go, it isn’t doing badly, either.
Right now the company is concentrating on getting permission to test its genetically engineered substances, including a hepatitis vaccine and a substance that promotes production of red blood cells, useful for kidney dialysis patients.
The company also is marketing its technology. Most recently, Amgen struck a deal with one of the nation’s biggest suppliers of poultry breeding stock, Arbor Acres of Glastonbury, Conn., to help it improve poultry strains.
“By any standard it’s a good company,” said James McCamant, editor of the Medical Technology Stock Letter.
Must Face FDA First
But, like others who hope to profit from drugs and chemicals made by gene-splicing, or recombinant DNA, Amgen isn’t selling anything yet and must navigate some of its products through the federal Food and Drug Administration before they can be marketed.
“The pharmaceutical items take quite a while to make their way through the Food and Drug Administration,” said Alan Goldhammer, a technical-affairs associate with the Industrial Biotechnology Assn., a trade group. “That can take five to seven years.”
The company doesn’t project profits until 1988 or so, and meanwhile is posting the losses that seem to come with the biotechnology turf. For the fiscal year ended March 31, Amgen lost $7.8 million on revenue of $10.1 million.
The losses have not scared investors away from Amgen or the industry at large. Research and development expenditures in the genetic engineering business are expected to exceed $500 million this year, Goldhammer said.
About 200 Companies in Field
He said there are about 200 companies in the field, ranging from small firms such as Amgen to multinational oil and pharmaceutical companies. A recent article in Science and Technology magazine estimated that $3 billion to $4 billion has been poured so far into the industry from all sources.
Amgen has raised $67 million since its inception, and on March 31 it had $22.3 million in cash remaining. The company’s strong balance sheet showed current assets of $23.7 million, and only $1.9 million in current liabilities. Amgen’s net worth was $37.7 million.
At Amgen and throughout the industry, this level of investment is almost entirely for future payoffs, since insulin is now the only substance produced by genetic engineering approved for human use.
Some biotechnology companies show profits, but usually from research and development partnerships, interest on capital, or contract research.
“Nobody in recombinant DNA makes money from operations yet,” McCamant said.
But Amgen’s history is a case study in the magnetic appeal a new technology can have for capital, despite the apparent risk.
Apparent Catalyst for Venture
“My version of the legend is that there was a guy living around here named Sam Wohlsteadter,” said Franklin P. Johnson Jr. of Asset Management Partners of San Francisco, who helped found the company.
Wohlsteadter, 43, is a publicity-shy investor who said he studied nothing but “truth and beauty and honesty” in college. He described himself as “the most lackluster person you’ll ever talk to,” but he has nevertheless helped start several high-tech companies, including Cetus Corp., in the biotechnology field.
Wohlsteadter, based in both Menlo Park, Calif., and Andover, Mass., appears to have been the catalyst. He was joined by William Bowes of U.S. Venture Partners, another San Francisco venture-capital firm. Bowes also has helped start several high-tech companies, and just happens to be the godfather of Franklin Johnson’s oldest child.
“People who know how to raise money and run a company decided there was room for another biotechnology company,” said Gordon Binder, Amgen’s vice president and chief financial officer.
$200,000 and a Scientist
Armed with perhaps $200,000 in seed money and a single scientist, the capitalists formed Applied Molecular Genetics--almost immediately shortened to Amgen--and set about getting the business off the ground.
The scientist was a UCLA molecular biologist, Winston Salser, who had a longstanding interest in starting a biotechnology company. He, in turn, helped form a research plan and recruited a group of scientists from around the country to serve on the advisory panel that would help choose products for Amgen to develop.
Salser and the capitalists then snared a top scientific executive, George Rathmann from Abbott Laboratories, which also invested in the business.
In February, 1981, they attracted additional capital by selling stock privately for $18.8 million, one of the biggest private placements ever for a genetic engineering business, according to Venture Economics Inc., a Massachusetts venture-capital consulting firm.
Eventually they took the company public, hired 185 workers, and began marketing Amgen technology to major companies such as Texaco and Upjohn. Along the way Salser left, he said, because he could not meet the company’s demands on his time.
Analysts praise Amgen as a well-run company, but note it cannot succeed by management alone--it will need good proprietary scientific products.
“Biotechnology is increasingly becoming a ‘me-too’ situation,” said Craig Dickson, who follows Amgen for Interstate Securities in Charlotte, N.C. “So far Amgen has been able to distinguish itself because its products are not ‘me-too.’ ”
For use on humans, the company is betting on five products in particular.
Erythropoietin--This substance, also known as EPO, controls production of red blood cells and often is in short supply in kidney patients, who frequently suffer from anemia. Amgen is believed to be the leader in EPO research.
Consensus interferon--Interferon is a naturally occurring protein with antiviral and tumor-fighting properties believed to have potential in the battle against cancer. Consensus interferon is a custom version using genetic engineering.
Gamma interferon--This is another type of interferon made by several companies, and the only Amgen product now being tested on humans, although the company hopes to be testing three of the four others on humans by the end of this year.
Interleukin 2--This is a substance that stimulates the immune system and could have a wide variety of medical uses. It might be of use to cancer patients, for example, whose white blood-cell count is depressed by chemotherapy. But preliminary indications are that it will not be of much help to victims of acquired immune deficiency syndrome, or AIDS.
Hepatitis B vaccine--Amgen says that, using genetic engineering, it can make this vaccine cheaper than anybody else. Hepatitis B is a particular problem in Asia, the company says, and the only vaccine now on the market is derived from human plasma and costs far more than Amgen’s.
Cost is one of the primary advantages of biotechnology. Genetic engineering offers a potential means of producing scarce vital substances, such as some human chemicals, on a large and economical scale that would make it feasible for doctors to administer them to patients.
Scott King, an analyst with Montgomery Securities in San Francisco, wrote in a May 29 assessment that Amgen “has accumulated an impressive backlog of products in development. We believe that erythropoietin, in particular, has the potential to generate major profits.”
King said in an interview that, with its stock trading at about $7 a share, “Amgen is an undervalued company.”
For financial backing in getting EPO on the market, Amgen has teamed up with Kirin, the Japanese brewer. Kirin will provide $12 million, while Amgen will provide $4 million and technology valued at $8 million. Kirin will get Japanese marketing rights, Amgen will keep the rights in the U.S., and the joint venture will share the rights in the rest of the world.
Amgen also has a five-year, $19-million agreement to do research for Abbott Laboratories on developing ways of using DNA to detect gene changes that could be precursors of cancer. Abbott owned 11.6% of Amgen as of June 15.
Animal-Growth Hormones
But Amgen’s products are not limited to human applications, which may be a good thing, because, as Binder said, “Amgen is several years away from having human therapeutics on the market.”
Amgen is working on animal-growth hormones, for example. It has an agreement with Upjohn to produce one that makes cows give more milk, and its chicken and bovine hormones also have been tested on salmon. Even consensus interferon could have animal uses: Amgen sees it as a way to prevent shipping fever, a respiratory ailment that afflicts cattle in transit.
Last month, the company announced the deal with Arbor Acres. Arbor produces specially bred poultry that farmers can use to begin raising chickens or to improve existing flocks. Amgen is to use its genetic technology to help Arbor develop better breeding stock, including greater feed efficiency--more chicken per pound of feed--and better resistance to disease.
Chemicals for other uses also can be manufactured using recombinant DNA. Amgen has an agreement with Texaco, for example, to produce specialty chemicals using organisms provided by the oil giant.
Even though most of its products haven’t been tested on humans yet, Amgen is moving ahead with plans for a $10-million, 40,000-square-foot production facility in Chicago, a city chosen partly because it is supplying $8 million in bond financing. The project also attracted $2 million in federal Urban Development Action Grants, and should employ 100 people, Binder said.
