Amgen Bets Its Future on Biotech Anemia Drug
Inside a room the size of a small wine cellar, there’s a constant, eerie squeaking noise as bottles filled with a cherry-red liquid are mechanically rotated on racks in 98.6-degree temperature. Erythropoietin (EPO) is incubating.
It’s not easy to get in that room at the Amgen complex in Thousand Oaks. Workers must use special magnetic key cards to enter the building, and double doors keep outside air from seeping in.
This is very valuable stuff. EPO figures to be Amgen’s first biotechnology drug, and in its dried state, analysts say, EPO will be worth about $100 million a pound.
So far, in clinical human tests, EPO has won eye-popping reviews, including one published in the New England Journal of Medicine. EPO seems to alleviate chronic anemia in patients with severe kidney disease, who cannot produce enough red blood cells on their own. They need frequent blood transfusions, which carry the risk, however small, of hepatitis or AIDS. Kidney patients given EPO transfusions three times a week after dialysis didn’t need blood transfusions, and patients recovered much of their old energy.
If all goes well, Amgen will get Food and Drug Administration approval for EPO by 1989.
Playing Detective
Amgen’s scientists played detective to find the molecule containing EPO, then broke apart the DNA blueprint, spliced together genes and cloned the hormone, which occurs naturally in the body and helps produce red blood cells.
“We’re in true designer genes,” said Philip Whitcome, Amgen’s director of strategic planning.
The nation’s 80,000 kidney dialysis patients could be treated with injections of EPO in a liquid form several times a week. To treat them all would only take a pound or two of EPO in its dried form, and could be worth $130 million a year in sales. EPO also looks as though it might help chemotherapy and rheumatoid-arthritis patients who suffer from anemia, plus other uses, worth another $300 million a year.
EPO also looks like a wonder drug to the stock market. Amgen’s stock, which closed Monday at $37.625, up from $12.50 last year, sports a stratospheric price-earnings ratio of 400. The average S&P; 500 stock has a p/e of 15.
In effect, what the stock market has done is priced Amgen in anticipation of the $50 million that analysts expect the company to earn five years from now.
‘A Little Scary’
“It’s a little scary. People don’t want to miss the boat, and they bet their chips a lot earlier today,” said George B. Rathmann, 59, a big, bearded man who is Amgen’s chairman and chief executive.
Can Amgen ever justify its dizzying stock price with real profits? The answer, increasingly, looks like yes.
“I really do not see any major dangers now,” said Jim McCamant, editor of Medical Technology Stock Letter. “EPO is the kind of dream product every biotechnology firm dreams they have. EPO will pay the bills and certainly allow Amgen to grow and develop other drugs,” said James Fenno, a former vice president of Amgen and now an executive with a Santa Monica biotech firm, Ingene.
In the drug business, it only takes one hit to become a star. SmithKline Beckman was an also-ran firm until it discovered Tagamet, an ulcer drug that produces $1 billion a year in sales. On a smaller scale, EPO might be Amgen’s Tagamet.
Amgen investors are obviously gambling that years from now they will look sage, much as were those early investors in Polaroid in the 1950s, Teledyne in the ‘60s, and Wal-Mart in the ‘70s.
“People are buying into the glamour of biotechnology. They like to go to cocktail parties and say they own stock in biotech. Twenty years ago it was electronics companies,” Fenno said.
Volatile Stock
Amgen’s stock price is both swollen and volatile, which makes it a prime target for short-selling. Last month, for instance, Amgen was set to sell another 2 million shares of stock. But in the two days before the offering came out, many investors took short positions on Amgen--that is, they borrowed Amgen stock, then sold it with a commitment to replace the stock in the near future. They were gambling the price of the stock would go down enough so they could replace it at a lower price and thus turn a profit.
It worked. The short-sellers beat down Amgen’s stock price from $38 to $34. Amgen went ahead with the offering anyway because major institutional investors had been waiting to get their hands on the stock, but the short-sellers picked $8 million out of Amgen’s pockets.
Still, Amgen’s current market capitalization--the total value of all its stock--places it third among all biotech firms, behind Genentech and Cetus.
More astonishing is that Amgen’s $624-million market capitalization now ranks it about 750th among all U.S. firms, ahead of many better-known companies in traditional businesses including Glendale Federal Savings & Loan, Nike and Mack Trucks. They have plenty of assets, but Amgen has a hot idea.
Nevertheless, Amgen remains a pipsqueak company. For its fiscal year ended March 31, it will report about $1 million in profits on $30 million in sales, but the numbers don’t really mean very much. Only about $1 million of its “sales” came from actual product sales--to research labs and universities--the rest are merely cash advances by Amgen’s research partners, plus interest.
The pressure to produce big is nothing new to Rathmann, a former vice president of research and development for Abbott Laboratories in Chicago. In 1981, when the company was no more than an idea, he persuaded venture capitalists to invest $19 million in Amgen. They told him they expected to multiply their investment 10 times within seven years.
“And suddenly, as you’re still an embryo, you must become a Fortune 500 company. Instead of dreaming about how big and exciting it might be, it is absolute that we must do that or we are a failure,” Rathmann said. One analgesic for Rathmann’s headaches is that his 3% of Amgen’s stock is now worth about $20 million.
By the time Amgen gets its first drug, EPO, to market, Rathmann figures Amgen will have spent, with its partners, $100 million in research and development on various projects. These range from biotechnology-created hormones to make chickens grow faster--it didn’t work--to a biotech-created indigo dye for blue jeans that Rathmann still isn’t sure he can sell at a profit. EPO’s research tab will run about $30 million.
But Rathmann thinks the company can hit the $50-million profit plateau inside five years. The major reason is EPO.
One Firm With Clear Edge
EPO is one of the few biotech drugs in which one company seems to have a clear edge, with plenty to gain if it wins the race to market. The prize will be orphan-drug status, bestowed by the FDA, granting an exclusive seven-year monopoly to sell EPO to kidney patients in the United States. The FDA offers orphan-drug status as a carrot to encourage research on diseases that have relatively few patients, under 200,000.
Amgen plans to finish its U.S. clinical tests soon on EPO and apply for FDA approval by the end of this year. The FDA’s review might last 18 months.
If EPO is approved, Amgen expects to charge patients about $1,500 a year for treatment, about the same rate all those blood transfusions cost. But EPO appears to have other uses as well: It could be used to help patients with liver diseases and sickle cell anemia. Or for patients worried about getting AIDS from a blood transfusion, who want to store their own blood before surgery, EPO might help them give more blood faster. It might also be used to help reduce the fatigue that the newly approved AIDS drug, AZT, seems to cause in patients.
How big is the world market for EPO? For 1992, analysts pencil in total sales of $435 million.
Amgen’s closest competitor in the EPO race is Genetics Institute, a Cambridge, Mass., biotech firm that has linked up with Japan’s Chugai Pharmaceuticals and has started EPO clinical tests overseas.
“Amgen has a substantial lead, I believe it’s a year and a half, over anybody else,” said Denise Gilbert, biotech analyst for Montgomery Securities.
Amgen has several marketing deals with big partners to raise R&D; funds and keep down investment costs. In various research projects, Amgen’s partners include mighty Upjohn, SmithKline Beckman, and Abbott Labs, which owns 9% of Amgen’s stock. Johnson & Johnson will market EPO in Europe and pay Amgen about 25% of its pretax profits. Kirin Brewery, meanwhile, will manufacture and market EPO to Japan in a joint venture with Amgen.
Amgen, however, has shrewdly kept all the rights for the biggest single market for EPO, namely, kidney patients in the United States--where it will have the benefit of orphan-drug status.
What could go wrong with EPO?
One unknown is whether Amgen’s patents will be judged as ironclad, and will keep out some of the competition. Also, Amgen thus far has been an idea factory, not a factory that turns out real products and knows how to sell them. But Amgen is building a $15-million plant to manufacture EPO, and Rathmann suggests that selling EPO won’t be as hard a sell as trying to persuade somebody to buy a new buffered aspirin. For anemic kidney patients, he said, the choice between another blood transfusion or taking EPO “does not exactly take a sophisticated marketing story.”
What does worry Rathmann is keeping together the fragile makeup of Amgen, especially his 75 research scientists. Amgen, he said, is one of those companies where all the assets go home at night “in tennis shoes.”
Thus far, only a couple of research scientists have left the company. The labs are peopled with young researchers dressed in white smocks, who play their part in helping a company grow at the edge of a scientific frontier. In the labs, workers use everything from powdered milk (a cheap protein source to grow test bacteria) to X-rays (to line up maps of gene coding).
Staff Gets Stock Options
Everybody at the company, down to the secretaries, gets stock options. A half dozen scientists now are paper millionaires, since the earliest stock options were given at 65 cents a share. But you won’t find Ferraris in the parking lot just yet. Most of the employees are holding onto their stock.
But Rathmann wants Amgen to be more than a one-drug company, so six biotech drugs are now in human clinical tests, including Granulocyte Colony-Stimulating Factor (G-CSF). “We will get more profits eventually with G-CSF over six or seven years” than from EPO, Rathmann said.
G-CSF produces white blood cells and so may strengthen the immune system of cancer patients undergoing chemotherapy. Amgen began human clinical trials in November, 1986, on cancer patients at Memorial Sloan-Kettering Institute in New York.
But unlike in the EPO race, there are similar white blood cell biotech drugs being tested. “Once you’ve indicated that the molecule exists, it’s the four-minute mile story,” Rathmann said. What seemed impossible before is suddenly quite possible, and the competition rushes in.
There are about a dozen biotech companies in the race for white blood cells, including Genetics Institute. With a Swiss partner, Sandoz, it began testing its own variation called GM-CSF in August on patients with cancer, patients getting bone marrow transplants and even AIDS patients to try and slow down the rate of infection.
With few exceptions, the potential markets here are much too large to qualify for orphan-drug status. So analysts scratch their heads, tap their calculators and talk of maybe a $200-million market in the United States for this sort of drug by the early 1990s, and maybe $1 billion worldwide. For Amgen, Medical Technology Newsletter Editor McCamant said, “G-CSF will pay off, the question is how much.”
Even if Amgen is the first to get to market with G-CSF, there figures to be a legal mess. Biotechnology patent fights are multiplying like cloned genes. Amgen is suing rival Cetus, which in turn is suing Amgen, in a patent dispute over Interleukin-2, an anti-cancer drug still in early test stages. Amgen also has two other cancer drugs in clinical tests, Gamma Interferon and Consensus Interferon.
At the moment, though, things are looking awfully good for Amgen. Rathmann is 95% sure that EPO will be a hit. One hit drug and Amgen will be a healthy company; two, and its early investors will count themselves as members of the smart money set.
“Creating something of that size in a relatively short period of time, yeah, it’s kind of remarkable, if it can be done,” Rathmann said. “And the people here will do it.”
