Amgen Takes a Stand for Drug R&D;

As Kevin Sharer took the helm of Amgen Inc. in mid-2000, the former naval officer worried that the company was sailing into a crisis.

The firm’s top two drugs each rang up $1 billion or so in sales while improving the lives of patients with cancer and kidney disease. But when Sharer looked ahead, he saw a “drought in the pipeline” of drugs in development to drive growth.

So Sharer set in motion an overhaul of research and development. He hired a top-ranking scientist from Merck & Co., the Harvard of commercial drug research, to lead the makeover. And he began snagging drugs from smaller biotechs that Amgen could transform into blockbusters.

The biggest catch was Enbrel, an arthritis drug acquired in the $9.6-billion purchase of Immunex Corp. in mid-2002. Last year the drug had sales of $1.3 billion, up 60% from the year before. Amgen shares profits with marketing partner Wyeth.

Today, Amgen has more than two dozen molecules in human tests. The Thousand Oaks firm hopes to persuade Wall Street that it has enough fuel in the form of potential products to keep its growth engine humming. Next month, it will give analysts and investors a look at some of the experimental drugs it believes will carry it into the next decade.

“All eyes are on R&D; day,” analyst Thomas Shoenebaum of Piper Jaffray & Co. recently wrote.

Although the company had a terrific year in 2003 -- it posted a healthy 51% jump in sales as it swung to a record $2.3-billion profit -- its stock, priced at $63.57 on Friday, didn’t keep pace with that of rivals.

Its shares rose 28%, underperforming compared with Genentech Inc. of South San Francisco, Chiron Corp. of Emeryville and Gilead Sciences Inc. of Foster City. The BTK index of biotechnology stocks gained 40%.

In many ways, Amgen is a victim of its own success. With $8.4 billion in revenue last year, Amgen is so big that it must add several billion dollars in new revenue each year to keep its growth in the 20% range.

Last year Amgen got a lift as doctors switched cancer patients from Neupogen, which boosts the immune system, to a more expensive follow-on drug the company makes. But because most of the conversions have taken place, Amgen won’t get much mileage from that tactic this year. And the Amgen drug closest to reaching the market, a pill to control calcium levels in dialysis patients, doesn’t look like a billion-dollar product to Wall Street.

Because it takes 10 to 15 years to develop a new drug, Amgen’s R&D; makeover is a work in progress. Sharer knows as well as anyone that in science there are no guarantees.

In the late 1990s, when he was chief operating officer, two high-profile product candidates withered in clinical trials. One was leptin, an obesity treatment Sharer considered so promising he told the troops to “back up the trucks.” The other was a drug to stimulate platelets, which are cells that cause blood to clot.

Sharer said Amgen now faces better odds. In the last three years, it has put more drugs into human tests than in the previous 10 years, he said. Since 2001, Amgen has advanced five to eight drugs each year into clinical trials; this year it should move 12 drugs from the lab into human tests. One drug candidate queued up for study is a pill for neuropathic pain, or pain created by abnormalities in nerve signals to the brain.

“We’re making progress,” Sharer said.

Leading Amgen’s R&D; makeover is Roger Perlmutter, formerly second in command of Merck’s vaunted research labs. Perlmutter refused to consider Amgen at first -- “R&D; at Merck is bigger than all of Amgen,” he said -- but was swayed in January 2001 by Nobel laureate David Baltimore, an Amgen director and president of Caltech.

“Amgen needed someone who could make decisions,” Baltimore said. “Roger can do that.”

Once on board, Perlmutter said he dropped more than 100 of Amgen’s research projects, about half of the total, and focused scientists on programs most likely to pay off. With marketing chief George Morrow, he removed the wall between R&D; and marketing to align product research with Amgen’s commercial goals.

To help him run R&D;, Perlmutter hired two Merck alums: Joseph Miletech, now Amgen’s research boss, and Beth Seidenberg, who joined Amgen as drug development chief after a brief stint at Bristol-Myers Squibb Co. (At drug companies, research departments handle lab work and the development area oversees human tests.)

And Perlmutter replaced Amgen’s head of chemistry -- “He wasn’t even a chemist,” Perlmutter said -- with Paul Reider, another Merck recruit. At Merck, Reider was famous for writing the intricate formula for Crixivan, a pill for HIV. If written longhand, the Crixivan recipe would take 800 pages.

Reider’s hiring signaled that Amgen was serious about adding pills to its stable of injectable protein-based drugs. Reider’s presence also helped attract scientists from Merck and other big pharmaceutical firms.

“We’ve out-recruited everyone,” Perlmutter said.

Merck isn’t wringing its hands over the loss of talent. “I think it speaks to the depth of our bench,” said Chief Executive Ray Gilmartin. “It hasn’t hurt us.”

Retired Amgen executives said they were proud of the company’s previous R&D; efforts, which produced Epogen, an anemia treatment, and Neupogen, the foundation for what became a $6.4-billion business for Amgen last year.

“I believe Amgen had the most productive R&D; department in the industry,” said former CEO Gordon Binder, who ran the company from 1988 to 2000.

“The most important test of a pharmaceutical company’s R&D; are the products for which it obtains [Food and Drug Administration] approval.”

Former research chief Daniel Vapnek said scientific failure simply was part of the process.

“We were trying to develop breakthrough drugs for diseases that have no cure. That is very difficult to do,” said Vapnek, who retired in 1996 after 15 years as head of research. “There are going to be failures.”

As for bringing the marketing department into the drug development process, Vapnek said: “I don’t see what marketing has to do with R&D.; If you have a drug that is unique, you can sell it with an 800 number.”

Amgen isn’t relying on its own scientists alone to fill its drug pipeline. Sharer & Co. have been courting small biotechs at highly visible get-acquainted gatherings in San Diego, San Francisco and other cities. The competition for licensing deals is fierce.

Two weeks after Amgen approached Scios Inc. about a license to the Fremont, Calif.-based company’s arthritis pills, Johnson & Johnson swooped in and acquired all of Scios for $2.4 billion.

After that, Amgen snagged a licensing deal last spring for experimental cancer pills when it secretly arranged to purchase a 16% stake in Tularik Inc. of South San Francisco. Tularik’s business development head, Jack Anthony, said two other companies were in the running, but Amgen was “on a mission from God.”

To win rights to a diabetes treatment under development at Swedish firm Biovitrum, Amgen relied on a personal touch.

Amgen wasn’t invited to bid on the drug because Biovitrum had larger companies such as Merck and GlaxoSmithKline in mind as partners, Biovitrum director Nicholas Simon said. So Perlmutter flew to Stockholm and talked Amgen into the auction. After that, Sharer cut short a vacation to visit Biovitrum and sell CEO Mats Pettersson on the deal.

Some analysts said Amgen paid too much for rights to the Biovitrum drug; the deal called for an $86.5-million upfront payment plus other sweeteners. But Sharer, who joined Amgen after stints at General Electric Co. and MCI Communications Corp., said the deal was an example of how Amgen is prepared to act swiftly.

What’s more, it will cost the firm a total of $150 million to find out if the Biovitrum drug works -- a reasonable investment if the product becomes a blockbuster, Amgen Chief Financial Officer Richard Nanula said.

“In science, it is always the luck of the draw,” Sharer said of Amgen’s R&D; makeover. “I am not declaring victory, but the early returns are promising.”