December 14 2007: 4:27 AM EST
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How Amgen lost its biotech luster

The once-admired pioneer of biotech has begun to suffer from all the problems that plague more established pharma firms.

By John Simons, writer

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Once deemed hipper and smarter than Big Pharma, Amgen now suffers from many of Pharma's symptoms.

(Fortune) -- Amgen, the nation's second-largest biotech, was once considered immune from the chronic problems facing old-line drugmakers. But these days Amgen has all the major symptoms of "Big Pharma disease:" regulatory run-ins, price competition from generic drugs, and a virtually empty pipeline of future medicines.

The Thousand Oaks, Calif.-based company, founded in 1980, pioneered the biotech field. Its scientists - using recombinant DNA and molecular biology - discovered and ushered to market the worlds first biotech blockbusters, Epogen (used to treat anemia) and Neupogen (which boosts white blood cells). In doing so, they helped conjure the biotech industry's aura as a hipper, faster-growing, and more innovative West Coast cousin to the old-line East Coast pharmaceutical industry.

But lately, that aura has faded. Early next year, Amgen will face yet another FDA advisory committee to argue for broader uses of its anemia treatments, Aranesp and Epogen. Regulators are concerned that doctors are over-prescribing the class of drugs know as ESAs (erythropoiesis-stimulating agents). ESAs are used to treat anemia in patients with chronic kidney disease, or kidney failure resulting from chemotherapy and radiation treatments. (Johnson & Johnson's (JNJ, Fortune 500) anemia drug, Procrit, is a competing drug in the same class.)

Last March, regulators placed a "black box" warning on ESA drug labels, warning that the treatments increased risk of death in some cancer patients. Since then, FDA advisory groups have met twice on ESAs, dealing heavy blows to the drugs' future sales by limiting the types of patients who should use them. Medicare and Medicaid have also begun to limit the types of patients who receive reimbursement for ESA treatments. And Congress is debating further limits on ESAs as it looks to reign in healthcare expenditures.

That's a potential major setback for Amgen. Amgen's Arenesp and Epogen generated revenues of $4.1 billion and $2.5 billion respectively in 2006, combining for nearly half of the company's overall sales of $13.8 billion. Arenesp sales grew at a brisk 44 percent last year, while Epogen sales grew 10 percent.

As a result of the FDA's warnings and restrictions in 2007, Merrill Lynch analyst Eric Ende projects that Aranesp sales will drop 14 percent in 2007 and another 24 percent in 2008. Likewise, he expects Epogen revenues to drop by 3 percent in both 2007 and 2008. What that means for Amgen overall: the company is likely to see product revenues grow a scant 2 percent for 2007 and decline by 2 percent the following year.

As a result of these factors - and the FDA's imminent meeting on ESAs (scheduled for sometime in the first quarter of 2008) - Merrill Lynch earlier this week downgraded Amgen from a "buy" to a "neutral" rating. "Despite a compelling valuation," notes Ende, "we would remain on the sidelines until there is more clarity about the FDA's position."

What's worse, Amgen's problems go deeper than its run-ins with regulators. Despite the company's annual $3.5 billion research budget, Amgen has very little to show in the way of forthcoming blockbuster medicines. Even successes like Neupogen and Neulasta - treatments used to stimulate white blood cell production in chemotherapy or bone marrow transplant patients - are under pressure from likely competition from biosimilars (or biotech generics) in Europe. The company's forthcoming osteoporosis medicine, denosumab, faces a highly competitive market in which many inexpensive generics already exist.

"It's hard to put all their issues in a nutshell," says Joel Sendek, an analyst with Lazard Capital Markets who has maintained a "sell" rating on Amgen for several quarters. "But Amgen became too reliant on one franchise."

In order to head off expected slowing growth, Amgen (AMGN, Fortune 500) announced a restructuring plan earlier this year that includes eliminating 14 percent of its workforce, 2,600 employees. The company also began an aggressive stock repurchase plan to prop up shares. Nonetheless, Amgen's shares have fallen 26 percent in 2007, compared to the S&P's rise of 5 percent. "We believe Amgen's stock is likely to suffer from continued uncertainty about the outlook for its pivotal [Aranesp/Epogen] franchise as well as further delays and disappointments from its pipeline," wrote Bernstein Research analyst, Geoffrey Porges in a note last Monday to investors.

Porges explained his downgrade of Amgen's shares to "market perform" (the equivalent of a neutral or "hold" position), observing that "despite the stock's compelling valuation upside, we see potential outcomes in the coming months skewed to the downside, with negative growth and estimate revisions more likely than positive."

So, what's the cure for Amgen's Big Pharma disease? Innovation. It's likely to be a painful next few years as Amgen nurses itself back to health. But, on the bright side, its biotech origins make it better equipped than most Big Pharmas to develop the kinds of novel cures that patients find valuable.  To top of page

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