Making big drugs during troubled times

Kevin Sharer, CEO of Amgen

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(Fortune Magazine) -- These are momentous times for Amgen, the world's largest biotech company. The health-care revolution brewing in Washington could be dramatically good news or bad for a business whose drugs tend to be life-changing -- and highly expensive. Also on deck this year is a critical FDA decision on Amgen's denosumab, a possible blockbuster treatment for osteoporosis and bone cancer on which Amgen is betting heavily. If it's approved, analysts expect annual sales of at least $1 billion -- maybe double or triple that. Overseeing it all is CEO Kevin Sharer, 61, who joined the company 17 years ago as a newcomer to biotech after a career with the U.S. Navy, McKinsey, General Electric, among others. Amgen (AMGN, Fortune 500) stock has been up and down during his nine years as chief, but right now Wall Street likes its prospects: 19 analysts rate it a buy or a strong buy, based on denosumab's prospects and further operating efficiencies, while five say it's a hold in light of the recession and strengthening competition. Fortune's Geoff Colvin talked with Sharer recently about health-care reform, cancer treatments, advice for new CEOs and aspiring CEOs, and much else. Edited excerpts:

Health care looks like the big issue of the summer, and President Obama's major theme is cost reduction. Many Amgen drugs are very expensive. Does that make them especially vulnerable?

To give a little context, the biopharmaceutical industry, including pharmaceuticals and biotechnology, is about 8% of the total health-care bill, and it's projected that, due to generic drugs and a few other things, that expenditure line is going to be flat for a few years. So the biopharmaceutical part of the system is sort of self-correcting.

As for individual biotechnology drugs, I think we have to look to value. For example, one of our drugs, Enbrel, is profoundly important to people with rheumatoid arthritis. It lets people who in many cases couldn't even get out of bed have a full life. It's an expensive drug [costing typically $20,000 to $24,000 a year], but the value it delivers is there. Sixty percent of the potential medicines for cancer are in the biotechnology pipeline, and if we can have a cancer drug that has profound benefit, generally that's seen as really good value. But we do have to be able to defend the value of the drug.

What about value in enabling the system to avoid costs that would be greater without the drug?

The way I think about value is avoided cost and quality of life or extension of life. Extension of life is very, very hard to achieve, but quality of life is important. We haven't yet developed a language in society to have that conversation. We need to develop a language of value in health care.

A central part of the debate right now is whether the program, whatever it turns out to be, should include a public plan. What's your view?

The devil's in the details. I would generally favor a private-sector solution, but if a public plan is deemed necessary, I would hope that it's on a level playing field. I fear statements like "What the industry needs is a not-for-profit plan to keep it honest." I'm not sure how that works. We do need to get access for people who don't have insurance. But I'd favor private sector over public.

If you could write the bill and have the President sign it, how would it read?

There are three big principles I'd want to keep in mind. First, access -- are we giving access to people in a reasonable and affordable way? Second is hope. The real thing I think America looks for my industry to do is come up with cures for the toughest diseases society faces, and I wouldn't want to do anything to diminish innovation. And the last thing I'd hope for is equity -- each member on the game board is going to have to contribute money to pay for this new environment, and we're probably going to have to tighten our belts. I hope those decisions are made on an equitable basis and everybody feels like they're paying their fair share.

When biotech was getting started back in the 1970s, part of the excitement was its potential for someday defeating cancer. It's 30 years later -- how are we doing?

It's still an important goal. There's definitely been progress made. There are many cancers that would've been a complete death sentence 30 years ago and that now we manage in a chronic way. We still have a lot of work to do. We understand the biology a lot better, but cancer is hundreds of different things, at least seven to 10 different biological mechanisms. And the body is amazingly redundant -- you block one thing, something else happens. I think we're going to be fighting cancer as a disease for the next 50 to 100 years, which seems very, very long, and it is long, but in a medical products development time frame, that's probably four or five product development cycles. We are making progress, there's no doubt about it.

They say every problem is an opportunity. Have you found any opportunities in this recession?

The opportunities are for a company that has a strong financial position and a good reputation. In our industry there are many biotechnology companies that are having a hard time raising cash. Those are opportunities for us to help them develop products. Our biggest opportunity in this situation is to reach out to some of the earlier-stage companies and see if we can find some products we can help develop. Just the other day we announced a $50 million investment in a small company called Cytokinetics (CYTK), which has a novel mechanism of action for congestive heart failure. It's a difficult disease. This is an early stage, but we think the biology is exciting, and we were delighted to have the chance to invest.

In April you cut Amgen's full-year sales outlook. How come?

For the first time in anybody's memory we're starting to see the biopharmaceutical industry and the medical industry at large affected by a recession. I think there are a couple of reasons. One is very high unemployment, and every time the unemployment rate goes up, people lose health insurance. Second, I think people are more aware of what they have to pay -- some of the cost has been shifted to them. While people don't have a full understanding of their cost of health care, they now bear more cost. That combination, I think, is unique.

And so what we did, out of caution, is we said it looks like a 1% effect on sales. We cut some costs, and our earnings should still be fine.

Everybody has made cost cuts in this recession, but choosing what to cut is a major management decision. How did you make that decision?

We made it as a team. I have eight or nine people I work with, and we try to make decisions based on collective judgment. The most important thing is to develop the products we have in the pipeline, so we protected that. Equally important is to make sure of the quality of the products we deliver to the market -- no compromise. But you'd be surprised when you look at things as mundane as travel, temporary workers, and vendors. You can get more money out than you might think. It's no one big thing. It's tightening the belt across the board but keeping the critical activities well funded.

One area where companies typically cut in a recession is training and development. What have you done?

We have not cut anything in development. When I became CEO about nine years ago, we decided that executive development was profoundly important, and we run weeklong classes with case studies from Amgen's experience, mostly things we didn't do well, because that's what you learn the most from. We haven't cut back on that at all. Developing people is the future of the company.

Earlier in your career you worked in three of the highest-performing organizations I know of: the U.S. Navy, McKinsey, and General Electric. What lessons did you take away about what creates a high-performing organization?

I was in the submarine force in the Navy, Adm. Rickover's child, and the basic thing that came out of the Navy was that the level of excellence you should hold yourself to should be extraordinarily high. At McKinsey what I learned was to make complexity simple in an analytic way and to communicate it so people can quickly understand it, and be right. At General Electric (GE, Fortune 500) I learned how to be a general manager. It was probably the best factory I ever saw for that. I spent time on the chairman's [Jack Welch's] staff, and watching him up close showed the power of embracing reality, being nimble, being adaptive, aggressive, competitive -- but still, as he used to say, we can be hardheaded in business yet softhearted when it comes to taking care of people.

All those organizations are intensely people-focused.

My life experience has taught me that there is no substitute for the best team. If I were going to give advice to a new CEO, I'd just say there is no substitute for the best team, and do what it takes to get one.

What have you learned about evaluating people when you're trying to distinguish the future stars from the rest?

Early in my career I thought I was able within a minute or two to evaluate anyone. I'm not that cocky anymore. So I've learned it's good to have multiple views of someone before you make a decision. The second thing I've learned is that personal characteristics are fundamental. If you don't have the right personal characteristics, I don't care what experience you have. The third thing is that, particularly at the senior levels, looking at where someone has been and what they've done is profoundly important in deciding what they can do. Then there's some intangible that's hard to describe, but you know it when you see it -- and if you're right three out of four times, you're in the hall of fame.

You mentioned Enbrel, the arthritis treatment. It accounted for almost a quarter of revenues in the first quarter, and sales of it were down markedly. How is Amgen going to make up for that?

One of the things that has affected that drug is these high co-pays that I talked about, and we've taken steps to relieve consumers of that burden. We're making sure that consumers don't pay any more than a nominal amount in co-pay, and we basically will handle the co-pays for them.

Why are investors and the industry so interested in denosumab?

Denosumab is a drug for osteoporosis. It has a new mechanism of action. It works on the bone biology to slow down the molecule that chews up the bone. You only have to take a shot twice a year, and you're protected from osteoporosis. We've very, very excited about it. We're also developing it for a kind of bone cancer, and we look forward to the final results of those trials this year. This has been a drug we've worked on for 15 years. We did the fundamental biology and invested over $1 billion. I bet my job on it. So I was happy that it turned out okay.

What happens next?

We're working with the FDA now, and it's not over till it's over, and you never predict exactly what agencies in the government are going to do, but I'm very, very enthusiastic, and more important, the doctors who've looked at it have been very positive in their response. I think it'll really be important for patients.

How dependent will Amgen be in its near-term future on this drug?

As is often the case in our industry, one drug is important, and this is clearly important in the intermediate term to us. Some analysts have predicted that it could have quite large potential. The unmet need for osteoporosis is huge. So it's very, very important to us.

You're an engineer, not trained or educated as a biologist or scientist, but you're managing a company that's built entirely on science and biology. How can you make the big decisions you have to make?

I leave the early discovery decisions to the scientific leadership. It's not something I have expertise in. It doesn't cost that much money. When I get involved is when we start spending a lot of money, which is when we start registration trials. For example, denosumab was over 10,000 patients, 25 countries, hundreds and hundreds of millions of dollars. We put the firm's reputation on the line. It gets publicity. So as the product moves through the pipeline, I get more and more involved. Again, I don't independently make the decision. I just convene the right people, listen to the conversation, and ask the right 10 questions.

Would I be correct in saying research is the core of Amgen?

Yes.

So much depends on the passion and dedication of your scientists and researchers. How can the CEO manage that?

The board asked me that question, and sitting on our board is a Nobel Prize winner in biology [David Baltimore, now president emeritus and a professor at Caltech] and a distinguished physician-scientist who's run big systems [Gilbert S. Omenn, former CEO of the University of Michigan Health System, now a professor at Michigan]. So it was a serious question. When I knew I was going to be CEO, I took a little sabbatical at their direction to learn about R&D, and I thought maybe there was a system, an answer. What I found out is, there's about 16 things you've got to do right, but the single most important thing, I decided, was hire the best person in the world to run research and development, and support that person. That's what I tried to do, and I think I got close to succeeding. [Amgen's R&D chief since 2001 has been Dr. Roger M. Perlmutter, a former Merck executive and professor at the Howard Hughes Medical Institute at the University of Washington.] It's having that person, then giving them the money and telling them to swing for the fences.

Presumably that person has tremendous power to attract other scientists.

Another easy concept I have is that A's don't work for B's very long, so you'd better start with A's at the top.

Earlier you told us your advice to a new CEO. What's your advice to somebody who wants to be a CEO but isn't one yet?

First is broad responsibility -- don't get channeled into just one functional area. Second is to focus on the job at hand, not your career. Third, be willing to embrace risk and know that you only grow outside your comfort zone.

Talkback: What diseases do you think Amgen should focus on when trying to develop the next blockbuster drugs? Let us know, and look for follow-up responses from C-Suite editor Geoff Colvin.