(FORTUNE Magazine) – For years Amgen has seemed biotechnology's best answer to the likes of Merck--a sector leader with so much heft and momentum that you'd recommend its stock to your mom. But now making that analogy would be a gross insult to the biotech company. Merck, like many major pharmaceuticals players, has been staggered by expiring patents and a dearth of new blockbusters--last year it lost more than a third of its market value, wiping out over $70 billion of shareholder wealth. Meanwhile, Amgen is looking ever more like the ideal prescription for your mom's portfolio.

Since September, Amgen has launched no fewer than three major drugs, including Aranesp, an anti-anemia medicine that it predicts may reach annual sales of $5 billion. Unlike most Big Pharma players, it boasts a portfolio of proven blockbusters with young patents and strong legs. This means that for years to come its new drugs will expand overall revenues rather than merely replace lost sales from medicines going off patent.

What's more, Amgen is no longer a Big Pharma wannabe: Its planned $17 billion acquisition later this year of Immunex, a Seattle biotech company, will boost its market value to perhaps $80 billion, putting it in the same ballpark as AstraZeneca and Wyeth. The biotech's annual revenues of roughly $5 billion and profit of $1.5 billion will still be relatively small--AstraZeneca, for instance, had sales last year of $16.5 billion and profits of $3 billion. But with the addition of a blockbuster arthritis drug from Immunex, Amgen aims to achieve far higher profit growth over the next few years than any of its pharma rivals. In fact, Amgen isn't so much joining Big Pharma as launching a whole new growth sector: Call it Big Biotech.

CEO Kevin Sharer, a former GE executive who began his career as chief engineer on the nuclear attack submarine U.S.S. Memphis, has already begun picturing Amgen as a worthy rival of giants like Merck and Pfizer. "We're not in their league yet," he says. "But our goal is to become the best human therapeutics company." That mantra may sound like annual report talk, but there's lots more to it than that. For Amgen, "best" means launching more profoundly novel medicines than other industry players, not necessarily becoming the biggest. In fact, since its drugs are prescribed mainly by small cadres of specialists, a situation unlikely to change for years, Amgen doesn't need a huge marketing and sales operation. That means less overhead and wider margins. Says executive vice president George Morrow: "We can double or triple revenue with a pretty modest increase in head count."

Second, note Sharer's pointed use of therapeutics instead of drug. At Amgen, drug has a mildly pejorative ring--it connotes a focus on medicines synthesized by chemists at old-line companies in dreary places like northern New Jersey. (Think unnatural, side effects, and freezing rain.) Amgen sprang from the heads of biologists in Beach Boys land, and its success so far has stemmed from isolating and duplicating key proteins that the body itself uses to regulate cell growth. (Think natural, fewer side effects, and sun and surf.) With the addition of Immunex, Amgen will boast the planet's largest R&D platform for bringing forth such bioengineered medicines. The deal will also expand Amgen's capacity to make monoclonal antibodies, immune system molecules increasingly used to fight cancer and other diseases.

Separately, with its $170 million purchase in 2000 of Kinetix Pharmaceuticals in Medford, Mass., Amgen is building an arm to develop the kind of "small molecule" drugs Big Pharma favors. (Unlike monoclonal antibodies and other proteins, which must be injected, small molecules can be formulated as pills--a gotta-have for any company aspiring to pharmaceuticals leadership.)

All this sets up a formidable growth strategy, says Immunex CEO Edward Fritzky: Few if any of Amgen's rivals will be able to quickly develop as many varied kinds of medicine to target molecules underlying disease--a crucial edge as researchers identify such targets by the score.

Amgen's deal with Immunex has as much to do with near-term profit as with long-term potential--which is why Sharer's go-go mantra is more than California dreamin'. Sales of Immunex's arthritis drug, Enbrel, are projected to rise from about $760 million last year to $3 billion or more in 2005. If that promise is realized, Amgen's post-merger earnings per share could soar around 25% a year through mid-decade--stunning growth for a company its size. By comparison, Pfizer's projected EPS growth is 20% this year and about 15% the next, while Merck is expected to report flat earnings for 2002.

Importantly, Amgen's size, growth, and biotech mindset will give it an edge in a high-stakes game that Big Pharma has long dominated--treating the multitude of early-stage biotech companies as a kind of vast, unofficial drug-discovery arm. Amgen says half of its future medicines are likely to come from outsiders via partnerships and acquisitions. That's not surprising--major biotech companies have long supplemented their pipelines with others' up-and-coming drugs. What is startling, though, is that the biotech contenders at this cream-skimming are now beating their Big Pharma rivals--a momentous shift in the balance of power between the sectors. A major reason is that pharmas in a slump can't afford to buy biotech companies with major drugs almost ready for market. "There's no tolerance on Wall Street for a regular, card-carrying pharma company to dilute its EPS growth by paying to acquire a biotech company with two or three times its P/E ratio," says Mark G. Edwards of Recombinant Capital, a Walnut Creek, Calif., biotech consultant. In contrast, maturing biotechs with buoyant outlooks and high P/E multiples can hoover up their smaller brethren in stock swaps with little dilution. In early December, Millennium Pharmaceuticals, a genomics company in Cambridge, Mass., snapped up Cor Therapeutics, in South San Francisco, for $2 billion in stock. Among other things, Cor owns a $300-million-a-year drug, Integrilin, for preventing blood clots in heart patients.

Despite the sector's rage for consolidation, Amgen's deal with Immunex took industry observers by surprise. After all, few companies seemed under less pressure to inject themselves with growth hormones. Nor have CEOs Sharer or Fritzky shown the usual symptoms of merger mania, such as hallucinatory raving about their visionary timing. Indeed, Amgen's Sharer, whose style was honed by two blunt, hardheaded legends--Admiral Hyman Rickover, the father of the nuclear navy, and GE's Jack Welch--concedes that it is an inconvenient time for his company to tackle a major acquisition, for it is busy launching its raft of new drugs. So what induced this lucid CEO, who keeps an arresting portrait of Gen. George Custer in his office to ward off hubris, to take on biotech's biggest deal?

The answer lies in Amgen's extraordinary history. The company set itself apart from the very first: In 1980 its founders, seeking laid-back lifestyles and low-rent digs, planted Amgen in one of L.A.'s remote back bedrooms, Thousand Oaks, Calif.--light-years, as the mind flies, from the gene-boutique havens around Boston and San Francisco. And as one biotech startup after another flamed out, Amgen's nonconformity reached epic proportions--it became gloriously profitable.

Its ascent began in 1983 when the company struck the biotech equivalent of Sutter's Mill: An Amgen researcher isolated the gene for human erythropoietin, a hormone made in the kidneys that stimulates red-blood-cell production. Splicing this "EPO" gene into cells grown in vats, Amgen was able to produce enough of the protein to test in animals. Its scientists weren't quite sure what to do with it at first--among other things, they mulled developing it as a kind of super-Geritol for racehorses. But by mid-decade, human tests had revealed EPO's blockbuster potential. Last year Amgen's version of EPO racked up worldwide sales of $2.2 billion, mainly as a treatment to lessen kidney patients' need for transfusions. Johnson & Johnson, which licensed rights to EPO for curtailing anemia caused by cancer-fighting drugs, sold some $3.4 billion of the medicine last year.

In the mid-1980s, Amgen struck a second lode by bioengineering G-CSF, a protein that boosts white blood cells. Approved by the FDA in 1991, it is now a $1.3-billion-a-year drug, Neupogen, for preventing infections in cancer patients on chemotherapy.

By the end of its first decade, Amgen had precociously entered adolescence. George Rathmann, an entrepreneurial chemist who was the company's founding CEO, had been succeeded by CFO Gordon Binder, who was turning Amgen into a full-fledged drugmaker. Its researchers seemed on a roll. Says Rathmann, who had moved upstairs to chairman: "We thought we were in a magic new field in which success would come easily, based on science that had been overlooked by Big Pharma."

Amgen spent its second decade learning how wrong that was. It now owns one of biotech's longest lists of disappointing proto-drugs: stem-cell factor, thrombopoietin, GDNF, BDNF, leptin, and more. The research slump wasn't a simple case of the gods punishing hubris. For one thing, Amgen during the early years was forced to shift much of its money and talent into areas such as manufacturing in order to realize EPO's promise, says executive vice president of operations Dennis Fenton, who joined in 1982. That left less for the kind of freewheeling research that might have spun out another big winner. "We thought that once we got focused back on basic research, we could find the next EPO," he adds. Overconfident, Amgen refrained from major moves to add outsiders' products to its drug portfolio.

Though failing to bring out a second wave of drugs, the company in the 1990s made two advances that set the stage for strong growth: It developed improved versions of its first two blockbusters, both of which it has recently launched. And it brought in a masterful agent of change in Kevin Sharer.

At first glance, Sharer seems an odd pick--when hired, he had zero pharmaceuticals experience. But at Amgen that wasn't a big issue. After all, its top brass regarded most candidates from Big Pharma as risk-averse conventionalists and their counterparts from biotech as lacking big-business expertise. What's more, Sharer was clearly a fast learner. After leaving the Navy, he worked as a management consultant at McKinsey & Co., then joined GE as part of a team that vetted proposed acquisitions. Next he jumped to MCI as a strategy wonk, a role that helped equip him to shape Amgen into a giant.

"I came to MCI as a brash, arrogant, overconfident 40-year-old following a good experience at GE," says Sharer. "After I'd been there about three months, I walked into the CEO's office and said that despite its success, MCI had totally misconceptualized its business. Instead of organizing around geography, it ought to organize around customers." Soon after, he says, "I found myself isolated" by MCI veterans resisting the idea. It eventually was adopted, but Sharer says he's still chagrined about "my lack of street smarts regarding the need to become an insider before advocating radical change."

Willingness to learn from his gaffe helped Sharer become president of MCI's business markets division. In 1992 he got a fax from a headhunter asking if he knew anyone who might want to be CEO of a company he'd never heard of--Amgen. Quickly boning up on biotech, he nominated himself, and after hitting it off with CEO Binder, Sharer was installed as president and heir apparent. By the time Binder retired at the end of 2000, Sharer had a magisterial grasp of the company--just as he'd once mastered the complexities of the nuclear sub whose assembly he oversaw on behalf of the Navy before going to sea in it.

He had also watched Amgen's series of flops from a front-row seat, an experience that impressed him with the need for a seize-the-day approach. "This is a lot like the entertainment business," he says. "Very few products turn out to be blockbusters, and you have to maximize the performance of the ones that do in order to be able to afford the high-risk investments needed to create new ones."

Before taking the helm, Sharer began scanning the horizon for nascent blockbusters that Amgen could buy rights to. Few looked better than Immunex's Enbrel, the first of a potent new class of medicines that block TNF, a protein that is one of the body's key stimulators of inflammation. Enbrel's sales took off with astounding speed after it was approved as a rheumatoid arthritis treatment in 1998. When it was launched, analysts' estimates for first-year sales ranged from $25 million to $250 million. The actual figure turned out to be nearly $400 million. In fact, Immunex hasn't been able to keep up with the soaring demand--thousands of patients are on a waiting list to get Enbrel. Now the company is scurrying to open a new $500 million plant in Rhode Island; it hopes the FDA will okay the facility later this year.

Analysts reckon that the market for TNF blockers may well top $6 billion by 2005, with Enbrel garnering half or more. The expected heady growth reflects the fact that many chronic diseases involve the swelling, pain, and tissue damage of inflammation. Enbrel's FDA-approved uses already have been expanded to include a form of arthritis associated with psoriasis, and the drug is expected to win approval for treating psoriasis itself, as well as ankylosing spondylitis, a disorder that causes the spine's vertebrae to fuse. Enbrel is expected to be a strong contender among TNF blockers through mid-decade, largely due to what Immunex chief technology officer Douglas Williams calls its Goldilocks advantage: Lowering TNF levels too much increases the risk of infection, while lowering them too little fails to stem inflammation--but Enbrel gets levels just about right, a happy medium that other TNF blockers seem to have a harder time hitting.

Enbrel's developing story has been doubly interesting to Sharer, for Amgen is forging into the anti-inflammatory market too--it recently launched a rheumatoid arthritis drug named Kineret. In early 2000 he met Fritzky at a biotech conference in San Francisco to discuss possible collaborations. Over drinks at the Top of the Mark, a restaurant with inspiring skyline views, the talk turned cosmic: "We agreed that we could transform the industry and make good things happen by combining our companies," says Sharer. But Immunex's stock price, inflated by the high-tech bubble, was prohibitive.

Last spring the stock fell after two high-profile clinical setbacks. Soon after, Sharer met Fritzky at the latter's desert getaway near Palm Springs, Calif., to start serious merger talks. The negotiations took months, partly because they included Immunex's 41% owner, Wyeth. Fortuitously, the Madison, N.J., pharmaceutical company needed money to cover lawsuit settlements stemming from the fen-phen diet-drug debacle, so it wasn't averse to parting with its Immunex stake.

Other stars aligned: Fritzky removed a potential stopper by agreeing to give Sharer control of the merged companies--Fritzky will remain as a director. And by midyear Sharer had hired a team of crack managers he deemed capable of handling the distractions of a merger, including Morrow, former co-president of GlaxoSmithKline's U.S. operations; Roger Perlmutter, former executive vice president of Merck's research arm, as chief of research; and Richard Nanula, formerly a senior executive at Walt Disney and Broadband Sports, as CFO.

On Dec. 17 the historic deal was unveiled, potentially giving Amgen three product categories with projected peak annual sales over $3 billion each. But in a recent interview, Sharer had more to say about the challenges he faces than about the merger coup.

One is the need to keep Amgen's expanding set of high-powered managers working smoothly as a team. Another is the risk that rare adverse reactions to its drugs will come to light as ever more people take them, opening the door for bad publicity and lawsuits. In fact, drug regulators recently spotlighted European cases of a rare immune reaction to EPO that causes it to make patients' anemia worse instead of better--while the cases involved Johnson & Johnson's version of the drug, they sparked concern about Amgen's formulation too.

Perhaps most daunting is Amgen's increasingly formidable competition, especially in the inflammation arena--J&J is aggressively marketing a TNF blocker called Remicade, and at least two other Enbrel-like medicines are expected to be launched by mid-decade. "What we have to do," Sharer muses, "is transition from a company that has had products in relatively uncompetitive markets to one that must be a fully effective commercial competitor. That's a tremendous challenge. The future looks very promising. But you have to deliver. You just have to deliver."

Can Amgen deliver well enough to avoid the doldrums that sooner or later seem to befall even the best big drug companies? With Custer glaring portentously nearby, Sharer chooses his words carefully: "We have an opportunity to do that. Our knowledge of biology is increasing rapidly. The number of areas in which we'll be able to do productive research is huge. But I don't claim to have a grand vision or some terrific insight on this. I'm just trying to get Amgen through the winter."

Winter indeed. If the brilliant, 65-degree January day beckoning outside as he spoke was any indication, Amgen isn't likely to face really rough sledding for quite a while.

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