Amgen, Inc. (AMGN)

Amgen, Inc. (AMGN) is the largest biotechnology company in the world by far. But how many people would challenge it by asking whether it is because of the stellar scientists and management, or it is mostly because of the luck?

I think the Board of the company picked the right CEOs in the perfect time period, thus has been utilizing the luck of this company to the full extent.

In the 1980s, when the company was established, it was just same as all the other small bio start-ups, burning cash without any positive return for years. George Rathmann, who was the executive of R&D at Abbott Laboratories (ABT) at that time, was headhunted by the venture capitalists of Amgen, and he became the first CEO of Amgen.

Under the leadership of George, who is an outstanding scientist himself and also knows how to grow and trust the outstanding staff – Fu-Kuen Lin, in mid-1983, Amgen finally reached the breakthrough of cloning the genetic recombinant Erythropoietin, or EPO, of which project had been close to be terminated several times previously.

In 1984, Amgen formed a joint venture with the Kirin Brewery Company – a famous beer producer in Japan. This is a critical event: not only had that Kirin provided the funding ($24 million) that was badly needed for Amgen, but also that the fermentation technology (even though it’s for beer production) from Kirin might had prompted the industry-scale production capability of the protein products of Amgen. On the other hand, Kirin is a big winner too, who had been reaping the handsome profit in Asian market based on their agreement.

In 1985, the first marvel product EPO, a synthetically produced hormone that promotes red blood cell production disclosed positive results in academic publishing. In 1989, the FDA approved EPO for the treatment of anemia associated with Chronic Renal Failure (CRF). In 1991, the FDA approval for another genetic recombinant protein in human body : granulocyte colony-stimulating factor (G-CSF), or Neupogen, indicated to treat Chemotherapy Induced Neutropenia, and Severe Chronic Neutropenia.

The competition was fierce since the starting when Amgen submitted the Biologic License Application (BLA) for EPO. A company named Genetics Institute Inc. or GI had been involved into the legal wrangle with Amgen for long years. Even though the court verdicted that both sides infringed patent to each other in the beginning, Amgen got the favor from both the U.S. and Europe courts eventually.

From then, Amgen had stabilized the monopoly advantage in marketing its great products protected by patent law. In 1992, the Board of Amgen introduced, in the perfect time, the new CEO – Kevin Sharer.  Kevin barely knows anything about biotechnology, but, he knows the keys – how to manage a company and how to market the products.

With two stellar biologic products at hand, he has played his talent and capabilities to the full extension. No one might have imagined that Kevin Sharer would keep selling these two red cell and white cell promoting products and their derivatives for 20 years with billions of dollars every year.

Kevin, who successfully changed the culture from science orientation to market/sales orientation with discipline, led the company to generate revenue increase year over year with two digit percentage until recent years.

Let’s take a look at the last 10 years’ sales record.

The total drug sales of Amgen by fiscal year 2001had already reached $3.5 billion; in 2006, it was almost 4 times than that of 2001, hitting $13.8 billion.

If we breakdown the historic drugs sales, you can easily notice the original two products – EPO and Neupogen still occupy high proportion in the total sales.

Epogen’s sales kept stable at around $2.5 billion, while the renovated, long lasting version Aranesp (Darbepoetin Alfa) displayed a fast growing pattern in the first 5 years, then gradually declined. The Healthcare Reform that has been undergoing has material impact on Amgen. The activities like ESA labeling change, Bundling in Dialysis could materially impact the dosage of Epogen, and the company indicated in their SEC filing that the loss could be 20-25% of drug revenue.

Neupogen (Filgrastim) also is a blockbuster, but didn’t show a clear growing pattern. Because Amgen came out with the long-lasting version of Neupogen, called Neulasta (Pegylated filgrstim), which has been increasing over years, hitting $3.3 billion in 2010, and it’s patent expiration date won’t be due until 2015.

Twenty years went by; Amgen still is heavily dependent on the original two type of products, which are around 60% of its total revenue per year.

This is risky per common sense. What other products has the firm been working on?

Enbrel (Etanercept) obviously is a product that Sharer would be proud of. Back in 2001, when the news that Amgen would merger with Immunex with a gem of drug – Enbrel for $16 billion came out, the stock price of both companies went down, indicating that the investors and analysts held negative opinion on that acquisition. However, the growing pattern of annual Enbrel sales shown below verified Sharer’s decision.

Enbrel is a Tumor Necrosis Factor-Alpha Antagonists (TNF-Alpha Antagonists), it is indicated to reduce signs and symptoms of psoriatic arthritis, to improve physical function in patients with psoriatic arthritis, ankylosing spoindylitis, and chronic moderate-to-severe plaque psoriasis. There are several TNF-Alpha Antagonists in the market competing with each other: Humira (expiration date 12/31/2016)  from Abbott Laboratory (ABT) reaped $6.5 billion revenue in last year; Remicade (expiration 2014) from Johnson and Johnson (JNJ) hit $4.6 billion over the same period, both are higher than Enbrel. Now, the concern became the expiration date of Enbrel on October 23, next year. There was some news on the grape-vine, claiming that Amgen has new patent protecting this blockbuster for another 17 years.

Although Enbrel is a nice play for Amgen, this firm needs more product candidate to fulfill its pipeline. Sharer once had rest huge hope on a product called Vectibix (Panitumumab), a monoclonal antibody, indicated to treat metastatic colorectal cancer in patients who have failed previous chemotherapy. Amgen had expected it to be another blockbuster. However, after 5 years’ sale, the amount just hit $288 million in 2010. The strong competition in colorectal cancer market might be a cause for this weak performance.

The other once promising product is Nplate (Romiplostim), platelet growth factors, indicated for usage of Chronic Immune Thrombocytopenia Pupura (ITP). It was approved on March 12, 2008, and the sales reached $229 million last year. Its performance in 2011 won’t be much higher per the last three quarters number: $65, $75, and $77 million in the first, second and third quarter respectively.

I am surprised to notice that Amgen also developed a chemical compound new drug – Sensipar (Cinacalcet Hydrochloride), indicated to treat Secondary Hyperparathyroidism (HPT) In Chronic Kidney Disease (CKD) Patients On Dialysis. Its sales keep growing every year, and in last year, the total revenue is $714 million, but promoting Sensipar to be another blockbuster may take further time.

In the most recent year, Amgen had Denosumab, which is Receptor Activator Of Nuclear Factor-kB Ligand (RANKL) Inhibitors, successfully developed and the FDA approval for different indications.

Under the brand name of Prolia, Treatment Of Postmenopausal Women With Osteoporosis At High Risk For Fracture was approved on June 01, 2010, Prevention Of Skeletal-related Events In Patients With Bone Metastases From Solid Tumor (Cancer) was approved on November, 18, 2010, Treatment And Prevention Of Treatment-Induced Bone Loss (TIBL) Resulting From Hormone Ablation Therapy For Breast And Prostate Cancer was approved on September, 19, 2011. The sales performance of Prolia in the last 3 quarters is $27, $44, $51 million respectively.

Under the brand name XGEVA, Prevention Of Skeletal-Related Events In Patients With Bone Metastases From Solid Tumor (Cancer) was approved. The sales performance of XGEVA in the last three quarters is  $42, $73, $102 million respectively, growing with a rate of more 50% on average.  On July 15, 2011, Amgen announced that the European Commission (EC) granted marketing authorization for XGEVA for the prevention of skeletal-related events (pathological fracture, radiation to bone, spinal cord compression or surgery to bone) in adults with bone metastases from solid tumors. We can expect the sales of XGEVA could reach higher going forward. There are other clinical trials aimed to expand the indication of XGEVA going on. The Prescription Drug User Fee Act action date (PDUFA) of XGEVA to treat men with castrate-resistant prostate cancer was announced to be April 26, 2012.

With this growing speed and the confidence on Sharer’s marketing/sales capabilities, I would expect Denosumab will be another blockbuster in the near future.

The financial sheets presented Amgen a risky firm, and at the same time, a brilliant firm too! The average quarter net income of ABT is $1.4 billion with 90,000 employees, while that of Amgen is $1.1 billion with 17,000 employees, which means each Abbott employee generates $62,000 net income per year, while each Amgen employee generates $259,000 net income per year. What a profitable machine Amgen is! No wonder Kevin Sharer is the highest paid CEO in Healthcare industry.

However, Sharer’s lack of savvy on biotechnology led to quite bit failures on purchasing decisions. For example, glia-derived neuro-factor (GDNF) with applications to Parkinson’s; recombinant leptin as an anti-obesity drug; keratinocite growth factor (KGF) for preventing side effects of chemo and radiation therapy… fell apart.

On March 4, 2011, Sharer decided to acquire BioVex with $407 million in cash and incurred contingent consideration obligations. BioVex is a privately held biotechnology company with a novel oncolytic vaccine – OncoVEX GM-CSF. It is in phase 3 clinical development for the treatment of melanoma and head and neck cancer. On July 29, 2011, the trial on head and neck cancer was announced to be failed. The phase 3 trial in patients with malignant melanoma is still ongoing.

With two major products Enbrel and Epogen going to be expired next year, and current CEO’s deficiency on filling new pipelines, it’s reasonable that Amgen announced to start paying a dividend this year amounting to about 20 percent of its adjusted net income, and increasing going forward. On April 20, 2011, the Board of Directors also approved a dividend policy authorizing Amgen to repurchase up $10.0 billion of the common stock. The analysts in street downgraded Amgen on this news, claiming it’s a signal of lacking engine for profit growth. However, the stock price increased 6% upon the news. I think it’s a right move for the management to utilize the low interest rate environment while the stock is underestimated.

Even though it’s kind of precarious that Amgen had reached the stagnant stage without enough promising candidates to fill the hole, the threat would not be so serious as people scared. Because Amgen’s products, unlike other chemical compounds that could be easily imitated in chemical labs, are high-molecular proteins that have to be synthesized in mammalian cells, purifying proteins is critical and difficult step that is much more daunting than that in chemical compounds; also, scaling up from pilot trials to production batch put another tenacious hardship for generic makers. These secret “know-how” inside Amgen has gained itself dominant status in biotechnology sector.

On the other hand, the FDA has just come out with guideline on approving biosimilars, which they will follow EU-EMA’s practice. So the FDA would be very cautious in approving the first Biosimilar application. The giant generic maker – Teva Pharmaceutical Industries Ltd (ADR) (TEVA) has already running trials for its biosimilar version of rituximab (Roche’s MabThera), but to copy Epogen or Enbrel, Teva has a long way to go yet.

So my conclusion is that even though the total revenue of Amgen might be stagnant or be slowly declining, the company is still safer at least compared to Pfizer.

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