AS SEEN IN USA TODAY MONEY SECTION, THURSDAY, OCTOBER 23, 2003, PAGE 3B

Amgen thinks small to grow
Biotech woos start-ups working on breakthroughs
By Matt Krantz, USA TODAY

THOUSAND OAKS, Calif. -- Nestled in the hills outside of Los Angeles is a company that's worth almost twice as much as nearby Walt Disney, dominates its industry and is led by a former General Electric executive who worked under Jack Welch.

Its stock has soared 24.7% this year, beating the Standard & Poor's 17.1% gain, and it's one of the fastest-growing companies of its size, beating even Cisco Systems, Intel, Microsoft and IBM.

It also has the distinction of being the only biotech company to manufacture one of the country's top 10 best-selling drugs: anemia treatment Epogen.

The company? Amgen. But if you didn't know that, don't worry, because that's exactly how Amgen wants it. Unlike most behemoth companies that flaunt their size to get an edge, a la Wal-Mart, Amgen is trying to act small and be considered anything but a giant pharmaceutical company.

In the emerging field of biotech, strong-arming suppliers doesn't bring the success that it does in retail and tech. The game in biotech is to woo small upstarts that are working on breakthrough treatments.

When biotech start-ups are considering partnering with a larger firm, nothing turns them off more than a soulless corporate giant, says Amgen CEO Kevin Sharer. "We're trying to have a small-company feel," he says.

The plan seems to be working. Amgen now has partnerships with 100 companies. In fact, its next drug expected to get Food and Drug Administration approval -- Cinacalcet, a treatment for a kidney-related condition called secondary hyperparathyroidism -- was actually licensed from a partner, NPS Pharmaceuticals.

While upstarts are key to Amgen's future, not all its partnerships are on a small scale. It pulled off the industry's latest megamerger a year ago by buying Immunex, maker of runaway biotech hit Enbrel, an arthritis treatment.

Judging from the company's bottom line, its strategy is paying off. Amgen reported its third-quarter earnings late Tuesday: a profit of $612 million, or 46 cents a share, compared with a year-ago loss of $2.6 billion. That loss included a $3 billion write-off because of the $16 billion purchase of Immunex. After stripping out artificial one-time factors, Amgen's operating earnings jumped 63% to $714 million in the latest quarter. Notable successes, including strong sales of its anemia-fighting drugs, which are stealing market share from rival Johnson & Johnson, helped.
That explains why investors are expecting the company to grow its earnings this year between 33% and 40%. That's a daunting growth rate for such a large company -- especially because it's well above its 18% earnings growth last year, the 12% growth in 2001 and 6% growth in 2000. To a degree, Amgen must defy gravity: Once companies grow to the size of Amgen, they usually slow down, not speed up.

Management team effort

To deliver the growth Wall Street demands, Amgen is trying some new approaches. Most recently, Amgen conducted three "outreach" tours. All members of top management flew across the country to meet with scientists at up-and-coming biotech firms to try to persuade them to become partners. The upstarts were usually stunned, Sharer says, "that the whole management team came." Two more trips are planned.

One meeting has already resulted in a deal: Tularik, which is working on finding treatments for tumors, in May agreed to split research and future discoveries with Amgen.

A big reason that deal came together, says Chief Financial Officer Richard Nanula, was that Amgen showed it isn't just another big drug company. "No one here wants to work for a big pharmaceutical company," he says. "We're younger and can move quicker."

Amgen might be agile, but it also has deep pockets. Market conditions are another reason many young biotechs are open to Amgen's overtures. At the end of 2002, the most recent data available, a third of the 318 publicly traded biotech companies had one year or less of available cash, says Ernst & Young.

But it's not as if Amgen doesn't have competition. Other large pharmaceutical companies, also hungry for the next big thing, are courting small biotechs, though not with the same friendly approach Amgen uses. And that's creating an "arms race," says Eric Bolesh, senior analyst at Cutting Edge.

Many biotech firms want to be the next Amgen. For instance, Larry Stambaugh, CEO of Maxim Pharmaceuticals, refuses to join forces because he doesn't want to share what he sees as a giant demand for his cancer treatment. "We're going to get to the end of the process," he says.

Amgen isn't betting its entire future on partnerships. It also is trying to find another hit drug in its own labs. Last year, Amgen spent 20% of its revenue on research and development -- well above the levels spent by Merck, Pfizer and Johnson & Johnson, says Ernst & Young. In the third quarter, it spent 18.5% of revenue on R&D.
Titanic expectations

One of the most promising projects brewing in Amgen's labs is a bioengineered protein called GDNF. When first developed by Amgen, the protein was considered a failure. But later testing found that it actually works as a treatment for Parkinson's disease when poured directly on the brain.

Whether GDNF will be Amgen's next billion-dollar drug is impossible to tell. Amgen has time to find out, because the patents on its best-selling drugs, Epogen and infection fighter Neupogen, last another 10 years.
But expectations are for nothing short of a blockbuster, since Amgen has the history of coming up with them.
"If we were in the movie business, what we've done is like having Star Wars in one year and Lion King in another year," Nanula says, referring to the company's first two drugs, Epogen and Neupogen.

The question, though, is whether it can live up to Wall Street's high expectations and come up with biotech's equivalent of the No. 1 movie, Titanic.