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JANUARY 28, 2005
By Arlene Weintraub No Easy Cure for Amgen's Ailment The drug giant has often beaten its early gloomy estimates, but recent Medicare changes make it tough for growth to rebound strongly
On Jan. 27, Amgen (AMGN ) CEO Kevin Sharer took the podium at the company's annual meeting for Wall Street analysts and joked about the Big Apple's frigid weather. But the reception inside the room for the chief of the world's largest biotech was no less frosty. Sharer admitted that after a year of stellar performance -- during which revenues jumped 26%, to $10.6 billion, and earnings climbed 24%, to $3.1 billion -- sales growth for 2005 might not climb out of the "low single digits." Earnings for the Thousand Oaks (Calif.) company will likely struggle to hit Wall Street's $2.85-a-share forecast. Disappointed investors pushed the stock down 3.12%, to $61.58, in trading that day. Amgen has a storied history of starting out the year on a pessimistic note and then surprising Wall Street by beating estimates. But Sharer will have to clear some high hurdles -- in both the short and long term -- if he's to pull off a similar feat this year (see BW Online, 1/28/05, "The Prognosis from Amgen's CEO"). MEDICARE CUTS The biggest immediate challenge facing Amgen is Medicare. In January the U.S. government dropped the reimbursement rates paid to doctors when they administer drugs to Medicare patients in their offices. Several Amgen products fit this category, including its blockbuster anemia treatment Aranesp, which is given largely to patients with kidney disease and cancer. Amgen executives and industry watchers fear that the reimbursement cuts may spur doctors to change the way they treat Medicare patients. Smaller players who have a tough time making a profit might simply refuse to see as many Medicare patients, sloughing them off on hospitals or larger practices that may not have the infrastructure in place to handle a sudden influx of patients. The worst case scenario: Doctors might opt to treat Medicare patients with less expensive drugs -- or maybe not at all -- if they decide a condition, such as anemia, isn't serious enough to worry about. Amgen execs have been working closely with physicians to help manage the Medicare changes, but Sharer says it's just too early to predict how they'll affect Amgen's sales and profits. RAISING THE BAR Ultimately, says Sharer, Amgen will have to work harder to prove that Aranesp and its other drugs are vital treatments. And not just because Medicare has grown stingy. "All [insurers] will get more demanding and more interventional. Drugs will have to be shown to be of economic value," he says. "The bar will be raised." Amgen hopes to add value to Aranesp by designing studies to assess whether treating anemia protects patients from heart attacks. Data from outside sources suggests a connection, but definitive proof needs to be established. Amgen's greatest hope -- and traditionally its biggest challenge -- lies in its ability to diversify its product portfolio. A number of drugs in its pipeline have the potential to achieve that. The one analysts and investors will be watching most closely over the next two years is AMG 162, a treatment for osteoporosis, a bone disease. The drug works by suppressing the body's ability to re-absorb bone. WAITING FOR RESULTS Amgen plans to test the medication in several patient groups, including post-menopausal women, men, and patients with rheumatoid arthritis. Roger Perlmutter, executive vice-president of research and development, says the outfit plans to enroll 10,000 patients in the first leg of trials -- by far the largest research program Amgen has ever undertaken. But Wall Street will have to be patient waiting for the results. Because Amgen has to prove that AMG 162 reduces the number of bone fractures in patients with osteoporosis, the company will literally have to wait for a statistically significant number of patients to suffer fractures. "These are event-driven trials," Perlmutter says. Hence, no significant data on the drug is expected this year. Beyond AMG 162, Sharer sees blockbuster potential in Amgen's growing oncology franchise. One of its most promising projects is AMG 706, which is being tested to treat cancerous gastrointestinal tumors. Similar to Genentech's (DNA ) hit colon-cancer drug Avastin, AMG 706 cuts off the blood supply to tumors. In animal trials it seems to have a broader mechanism of action than Avastin does. Says Sharer: "We hope it's better than Avastin." The drug is currently in Phase 2 trials. ROOM TO GROW For his part, Sharer hasn't given up hope of pulling out double-digit revenue gains this year. In fact, Amgen's biggest hit drugs -- Enbrel for rheumatoid arthritis and psoriasis, Neulasta for preventing infections in patients on chemotherapy, and Aranesp -- still have plenty of potential for market growth, since many patients with those diseases still aren't treated with any drugs. To tap into that potential, says Sharer, "We're going to bust our butts. I wouldn't count us out." Maybe not, but it's clear 2005 will be a year of watching and waiting to see if Sharer can lay down a strong enough foundation to return Amgen to the 20%-plus growth rates investors have come to expect of the biotech powerhouse.  Weintraub writes about science and medicine for BusinessWeek
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