The Deconstruction Of Amgen

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Thinking about Life Sciences http://blog.aesisgroup.com Wednesday, August 22, 2007 The Deconstruction of Amgen

As some of you may be aware, Amgen announced last week an unprecedented set of layoffs numbering almost 2,600 employees (or about 14% of its overall workforce). “We are a company and a management group that faces reality [italics added] and deals with it, and we have a new reality to face today compared to when we planned this year …” Amgen CEO Kevin Sharer said in an investor conference call as quoted in Andrew Pollack’s New York Times article. What is going on? Amgen is largely a victim of its own success. It has been the darling of biotechnology ever since it introduced recombinant erythropoietin (EPO or Epogen® as Amgen calls it) back in 1988. Epogen® has billions in revenue to Amgen over the years. Back in 2004, BusinessWeek listed Amgen as one of the most “future-oriented” companies in the world. Back then, the company was quoted as devoting “just over half of its total outlays to future-oriented activities, split roughly equally between R&D and capital spending.” How was that massive investment being spent? In reality it would appear that Amgen has largely been living off the fruits of its illustrious past. When Lawyers Run the Show I have worked with many lawyers over the years and I greatly respect the expertise and professionalism of many of these legal colleagues. The purpose of this column is not to malign lawyers but rather to point out that businesses should view their legal resources as a means to an end rather than an end in itself. From observing Amgen over the years and even having personal experience extending back in the early 1990s, I have come to learn that Amgen – relative to many other biotech firms - is a very lawyer-driven company. Protecting and extending its EPO franchise has been, in my opinion the leading if not defining strategy for the company over the past two decades. As I wrote in a 2006 column – “Does Intellectual Property Matter” I cited two important reasons for the relative “decline” of intellectual property. These were: 1. Technology develops so rapidly that patent protection can in fact be obsolete even before it expires. Ever-increasing technology innovation will further accelerate this trend. 2. Medical technology increasingly is based on combinations of individual technologies. These technologies are often called convergent (or combination) medical technologies (CMT). In this case, the innovation that a company brings to the market may be only one (or a few) of the components of a device that utilizes inventions from a number of sources. In following Amgen over these years, it was dismaying to see the continuing litany of litigation that seemed to emerge from the Thousand Oaks headquarters. In 2002, for example, an Amgen lawsuit against Medicare was dismissed. 2005 saw Amgen file a lawsuit against Roche which an International

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Trade Commission judge later ruled in favor of Roche. Earlier this year, the Supreme Court dismissed a case brought by Amgen against Sanofi-Aventis and Shire Human Genetic Therapies. In 2004, Amgen won a seven-year legal battle against Transkaryotic Therapies. And this is just a sampling of the legal agenda over the past decade. The story has been a dizzyingly, mind-numbing circus of legal maneuvers. In the end, has Amgen won? Did it make any friends? Was its focus – as seemingly highlighted by BusinessWeek – really on the future? Again, I’ve known many brilliant lawyers and, indeed, admired many an innovative legal argument. But, to effectively “hand over the keys” for the company – as it has seemed over the past years – is not, in my opinion, the right way to run a life sciences company that ultimately lives or dies on the basis of its ability to truly innovate and bring new products to market. Blockbuster Candy, “Safety” Overreach This leads to the topic of “blockbuster candy.” The prevailing paradigm in the biopharma industry (albeit simplified) has been that biotechnology firms (like Amgen) research, develop and market fairly complex molecules (such as proteins). These complex molecules are used to treat relatively specific conditions and relatively small numbers of patients while the large pharmaceutical companies focus on smaller molecules with a corresponding “blockbuster” market. In the latter case, drugs such as statins, blood pressure medications, anti-depressives and so forth treat literally tens of millions of patients and even hundreds of millions worldwide. This is the blockbuster model and biotechnology companies have largely eschewed that approach. Apart from the unfavorable economics of the blockbuster model for biotech firms in which it is generally difficult to recover the high costs of developing and producing complex biologicals through the mass-market, one of the most significant challenges to blockbuster drugs is the safety issues that invariably arise when millions of patients are taking a drug. I wrote about this in a blog entry earlier this year “FDA Reform Redux: On Business Models, Regulatory Reform and Safety” in which the troubled blockbuster model intersects significantly with the recent controversies over drug safety as evidenced by the Vioxx and Avandia headlines. Most biotech firms have thus avoided expanding their specialized products into blockbuster status – tasting blockbuster “candy” as it were. A notable exception has been Amgen in which it has recently worked to expand its EPO indications into ever wider markets including pre-dialysis patients. As the New York Times article states: “The new reality is that sales of Aranesp and an older anemia drug, Epogen, are being buffeted by recent findings suggesting that overuse can worsen cancer, cause blood clots or heart attacks and perhaps hasten death.” I wrote about the safety challenges with EPO as far back as 1989 and summarized this more recently earlier in 2007. However, when a company has few other products in the pipeline (perhaps because of its focus on legal matters) and the current portfolio is at risk of expiring then I can see the “logic” of throwing a “Hail Mary” and hoping for the best in expanding the current product offering to mega-market proportions. It was a big risk - risky not just for Amgen but for patients as well. The results of this strategy are unfolding now. As I’ve written in these pages on a number of occasions, the take-away points are as follows: 1. Intellectual property is only one aspect of corporate value. Do not rely on that alone. 2. Partnerships – which is largely the anthesis of filing lawsuits – are what creates value. 3. Drug (and device) safety is important. Ignore it at your peril. 4. The blockbuster model is coming under considerable challenge – from many quarters. Companies that aim for a blockbuster product are – with very few exceptions – looking to the past rather than the future.

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The New York Times article ends with a particularly telling observation regarding the impending Amgen layoffs. “In San Francisco and San Diego, executives frequently leave established companies, like the industry pioneer Genentech, to start new ventures. But there are virtually no such spinoffs from Amgen.” Indeed, I can’t imagine the many reams of legal briefs that have been generated over the years as providing the intellectual property necessary to spin off new firms.

Ogan Gurel, MD MPhil [email protected] http://blog.aesisgroup.com/

Amgen biotechnology erythropoietin Epogen EPO innovation intellectual property Aesis Research Group Ogan Gurel

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