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AMGEN, WITH NUMBER ONE HOSPITAL PRODUCT EPOGEN, IS NUMBER ONE ON WALL STREET IN 1990; LIMELIGHT CARRIES BENEFITS AND RISKS FOR COMPANY AND BIOTECH SECTOR

Executive Summary

Amgen's multi-front successes in 1990 in the marketplace, in the courts, in the arbitration chambers, at FDA and on Wall Street have moved the company into the enviable, but perhaps uncomfortable, position of the biotech industry bellwether. The key to Amgen's recognition by the investment community is the continuing progress of the company's first product, Epogen (recombinant erythropoietin). That product's quick sales climb has created an annualized U.S. volume now calculated at about $ 280 mil. Highlighting its dramatic first-product story, Amgen has begun calling Epogen the leading U.S. drug product for the hospital/institution market, surpassing Roche's Rocephin antibiotic. Like a shot in the arm, Epogen invigorated the financial community, creating a very big year for Amgen's stock. Closing up 37-3/4 points after a two-for-one split, the stock price gained 154% for the year, and the stock began appearing more frequently in the investment portfolios of large buyers. From 125 institutions owning about 34% of the company's stock in January, institutional holdings in Amgen climbed to about 45% (in the hands of 180 firms) at the end of the year. While the clinical benefits to dialysis patients and future possibilities for Epogen are impressive, Amgen probably won more respect from Wall Street for its tough and determined management of the product and its exclusive market position. The company's refusal to take royalty-free cross-licensing as an answer in its protracted suit-countersuit versus the combined forces of Genetics Institute/Chugai/Upjohn exhibited a temerity, and continued cash flow, admired by Wall Street. A March order from Boston federal court to pursue a licensing arrangement was tied up by Amgen for the rest of 1990 on appeal, with no clear signs of a resolution in the short term. Similarly, Amgen's ability to stretch out the arbitration proceedings with Ortho for the introduction of that firm's brand of Amgen erythropoietin also protected Epogen's exclusive position. Ortho is now preparing to bring its brand Procrit to market in February ("The Pink Sheet" Jan. 7, p. 5), but Amgen has gotten the headstart and name recognition in the dialysis population to protect that segment against product switching. In its most recent quarterly report Amgen claimed to be serving 82% of the appropriate dialysis patient population and appears to have a fairly firm grip on that chronic use group. The arbitration agreement also establishes an outside monitoring procedure to assure that neither Amgen nor Ortho strays into the other's defined patient populations. The tough legal battles have clearly taken a Herculean effort by Amgen and probably burned out one top legal exec at the company. The secretary/general counsel resigned after the start of the appeal process in the Genetics Institute case. While difficult, the legal fights did not consume all of Amgen's management attention. Showing regulatory skills, Amgen is quickly moving its second product, Neupogen (G-CSF), through the FDA review process. The product received an advisory committee recommendation for approval within one year of the filing of the product license application to treat febrile neutropenia as an adjunct to chemotherapy. The Neupogen PLA, in fact, moved almost as rapidly during 1990 as Amgen's pursuit of the supplemental filing for Ortho for Procrit. That filing was required by a court ruling that Amgen had to speed up efforts at FDA on Ortho's behalf. Holding the featured spot in Wall Street's eyes can be lucrative for a company and its execs. Amgen Chairman George Rathmann's holdings, for example, increased in value from about $ 45 mil. at the end of 1989 to about $ 114 mil. at the end of 1990. Amgen's year-end valuation passed the $ 2 bil. mark, putting the company about on par with Sanofi, according to a recent calculation of the top 50 drug companies' valuations by the independent analysts, Mehta & Islay ("The Pink Sheet" Jan. 7, p. 26). Flush with capital and the ability to raise new funds, Amgen has been able to continue to fund its internal development projects and even take on outside investment ventures -- agreeing to put $ 26 mil. into Regeneron, a Tarrytown, N.Y. firm in the neurotrophic field. The limelight, however, can also be a straining and wearing position as demonstrated by Genentech. That firm experienced the shocks of being the lightning rod for industry prospects and performance during the first decade of the biotech business. Hoffmann-LaRoche's controlling purchase of Genentech (announced in March and completed in early September) essentially took that company out of active play. The purchase was openly described at the time of the deal as an effort to take the pressure of Wall Street scrutiny off of Genentech's next generation of development projects. Genentech's stock is still traded, but Roche's formula for further purchases is setting a market stability Genentech hasn't had since its flamboyant burst onto the stock market in 1980. With Amgen in the lead, the NASDAQ pharmaceutical and biotechnology stocks had a strong year. The "F-D-C" index average of 37 issues in the pharmaceutical field gained almost 23%, comparable to the performance by the major NYSE and AMEX-traded drug companies. A separate "F-D-C" index of those issues climbed 21%. Both performances were well ahead of the market in general, where the Dow 30 Industrials were off 4.34% for the year and the S&P 500 down 6.56%. Paced by Centocor (up 78% to 44-1/2 for the year) and Medco Cost Containment (up 66% to 30-1/4), a group of 11 issues with diversified operations in pharmaceuticals, diagnostics and services related to the drug industry performed even better. That group turned in a 42.6% jump in 1990. In addition to Amgen, two other index issues more than doubled their stock price during 1990: The Liposome Company (rebounding 1- 7/8 points or 136% from 1989) and Enzon (closing at 8-3/8 up 123.3%). The Liposome Company's (TLC) gains put the firm near the top of its trading range for the year and helped the firm recover from a drop in 1989. A year ago, prospects for the firm were confused by an aborted merger between Liposome Company and Liposome Technology. TLC ended the year with three intriguing reports: (1) the November initiation of Phase II clinicals of an injectable liposomal aminoglycoside antibiotic for use against mycobacterium avium intracellulare (MAI); (2) the mid-December signing of a development agreement with the German firm Schering AG to put a Schering non-ionic contrast media agent in a liposomal formulation for liver cancer imaging; and (3) a license agreement with Pfizer for TLC D-99, an anti-cancer drug being tested on breast cancer patients in Canada. The MAI indication, an AIDS-related disease, is designated an orphan project by FDA but could lead to a product to treat up to about one-quarter of the AIDS patient population, TLC estimates. The firm has recently described a development schedule that might get the product to market by 1993. Phase III trials are set to begin in the middle of this year. TLC calculates a $ 155 mil. market for the MAI product by mid- decade. The onset of MAI is more likely the longer patients with AIDS survive (at four years, about 75% of AIDS patients can develop the infection). Current treatments prolonging the lives of AIDS patients could contribute to the increased frequency of MAI in the next several years. The Schering AG deal could add payments of "over $ 15 mil." to the firm's funding in addition to future royalties. The liver imaging agent will be aimed at a market currently put at $ 100 mil. TLC claims that the Schering AG product will justify a premium if it makes it to market because it allows scans to be taken four hours after injection instead of within minutes. Schering AG is the parent of Berlex Labs in the U.S. TLC is also developing a liposomal amphotericin B (antifungal) with Bristol- Myers Squibb and a liposomal doxorubicin. Vestar, a competitor of TLC in the race for liposomal amphotericin B, ended the year with the first regulatory approval for the product, in Ireland. Alex. Brown analyst David Webber issued a Dec. 26 buy recommendation for the stock saying that the approval "validates the product and raises confidence in approvals elsewhere." The relatively inactive stock (averaging 4,600 shares exchanging hands per day) traded in the range of 1-5/8 to 4 during the year and closed at 3, off 3/4 from its 1989 close. Liposomes and dosage forms, in general, were a good way to penetrate Wall Street's naturally skeptical defense systems in 1990. With the models of Alza and Elan among the AMEX and NYSE- traded drug issues, the Street was on the prowl for drug delivery stories. A transdermal patch development firm, Cygnus Therapeutic, is attempting to ride the wave of interest with a pending initial public offering. The red herring preliminary filing for that offering was issued just before Christmas (see box, p. 17, and related item, T&G-4). The intensity of interest in delivery systems was demonstrated by a large oversubscription for a spin-off offering by Elan in late November. That offering, designed to sell stock worth $ 43 mil. was over-subscribed by $ 21 mil. The public markets were kinder to biotech/pharmaceutical companies in 1990 than in 1989. In early December, Hambrecht & Quist Managing Director David MacCallum estimated that about $ 1.3 bil. had been raised from about 75 public offerings. In 1989, the money was a bit tighter, with only $ 1 bil. being raised, according to MacCallum. Biotech private placements slipped to around $ 300 mil. in 1990 from $ 500 mil. the year before. Liposome Technology (up 1 point, 80%) and Enzon also exhibited the ability of new formulation firms to find a way past the Wall Street/wallet barrier. Liposome Technology's movement was aided by purchases by a major shareholder. Biotech investor David Blech purchased more than 50,000 shares late in the year bringing his position in the firm to almost 37%. In December, the firm said it received FDA clearance to start Phase II trials in January for its liposomal amphotericin B. Enzon found broader and stronger support for its polyethylene glycol formulation work. The firm was pegged as a comer after its March 21 approval for Adagen, a PEG formulation of an enzyme replacement for adenosine deaminase deficiency ("bubble boy" disease). Within a week, Enzon closed a major private placement, selling 1 mil. shares of preferred convertible stock and netting the firm $ 23.7 mil. for future cash needs. That cash influx represented all of cash and investments on hand at the end of the company's June 30 fiscal year and should be enough to fund activities "until early 1992," the company predicts. In mid-1989, Enzon transferred to Sterling development rights to PEG formulations of superoxide dismutase and catalase. Most of the agreements in 1990 went the other way with new development partners coming on-stream to let Enzon work on formulations of major products. The company, for example, signed a preliminary agreement with Schering in April for a PEG version of alpha interferon (Intron A). The final touches to that deal were completed in mid-November. On its own in the U.S., Canada and the USSR (and in conjunction with Erbamont elsewhere), Enzon is developing PEG-L- asparaginase for use in acute lymphoblastic leukemia. NCI's Division of Cancer Treatment has said it will help with further clinical trials. The company has said that it is close to filing a PLA application with FDA. Enzon projects that its form of asparaginase will become the firm's "first major revenue-producing product" as a formulation improvement over existing asparaginase. Enzon also had direct contact with Amgen and picked up some of its notoriety during 1990. In January, the two firms agreed to work on a PEG formulation of Amgen's next product coming through the pipeline, G-CSF (Neupogen). Enzon notes in its annual report the potential large market for G-CSF, topping $ 500 mil. in the U.S. in 1994. That type of prediction and the close attention that it draws exemplify the double-edged sword facing Amgen and the rest of the biotech sector. Put shortly: If Amgen stumbles, the industry could slip with the leader. Sustaining expectations after a big year like Amgen's in 1990 is a tough task. The job is made particularly difficult when financial analysts are forced to predict ahead into uncharted treatment areas with new product uses and new types of competing products. Amgen has noted that there are 250,000 new chemotherapy patients in the U.S. each year. It may, however, be difficult to estimate the appropriate patient population for Neupogen. The extent of Neupogen's eventual applications is broad. Amgen has noted that G-CSF may be used in situations where antibiotics are now used prophylactically: pre-surgery, gunshot wounds, serious accidents. That kind of broad usage can raise expectations very high. Amgen will have to walk the familiar tightrope for biotech companies of maintaining the financial community's interest without over-promising. With Neupogen, Amgen will also face a pricing predicament of broad application to the biotech business during the next several years. The firm will have to address the question of who will pay for high costs of the new product. Although the pricing question is often viewed as primarily a "how much" decision, it is becoming more and more a challenge of defining who can pay. Pricing on Epogen was relatively simple from the point of view of who would pay. Amgen essentially had to calculate and justify a price that the federal government would tolerate. The coverage of end-stage renal dialysis under a specific Medicare authority made it easy to define the payer. Amgen did a good job on its cost effectiveness background for Epogen before approval; and the firm has interacted effectively with Congress and HCFA over questions on the price -- including the appropriate dosage size. When Neupogen reaches the market, Amgen is likely to have a high-priced product and will be up against a more fragmented and private sector customer class. Wall Street is used to the biotech business bringing on premium-priced items, but the private third parties may be less willing to absorb the cost than Medicare was for Epogen. The firm has to be watchful of charges of cost- shifting to a small segment of cancer patients and yet will have to try to balance that against Wall Street's high expectations. Asked about pricing at the recent Hambrecht & Quist conference in San Francisco, Amgen CEO Gordon Binder declined to specify a price "until we are cleared to sell the product." Noting that the firm has again done its cost effectiveness work upfront, Binder said: "You have to look at the different markets." He pointed out that the firm is anticipating the indigent patient question. "We will have a special program for indigent patients as we do for Epogen; we don't want to be in a situation where these patients are not able to get our product." Genetics Institute, Amgen's adversary in court, had a strong market year, despite the setback of the lingering court proceedings and a second-place position to Immunex in the GM-CSF development race. The stock (closing at 41) was up 20% in price for the year after doubling the year before. Early in the year, analysts were touting the stock on the belief that it would break Amgen's EPO monopoly in the U.S. Early in the second quarter, for example, Shearson Lehman's Teena Lerner reported the company's prediction that Genetics Institute's EPO (Marogen) "is close to U.S. approval" and that its GM-CSF would be launched worldwide in early 1991. By the end of the year, the fact that both predictions had failed to materialize did not seem to bother the analysts too much. A Nov. 20 Robertson Stephens report noted that Genetics Institute is receiving between $ 8-$ 9 mil. in royalties from Chugai's sale of EPO in Japan and the firm's European partner, Boehringer Mannheim, appeared on track to capture about 15%-20% of a $ 150-$ 175 mil. European market. The Robertson Stephens report predicted 1993 EPO royalties to Genetics Institute from all of its licensees of about $ 63 mil. and noted that the firm may be in for a windfall if Amgen and Ortho are required to pay it royalties. Robertson Stephens was hoping for a resolution to Amgen's appeal "in early 1991." When Immunex was first to get to a FDA advisory committee with its GM-CSF product, Leukine, one of GI's partners in that field, Schering-Plough discounted the long-term importance of being first. Schering-Plough Chairman Robert Luciano told a Nov. 14 analyst meeting that the absence of Leucomax from the agenda for FDA's Dec. 13-14 review of GM-CSF and G-CSF was a "disappointment . . . but hardly fatal." The market, however, was clearly impressed by the ability of Immunex to get to an advisory committee. The Seattle-based company was up 86% on top of a 61% increase the year before. At its second advisory committee review in December, Immunex received an approval recommendation for autologous bone marrow transplants in non-Hodgkin's lymphoma and acute lymphoblastic leukemia. A further indication for bone marrow engraftment failure is pending a re- analysis of data ("The Pink Sheet" Dec. 17, p. 20). The first advisory committee review for Leukine in early August was also generally favorable and recommended that the product be moved under a Treatment IND, but the market wanted a clear-cut recommendation and dropped the stock in the early autumn before a large November recovery. Many of the biotech firms are getting their first large market run-ups, but one of the recent favorites is an old name -- Biogen. The stock rose 73% in 1990 (hitting an all-time high of 29-3/8 during December and finishing the month and year at 29). That gain was on top of 135% jump in 1989. The firm is now valued at over $ 650 mil. after looking nearly moribund as recently as three years ago. Biogen is quickly emerging as one of the two biotech firms with a strong base position in products to treat and prevent hepatitis. Biogen is developing a steady stream of royalties from hepatitis B product licensees ($ 20 mil. in 1990) and a potentially large stream from approvals for Schering-Plough's Intron A against hepatitis C (pending at FDA) and hepatitis B (possible later in 1991). Intron A royalties are already approaching $ 20 mil. annually for Biogen, and the company notes with enthusiasm that "most analysts see the market for alpha interferon as exceeding $ 1 bil. in the next several years." The company receives relatively high royalties in the "mid-teens" from Schering. Biogen's total revenues for 1990 are expected to be about $ 60 mil. With the cash inflow and better spending controls, the firm wound up 1990 with about $ 100 mil. in cash. In the new product development area Biogen is using its cash and resources more sparingly. For example, the firm is cooling its ardor for soluble CD4 until certain questions about in vitro binding are resolved. Biogen Chairman James Vincent told Hambrecht & Quist during the second week of January that the firm has temporarily reduced the size of the clinical research program on CD4. He also noted that the development of CD4, like all AIDS products, is being complicated in the clinical stage by FDA's parallel track trial program. Biogen's two top development projects currently are Hirulog, a small protein developed from a leech protein called hiradin, and the revived beta interferon project. The leech protein derivative is being designed and studied as a novel anti-coagulant. The firm recently reported "very positive" Phase I results. Vincent noted that beta interferon appears more interesting now that it has been shown to work on different receptor sites from alpha interferon. U.S. clinical trials on a number of indications are set to begin during the first months of this year, Vincent predicted. Also growing in the hepatitis field is Chiron, from its position in hepatitis C screening and its original work with Merck on the recombinant vaccine. Weathering a drop in November when the market reacted to Abbott's blood screening contract with Red Cross, Chiron netted 15-1/2 points and 54% gain for 1990. In 1989, the stock jumped 107%. The stock got some wide visibility at the beginning of 1990 when it was featured as the stock of the week in Investor's Daily on Friday, Jan. 4. Chiron's vaccine program, through the Biocine joint venture with Ciba-Geigy, includes a hepatitis C vaccine in early development. The company's most advanced vaccine projects are in herpes and AIDS. In November, Chiron reported starting Phase II trials on the herpes vaccine in patients experiencing frequent recurrent infections. The firm noted that "at the same time, we are continuing development of a more comprehensive vaccine formulation that we are planning to enter into clinical trials in 1991." Chiron also noted that it has filed an IND, in conjunction with NIAID, to begin clinical testing of its AIDS vaccine. Chiron predicted that Phase II efficacy trials could begin in 1991. Merck's AIDS vaccine partner, Repligen, turned in a 25% gain (2 points) in 1990 trading. Repligen and Merck have developed into strange bedfellows during the development project: Merck treating its work with the secrecy of a Manhattan Project and Repligen keeping up a steady stream of news to the investment community. The Merck/Repligen AIDS vaccine is behind several other vaccine candidates in terms of the starting date of clinicals because of Merck's conservative approach to the project. Repligen recently reported that it expects to complete preclinicals with chimpanzees during 1991. During 1990, one of the questions in Repligen's AIDS vaccine development program centered on the need for an adjuvant agent to supplement the vaccine's immunogenicity. On Jan. 7, Repligen announced a licensing deal with MedImmune for a "recombinant bacterium which may add an infected cell-killing capability to the virus-neutralizing capability now being research by Merck and Repligen." MedImmune is the new name for Molecular Vaccines, Inc., one of the start-up companies funded by Healthcare Ventures I and headed by former Praxis Biologics exec Wayne Hockmeyer. ISSUES GAINING 30% OR MORE IN 1990 TRADING NEW OFFERINGS FOR BEGINNING OF 1991 Cygnus Therapeutic Systems (CYGN) Offering: 3 mil. shares common stock Underwriters: Hambrecht & Quist and Robertson, Stephens Red Herring: Dec. 21 Estimated Price Per Share: $ 9.00 to $ 11.00 Estimated Revenue From Offering: $ 27.4 mil., assuming price of $ 10.00 per share. Use of Proceeds: For capital expenditures and general corporate purposes, including R&D and working capital. Background: Founded in April 1985, by Gary Cleary, PhD, (chief technical officer) the company specializes in transdermal drug delivery systems. Like Alza and Elan, Cygnus relies upon other pharmaceutical companies to fund product development. The company currently has two products in Phase III, a nicotine smoking cessation patch and a fentanyl patch for pain management, and has recently concluded deals with Warner-Lambert, Sanofi and Merck. PaineWebber agreed to a $ 5.5 mil. deal in September to finance R&D into transdermal delivery of six generic products and to investigate a non-invasive blood monitoring device for diabetics. As of September 30, the company had $ 281,443 in cash and cash equivalents with net losses of $ 3.7 mil. for the first nine months of 1990. Marcam Corporation (MCAM) Offering: 1.5 mil. shares common stock Underwriters: Hambrecht & Quist and Alex, Brown & Sons SEC Prospectus Filing: Jan. 3, 1991 Last Reported Price Per Share: $ 25.00 (Dec. 31) Estimated Revenue From Offering: Company will not receive any proceeds from stock sale. The offering is being made by seven of the principal stockholders, including Morgan Stanley, Battery Ventures, and the officers and directors of the company. Background: Incorporated in Massachusetts in 1980, Marcam is a service business supplying applications software and services for process manufacturers such as the food, chemical and pharmaceutical industries. Pharmaceutical clients include Rorer, Johnson & Johnson, and SmithKline Beecham. The company's sales are tied to its Prism product line, software addressing manufacturing, logistics and financial management. An August 1990 initial public offering of 900,000 shares netted the company $ 11.3 mil, which is being used for working capital and general corporate purposes. The company reported a net income of $ 4.1 mil. for the year ended September 30, and had $ 11 mil. cash and cash equivalents. Charts omitted.
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