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ORTHO's $ 164 MIL. EPO ARBITRATION AWARD WILL GIVE J&J SUBSIDIARY ABOUT ONE-THIRD OF AMGEN's TOTAL EPO SALES TO DATE; AMGEN HAS $ 225 MIL. IN CASH RESERVES

Executive Summary

Ortho will be getting about one-third of Amgen's total erythropoietin revenues to date in a $ 164 mil. damage award announced July 1. The award by Chicago arbitration judge Frank McGarr has been calculated to compensate Ortho for damages "resulting from the delay of its entry into the U.S. market [for Epoetin alfa] for 19 months." The 19-month timeframe runs from the June 1989 introduction of Amgen's Epogen until the U.S. launch of Ortho's brand Procrit in mid-January of this year ("The Pink Sheet" Jan. 7, p. 5). The damage award resolves a 1985 development and supply agreement between Amgen and Ortho that went awry. The arbitration documents are not public so it is not known how McGarr arrived at the $ 164 mil. damage figure. However, the amount roughly approximates about 40% of Amgen's EPO sales during the 19-month period of lost sales. The award figure can be interpreted to indicate that the judge felt that Ortho would have developed its segment of the split market at a slightly slower pace than Amgen -- or that the two companies would have split the market 60% (Amgen) and 40% (Ortho) through the first 19 months of marketing. Under the original Amgen-Ortho agreement, the two companies were to split the U.S. market for chronic renal failure patients into dialysis and non- dialysis segments. Ortho's target, the non-dialysis market, has been estimated at about 100,000 patients; the dialysis market has been put at about 10% higher (110,000). According to Amgen's running commentary on the number of patients that it has been treating, the firm has not reached beyond the approved patient population. Most recently, Amgen says in its just-released annual report that over 90,000 dialysis patients in the U.S. are "now benefiting" from Epogen use. The damages are being held in abeyance pending resolution of arbitration on the other part of the same Ortho-Amgen agreement, which concerns IL-2 and hepatitis B. Amgen is claiming in the second part of the arbitration dispute that Ortho has not been diligent in its development of Amgen's interleukin-2 and a biosynthetic hepatitis B vaccine. The former has been reported in Phase II and the latter product in Phase III trials. McGarr has set a hearing on that issue for Sept. 9. Amgen announced July 1 that it will take a charge to after-tax earnings of $ 88.5 mil. for the quarter ended June 30 as a result of the EPO arbitration award. The company noted that it has a reserve of approximately $ 225 mil. in cash and equivalents and an unused $ 100 mil. line of credit. "The ultimate payment of damages in this arbitration is not expected to have a material adverse impact," the company said. Ortho purchases its Epoetin alfa for the U.S. market from Amgen and must pay Amgen 5% of its net sales of the product in the U.S. Under the supply agreement, after Ortho has recovered R&D costs, it will be required to pay Amgen 10% of U.S. sales. The marketing of the Ortho drug and Amgen's Epogen is monitored by an independent auditor to ensure that Procrit is sold only to physicians involved in AIDS therapy or non-dialysis chronic renal failure treatment and that Epogen is marketed only to the dialysis market. Ortho is expected to file imminently an NDA for Procrit for chemotherapy-induced anemia. Separately, Amgen said it filed a motion July 1 with the Boston federal court asking for a reinstatement of a permanent injunction against Genetics Institute, which licenses EPO to Chugai-Upjohn and Boehringer Mannheim in Europe, and an escrow account for proceeds from Genetics Institute's past sales of EPO to Boehringer Mannheim. According to Amgen, the "injunction was vacated and the escrow was released on April 25, 1990" due to appeals by both companies to a federal circuit court. A February 1989 preliminary injunction required Amgen to deposit $ 21 mil. in escrow and Genetics Institute to deposit up to $ 15 mil.

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