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Amgen and Johnson & Johnson

When less than perfect is just right.

The Case: In evaluating a potential deal with a large biotech or pharmaceutical company, small biotech firms need to consider more than just the size of the cash infusion. Though many observers initially thought Amgenís 1985 agreement with Johnson & Johnson was a giveaway, time has proven it to be not only a necessary tactic for Amgenís survival, but also an ongoing financial success for both parties.

One-quarter of all public biotechnology companies are currently trading below cash value. Ordinarily, the situation would make licensing deals, and even mergers and acquisitions, urgent and easy. But although the financial size of such deals has increased, the number of them has declined for three years straight. That may be changing soon. Without new cash or, more importantly, without new collaborations with big pharmaceutical or big biotech companies, many of the biotech firms that went public or received generous private equity between 1998 and 2000 will not survive (see “Capital Markets,” page 26 of the Journal, Issue 2). Historically, firms that cut deals often prosper in the end—even if those deals seem like sellouts at first.

Consider the fabled 1985 license agreement between Amgen and Johnson & Johnson for the anemia treatment Epogen (epoetin alfa). Many accused Amgen of selling the farm for a puny $10 million in cash and rights. But not only was this the best deal Amgen could have made at the time, it was the only deal it could have made. According to sources close to the deal, Amgen tried in vain to create a bidding war for Epogen, but only J&J was interested, and it was a take-it-or-leave-it offer.

A cash-strapped startup
Barely four years old then and fatally short of cash, Amgen had just two drugs in development, Epogen and Neupogen (filgrastim), an anti-infective used to stimulate the immune systems of some cancer patients. Most analysts said that Neupogen had decent prospects, but they doubted that Epogen would amount to much. Amgenís CEO and cofounder, George Rathmann, Ph.D., knew that his firm could not develop either product on its own. Those familiar with the company at the time say that he was under enormous pressure from investors, who had been oversold on both the promise of the two drugs and the time it would take to commercialize them.

Another source of financial worry at Amgen was an ongoing lawsuit over the commercialization of Epogen. The product was not actually discovered at Amgen; it is a synthetically produced recombinant version of the naturally occurring protein erythropoietin, better known as EPO, which is produced in the kidney and stimulates production of red blood cells. It had been studied for decades before a University of Chicago scientist discovered, in 1976, how to produce EPO for therapeutic purposes. Amgen was not the only company interested in EPO; Genetics Institute (now part of Wyeth) also wanted to commercialize it. Both companies figured out, at roughly the same time, how to manufacture it reliably in industrial quantities, thus setting off a bitter patent dispute that lasted through the í80s. Each firm continued to develop its own version of EPO while legal skirmishes siphoned away precious capital and focus.

In a fit of desperation, Amgen forged a deal with Ortho Pharmaceutical, a unit of J&J that had been keen on developing its own EPO production technology. In exchange for that small, but lifesaving, infusion of $10 million, J&J gained worldwide rights to sell EPO under the name Procrit. Amgen was left with the U.S. rights to EPO solely for kidney dialysis patients; this starved Amgen of more than two-thirds of the potential global market for EPO. As a result, Dr. Rathmann was pilloried in the financial press and on Wall Street for giving away too much.

Blossoming into a $4 billion company
Amgen and J&J subsequently became bitterly estranged over licensing rights and have fought each other in and out of court for years over EPO. (The latest chapter in this epic battle came to a close last October, when an arbitrator awarded Amgen $150 million in damages.) But the deal likely saved Amgen, and J&J played an important role in Amgenís and EPOís subsequent success, because Amgen never could have commercialized EPO on its own.

Last year, Amgenís EPO sales produced $2.3 billion, while J&Jís global sales of Procrit produced $4.3 billion. All told, this makes it by far the most financially successful biotech product in history. Without the reliable cash that EPO has generated over the years, Amgenís shareholders would not have enjoyed triple-digit returns, and Amgen most likely would not have been in a position last year to acquire Immunex, maker of the highly popular arthritis drug Enbrel (etanercept), or this year to secure 21% of Tularik, a small biotech firm that uses a gene regulation approach to drug discovery. Nor would it have been able to raise easily $2.5 billion, as it did in 2002 in a convertible debt offering, for other acquisitions. Amgen is now the healthiest biotech firm in the world, with $4 billion in cash.

Epogen Sales; Copyright © 2003 Acumen Sciences, LLC, All Rights Reserved.As a case study for todayís frustrated biotech upstarts, the lesson of Amgenís deal with J&J is simple: impoverished biotech firms need to produce a profitable product to avoid financial ruin, and that may mean cutting a deal that, on the outside, seems less than perfect.

In a sellerís market, such an agreement may seem like a short-term solution that cripples the firmís long-term prospects. Yet Amgen proved itís not the size of the deal, or how good looking it is, that matters, but what you do with it that counts. Every biotech startup has delusions of grandeur, dreams of going it alone, partnering on their own terms. The smart firms know when to keep that bravado in check. Even the precious few upstarts that still have cash on hand these days realize that they, too, are not immune to plunging valuations, delisting, layoffs, and bankruptcy. Whatís more, when capital markets finally do reopen, most likely only the new and the novel will be rewarded. Smart firms do deals when they can.
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Case Studies

» Amgen and Johnson & Johnson

AstraZeneca

Genentech

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Sitting Pretty
Amgen and Johnson & Johnson each profited handsomely last year from Epogen and Procrit.

RANK DRUG 2002 WORLDWIDE
SALES (BILLIONS)
1 Lipitor $7.97
2 Zocor $5.58
3 Prilosec $4.62
4 Procrit $4.27
5 Norvasc $3.85
6 Zyprexa $3.69
7 Prevacid $3.16
8 Paxil $3.08
9 Celebrex $3.05
10 Zoloft $2.74
11 Intron A $2.74
12 Vioxx $2.53
13 Advair $2.45
14 Neurontin $2.27
15 Pravachol $2.27
16 Epogen $2.26
17 Fosamax $2.25
18 Cozaar $2.19
19 Risperdal $2.15
20 Effexor $2.07
SOURCE: Med Ad News
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AstraZeneca

Full disclosure works to a companyís advantage.

The Case: A cancer drug that should have been a slam dunk nearly crossed the foul line. So the pharmaceutical company turned, successfully, to a new game plan.

Instead of the blockbuster it had hoped for with Iressa, AstraZeneca found itself with a promising new drug that worked well in just a subset of patients. It also had lethal side effects for a few patients, and competitive cancer treatments from the same class of drug were experiencing their own problems. The companyís response to these setbacks, however, was to adjust its expectations and orchestrate a strategy for U.S. Food and Drug Administration approval that would at least get the drug to patients who had no other recourse—a plan that would require expensive Phase IV clinical trials.

In the end, the companyís adroit handling of the drug may open up a whole new realm of cancer treatment that goes far beyond the productís initial indication. By rising to the challenge of Phase IV trials, which are required for accelerated approval, AstraZeneca shows other companies a way to open a door that might otherwise have been shut.

 

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Case Studies

Amgen and Johnson & Johnson

» AstraZeneca

Genentech

Genentech

Easing reimbursement to doctors is as important as making effective medicine.

The Case: Reimbursement support for doctorsí offices—making sure that physicians donít lose money when they administer certain drugs—may not be glamorous, but it helps sales. Implementing previous lessons, Genentech has excelled in this area with one drug in particular, by working with doctors and insurance companies to assure physicians that reimbursement claims will be processed swiftly and with minimal hassle.

As many administrators can attest, some of the most complicated procedures in a medical practice donít occur between doctor and patient, but between collection office and health plan. The situation is especially acute for medicines like vaccines and, increasingly, cancer therapies, which must be administered in a doctorís office or other health care setting. The practice must first buy the medicines from the drug company, then wrangle to be reimbursed by the insurance company. The less hassle a practice anticipates, the more likely it is to purchase and administer a particular product. If doctors worry that their practice may lose money by administering a certain medicine, they tend to use competing medicines or to recommend alternative treatment. Thus, drug companies that facilitate reimbursement can expect higher sales of their products.

Genentech is famous for developing innovative medicines, from recombinant insulin to Rituxan (rituximab), the first monoclonal antibody for cancer,but these breakthroughs donít fully explain the companyís success. Genentech has also been innovative in reducing barriers that might keep its products from physicians and patients, specifically by supporting practicesí reimbursement efforts.

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Case Studies

Amgen and Johnson & Johnson

AstraZeneca

» Genentech

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