Lessons from the deconstruction of Amgen

As some of you may be aware, Amgen announced last week an unprecedented (at least for that charmed firm) set of layoffs numbering almost 2,600 employees or about 14 percent of its overall workforce. As Kevin Sharer, Amgen's CEO, said in an investor conference call: “We are a company and a management group that faces reality and deals with it, and we have a new reality to face today compared to when we planned this year.”

What is going on?

Interestingly, Amgen is a victim of its own success. It has been the darling of biotechnology ever since it introduced recombinant erythropoietin (EPO) back in 1988. EPO has been the product for Amgen bringing it billions in revenue over the years.

In 2004, BusinessWeek listed Amgen as one of the most “future-oriented” companies and indeed 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.” The question is what that massive investment was being spent on because in reality - the reality that Mr. Sharer refers to - 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 and I greatly respect the expertise and professionalism of many of the legal colleagues that I have had the pleasure of working with. 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.

Observing Amgen over the years, and indeed even 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 the defining) strategy for the company over the past two decades.

As I wrote in a column titled, “Does Intellectual Property Matter,” in addition to highlighting the importance of freedom-to-operate (as compared to traditional patent protection), 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 the past few years, it was dismaying to see the continuing litany of litigation that seemed to emerge from the Thousand Oaks headquarters. In 2002, an Amgen lawsuit against Medicare was dismissed. The year 2005 saw Amgen file a lawsuit against Roche, and an International 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, I've 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 and “safety” overreach

Which 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, which are used to treat relatively specific conditions and relatively small numbers of patients. Meanwhile, 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, it is generally difficult to recover the high costs of developing and producing complex biologicals. One of the most significant challenges 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, which recently has worked to expand its erythropoeitin (EPO) indications into ever wider markets including pre-dialysis patients. As the New York Times article noted:

“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 erythropoeitin as far back as 1989 and summarized more recently earlier this year. However, when a company has few other products in the pipeline (perhaps because of a 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 (and risky not just for Amgen but for patients as well) and the results are unfolding now.

As I've written in these pages on a number of occasions, the take-away points are as follows:

• Intellectual property is only one aspect of corporate value. Do not rely on that alone.

• Partnerships - which is largely the anthesis of filing lawsuits - are what creates value.

• Drug (and device) safety is important. Ignore it at your peril.

• 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.

Like many of you, I will be following this Amgen story closely.

Previous articles by Ogan Gurel

• Ogan Gurel: Crazy like a Google? With GE-Abbott deal scrapped, could Google be next buyer?

• Ogan Gurel: Reforming FDA: Focus on safety, let market judge efficacy

• Dr. Ogan Gurel: FDA: Tortoise, hare, or something else?

• Dr. Ogan Gurel: Who is minding the Innovation Gap?

• Barriers will not stop convergence of medical technologies