Strategic Report for Amgen, Inc. - Economics...
Transcript of Strategic Report for Amgen, Inc. - Economics...
Strategic Report for Amgen, Inc.
Harkness Consulting Innovation through Collaboration
Matthew Burrows Jason Cincotta
Rosanna Smart
April 14, 2008
Table of Contents
Executive Summary ………………………………………………..2 Company History ………………………………….………………...3 Competitive Analysis ………………………………………………8 Internal Rivalry …………………………………………………………. 9
Entry ………………………………………………………………………… 10
Substitutes and Complements …………………………………….. 10
Supplier Power ………………………………………………………….. 11
Buyer Power …………………………………………………............... 11
Financial Analysis ………………………………………………….12 SWOT Analysis ………………………………………………………16 Strategic Issues and Recommendations …………………..18 Appendix ………………………………………………………………22
Harkness Consulting 1
Executive Summary
After a difficult 2007 fiscal year, CEO Kevin Sharer retained Harkness Consulting to provide
strategic advice for Amgen Inc. The company currently faces a number of problems, including
stagnant revenues and earnings, and anticipated problems with a number of its main drugs.
Harkness assigned the project to its biotechnology team, including Matthew Burrows (project
leader), Jason Cincotta and Rosanna Smart. The company researched Amgen’s history, and
provided competitive analysis, financial analysis, and SWOT analysis. After gaining a better
understanding of the company and the competitive landscape of the industry, Harkness
identified key issues and made a number of strategic recommendations. The following
summarizes Harkness’s findings and recommendations:
Amgen Inc. is a biotechnology company headquartered in Thousand Oaks, California. Amgen
uses molecular biology and recombinant DNA technology to develop therapeutics. The
company has more than 14,000 employees, including top research scientists, who develop
innovative, high-revenue drugs.
Amgen has a number of highly profitable drugs. Its first big product, anemia drug Epogen, at
one point accounted for 25% of the entire biotechnology industry’s revenues. Since then, the
company has developed a wide variety of different products. Aranesp, like Epogen, treats
anemia. Neupogen and Neulasta treat neutropenia. Enbrel treats arthritis. Other products, with
substantially lower revenues, include Kepivance and Sensipar.1
Amgen is a leader within the biotechnology industry. Competitors include Genentech,
Genzyme, UCB, and Gilead Sciences. Amgen’s 2007 revenue, $14.7 billion, and net income, $3.2
billion, outdistanced all other biotech firms. The nearest competitor, Genentech, posted $11.7
billion in revenue and $2.8 billion in net income.2 Total industry revenues were approximately
$50 billion dollars in 2007.3
Analysis of Amgen’s financial ratios shows that the company performs comparably to other
firms in its industry. Its gross profit margin and net profit margin, 83% and 21%, respectively,
are slightly above the biotechnology industry averages of 69% and 14%.4 However, the stock
Harkness Consulting 2
has performed poorly of late, with shares falling from a high of $85 in 2005 to just over $40 in
recent weeks.5
Amgen’s declining stock price is due primarily to threats to its highly profitable ESA drugs,
Epogen and Aranesp. Recent research has suggests that these drugs may promote tumor
growth for as much as 10% of patients. If demand for these drugs decreases, the company’s
profitability and value will decline significantly. Another significant problem is that the
company’s revenues have grown much more slowly than the revenues of its peers. On the cost
side, Amgen spends a tremendous of money on research and development, which adversely
affects the company’s bottom line..
Despite recent stock price declines, Harkness Consulting’s biotechnology consulting division
feels confident about Amgen’s future prospects, assuming Amgen adequately addresses the key
strategic issues facing their business. In order to maintain revenues, Amgen needs to place most
of its short-term focus on ESA litigation and labeling, as it will be critical to the company’s
success to maintain the success of Aranesp and Epogen. If further research confirms the drugs’
safety, then Amgen should fight to maintain market share. However, if the drugs are truly
dangerous, then Amgen should consider long-term brand value and patient health by being
more cautious in marketing the drugs.
Amgen also has cost issues to address as well. Manufacturing can be done at a much lower cost
in places such as southeastern Asian and eastern Europe. Similarly, research and development
can be conducted more cheaply in India, with highly capable, low-cost research scientists.
Revenue growth can be maintained by continued patent protection and increased international
sales.
Company History
Biotechnology: Birth of an Industry
In the early 1970’s, biochemist Dr. Herbert Boyer and geneticist Stanley Cohen invented
recombinant DNA technology.5 Venture capitalist Robert Swanson, excited by this new
Harkness Consulting 3
development, teamed with Boyer in founding the world’s first biotechnology firm, Genetech
Inc. In 1978, the company cloned human insulin, and in 1979, it cloned the human growth
hormone. The following year, the company raised $35 million in a well-received initial public
offering. Since then, biotechnology has grown significantly, with multiple companies worth
billions of dollars, including Genentech ($80.1 billion), Amgen ($46.8 billion), and Genzyme
($19.6 billion).6 Biotechnology has been established as successful and highly profitable, and thus
is now being used by pharmaceutical companies as well. Biotech companies now must compete
directly with pharmaceutical companies, yet are well-poised to continue growing in the future.
Amgen’s Foundation
In 1980, four years after Genentech’s birth had spawned the new biotechnology industry, a
group of scientists and venture capitalists formed Applied Molecular Genetics (later Amgen)
with a $19 million private-equity placement from venture capital firms and two major
corporations. Amgen began operations in Thousand Oaks, California as a development
company for health care products based on molecular biology research.8 The former vice
president for research and development in the diagnostics division of Abbott Laboratories,
George Rathmann, served as the company’s CEO until 1986, when he was named chairman of
Amgen’s Board of Directors.
Under Rathmann, Amgen initially operated under the strategy of creating a few potentially
profitable products rather than conducting extensive research. The company operated near
bankruptcy until 1983, when Amgen scientist Fu-Kuen Lin cloned erythropoietin (EPO), a
human protein that stimulates red blood cell production in the human body. Amgen went
public the same year under the NASDAQ ticker AMGN with an IPO of 2,350,000 shares. The
company then formed a joint venture with Kirin Brewery in 1984 to develop and market Lin’s
discovery and another protein (G-CSF) that stimulates the immune system.
In 1989, the FDA approved Epogen (under brand name EPO) for the treatment of anemia. By
the end of June, it had sold nearly $17 million worth of the drug--its first product after nine
years in business. Legal battles with Genetics Institute (GI) over patent rights for EPO ensued,
but Amgen had the market to itself as GI's version of EPO awaited FDA approval.
Harkness Consulting 4
Meanwhile, as CEO Rathmann passed his title to CFO Gordon M. Binder, expectations soared
for Amgen's new drug, Neupogen (using G-CSF). In clinical studies, G-CSF performed well,
and the initial market for Neupogen was calculated to be twice that of Epogen. The hope was
that the drug's use would extend beyond chemotherapy patients to include others who would
benefit from increased immunization. Amgen received the first U.S. patent on recombinant G-
CSF in 1989, and the FDA issued approval for Neupogen in February 1991. Amgen retained full
domestic marketing rights to the drug, while Kirin Brewery had exclusive license for sales of G-
CSF in Japan, Korea, and Taiwan.
In March 1991, Amgen received more good news: A federal court of appeals issued the final
verdict favoring Amgen in the company’s ongoing struggle with Genetics Institute over EPO.
The judge blocked GI from selling its version of the anti-anemia drug, ruling that GI had failed
to demonstrate just how it made the purified form of EPO from human urine--the factor by
which GI's product differed from Amgen's. Thus, Amgen was given a legal monopoly over
domestic EPO sales, and Amgen stepped into the new decade with two heavy-hitting drugs in
its arsenal.
Amgen closed 1992 as the first biotech company to top $1 billion in sales and the only one to
near the status of independent global pharmaceutical company. In the fall of 1992, Amgen
tapped Kevin W. Sharer, president of the telephone giant MCI Communications Corporation, to
fill the post of president and COO, and in 1993, Amgen announced an expansion of its research
and development investment to nearly double what its 1992 expenditure had been. New
research focused on blood-cell growth factors, soft-tissue growth factors, and inflammation,
neurobiology, and nucleic acid therapeutics. The company also began exploring growth factors
to help heal burns, bone damage, and other injuries. As of early 1993, Amgen had more than 90
percent of the white blood cell stimulator market in the United States and no competition in the
red blood cell stimulator market. Neupogen's growth potential remained considerable. That
year, Amgen's revenues reached $1.4 billion, with Neupogen sales comprising 52 percent of this
figure.
Harkness Consulting 5
Throughout 1994, while the growth rate of Amgen's products continued to increase, the
company joined with Amcell Corp. in commercializing certain cell separation products
developed by Amcell in an extension of Amgen's clinical research with stem cell factor and
Neupogen. In December of 1994, Amgen also purchased Synergen, acquiring that company's
product pipeline, and was awarded a national medal of technology for development of Epogen,
the first biotechnology company and only one of five corporations ever to receive this highest
presidential tribute for the commercial application of technology.
Throughout this period of growth, Amgen's legal battles continued. In 1991, Amgen was
ordered to pay Johnson & Johnson's subsidiary, Ortho Pharmaceutical Corporation, $164
million in damages for selling Epogen in violation of their 1985 EPO marketing agreement
during the 19 months it took for Ortho to bring its product to the market.
However, in a turnaround case in 1992 Johnson & Johnson was ordered to pay Amgen $90
million for failing to comply with another aspect of the same 1985 agreement that stipulated
Johnson & Johnson was to develop two products from which Amgen was to receive royalties.
Another dispute with Johnson & Johnson over Amgen's 1985 licensing agreement with Ortho
Pharmaceutical ended when an arbiter ordered Amgen to pay about $200 million. Later,
however, Amgen won a legal battle with J&J over the rights to a promising anemia drug.
Recent Years
Work on Amgen’s product pipeline continued in 1999: The company ended development of
obesity and Parkinson's disease drugs after clinical trials produced discouraging results, but at
the same time it began human tests with partner Guilford Pharmaceuticals on a drug designed
to regenerate damaged nerve cells in the brain in Parkinson's disease patients. (Guildford and
Amgen ended the collaboration in 2001.)
In 2000 the firm resumed its battle to keep its stranglehold on the Epogen market: It sued
Transkaryotic Therapies and Aventis (presently Sanofi-Aventis) for alleged patent violations
over its Epogen product in both the US and the UK. Although it initially won its case in the UK,
that verdict was overturned in 2002, making Amgen vulnerable to competition before Epogen's
Harkness Consulting 6
patent expired in 2004. That year it won EU and US approval for Aranesp, an updated version
of Epogen.
Despite continued legal battles throughout the beginning of the decade, Amgen continued to
make acquisitions. In 2000, the company absorbed Kintex Pharmaceuticals Inc., and in 2002, the
company bought leukemia and rheumatoid arthritis drugs maker Immunex. In 2004, Amgen
bought Tularik Inc., a company involved in the discovery and development of oral medicines to
treat cancer, immunology and metabolic diseases; and in 2006 Amgen acquired Abgenix, a
manufacturer of human therapeutic antibodies. The company also bought private company
Avidia, a developer of treatments for inflammation and autoimmune diseases. Furthering its
acquisitive phase in 2007, Amgen privately bought Ilypsa, a biotech working in renal disease
care, and Alantos, which worked on therapies for rheumatoid arthritis and Type II Diabetes.
Unfortunately, Amgen’s acquisitive phase came to a halt in 2007, when the company disclosed a
study of patients who had cancer and anemia but were not undergoing chemotherapy showed
an increased risk of death on Aranesp.8 These results imply that Aranesp can actually cause
cancer in some patients, a damaging blow to one of Amgen’s most profitable products. Epogen
also took a significant hit in the world marketplace following reports the drug’s adverse effects
on the heart.9 As a result, Medicare restricted EPO’s use in chemotherapy patients, and the FDA
has requested changes in the drugs' warning labels. Those two drugs account for about half of
Amgen’s sales and more than half their profits, and the FDA’s actions pushed the stock to a
four-year low. After trading above $85 per share in 2005, Amgen has now sunk below $50.
The company has since announced restructuring plans in hopes of absorbing sales losses. While
Amgen has continued increasing investment in its manufacturing and research and
development operations and extending its sales reach in Europe and South America, the
company is scaling back on its expansion plans as part of the 2007 restructuring. In addition to
cutting its workforce by 12% to 14%, the company plans to rationalize its manufacturing
facilities, reduce R&D efforts, and lower capital expenditures by nearly $2 billion. It has also
delayed the development of a manufacturing plant in Ireland.
Harkness Consulting 7
As Democrats attempt to pass legislation helping generic drug firms create cheaper knockoffs of
Amgen’s products, and as the biotech industry becomes increasingly competitive, Amgen
strives to employ a broad range of technologies in developing new approaches to multiple
therapeutic systems. The company’s pipeline currently contains denosumab, an osteoporosis
drug they hope will contend with Merck’s Fosamax (losing patent protection on February 6,
2008).10 Study results from January show Denosumab to be more effective than Fosamax in
treating bone disease in the hips. Bret Holley, analyst for Oppenheimer and Co., projects $2
billion in annual peak sales for the drug. Stockholders seem to hold the same optimistic view as
Amgen’s stock has risen 4% since it released a strong earnings report on January 24.11
Overview
Over the course of its history, Amgen has grown from having no products (for its first seven
years) to being among the top biotechnology companies in the world. It has shown the ability
to grow both organically and inorganically. Amgen has developed highly successful drugs,
such as Epogen and Neupogen, in house. It has also been able to purchase other drugs, most
notably Enbrel, and leverage its marketing and distribution power to justify high purchase
prices. Once drugs have established market share, Amgen also devotes significant efforts and
resources to protecting such intellectual property. Litigation is standard within the
biotechnology industry, and Amgen is no exception. Its wins in major lawsuits against the
Genetics Institute and Johnson and Johnson, among others, allowed its drugs to maintain
market dominance.
Competitive Analysis
Amgen operates in the Biological Products industry, often referred to simply as “biotech,” and
coded SIC 2836 with the official title of “Biological Products (No Diagnostic Substances).” 12 The
industry is defined by the technology used to make the products, described in several U.S.
government publications as, “techniques that use organisms or their cellular, sub-cellular, or
molecular components to make products or modify plants, animals, and micro-organisms to
carry desired traits.” This microenvironment encompasses more than 1,300 domestic biotech
firms and many more international ones. Few of these firms can match the size of Amgen and
Harkness Consulting 8
its closest competitors. The companies in this space with 2006 revenues of over $1bn include
Genentech Inc., Genzyme Corporation, UCB (Belgium), Gilead Sciences, Serono (Switzerland),
Biogen Idec Inc., CSL Limited (Australia), Cephalon Inc., and MedImmune Inc.
Although Amgen is strictly a biotechnology firm, it also competes directly with firms in the
pharmaceutical industry, whose industry revenues, $140 billion, far exceed biotechnology
revenues, $50 billion.13 However, biotechnology industry is considered to have higher growth
prospects than the pharmaceutical industry, as reflected in the industry price-to-equity ratios,
28.6 and 24.1, respectively.14 Since pharmaceuticals are increasingly utilizing biotechnology to
develop new products, from a competitive standpoint, it is most accurate to define
biotechnology as a subset of the pharmaceutical industry. Pharmaceutical and biotechnology
firms that compete directly with Amgen include Johnson & Johnson, Hospira Enterprise B.V.,
Arzneimittel AG, Sandoz GmbH, Hexal Biotech Forschungs GmbH, Medice Arzneimittel Pütter
GmbH & Co. KG, Bayer HealthCare Pharmaceuticals, MedImmune Oncology, Inc., Chugai
Pharmaceuticals Co., Ltd., Sanofi-Aventis Novartis AG, Kyowa Hakko Kogyo Co., Ltd., Shire
Pharmaceutical Group Plc, Roche, Janssen-Cilag, Abbott Laboratories, and Genzyme
Corporation. Amgen shares a similar position with Genentech and Genzyme, which can be
considered its closest competitors in terms of size and structure. Amgen focuses primarily on
products for the treatment of cancer, inflammatory disorders, and metabolic and
neurodegenerative diseases. The industry is becoming increasingly international due to three
primary factors. First, there is a global market for the technologies developed by biotech firms.
Second, many countries, particularly in the European Union and Asia, are coordinating strong
governmentally supported biotech infrastructure. Third, all firms are subject to the international
environment with respect to regulation and intellectual property laws.
Internal Rivalry
Internal rivalry in the biotechnology industry is severely limited by the presence of strong
patents on developed technology. As such, one firm’s product will often be differentiated from
its competitors’ products. Amgen faces less internal rivalry than the vast majority of biotech
firms due to its size, which provides it increased purchasing power and a more global reach.
While there are more than 1,300 firms in the larger market space, there are perhaps as few as
Harkness Consulting 9
three that can be considered direct competitors. For many smaller firms, the process of capital
formation presents a significant hurdle to successfully competing in the space. At the other end
of the spectrum, Amgen competes with other biotech and pharma firms to acquire the most
promising small firms and technologies. Another aspect of internal rivalry is competition with
other firms for the right to develop products of NIH and other federally funded research when
the technological knowledge is brought to the private sector. Finally, non-price competition
exists through the development of new and superior products.
Entry
Entry into the biotech industry is facilitated through grants and venture capital. While entry on
a small scale is available to enterprising individuals, the risk of entry of an equivalently-sized
competitor is much less likely for a firm as large as Amgen. One potential risk is entry by large
pharmaceutical companies. This will become increasingly more popular as pharma experiences
reduced revenues and contracting margins in the future. An example of this crossover entry is
the recent expansion into agricultural biotech by Pfizer, Inc. The cost of developing new
technologies and the presence of patented technology limits the entry of firms from related
industries, even those that are well capitalized. Other barriers include prior technological know-
how, which is a stronger factor in more specialized fields, and relationships with biotech
researchers.
Substitutes and Complements
Direct substitutes are generally prevented by process and product patents for drugs. However,
one long-term threat biotechnology companies face is the development of cheaper generic
versions of their products. Patents last only twenty years, after which biosimilar generic drugs
enter the market and drive down profit margins substantially. Amgen’s products are highly
competitive, and are at a competitive advantage because of Amgen’s brand name and
marketing. However, close substitutes exist for most of Amgen’s drugs. Domestically,
substitutes include Johnson and Johnson’s Procrit (biosimilar to Aranesp) and Abott Labs’
Humira (Enbrel), as well as others that compete with Amgen’s low-revenue drugs.
Internationally, Roche, Janssen-Cliag, and Sandoz produce substitutes for Aranesp, and foreign
substitutes exist for Amgen’s low-revenue drugs.15 Amgen is in the strong position of having no
Harkness Consulting 10
direct substitutes in any market for two of its four high-revenue drugs: Epogen and Neupogen,
which comprise 17.4% and 30.0% of the company’s revenue, respectively.
Supplier Power
Supplier power is mostly felt in the market for labor. Competition between firms for the best
scientists and the right to develop their research presents an instance where supplier power can
be exerted. One development in supplier power will be a movement of production overseas by
some biotech firms, which will allow them to hire in a different market. On the materials side,
supply can be affected by other firms' patents, such as the patenting of a specific genome or
germ line, and through governmental regulation. A clear example of this is the U.S. regulation
of stem-cell based research. As such, supply is susceptible to the political situation of the
countries in which firms operate. This will almost certainly become a more prevalent issue as
the industry’s research becomes more politicized. Short-term supply of certain materials can
present difficulties as well. Some raw materials, medical devices, and components are
proprietary products of third parties. Finally, many smaller biotech companies do not possess
the distribution and marking capabilities necessary to bring their product to market, forcing
them to license it to a firm with better capabilities.
Buyer Power
Direct buyer power for the patient is curtailed by the nature of the U.S. healthcare industry.
Instead, buyer power is held by hospitals, doctors, HMOs, and governments, with their social
healthcare programs. The availability of a product to a patient is circumscribed by the decision-
making of these agents. Medicaid and Medicare make decisions about the safety and efficacy of
biotech products that can significantly affect demand. One example of this is recent studies on
the use of ESAs which have impacted the policy of these social medicine bodies. Even though
some of Amgen’s products do not suffer much substitute competition, the challenge of selling to
these groups can be difficult and comprises buyer power through the collective bargaining
aspect to the groups that are making purchasing decisions. As such, Amgen is well positioned
because it has established relationships and marketing experience that positions it well in
selling its products.
Harkness Consulting 11
Financial Analysis
Financial Overview
Amgen has been the top revenue-grossing firm in the biotechnology industry, and had revenue
of $14.7 billion in 2007. Net income for the past year was $3.2 billion. The stock price has slid in
recent months, but its market capitalization, $45 billion, is still among the top in the industry.
Like most biotechnology and pharmaceutical companies, Amgen’s financial outcome hinges on
the success of a few drugs. As seen in Table 1, ninety-five percent of Amgen’s revenues come
from merely four of its drugs. Amgen spends more than $3 billion on research and development
every year, as the development of a pipeline of possible future drugs is essential to a biotech
company’s future success. Amgen’s research and development expenditures are consistent with
the industry average of 20% of revenues.
Table 1
Source: Amgen 2007 10-K
Harkness Consulting 12
Financial Statement Analysis
Figure 1
Amgen Revenue and Income
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
2003 2004 2005 2006 2007 2008E
(bill
ions
)
RevenueNet Income
Amgen maintained double-digit growth in revenues from the beginning of the decade until the
end of 2005, but revenues have stagnated since and are expected to decrease in coming years.
Robust revenue and income growth in first half of the decade were due to two primary causes.
One was strong growth in Amgen’s ESA drugs, Aranesp and Epogen. The second was that
Amgen was able to leverage its marketing strength and brand name to increase sales of Enbrel,
the primary drug received in the 2001 takeover of Immunex. Net income has stayed relatively
steady within a range of $2 to $4 billion per year. Company estimates for 2008 may prove to be
overly optimistic, as revenues may drop dramatically due to problems with ESA drugs. The
estimate of a sharp increase in net income may also fail to come to fruition, unless the company
cuts expenses significantly. Recent expense reductions have been achieved primarily by cutting
research and development costs, but this may backfire in the long term.
Harkness Consulting 13
Figure 2
Biotech Profitability Ratios
0%10%20%30%40%50%60%70%80%90%
Amgen Genentech Genzyme GileadSciences
Industry
Per
cent
age Gross Profit Margin
Operating MarginNet Profit Margin
Amgen’s profitability ratios are similar to those of most of the other top biotechnology firms.
Amgen’s gross profit margin for 2007, 82.75%, is much higher than the S+P 500 average, 43.92%,
but is average within the biotech industry. For biotech firms, the actual cost of manufacturing is
relatively small, whereas research and development and marketing costs predominate. For
Amgen’s fiscal year 2007, the Cost of Goods Sold, 17.3% of revenues, was exceeded by its
Research and Development expense, 22.1% of revenues, and its Selling, General and
Administrative expense, 22.8% of revenues.
Amgen’s Balance Sheet is fairly standard for a biotech firm, closely resembling rivals such as
Genentech in most respects. The company has much financial flexibility, with a combined $7.1
billion in the highly liquid assets Cash and Cash Equivalents and Marketable Securities. This
gives Amgen the ability to acquire competitor firms and products. Amgen’s Goodwill, at $11.2
billion, is 7 times greater than Genentech’s. This is due to Amgen’s 2001 acquisition of Immunix
for $16 billion, when the company booked $9.8 billion in Goodwill.16. With more than $9 billion
in debt, and a debt to equity ratio of 0.51, Amgen is among the most levered biotech firms.
However, such figures do not indicate that the company is risk-taking, since Amgen currently
holds $7.1 billion in highly liquid assets, and another $5.9 billion in other current assets, and
thus can easily pay back its creditors. The ability to raise fund in credit markets is reflective of
Harkness Consulting 14
creditors’ confidence in Amgen, which is one of the only biotech firms to consistently generate
positive earnings.
Analysis of Amgen’s Statements of Cash Flows shows that the company has been quite effective
in generating cash from its operating activities. The company’s cash flows from operations in
2005, 2006, and 2007 were $4.9 billion, $5.4 billion, and $5.4 billion, respectively, and
corresponding free cash flows were $4.0 billion, $4.2 billion, and $4.1 billion. Net changes in
cash were approximately zero in recent years, as the company made billions of dollars in stock
repurchases. The company’s ability to generate cash from its business operations is clearly a
positive sign. Furthermore, manipulation of profits through accounting sleight of hand is highly
unlikely, as consistent, positive cash flows indicate that the company is in good financial health
and is economically viable.
Stock Price Analysis
Figure 3
Source: Google Finance
(IBB=NASDAQ Biotechnology Index, AMGN=Amgen)
Despite strong financial data, Amgen’s stock has floundered in recent years, especially in 2007.
Amgen’s stock sunk in early 2002 after the acquisition of Immunix for $16 billion, although part
of this decline may have been due to the market’s post-9/11 downturn. Amgen shares rose
sharply in mid-2005, coinciding with much-improved Enbrel sales, and continued EPO success.
However, 2007 proved a down year for the stock, driven by research showing that two of its top
Harkness Consulting 15
products, ESA drugs Epogen and Aranesp, may actually cause increased tumor growth and
earlier death for cancer patients. The FDA has announced that the two drugs will henceforth
have “black box” labeling. In addition, the United States government is considering reducing
Medicare subsidies for these products.
Figure 4
Source: Google Finance
(AMGN=Amgen, DNA=Genentech, GENZ=Genzyme, GILD=Gilead Sciences)
Investors’ bearishness concerning Amgen stock is evident in the company’s price-to-earnings
ratio, 14, which is half the industry average, 28. The reason for this is that investors are not
confident in Amgen’s earnings growth. Wall Street’s views of Amgen’s future are evident when
one notes that the Gilead Science’s market capitalization, $47 billion, exceeds Amgen’s market
capitalization, $44 billion, even though Amgen revenues were three times greater in 2007. As
shown in Figure 4, in the past year, Amgen’s stock has been outperformed by stock of
competitors Genentech, Genzyme, and Gilead Sciences. Analysts and investors feel that
Amgen’s uncertain future make it a risky purchase, as reflected in the company’s relatively low
stock price, which is now barely over $40 per share, down more than fifty percent from its $85
peak in 2005.
SWOT Analysis
Strengths
• Biotech industry leader, and large revenues give them market power
Harkness Consulting 16
• Strong brand name and marketing provide competitive advantage in selling drugs
• Established distributional relationships with healthcare providers allow for consistent
revenue
• Consistent ability to generate income and positive cash flows
• Large, promising pipeline of potential drugs
• Flexibility provided by liquid assets
• Perceived stability enables access to debt markets
o Unusual for a biotech firm
Weaknesses
• Revenue growth slowing
• ESA drug problems
• High research and development costs
• High cost of equity financing due to low stock price
• Direct substitutes for high revenue drugs
Opportunities
• Possibility of lower costs through research and manufacturing partnerships with East
Asian firms
• Room for international growth
o Foreign sales comprise only 20% of revenues, but are growing 17% annually
• More marketing and sales partnerships with foreign firms
o Current partnerships, such as with Japan’s Daiichi Sankyo, have proven highly
successful
Threats
• Possible changes to the U.S. healthcare system with political regime change
• Pharmaceutical industry concentrating more on biotech
• Studies revealing dangers of drugs
o “Black box” labeling and decreased Medicare and Medicaid funding are
legitimate possibilities
Harkness Consulting 17
• FDA denial of pipeline drugs
• Increased competition from foreign competitors, especially from Japanese and European
firms
• Circumvention or invalidation of patents
Strategic Issues and Recommendations
If Amgen places attention on a few key areas, it should be able to maintain its position as leader
of the biotechnology industry for many years to come. Most important will be to maintain
current revenues, especially for its ESA drugs. It can also increase its long-term future revenues
by expanding internationally and by maintaining a strong pipeline of potential drugs. Finally, it
can reduce costs by conducting more research and development in countries with lower labor
costs.
The company’s most pressing near-term issue is the safety of its ESA drugs, Epogen and
Aranesp. As the two drugs comprised $6.1 billion of Amgen’s $14.3 billion in revenue in 2007, a
drop-off in the drugs’ revenue would significantly impact the company’s financial health.
Harkness recommends that Amgen conduct further research on the two drugs. If concerns that
Epogen and Aranesp promote tumor growth are unfounded, then Amgen should fight
vigorously to maintain the drugs’ market share. The company should continue to lobby
Congress and the FDA. Much of Amgen’s revenue comes from Medicare and Medicaid
programs, so Congressional support of the drugs is important. FDA support is equally
important since “black box” labeling could prove costly. Amgen should not be miserly in its
lobbying and litigation expenditures, a possible yearly loss of one or two billion dollars in
revenues hinge upon the perception of toxicity of its ESA drugs.
However, if the drugs truly do promote tumor growth, Amgen would be best served to take a
cautious approach in marketing and distributing the drugs. On its website, the company notes
that it follows the noble mission of “us[ing] science and innovation to dramatically improve
people’s lives.” Much of Amgen’s value and competitive advantage is derived from its brand
name and prestige. If the drugs have harmful effects, then such information should be made
Harkness Consulting 18
known to prescribing doctors, who can determine on a case by case basis whether benefits
exceed the risks for their patients. Such policies, while financially hurtful in the short-run,
would allow the company to maintain its important distribution relationships with the medical
community and allow it to continue to leverage its greatest intangible asset, the Amgen brand
name. Continued use of a dangerous product would risk the public relations fiasco that Merrell-
Dow Pharmaceutical endured when it was revealed that the company had continued to sell its
Bendectin drug despite awareness that the product caused serious birth defects.
After resolving its ESA litigation, Amgen should consider external avenues for growth. Amgen
has a large amount of highly liquid assets at its disposal, including $2.0 billion in cash and cash
equivalents and $5.1 billion in marketable securities. Amgen should use this to purchase drugs
from other companies, or to purchase other biotech firms outright. This occurred in 2002 when
Amgen bought Immunix. The purchase was $19 billion, and Immunix shares, which had been
trading between $12 and $20 for much of the year, were acquired for $30 per share. While this
acquisition could be considered costly, it allowed Amgen to leverage its brand name and
distribution channels to significantly increase the revenues of its flagship arthritis drug, Enbrel,
from a few hundred million dollars in 2001, while part of Immunix, to $3.2 billion, as a top
Amgen drug, in 2007. Amgen has held more than $7 billion in highly liquid, non-core assets for
the past few years. As credit markets have soured, it appears that it is a buyer’s market for
acquisitions. Amgen should try to add another $3 billion revenue drug to its portfolio of major
drugs. After considering the premium paid for such a drug, such a purchase could add $500
million to $1.5 billion in net income per year in the long-run. In order to maximize shareholder
value, Amgen should either purchase high-potential drugs and companies or distribute cash to
shareholders through increased dividends or more stock buybacks.
Amgen should actively work to protect existing patents, and to secure patents for its pipeline
drugs. The company’s value is derived primarily from its proprietary technology, including its
products and processes. Amgen lists the value of its intangible assets, primarily patents, at a
book value of $4 billion, but the actual value to the company is even higher. Amgen has been
mostly successful in patent litigation in the past. Amgen would do well to continue vigorously
Harkness Consulting 19
fighting possible instances of patent infringement, such as the entry Roche’s anemia drug,
Mircera (biosimilar to Epogen), to maintain the market shares of its products.
Amgen would also do well to increase its international exposure. In 2007, only $2.9 billion of its
$14.3 billion in revenues came from non-U.S. markets. Although its primary potential markets,
the developed economies of western Europe and Canada, have socialized medical systems and
entrenched local firms, such as Roche, Janssen-Cliag, and Sandoz, Amgen still has untapped
revenue potential abroad. Amgen should obtain approval and patents for its drugs from more
foreign regulatory agencies, increase global sales staff, and actively initiate distribution to
foreign doctors and healthcare systems. Upside for potential foreign growth is limited by
preference towards local firms by European medicare systems, but expanded sales efforts
should allow Amgen to increase its non-U.S. revenues by approximately 20-25% in the near
future.
A more international approach to would also benefit Amgen in its manufacturing and research
and development by allowing the company to reduce costs. Amgen currently operates
manufacturing facilities in the United States, Puerto Rico, and the Netherlands. It might be
beneficial to move manufacturing to countries with lower labor costs, including eastern
European and southeastern Asian countries. Amgen might also benefit from outsourcing some
of its research and development processes to India, where scientists are well-educated but
command much lower salaries. There are relatively limited but positive gains to moving
manufacturing abroad, as cost of goods sold is a mere 17% of revenues, and much
manufacturing is already done in low-cost Puerto Rico. However, moving research and
development could allow Amgen to reduce its high research and development costs, over $3
billion annually, by up to $1 billion per year.
Overall, Amgen is a financially robust, innovative company that will likely continue to be an
industry leader for years to come. The company’s short term success hinges greatly on how
dangerous its high revenue ESA drugs, Aranesp and Epogen truly are. However, the company
should maintain a long-term perspective, and can maximize brand value and distribution lines
if it stays true to its objective of being a patient-oriented company. By expanding internationally
Harkness Consulting 20
and protecting patents, the company can maintain revenue growth and further increase its
bottom line by outsourcing production and research and development to low-cost countries. If
Amgen implements the aforementioned suggestions and mitigates its ESA problems, it will
continue to be an industry leader and should see a significant resurgence in stock price.
Harkness Consulting 21
Harkness Consulting 22
Appendix Amgen Balance Sheets (in millions) 2007 2006 2005 2004 2003
Cash and cash equivalents $ 2,024 $ 1,283 $ 1,840 $ 1,526 $ 837 Marketable securities 5,127 4,994 3,415 4,282 4286 Trade receivables, net doubtful accounts 2,101 2,124 1,769 1,461 1008 Inventories 2,091 1,903 1,258 888 713 Other current assets 1,698 1,408 953 1,013 558 Total current assets 13,041 11,712 9,235 9,170 7,402 Property, plant and equipment 5,941 5,921 5,038 4,712 3799 Intangible assets, net 3,332 3,747 3,742 4,033 4288 Goodwill1 11,240 11,302 10,495 10,525 9820
Other assets 1,085 1,106 787 781 804 Total assets $ 34,639 $ 33,788 $ 29,297 $29,221 $ 26,113 Accounts Payable 378 555 596 507 327 Accrued Liabilities 3,801 4,589 2,999 2,477 2129 Convertible Notes 1,778 ‐ 1,173 ‐ Other short‐term liabilities 2,000 100 ‐ ‐ ‐
Total current liabilities 6,179 7,022 3,595 4,157 2,456 Deferred tax liabilities 480 367 1,163 1,294 1146 Convertible Notes 5,080 5,000 1,759 1,739 2880 Other long‐term debt 4,097 2,134 2,198 2,198 200 Other non‐current liabilities 934 301 131 128 42 Commitments and contingencies ‐ ‐ ‐ ‐ ‐ Total liabilities 16,770 14,824 8,846 9,516 6,724 Preferred stock ‐ ‐ ‐ ‐ Common stock and additional paid‐in capital 24,976 24,155 23,561 22,078 19995 Accumulated deficit (7,160) (5,203) (3,132) (2,376) (667) Accumulated other comprehensive income 53 12 22 3 61 Total shareholdersʹ equity 17,869 18,964 20,451 19,705 19,389
Total liabilities and shareholders equity $ 34,639 $ 33,788 $ 29,297 $29,221 $ 26,113 Amgen Balance Sheets Vertical Common Size 2007 2006 2005 2004 2003 Cash and cash equivalents 5.8% 3.8% 6.3% 5.2% 3.2% Marketable securities 14.8% 14.8% 11.7% 14.7% 16.4% Trade receivables, net doubtful accounts 6.1% 6.3% 6.0% 5.0% 3.9% Inventories 6.0% 5.6% 4.3% 3.0% 2.7% Other current assets 4.9% 4.2% 3.3% 3.5% 2.1% Total current assets 37.6% 34.7% 31.5% 31.4% 28.3% Property, plant and equipment 17.2% 17.5% 17.2% 16.1% 14.5% Intangible assets, net 9.6% 11.1% 12.8% 13.8% 16.4% Goodwill 32.4% 33.4% 35.8% 36.0% 37.6% Other assets 3.1% 3.3% 2.7% 2.7% 3.1% Total assets 100.0% 100.0% 100.0% 100.0% 100.0%
Harkness Consulting 23
Accounts Payable 1.1% 1.6% 2.0% 1.7% 1.3% Accrued Liabilities 11.0% 13.6% 10.2% 8.5% 8.2% Convertible Notes 0.0% 5.3% 0.0% 4.0% 0.0% Total current liabilities 17.8% 20.8% 12.3% 14.2% 9.4% Deferred tax liabilities 1.4% 1.1% 4.0% 4.4% 4.4% Convertible Notes 14.7% 14.8% 6.0% 6.0% 11.0% Other long‐term debt 11.8% 6.3% 7.5% 7.5% 0.8% Other non‐current liabilities 2.7% 0.9% 0.4% 0.4% 0.2% Commitments and contingencies 0.0% 0.0% 0.0% 0.0% 0.0% Total liabilities 48.4% 43.9% 30.2% 32.6% 25.7% Preferred stock 0.0% 0.0% 0.0% 0.0% 0.0% Common stock 72.1% 71.5% 80.4% 75.6% 76.6% Accumulated deficit ‐20.7% ‐15.4% ‐10.7% ‐8.1% ‐2.6% Accumulated other comprehensive income 0.2% 0.0% 0.1% 0.0% 0.2% Total shareholdersʹ equity 51.6% 56.1% 69.8% 67.4% 74.3% Total liabilities and shareholders equity 100.0% 100.0% 100.0% 100.0% 100.0% Amgen Balance Sheets Financial Ratios 2007 2006 2005 2004 2003 AR Turn 7 7 8 9 17 Days AR 52 50 47 43 22 AP Turn 5 4 4 4 8 Days AP 67 100 97 88 45 Inv. Turn 1 1 2 2 4 Day Inv. 286 275 188 169 97 Net Cash Conversion Cycle 271 225 139 124 75 ROE 17.19% 14.97% 18.30% 12.09% 23.31% Growth in Book Value ‐15.79% ‐37.00% 20.73% ‐2.54% Book value 3,297 3,915 6,214 5,147 5,281 Debt to EBITDA 2.16 1.88 0.70 1.25 0.82 Notes [1] Goodwill increased from 97.2 to 9871 in 2002 with $9.7 billion purchase of Immunex for Enbrel arthritis drug.
Amgen Income Statement (in millions) 2007 2006 2005 2004 2003 2002 Sales revenues $14,771 $14,268 $12,430 $10,550 $8,356 $5,523 Cost of goods sold 2,548 2,095 2,082 1,731 1,341 736 Research and Development 3,266 3,366 2,314 2,028 1,655 1,117 Write‐off of acquired‐in process R+D 590 1,231 ‐ 554 ‐ 2,992 Selling, general and administrative expenses 3,361 3,366 2,790 2,556 1,953 1,462 Amortization of acquired intangible assets 298 370 347 333 336 155 Loss (earnings) of affiliates, net 4 (13) Other 728 ‐ 49 ‐ (24) (141)
Harkness Consulting 24
Total operating expenses 10,791 10,428 7,582 7,202 5,265 6,307
Operating income 3,980 3,840 4,848 3,348 3,091 (784) Interest and other income, net 309 309 119 85 113 144 Interest expense, net (328) (129) (99) (38) (32) (44)
Other non‐operating (income), net (19) 180 20 47 82 100
Income before income taxes 3,961 4,020 4,868 3,395 3,173 (684) Tax expense 795 1,070 1,194 1,032 914 707 Net income $ 3,166 $ 2,950 $ 3,674 $ 2,363 $2,260 $
(1,392) Earnings per share: Basic EPS $ 2.83 $ 2.51 $ 2.97 $ 1.86 $ 1.75 $
(1.21) Diluted EPS $ 2.82 $ 2.48 $ 2.92 $ 1.79 $ 1.68 $
(1.21) Shares used in calculation of EPS: Basic 1,117 1,176 1,236 1,271 1,288 1,154 Diluted 1,123 1,190 1,258 1,320 1,346 1,154 Amgen Income Statements Vertical Common Size 2007 2006 2005 2004 2003 Sales revenues 3.5% 14.8% 17.8% 26.3% 51.3% Cost of goods sold 17.3% 14.7% 16.7% 16.4% 16.0% Gross Profit 82.7% 85.3% 83.3% 83.6% 84.0% Research and Development 22.1% 23.6% 18.6% 19.2% 19.8% Write‐off of acquired‐in process R+D 4.0% 8.6% 0.0% 5.3% 0.0% Selling, general and administrative expenses 22.8% 23.6% 22.4% 24.2% 23.4% Amortization of acquired intangible assets 2.0% 2.6% 2.8% 3.2% 4.0% Loss (earnings) of affiliates, net 0.0% 0.0% 0.0% 0.0% 0.1% Other 4.9% 0.0% 0.4% 0.0% ‐0.3% Total operating expenses 73.1% 73.1% 61.0% 68.3% 63.0% Operating income 26.9% 26.9% 39.0% 31.7% 37.0% Interest and other income, net 2.1% 2.2% 1.0% 0.8% 1.4% Interest expense, net ‐2.2% ‐0.9% ‐0.8% ‐0.4% ‐0.4% Other non‐operating (income), net ‐0.1% 1.3% 0.2% 0.4% 1.0% Income before income taxes 26.8% 28.2% 39.2% 32.2% 38.0% Tax expense 5.4% 7.5% 9.6% 9.8% 10.9% Net income 21.4% 20.7% 29.6% 22.4% 27.0% Amgen Income Statements Compound Annual Growth Rate 2007 2006 2005 2004 Sales revenues 9.01% 16.29% 21.97% 38.21% Cost of goods sold 10.63% 10.01% 24.62% 53.39% Research and Development 18.80% 28.83% 18.23% 34.77% Selling, general and administrative expenses 9.76% 14.76% 19.54% 32.22% Amortization of acquired intangible assets ‐7.33% 5.41% 1.65% 46.48%
Harkness Consulting 25
Total operating expenses 19.30% 20.33% 20.01% 6.86% Operating income ‐9.39% 7.10% 25.23% Interest and other income, net 61.14% 90.66% 2.44% ‐23.22% Interest expense, net 82.02% 84.25% 77.28% ‐7.28% Other non‐operating (income), net ‐ 95.70% ‐50.58% ‐31.44% Income before income taxes ‐9.80% 8.82% 23.86% Tax expense ‐18.40% 1.82% 14.32% 20.78% Net income ‐7.17% 11.73% 27.52% Earnings per share: Basic EPS 16.16% 30.19% Diluted EPS 17.68% 31.90%
Consolidated Statement of Cash Flows Amgen (in millions of dollars) 2007 2006 2005 2004 2003 2002 Operating: Net income (loss) $ 3,166 $ 2,950 $ 3,674 $ 2,363 $2,260 $(1,392) Depreciation and Amortization 1,202 963 841 734 687 447 Write‐off of acquired R+D 590 1,231 ‐ 554 0 $ 2,992 Stock‐based compensation expense 263 403 106 45 0 ‐ Tax benefits of employee stock plans ‐ 315 203 287 252 Deferred income taxes 136 (540) (95) 57 (190) 175 Property, plant, and equipment impairments 404 Other non‐cash expenses 81 (81) 60 116 99 25 Cash provided by (used in) changes in assets and liabilities: Trade Receivables, net 38 (355) (308) (453) (256) (122) Inventories (109) (561) (370) (175) (168) (102) Other current assets (119) (6) (47) (85) (33) (5) Accounts payable (181) (24) 72 179 74 11 Other accrued liabilities (70) 1,409 663 159 825 (32)
Cash generated by operating activities $ 5,401 $ 5,389 $ 4,911 $ 3,697 $ 3,585 $ 2,249 Investing: Cash paid for acquisitions $ (697) $(2,167) $ ‐ $ 115 $(2,037) Cash received for product sales $ 390 Purchases of property, plant, and equipment (1,267) (1,218) (867) (1,336) (1,357) (659) Purchases of marketable securities (5,579) (5,386) (9,597) (6,869) (5,320) (2,953) Proceeds from sales of marketable securities 5,073 3,065 9,835 6,606 3,339 1,622 Proceeds from maturities of marketable securities 454 785 603 208 371 778 Other 24 (210) (33) (123) (243) (6)
Net cash used for investing activities $(1,992) $(5,131) $ (59) $(1,399) $(3,210) $(2,864) Financing: Repurchases of common stock $(5,100) $(2,000) $(4,430) $(4,072) Issuance of debt 3982 Repayment of debt $(1,840) (653) (1,175) ‐ (123)
Harkness Consulting 26
Issuance of notes payable 439 ‐ 1,989 2,765 Repurchase of notes payable ‐ ‐
Issuance of common stock 277 528 1,087 453 529 428 Repurchase of common stock (1,801) (1,420)
Issuance of preferred stock ‐ Issuance of warrents 774 ‐ ‐ Other 13 97 (20) 21 24 6
Net cash generated by financing activities (2,668) (815) (4,538) (1,609) (1,372) 1,778 Total cash generated (used) $ 741 $ (557) $ 314 $ 689 $ (997) $ 1,163 Cash and cash equiv., beginning of year $ 1,283 $ 1,840 $ 1,526 $ 837 $1,852 689.1 Cash and cash equivalents, end of year $ 2,024 $ 1,283 $ 1,840 $ 1,526 $855 $1,852 Cash Flow Ratios Free cash flow $ 4,134 $ 4,171 $ 4,044 $ 2,361 $ 2,228 $ 1,590 Cash flow return on assets 16% 17% 17% 13% 14% Cash flow return on sales 37% 38% 40% 35% 43% 41% Cash Flows excluding Stock Repurchases $ 5,841 $ 1,443 $ 4,744 $ 4,761 $ (997) $ 1,163
Endnotes _____________________ 1 Amgen FY 2007 10-K. 2 http://finance.google.com/finance?q=amgn&btnG=Search 3 http://premium.hoovers.com/subscribe/ind/fr/profile/basic.xhtml?ID=174 4 http://stocks.us.reuters.com/stocks/ratios.asp?rpc=66&symbol=AMGN.O 5 http://www.gene.com/gene/about/corporate/history 6 http://finance.google.com/finance 7 http://finance.google.com/finance 8 http://premium.hoovers.com/subscribe/co/history.xhtml?ID=ffffrtjtyfysskjrsj 9 http://www.forbes.com/2007/02/16/amgen-cancer-pharmacuticals-biz_cx_mh_0216amgen.html 10 Smith, Aaron. “Big Pharma’s Leaky Pipeline.” CNNMoney.com. 1 February 2008. 11 Aenlle, Conrad. “Amgen Finds Growing Up Isn’t So Easy.” New York Times. 18 August 2007. 12 http://premium.hoovers.com/subscribe/co/factsheet.xhtml?ID=12623 13 http://finance.google.com/finance?q=amgn&btnG=Search 14 http://stocks.us.reuters.com/stocks/ratios.asp?rpc=66&symbol=AMGN.O 15 Amgen FY 2007 10-K. 16 “Amgen to Buy Immunex.” CNNMoney.com. 17 December 2001.
Harkness Consulting 27