12:00 AM
Oct 27, 2014
 |  BioCentury  |  Strategy

Amgen on notice

How splitting up doesn't address Amgen's struggles creating value-driving assets

Amgen Inc. left itself open to the shot fired by activist investor Third Point LLC by failing to apply the ruthless discipline to pipeline pruning that other large companies have undertaken under new management regimes.

In an Oct. 21 letter to the hedge fund's investors, Third Point assailed Amgen's R&D output and proposed splitting the big biotech into two companies. The investor said new product launches haven't kept pace with Amgen's R&D spending, and the few drugs that have been launched have been unable to match sales of the legacy drugs that continue to account for the lion's share of Amgen's top line.

Third Point also took Amgen to task for its 2013 acquisition of Onyx Pharmaceuticals Inc. and its "bloated" cost structure (see "Other Gripes," page 3).

Third Point thinks the solution is to split Amgen into a Mature Products Co. and a Growth Products Co. whose combined share prices the firm said could rise to $249 in the next two years, an 80% increase over Amgen's close of $137.50 on Oct. 20.

Growth Co. would house Amgen's novel pipeline and the four drugs approved in the last decade. Mature Co. would have Amgen's legacy products along with its biosimilars business.

The smaller Growth Co. would focus on its pipeline and get more programs to market faster, Third Point argued, while Mature Co. would focus on efficiency and cash flow.

Third Point wouldn't disclose its specific stake in Amgen, but has been increasing its position and claims to be one of the biotech's largest shareholders. The fund confirmed reports that it holds over $1 billion of the stock, which would translate into over 6.9 million shares using Amgen's Oct. 21 close. According to SEC filings, Third Point held no position as of March 31; it reported owning 450,000 shares on Aug. 14.

Third Point and Amgen both declined to be interviewed for this story.

But four of five buysiders who spoke to BioCentury don't think the assets of Growth Co. and Mature Co. would be distinct enough to attract different investors. Moreover, several warned the duplication of manufacturing and commercial resources to support the separate companies could destroy value and wouldn't address what they said is the core problem: a pipeline that contains too many moribund programs in Phase I and II, and not enough differentiated Phase III programs to reduce dependence on the legacy drugs.

By themselves, the numbers suggest that trimming undead and uncompetitive programs could reduce Amgen's R&D spending. The biotech has 16 programs in Phase I, over half of which haven't advanced since 2010 or are not first-in-class. At least three of the latter are two years behind their competitors.

Further downstream, two cancer programs in Phase III and registration have reported data that don't clearly demonstrate clinical relevance, even if they have shown statistically significant results on their primary endpoints.

Indeed, Amgen's R&D productivity since 2002 has been mediocre relative to its spending. The company spends about as much on R&D as a percentage of revenues - about 20% - as Biogen Idec Inc. does now, and as Genentech Inc. did prior to its acquisition by Roche, and well above the 14% by bellwether Gilead Sciences Inc.

But Amgen hasn't launched a single new drug since the bone-building antibody Prolia/Xgeva denosumab in 2010, while Gilead and Biogen Idec each have launched five NMEs since the start of 2013 (see "Amgen R&D Comps").

Biogen Idec has worked hard to bring its R&D costs down and its productivity up since getting a new management team, including CEO George Scangos in 2010 and EVP of R&D Douglas Williams in 2011. One of the pair's first steps was to cut zombie programs, as well as active programs that had missed the competitive window.

EVP of Corporate Development Steven Holtzman, who also joined in 2011, also began restocking with first-in-class assets.

Amgen's current leadership, while still relatively new in their current roles, are company veterans rather than fresh blood.

In December 2011, Roger Perlmutter left his role as EVP of R&D to become EVP and president of Merck & Co. Inc.'s Merck Research Laboratories unit. Perlmutter was replaced by SVP of global development and CMO Sean Harper. Harper was previously VP of global regulatory affairs and safety. He joined Amgen in 2002 as VP of development.

Chairman and CEO Robert Bradway joined the company in 2006 as VP of operations strategy. He...

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