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Amgen-Immunex Deal Needs to Start Making Sense

Now that Amgen (AMGN - Get Report)appears very close to acquiring Immunex (IMNX) for about $17 billion to $18 billion, the toughest task ahead for the biotech companies will be convincing Wall Street that the deal makes sense.

And to do this, Amgen has to sell investors on the future growth potential of Enbrel, Immunex's top-selling rheumatoid arthritis drug. If you believe, as Immunex executives claim, that Enbrel's annual sales can grow more than fivefold to $5 billion a year in the next five years, then this deal looks good. Recently, Amgen forecast 20% earnings-per-share growth over the next five years. If that goal has to be set aside in the near term, then gaining access to a super-growth drug such as Enbrel makes earnings dilution more palatable.

But if you're someone who sees serious competition from other drugs on the horizon making such rosy growth targets unattainable, then Amgen is spending a whole lot of coin to get not much in return.

As rumors of the deal circulated Thursday, Amgen shares fell $4.20, or 6.5%, to $60.19, while Immunex shares rose $2.51, or 10%, to $26.96.

Enbrel really is the key to this deal, because the drug is Immunex's chief moneymaker and engine for near- to mid-term growth. Launched just three years ago, Enbrel is expected to rack up sales of $750 million this year, despite well-publicized supply constraints that have limited sales growth. Immunex has taken steps to boost the manufacturing capacity for Enbrel, and the company now forecasts 2002 sales to reach $900 million to $1.3 billion. Immunex is expected to earn 29 cents a share this year and 30 cents in 2002, according to Thomson Financial/First Call.

Amgen is the world's largest biotech company, with annual revenue topping $4 billion, powered by two blockbuster drugs: anemia-fighter Epogen and anti-infection agent Neupogen. The company also recently won regulatory approval for Aranesp, an improved version of Epogen that it also believes has billion-dollar sales potential. The company is expected to earn $1.19 a share this year and $1.43 in 2002.

Can Enbrel Go Deep?

Amgen executives will likely argue that adding Enbrel to this lineup creates the biotech version of the New York Yankees' Murderers' Row.

Looking forward, Amgen and Immunex will argue that Enbrel hasn't even hit its full stride yet. In July, Immunex filed an application with the Food and Drug Administration, seeking to have Enbrel approved for the treatment of psoriatic arthritis, a chronic inflammatory disease that causes pain and swelling of the joints as well as irritating, scaly red patches on the skin.

Approval, which could come as early as January, is very important for two reasons: First, it opens an opportunity to target another 250,000 patients who suffer from psoriatic arthritis. Second, and maybe more importantly for the company, dermatologists could start prescribing Enbrel for patients suffering from psoriasis -- a multi-billion dollar market unto itself. Immunex is testing Enbrel on psoriasis patients and probably won't get FDA approval for a few more years. But approval in psoriatic arthritis could be all the evidence dermatologists need to begin using the drug on an off-label basis for psoriasis.

"If Amgen and Immunex can get Enbrel used off-label in psoriasis, I think the drug's growth rate could really soar," says one hedge fund manager. He believes that this, combined with growth in rheumatoid arthritis, could enable Enbrel to achieve the bullish $5 billion sales forecast, and help Amgen sell its expensive takeover of Immunex.

Doubters take a look at this scenario and roll their eyes in disbelief. For starters, there is some evidence suggesting the Enbrel growth story relies as much on witchcraft as does Harry Potter.

At a recent rheumatology conference, some hedge fund managers who spoke to say their checks with doctors suggest that the rheumatoid arthritis patient waiting list for Enbrel isn't really that long -- maybe two weeks. If true, this means that Enbrel demand is essentially being met, and that sales won't explode as expected when Immunex increases manufacturing capacity next year. Enbrel is also facing stronger-than-expected market share competition from Remicade, a rival drug marketed by Johnson & Johnson (JNJ), these hedge fund managers believe.

In 2003, Abbott Laboratories (ABT)is expected to gain FDA approval for its own rheumatoid arthritis drug, dubbed D2E7, that has some advantages over Enbrel. Current testing of D2E7 suggests the drug can be given to patients via injection once a week or once every two weeks. Enbrel, by comparison, must be injected by patients twice a week.

And as for the lucrative psoriasis market, Immunex is not likely to get official FDA approval for Enbrel in this disease until 2005. Counting on significant off-label use might be wishful thinking, critics say, especially because Biogen (BGEN)is expected to have a psoriasis drug approved and on the market next year. Genentech (DNA) should have its own psoriasis drug on the market in 2003.

Then there's the issue of dealing with American Home Products, which owns 41% of Immunex and has rights to Enbrel sales outside the United States. If the Amgen-Immunex merger falls apart, this could be the reason.

"Look, Enbrel sales are going to grow, but they're not going to grow enough to justify the price Amgen is paying," says one hedge fund manager. "We were really hoping that Amgen was going to buy Biogen, because buying Immunex doesn't really make any sense."

If and when Amgen and Immunex do announce their deal, it's doubters like these who will have to be turned around.

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