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Amgen Blazed Biotech Trail, Earned A 165,233% Reward

Nowadays, Amgen is a gray eminence among biotechs. With more than $18 billion in sales last year, it's the kingpin in an industry that's turned into one of America's biggest innovation machines, and one of the highest-returning stock groups of the last few years.

It's hard to believe now, but back in the 1980s biotech was still a largely unproven business model. And Amgen (AMGN), founded in 1980 and public in 1982, was one of the first to show what could be done.

"When I think of the forefathers of biotech, I think of Amgen and Genentech," said Les Funtleyder, author of "Healthcare Investing: Profiting from the New World of Pharma, Biotech and Health Care Services." "(They were) able to go public early on and able to show a lot of success early on.

Industry watchers give much of the credit to Amgen's first chief executive, George Rathmann. Rathmann worked as a research chemist at old-school giants 3M (MMM) and Abbott Laboratories (ABT) before being recruited by venture capitalists for their new biotech startup.

Rathmann died in 2012, but in 1992 he spoke with IBD for a Leaders & Success profile. He emphasized the importance of investing in good science as the key to business success.

"The person who leads a good scientific team has to have tremendous respect for science. He has to be able to differentiate good science from bad. And then from there on, it's mostly a support function," Rathmann said at the time. "Get the guy the money, get him the facilities, and get him the resources to make it possible to sustain the effort all the way to the marketplace.

Rathmann was particularly interested in genetic engineering, which was then cutting-edge science. Pharmaceutical technology, then the dominant platform for drug development, is based on chemistry. But biotechnology is based on manipulating biological processes. Rathmann eventually zeroed in on the goal of cloning the erythropoietin gene, which stimulates production of red blood cells. He saw the potentially huge market in treating severe anemia brought on by kidney failure or chemotherapy.

The eventual result was Epogen, which launched in 1988 and became one of biotech's first blockbusters. Not surprisingly, it also launched a big stock run-up. From July 1988 to January 1992, the stock — which was already up sharply from its levels several years earlier — increased more than 17-fold.

Amgen shares have staged other big runs since then. Last month they hit an all-time high of 128.96 — up 165,233% from their 1984 low. That gain puts Amgen near the top of the greatest stocks of the past 30 years.

Amgen wasn't the only company interested in erythropoietin in its early days — in fact, there was something of a race to get a viable product out first. Rathmann was so conscious of the time pressure that he reportedly threatened to shut down the research of the eventually successful scientist unless he isolated the gene.

"He was resolute in his determination to be first to market with Epogen," said Michael King, a biotech analyst at JMP Securities. "I was a salesperson at the time, and I used to call on him and try to convince him, when the stock was exploding to new highs, to sell some of the stock and diversify. His answer was constantly no — and he was right. He built a great fortune for himself and his family by maintaining his vision and his focus on what Amgen could be.

Despite that commitment, in 1988 Rathmann decided to hand the reins over to his CFO, Gordon Binder, who shepherded Amgen through its greatest period of financial growth before leaving in 2000. Binder oversaw the launch of another blood-cell-stimulating blockbuster, Neupogen, in 1991, and rheumatoid-arthritis treatment Enbrel in 1998. Those three drugs together, along with a pegylated version of Neupogen launched in 2002, still provide more than two-thirds of revenue.

While all that was going on, biotechs started breaking out like measles all over the market. Funtleyder says Amgen not only helped prove the science of biotechnology but also the business model, whereby a company could lose money for nearly a decade, most of that time publicly traded, before bringing a product to market that eventually would earn investors a handsome return.

Amgen "sent a clear message that you could be a pure biotechnology company and succeed," said King. "In some ways, it also set expectations a bit too high. A lot of the early biotech companies picked the low-hanging fruit.

Nonetheless, the era produced a number of winners that went on to become big caps such as Alexion Pharmaceuticals (ALXN), Biogen Idec (BIIB) and Gilead Sciences (GILD), or were acquired by big pharmas. Although getting in on the ground floor of a young biotech is still risky, King says that "(the) model works much better now" due to the long years of experience.

In a 2009 interview with IBD, former CEO Binder pointed out that innovations in research technology have also helped speed biotech innovation.

"In the early days of Amgen, if you wanted to make a piece of DNA with 100 base pairs, it was a major project. Now a robot can make thousands a year without a human being doing anything except setting it up and turning it on," Binder said. "Over the years, we could make DNA faster, easier and cheaper. With that continuous improvement, our knowledge grew. It built on itself."