The key to understanding Amgen these days comes down to understanding a simple reality of the recent Centers for Medicare and Medicaid Services decision that will restrict reimbursement on two of the company's anemia drugs: It could have been worse.

 

That's not much solace for the company or its shareholders, but these days, what seems constitute a good day for Amgen is when things don't go as badly as they could have.

 

That's not to say the company is happy that CMS has placed new reimbursement limits on so-called erythropoietin stimulating agents or ESAs such as Amgen's blockbusters Aranesp and Epogen. These are recombinant forms of the hormone erythropoietin, which regulate the production of red blood cells.

 

In fact, the Thousand Oaks, California-based biotech giant is challenging the decision. In a prepared statement, Roger Perlmutter, Amgen's executive vice president of global research and development called the restrictions "unreasonable, impractical, and unworkable." Though CMS had proposed more severe restrictions on ESAs, an outcry from patients and physicians caused the agency to ease up on its plans. But it still said it would limit reimbursement to patients with hemoglobin levels of less than 10 grams per deciliter of blood. Normal hemoglobin levels range from 12 to 18 grams per deciliter of blood.

 

The policy grows out of concerns that aggressive use of the drugs could harm cancer patients and follows the U.S. Food and Drug Administration's placement of a so-called black box warning—the most serious warning—on the labels of these drugs. "The coverage restrictions placed on the FDA-approved indication have no scientific basis and are incompatible with good clinical practice," said Perlmutter. "We are concerned that inappropriately limiting coverage for ESAs at hemoglobin levels less than 10 g/dL will both increase blood transfusions and severely compromise the high quality of cancer care delivered by American physicians."

 

Amgen noted that the new policy from CMS runs counter the FDA's labeling for ESA's, as well as the recommendations against changing the upper hemoglobin limit of 12 grams per deciliter of blood in the current FDA label and the clinical practice guidelines from the American Society of Clinical Oncology and the American Society of Hematology. But some observers are concerned that the new policy will give license to private payers to follow suit.

 

Eroding Sales
"How could it get worse? If private payers try to take a run at this," said Christopher Raymond, an analyst with Robert W. Baird, who dropped his rating on Amgen to "neutral" in May. "Since most cancer patients in the community setting are financed by private pay, that's what's had us nervous as this has played out—what are they going to do?"

 

Already Amgen has started to see its sales of Aranesp erode from label and reimbursement changes. Worldwide sales of Aranesp fell to $949 million in the second quarter, a 10 percent drop from the same period a year ago. In the United States, sales during the period fell by 19 percent.

 

"Now that its policy and there's maybe a perception of a good housekeeping seal of approval, I don't think its unreasonable to fear that you are going to see some private payers say, 'okay,'" said Raymond. "They won't have to necessarily follow suit with CMS, but they could restrict it from where they had been."

 

As the label and reimbursement changes have been made to Aranesp, Raymond has twice cut his forecast for the drug. He now is projecting 2008 global sales of Aranesp of $2 billion, down from his original forecast of $3.7 billion. Aranesp sales for 2006 reached $4.1 billion.

 

Other Concerns
Before the clouds clear for Amgen there are still some other concerns on the horizon. In September, the FDA's Cardiorenal Drug Advisory Committee will convene to consider the risks and benefits of ESA's in treating patients with anemia caused by chronic kidney failure. Amgen is also squaring off in the courts against Roche in an effort to prevent its competing anemia drug from entering the market. Amgen believes Roche is infringing on its patents with its pegylated version of recombinant human erythropoietin. Pegylation involves using a polymer to extend the time the erythropoietin remains available in the body.

 

But it's not just the woes around its anemia franchise that analysts are watching. On the positive side there is Amgen's late-stage clinical product for osteoporosis and metastatic bone cancer, where it has a lot of hope riding. But any stumble there could spell more problems for the company.

 

"The key question is how bad can it get?" said the analyst Raymond. "They have a pretty interesting pipeline drug in denosumab, but if that doesn't work, this company I think is in a bit of trouble."