More Misery for Amgen

Shares fell Tuesday after Medicare said it would stop paying for certain uses of the company's Aranesp drug

by Ben Steverman

Medicare had some bad news for Amgen (AMGN) May 14: The government health insurer wants to stop paying for certain uses of Amgen's most lucrative drug, Aranesp. The drug, which can help chemotherapy patients battle anemia, made up $1 billion of Amgen's $3.6 billion in sales in the first quarter of this year.

The Food and Drug Administration raised concerns about it and similar drugs last week, saying its use should be restricted for certain cancer patients. The Centers for Medicare and Medicaid Services swiftly proposed guidelines to stop covering those uses.

In doing so, Medicare should save some money. Aranesp and its peers are some of the most expensive drugs on the market. They stimulate the body to make more red blood cells to treat anemia, a common effect of chemotherapy. The drugs are also used to treat anemia from kidney failure and other maladies.

The FDA said Aranesp and similar drugs might not be safe or effective for patients with certain cancers. Medicare would limit its use to certain patients and to certain lengths of time. Medicare's rules would also affect Procrit, a similar drug made by Johnson & Johnson (JNJ).

Bank of America analyst William Q. Sargent, Jr. called the proposed rules "surprisingly severe." Amgen is an investment banking client of Bank of America.

In response to the news, several analysts reduced their estimates for Amgen earnings. Amgen shares lost 3.7% to $54.01 on May 15, after touching a 52-week low of $52.36 during the session, on three times their average daily trading volume. Procrit makes up a much smaller portion of J&J's revenues. Its shares fell 1.3% to $61.82 on May 15.

The key question, analysts say, is whether the rules go into effect as proposed. Expect "particularly heated push-back from oncologists," Baird analyst Christopher Raymond said in a research note. (Baird makes a market in Amgen shares.)

Medicare is accepting comments on the plan for 30 days. It makes a final decision in mid-July.

Standard & Poors analyst Steven Silvers expects both Medicare and the FDA to soften their stances a bit.

If they don't, private insurance companies could also stop reimbursing certain uses of Aranesp. Many insurance plans follow Medicare's lead, especially when it comes to restricting drug reimbursements, according to Baird's Raymond.

Despite the proposed rules, much of Amgen's market for Aranesp is intact. The drug is still approved for a variety of treatments. Raymond estimates 20 to 30% of revenues from Aranesp could be at risk.

Analysts differ on the long-term prognosis for Amgen.

Policy makers are reviewing various uses for Aranesp and another Amgen anti-anemia drug, Epogen. Later this year, they could restrict uses of the drugs for other disorders as well.

At the same time, Amgen remains a "solid company" with multi-billion dollar revenue streams, said Edward Nash of Stifel Nicolaus. (Stifel makes a market in Amgen shares.) Nash called Amgen a "trading stock." The stock is expected to be volatile as the FDA and Medicare debate its drugs, and as it engages a patent lawsuit later this year. Investors could take advantage of volatility to buy at low points and sell at high points, he said.

Amgen "still ha[s] some things waiting in the wings," Nash said.

One of them could be a drug designed to treat osteoporosis. That compound is among the promising prospects that could reduce Amgen's dependence on its anti-anemia drugs, S&P's Silver said. (S&P, like BusinessWeek.com is a unit of The McGraw-Hill Companies.)

With a broader product portfolio, Amgen would be better able to withstand the occasional regulatory hiccup.

Steverman is a reporter for BusinessWeek's Investing channel.