Forbes.com


Health
Congress To Scrutinize Amgen Drug
Kerry A. Dolan, 12.06.06, 9:50 AM ET

Burlingame, Calif. -

One of biotech powerhouse Amgen's most profitable blockbuster drugs will come under the scrutiny of the House Ways and Means Committee in a hearing scheduled to begin at 10:30 Wednesday morning. The hearing isn't likely to warm the hearts of Amgen shareholders.

A report issued by the U.S. Government Accountability Office on Tuesday provides a glimpse into the congressional committee's thinking. The report suggests changing the way Medicare pays for Epogen, Amgen's multibillion-dollar anti-anemia drug. The changes, if implemented, would likely cut into Amgen's prodigious profits.

Epogen's main use is to treat anemia in patients with kidney failure, also known as end-stage renal disease. Such patients receive Epogen during dialysis treatments, which are usually covered by Medicare. In 2005, Medicare and Medicaid spent $2 billion on Epogen, more money than on any other drug. This year, Epogen sales to Medicare and Medicaid should total about $2.5 billion, accounting for 18% of Amgen's sales and 23% of its profit, according to Sanford C. Bernstein analyst Geoffrey Porges.

One reason Rep. Bill Thomas, the California Republican who is chairman of the revenue-raising Ways & Means Committee, called for the hearing was the publication last month of a study on dialysis, the blood-cleansing treatment used for kidney patients. The New England Journal of Medicine report found 20% of patients being treated for dialysis have red blood cell counts associated with increased risk of heart problems and death.

The GAO report notes that Medicare pays for certain dialysis services under a type of bundled rate, called a composite rate. For some dialysis-related drugs, including Epogen, Medicare also pays each time the drug is administered. The current system provides a financial incentive to use drugs, according to a report earlier this year by the Medicare Payment Advisory Commission, an independent federal body that advises Congress on issues affecting the Medicare program. Indeed, dialysis centers get 25% of their profits from the Medicare reimbursements they receive on Epogen, according to a Morgan Stanley report. Perhaps unsurprisingly, the average dose of Epogen quadrupled between 1991 and 2003.

The GAO recommended that Congress consider establishing a bundled payment system for all kidney-failure services, "including drugs, as soon as possible." In such a bundled payment system, a dialysis center is given a fixed sum of money and then chooses how to spend that sum on dialysis treatment and related drugs. Such a system gives dialysis providers an incentive to minimize expenditures, because it gets to keep what it doesn't spend.

Of course, that pits the treatment providers' profits against the best interests of patients. In a statement issued in response to the GAO report, Amgen said it is concerned that implementing a bundled payment system "without appropriate case-mix adjusters and quality safeguards could introduce financial incentives to underutilize services and could decrease the quality of care."

After the Ways and Means hearing was announced last week, Sanford Bernstein's Porges wrote, "We see no way for this to be positively construed by Amgen ... there is significant risk to Amgen's earnings from these hearings." Porges added that he does not expect any change in reimbursement policy for at least two years, but "the issue adds to the growing pressure" on Epogen.

To repeat an email response to this article, as Tommy Chong would say on That 70's Show....."Wow must be bad karma, man."

paula

It's always darkest before it turns absolutely pitch black.
- Paul Newman