Washington Editor

WASHINGTON - Investors reacted sharply to language about follow-on biologics (FOBs), drug reimportation, comparative effectiveness research and Medicaid rebates in President Barack Obama's proposed $3.55 trillion 2010 budget, with shares of Amgen Inc., Biogen Idec Inc., Celgene Corp. and Gilead Sciences Inc. all tumbling Thursday - the day the proposal was made public.

In fact, the Nasdaq Biotechnology Index was down 4.7 percent Thursday. Shares continued to fall for many biotechs Friday, even as many analysts said the sell-off was unwarranted.

Shares of Thousand Oaks, Calif.-based Amgen (NASDAQ:AMGN) lost $2.30 Friday, to close at $48.93, while Cambridge, Mass.-based Biogen's shares (NASDAQ:BIIB) also fell $1.65, to close at $46.04. Shares of Foster City, Calif.-based Gilead (NASDAQ:GILD) also lost ground, falling $2.27, to close at $44.80, while Summit, N.J.-based Celgene's stock (NASDAQ:CELG) plunged $4.01, to close at $44.73.

"We are somewhat surprised by the market's reaction given that most investors expected health care reform to figure prominently in this administration," said analyst Michael Aberman, of Credit Suisse Securities.

Tucked inside the budget document is a proposal for a $634 billion reserve fund intended to help finance health care reform over 10 years.

The Obama administration said the reserve would be funded half by new revenue and half by savings proposals that "promote efficiency and accountability, align incentives toward quality, and encourage shared responsibility."

Analyst Christopher Raymond, of Robert W. Baird & Co., said investors may have been spooked specifically by the section of the budget discussing how the administration plans to finance the reserve fund in part by reducing drug prices.

The Obama administration proposed a savings estimate of $9.24 billion over 10 years related to FOBs and said incentives for R&D innovation should be retained by establishing a period of exclusivity "guaranteed for the original innovator product, which is generally consistent with the principles in the Hatch-Waxman law for traditional products."

The Hatch-Waxman Act of 1984, which established the regulatory pathway allowing generic versions of small-molecule drugs to enter the U.S. market, set an exclusivity period of three to five years.

Given that the debate over the five years of data exclusivity sought by the generic drug industry and the 14 years called for by the Biotechnology Industry Organization has already played out over the past year or more - with Obama's side on the debate long known - such a proposal should hardly have been a surprise for biotech investors, Raymond said.

Rather than being vexed by the statement, investors should be heartened that the administration proposed some degree of exclusivity, he argued.

Investors in biotechs should have very little to fear in the near-term, given that it may take time for the FDA to develop and implement regulations for FOBs, Cowen & Co. analyst Eric Schmidt predicted. In addition, he noted that biologic patent expiration dates are several years off for many products.

"Most of the large biotech franchises are protected for another 5-10 years," Schmidt said in a research note.

Credit Suisse's Aberman said the one relative surprise in Obama's budget was an increase in the Medicaid rebate for branded drugs from 15.1 percent to 21.1 percent, which he said will have an impact on several of the large-cap biotech firms.

The budget proposal's language stating that the Obama administration would continue to build on the $1.1 billion for comparative effectiveness research included in the economic stimulus package "sparks concern over a UK's NICE-like process in the U.S. for many drugs," Aberman said.

But, he said, "While that may ultimately be the case, we think it is a long way off from this budget's inclusion of 'funding research.'"

Most biotech drugs, Aberman added, "offer significant medical benefit and have been approved by agencies like the UK's NICE."

However, he warned, some drugs that have had trouble with NICE "could see pressure due to negative sentiment."

On the positive side for biotechs, Obama's budget calls for doubling the investment in cancer research, with a proposal of $6.6 billion, and seeks to increase domestic funding for treating HIV/AIDS, which Baird's Raymond noted would have a positive impact on Gilead's HIV franchise.

Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, said he was "pleased" with Obama's proposed investments in health care reform.

"This is a strong proposal that focuses on urgent priorities," he said, calling the president's health funding proposals "a clear commitment to action this year with an important and historic downpayment on reform."

Baucus plans to convene a hearing Wednesday to examine the president's budget proposal, with Treasury Secretary Timothy Geithner scheduled to testify.

NIH Reveals Some Details on ARRA Fund Plans

The National Institutes of Health (NIH) provided some details about how it plans to use the $10 billion it is scheduled to receive over the next two years under the $787 billion economic stimulus package, known as the American Recovery and Reinvestment Act (ARRA).

Of the $8.2 billion set aside for supporting scientific research priorities, $7.4 billion will be transferred to the NIH's Institutes and Centers and Common Fund, on a percentage-based formula.

The agency said that $800 million will be directed to the Office of the Director for programs such as Challenge Grants, which are designed to focus on health and science problems where progress can be expected in two years, and to support additional scientific research-related activities.

The NIH said $1 billion would be devoted to support extramural construction, repairs and alterations and allocated to the National Center for Research Resources (NCRR) in support of all NIH-funded research institutions.

In addition, $300 million will be directed to shared instrumentation and other capital equipment, and allocated to NCRR to support all NIH activities, and $500 million will go to NIH buildings and facilities to fund high-priority repair, construction and improvement projects on agency's campuses.

In addition, the NIH said it will receive $400 million of the $1.1 billion from the ARRA allocated for comparative effectiveness research. The Agency for Healthcare Research and Quality is due to get the majority sum of the comparative effectiveness funds.

The NIH said many types of funding mechanisms will be supported with its ARRA funds, but in general, the dollars will be focused on scientific activities in several areas.

The agency said it will choose among recently peer-reviewed, "highly meritorious" R01 research grant applications and similar mechanisms "capable of making significant advances with a two-year grant" and also will fund new R01 applications that have a "reasonable expectation" of making progress over two years.

The NIH also said it planned to accelerate the tempo of ongoing science through targeted supplements to current grants.

For example, the NIH said it may competitively expand the scope of current research awards or supplement an existing award with additional support for infrastructure, such as equipment, that will be used in the two-year availability.

The agency said it anticipated supporting new types of activities that fit into the structure of ARRA and would support a reasonable number of awards to jumpstart the new NIH Challenge Grant program.

The NIH said the number of awards and amount of funds will be determined, based on the scientific merit and the quality of applications.

The agency said it would use other funding mechanisms as appropriate.

As spending plans are approved, the NIH plans to post the information on the Obama administration's recovery.gov website, which was established to make the spending of the ARRA stimulus funds transparent to the nation.