West Coast Editor

Amgen Inc. and partner Johnson & Johnson sent a "dear doctor" letter warning physicians about the heightened risk of pure red cell aplasia and severe anemia in patients given the red blood cell booster Aranesp, the second generation of Epogen (epoetin alfa, which J&J sells under the trade name Procrit).

But analysts at Chicago-based Robert Baird & Co. issued something of a "dear investor" letter pertaining to Amgen and other companies, in the form of a research note based on a different subject altogether - the Centers for Medicare & Medicaid Services' ballyhooed Quality of Care Demo Project, which may turn out to be less used than many believed.

The Aranesp/Epogen news is "not an issue at all," said Christopher Raymond, analyst with Baird. "This won't change any use patterns."

Wall Street seemed largely unmoved by the news as well. Amgen's stock (NASDAQ:AMGN) closed Friday at $80.78, down 86 cents. On the same day the revised label was disclosed, Baird reiterated its "outperform" rating on the stock, and New York-based Stifel Nicolaus & Co. initiated coverage with the same rating.

The risks with EPO drugs "was a major issue for Eprex in Europe" in the past, Raymond pointed out, so the potential for trouble with the drugs is old news. As the Amgen letter to physicians puts it, "When utilized in accordance with the approved prescribing information, the benefit/risk profile of Aranesp continues to be favorable."

The letter said that recently PRCA and anemia "with or without other cytopenias, associated with neutralizing antibodies to erythropoietin have been reported in patients treated with Aranesp," and the Aranesp caution "applies to all marketed erythropoietic proteins," so the labels have been revised.

If EPO antibody-associated anemia is suspected, physicians should withhold the drugs and contact Amgen to perform assays, and Aranesp is to be discontinued permanently in patients with antibody-mediated anemia, according to the warning. "Patients should not be switched to other erythropoietic proteins, as there is a potential for the antibodies to cross-react," the letter continued.

Of more interest, Raymond said, is the CMS Demo Project, started last year and continuing next, which pays oncologists to evaluate and report chemotherapy patients' pain, nausea, vomiting and fatigue. The program is designed to help switch providers to the new reimbursement formula for drugs covered under Medicare Part B. Providers of Part B drugs now are reimbursed at average sales price (ASP) plus 6 percent.

Baird analysts last week toured the West Clinic in Memphis, Tenn., one of the larger free-standing, for-profit oncology clinics in the U.S., treating 400 to 600 patients per day - an operation that is "at the forefront of what we believe is a major consolidation and rationalization of private oncology practice currently under way," Raymond wrote in a research note.

"It was kind of an epiphany for me," he told BioWorld Today. Regarding the Demo Project specifically, he said, "We got a nice, first-hand view of how the program is administered. Docs probably aren't going to use this thing much, because it doesn't make any sense whatsoever for them to do it."

West Clinic officials outlined what Raymond regards as an "absolutely Byzantine" QOC Demo Project for next year. In 2005, CMS came up with a three-question system and paid physicians $130 per question, based on patient quality-of-life measures including pain, nausea and fatigue (likely meaning anemia, which Amgen's EPO products treat).

"This program was funded to the tune of $300 million, but most observers believe the total 2005 bill will be in the $400 million to $500 million range," Raymond wrote. "There was a great deal of flexibility to administer this program with support staff or more automated means, making the cost of administration relatively easy."

Next year, not so.

"The devil is very much in the details," Raymond said. In 2006, there will be a total of 81 codes to satisfy, requiring direct doctor involvement. "Guaranteed to be a cumbersome, manual procedure," the system "will not make sense for a good chunk of physicians," he said.

The Demo Project factor and others will have varying upshots for companies, Raymond predicted. Regarding Thousand Oaks, Calif.-based Amgen, the picture might be "understandably disconcerting," he wrote. "We do think the halo effect' associated with [the 2005 Demo Project] for all supportive care drugs may disappear next year. However, another dynamic at play - practice consolidation, increased economic focus and adherence to treatment protocols - may actually work more in Amgen's favor next year."

Mixed accounts (those accounts that are largely Aranesp or Procrit accounts, and use both to accommodate physician preference) will dwindle, according to his forecast.

"With Amgen's clear leverage advantage from offering Aranesp, Neupogen and Neulasta and its aggressive use of rebates and performance-based agreements, we think an increasingly binary market (100 percent either/or) should favor Aranesp, accelerating Procrit's descent," Raymond said, adding that he's sticking with his Aranesp sales estimate of $3.87 billion next year.

Neulasta (pegfilgrastim) is used to decrease infection during chemotherapy, and Neupogen is that compound's first and shorter-acting version.

For other companies and their drugs, the picture is less clear. Minneapolis-based MGI Pharma Inc., for example, has Aloxi (palonosetron hydrochloride) for chemotherapy-induced nausea and vomiting. Physicians at West Clinic told Baird that Aloxi is a better product than Zofran (ondansetron hydrochloride), from London-based GlaxoSmithKline plc, but the GSK drug becomes available as a generic compound at year's end.

The lowered generic price will mean "the decision to use Aloxi may be much more difficult to make based on efficacy alone, according to physicians we talked with," Raymond wrote. "With consensus estimates (as well as ours) presupposing 20 percent Aloxi growth for 2006 and 2007, this issue clearly warrants close monitoring."

Altogether, a problematic CMS Demo Project, along with fiercer competition between physician practices (which likely will drive more consolidation), plus a move by private payers to the ASP-based fee structure will have fallout for other firms as well, Raymond said.

"It's absolutely not fully understood by the Street [yet]," he said, adding that Baird expects to host a conference call this week to "go over this in more detail."