Washington Editor

It appears that Amgen Inc. could fall victim to a government reimbursement program that calls its anemia drug Aranesp "functionally equivalent" to a similar product, Procrit, made by Johnson & Johnson.

Amgen, of Thousand Oaks, Calif., calls the classification a "mischaracterization" and vows to "work vigorously to correct the inaccuracies" it said led the government to fail to recognize Aranesp as a new therapy. That characterization could cost Amgen 10 percent annually in U.S. sales of Aranesp (darbepoetin alpha).

Amgen's challenge is a result of changes to the hospital outpatient prospective payment system announced last week by the Centers for Medicare & Medicaid Service (CMS), formerly HCFA. The adjustments, in the form of a final rule, were posted on the Federal Register Thursday and go into effect Jan. 1.

Amgen did not return calls seeking comment Friday, but it isn't expected to be the only biotechnology firm impacted by the new CMS payment system.

Indeed, the CMS was required to develop the rules because so many biologics and drugs will advance from the previous "pass-through" payment (drugs paid at 95 percent of the wholesale price) system to the Ambulatory Payment Classification (APC) group rates beginning in January. (Aranesp, a new product, was classified as a "pass-through," while Procrit is an APC.)

Several members of Congress, including Billy Tauzin (R-La.), chairman of the House Energy and Commerce Committee, informed the CMS that its new payment system would result in "aberrant payments for certain drugs."

Beginning last April, the pass-through payment system dropped from the previous reimbursement level of 95 percent to 78 percent because of government regulations related to the amount it will pay for drugs. Therefore, the new payment formula will be based on the 78 percent reimbursement schedule.

Sharon Cohen, the Biotechnology Industry Organization's vice president for government relations, told BioWorld Today that the new payment methodology is "fundamentally flawed." She was speaking of the new rule and not the Amgen case in particular.

"It is a bit of an averaging system," she said. "So expensive high-tech products under the new CMS methodology, in an overwhelming majority of cases, render an amount that is lower than the actual acquisition amount and that methodology is what is driving down the reimbursement amounts."

The Aranesp-Procrit situation, though, falls under the "functionally equivalent" section of the rule.

Aranesp, the second generation of Amgen's blockbuster Epogen (epoetin alfa), was first approved in September 2001 as a red blood cell booster for dialysis and non-dialysis patients with chronic renal failure. In July, the FDA cleared Aranesp for use in patients with non-myeloid malignancies who have chemotherapy-induced anemia. (See BioWorld Today, July 23, 2002.)

Ruling Surprises Biotech Analysts

Even though J&J's epoetin alfa, called Procrit, can be used for the same purpose, biotechnology analysts caution that the products are different.

"I think a lot of us were surprised by the Medicare opinion calling the drugs functionally equivalent, given that one clearly lasts longer in the body and has an obvious dosing advantage," Eric Schmidt, a biotechnology analyst with SG Cowen Securities in New York, told BioWorld Today. "The primary difference is the half-life in the body and the fact that Aranesp lasts three times longer, so it can be dosed three time less frequently."

In a prepared statement, Amgen said the unique character of Aranesp is widely accepted and has been recognized by the FDA. "The new reimbursement rate set by CMS for the hospital outpatient setting was based on an Aranesp dose that is inconsistent with actual clinical practice," it said.

A research note from Dennis Harp, of Deutsche Bank-North America, said in deciding the reimbursement rates, CMS determined "equivalent" dosing regimens for each product using available data and then calculated the per-microgram reimbursement rate for Procrit. "We believe that CMS has assumed a dosing regimen for Aranesp that is substantially higher than the actual clinical dosing of Aranesp," he said.

He said data on Aranesp are limited because the product is new to the market.

To remedy the situation, Amgen said that CMS is directing the National Cancer Institute (NCI) to initiate a clinical study to evaluate the appropriate dose-conversion ratio for the rule. "The rule further states that if CMS can estimate a more accurate conversion ratio based on this study or from our review of our own payment data, we will make a change to reflect this ratio as soon as practical," the statement said.

Patrick Mooney, senior biotechnology analyst at Thomas Weisel Partners LLC in New York, told BioWorld Today that he expects Amgen to get a better reimbursement rate. "We think they [CMS] will reverse it somewhat, but it's probably not going to go up to the level that Amgen wants. We think Amgen has a good case and it's unlikely that it will stay down where it is now, pending a positive outcome of the NCI-sponsored trial."

J&J Perspective' Considered In Decision

"This conversion ratio to determine the Aranesp reimbursement rate has the fingerprint of J&J all over it. I think J&J probably caught Amgen a little by surprise by the amount of lobbying they did," he added.

In response, Carol Goodrich, a spokeswoman for J&J, said, "We certainly respect the fact that this was a difficult and complex decision and we appreciate the thorough evaluation the CMS has given to this important issue. With respect to lobbying, we were asked for our perspective on this issue and we communicated our position to all appropriate individuals, including [Health and Human Services] Secretary Tommy Thompson, [CMS administrator] Tom Scully and the independent consultant who conducted the data analysis."

In a worst-case scenario, the Thomas Weisel model projects Aranesp 2003 sales to drop 12 percent from the earlier estimate of $987 million, to $868 million, and 2004 sales to drop from $1.34 billion to $1.18 billion.

Schmidt said 2003 worldwide sales of Aranesp are projected to top $735 million, including $300 million in oncology sales. The hospital outpatient setting could account for about $30 million to $45 million of those sales.

"If there is a reimbursement disincentive to the drug, they may lose money, but I don't doubt that they'll make it up somewhere else," Schmidt said.

In 2001, worldwide sales of Procrit (including Eprex, the trade name outside the U.S.) totaled $3.4 billion, Goodrich said.