What the government gives, it also can take away.

That time-worn lesson was a big reason behind a slip in Amgen Inc.'s share price last week as the company cut its 2005 earnings and revenue guidance.

Worldwide sales of Aranesp, a drug that treats anemia in dialysis and cancer patients, grew 60 percent in 2004, grossing the biotech giant $2.5 billion. But a new Medicare payment system for that and other oncology drugs has company executives unsure whether that kind of sales growth can continue.

"I would be disingenuous if I said we had it all figured out," said George Morrow, executive vice president of global commercial operations during a presentation in New York to analysts. "There is some uncertainty."

Thousand Oaks-based Amgen lowered its 2005 revenue-growth guidance to the "high single digits to low teens" after a year in which sales rose 27 percent, to $10 billion. It also forecast earnings of $2.70 to $2.85 per share, where analysts' previous estimates had averaged $2.85, according to Thomson First Call.

Amgen shares closed at $61.58 on Jan. 27, falling 3.1 percent on the news, as the company also failed to meet analysts' fourth quarter earnings projections.

A big reason behind the unimpressive forecast is a new Medicare drug payment system the Centers for Medicare & Medicaid Services implemented on Jan. 1 as required by the Medicare Modernization Act of 2003.

Unlike other physicians, oncologists actually buy the drugs they dispense to their patients, providing them a substantial source of income if there is a significant margin between their acquisition costs and their reimbursement from Medicare and other payers, such as private health insurers.

Selling the drugs

The new Medicare system pays oncologists a 6 percent margin for cancer drugs above a drug's average sales price, a figure that the agency spent months calculating last year using data from drug companies.

Previously, oncologists were reimbursed from Medicare based on the "average wholesale price," which was supposed to reflect prices paid by physicians, pharmacists and other large buyers, but which was largely arrived at by drug companies themselves and is widely believed to be inflated.

The biggest concern is whether the reduced payments will prompt oncologists to prescribe Aranesp, used to ward off anemia in cancer and dialysis patients, less frequently. There are also concerns it could cut sales of Epogen, another anemia drug, and Neulasta, a drug that helps fight off infection in chemotherapy patients.

Eric Schmidt, an analyst with S.G. Cowen Securities Corp., estimated that under the old system, oncologists were probably buying Aranesp at a cost of about $650 to $700 per dose, while being reimbursed by Medicare $800. That amounted to about a 15 percent to 20 percent profit margin.

"Doctors had been heavily incentivized to administer the drugs," said Schmidt, who follows the company but does not issue a rating. "Typically when things go well they stand to make a lot of money."

The American Society of Clinical Oncology has started to survey its members to determine if some of the new reimbursement rates are too low, causing doctors to go "under water" on some drugs. If so, they plan to use that information to lobby the federal government for higher prices.

Amgen Chief Executive Kevin Sharer told analysts that he believes physicians will "find a way to do the right thing for patients" and continue to administer the drugs, given the serious complications that anemia and infections can present to cancer patients.

However, company officials acknowledged that the new Medicare payment system could hit oncologists at small "inefficient" clinics with higher costs structures, though it believes oncologists at larger centers will fair better.

Schmidt said oncologists at larger centers are able to buy cancer drugs in large volume, which gains them discounts from Amgen and other drug companies while raising their margins.

The new system may force oncologists at smaller centers to band together to form larger purchasing groups, which could lessen the impact of the reimbursement changes.

"The risk for Amgen is if there is a group or subgroup of physicians who are actually losing money and who don't think it's worth their time. The result could be a disruption in the supply channel," said Schmidt, who nevertheless downplayed the risk as a "fear about nothing or much to do about nothing."

Amgen officials also noted that the federal government is increasing payments to oncologists this year by $300 million, partially to help offset any reduction in drug payments.

Analyst downgrades

However, analyst Mark E. Karvosky of Piper Jaffray & Co. downgraded Amgen to "market perform" from "outperform" following the announcement, citing the Medicare changes and other issues. That included a concern that the company will not have enough new sales drivers this year to outperform its peers.

Amgen previewed its product pipeline during the analyst meeting, but officials conceded that much of 2005 would be spent enrolling and conducting studies on new drugs, with much clinical data not arriving until in 2006.

Prominent among those drug candidates is AMG 162, which is under investigation to treat osteoporosis and bone loss associated with some cancer treatments. Karvosky said the compound has "significant potential" but he does not expect Food and Drug Administration approval prior to 2007.

In last week's earnings announcement, Amgen reported fourth quarter net income of $689 million a 26 percent increase compared with the like period a year ago. Revenues hit $2.8 billion, up 24 percent from a year ago.

Amgen said its net income would have been $749 million, excluding expenses related to a pair of acquisitions and other special charges.

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