Recent safety concerns about the popular anemia drugs Epogen and Aranesp have mainly focused on the potential impact on its maker, Amgen Inc., should physicians start prescribing the drug for fewer conditions and in smaller dosages. Now some of the drugs' largest customers are starting to feel the blow-black.


Consider El Segundo-based dialysis service provider DaVita Inc. While most of the safety concerns have been over off-label usage of the drug to treat cancer-related anemia, DaVita Inc. saw its shares fall more than 3 percent on March 12 after it warned that newly mandated safety precautions on the labels of the popular anemia drugs could crimp earnings. The drug is also used to treat dialysis related anemia.


DaVita last month reported that 2006 net income rose 26.7 percent to $289.7 million, or $2.74 per share, with revenue up 64 percent to $4.88 billion. By one analyst's estimate, 38 percent of DaVita's operating income last year as defined by EBITDA (earnings before interest, taxes, depreciation, and amortization) was generated by administering Epogen to managed care patients.


Gary Lieberman, an analyst for Stanford Group Co., who has a hold recommendation on shares, said the company's earnings growth is vulnerable to both reimbursement cuts by Medicare and other payers, but also to decreased usage by physicians worried about the drug's safety. Even Amgen is admitting the possibility.


"We expect some physicians to change their prescribing patters in response to this labeling change, although we have no ability to predict the extent of those changes," DaVita said in a statement.


But other analysts believe the sell-off presents opportunities for DaVita investors. Mark Arnold at Piper Jaffray & Co. last week raised his stock recommendation from sector-perform to outperform with a $59 a share price target. He believes the stock, which closed at $52.12 on March 14, is undervalued given the growth prospects from its 2005 acquisition of Gambro Healthcare dialysis centers. Lieberman has a $56.88 price target on shares.


Taking the Pledge

U.S. Health and Human Services Secretary Michael Leavitt was in Los Angeles last week, drumming up support among area business leaders for a new carrot-and-stick initiative promoting high-quality cost-effective health care.


The U.S. health care system needs electronic health records and billing systems, and more transparency on the price and quality of services. That was Leavitt's message to a group of health care employers and employee benefit consultants at a March 14 event hosted by Greater Los Angeles Chamber of Commerce.

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