The Medicare Part B market is holding up well in the early weeks of 2005 thanks to a $300 mil. demonstration project unveiled in November, Amgen told analysts Jan. 27 in New York.

"The G-code demonstration project that we heard about on the eve of the election...is going over very well," Exec VP-Commercial Operations George Morrow said. "This has taken a lot of the sting out of reducing the drug margin."

The Centers for Medicare & Medicaid Services announced a $300 mil. "quality of care" demonstration project to pay physicians for assessing oncology patients for pain, nausea and anemia Nov. 1.

The new policy restores a large portion of the money being taken out of the Part B sector by the changes in reimbursement for drugs, which are now paid based on average sales price rather than average wholesale price (¹ Also see "Medicare Part B Demo, Coding Changes Will Stabilize Oncology Rx Market" - Pink Sheet, 8 November, 2004., p. 18).

Uncertainty in the Part B market is one of the major issues facing Amgen heading into 2005. The company is coming off another strong year, with both revenue and net income increasing more than 20%.

However, the company is forecasting revenue growth in the "high single digits or low teens" for 2005, in part because of "uncertainty" in the Part B market.

Amgen has more than doubled in size since 2001, and in the process has claimed the number one spot in the oncology market in the U.S. - based entirely on sales of supportive therapy products like the anemia agent Aranesp (darbepoetin) and the febrile neutropenia therapies Neupogen (filgrastim) and Neulasta (pegfilgrastim).

[Editor's Note: Amgen's transformation from biotech bellwether into a top-tier pharma company is featured in "The Pink Sheet" 2004/2005 Almanac. Copies will be delivered to subscribers soon.]

Amgen claims total oncology market revenues of $4.2 bil. for the 12 months through October 2004, with a growth rate of 42%. J&J (which markets Procrit and some oncology therapies) is second at $3.4 bil., with Genentech third ($2.1 bil.), followed by Sanofi-Aventis ($1.9 bil.) and GlaxoSmithKline ($1.5 bil.).

The transition in the oncology market will therefore affect Amgen more than any other company.

"We are working with the oncology community, including patient groups to monitor any kind of dislocation in cancer care, and we have key members of Congress waiting to hear, 'are patients being kind of pushed aside?'" Morrow said.

"With the G-code, we are going to be evaluating how effective it is."

"As you go from the drug revenue model to the service revenue model, you have got to do something to maintain that, because there may be some very large, highly efficient practices that will still do okay, but there are a lot of small practices that could take it on the chin, and we have got to help represent them."

During recent visits to "large oncology clinics," Amgen found that "virtually all of those clinics had protocols in place before the beginning of the year" to take advantage of the new demonstration project, Morrow said.

"They are already doing that, so they hit the year running," Morrow said. "It is pretty much business as usual in the large accounts at this point."

However, Morrow added, providers are likely to review their financial position carefully after they receive their first payments under the new policy.

"They are submitting the new G-codes...and it will take four to eight weeks to get paid," Morrow said. "They will look at the financial situation at that point and they will make adjustments. So, probably late in the first quarter, they will be doing their financial assessment and adjustments will be made down the road."

Amgen acknowledged that there may also be an issue with the requirement that oncologists bill patients for the 20% copay on the payment for assessing side effects. The response of patients to the copay "is still a huge question mark," Morrow said. "They are still in discussions around that."

Nevertheless, "it is very good for patients and for our business that the doctor has to ask patients, 'Are you fatigued?'" Morrow observed. "Very often, the answer will be yes and the solution will be Aranesp."

Amgen's move to the top of the market has been driven primarily by Aranesp's growth in head-to-head competition with Procrit.

Amgen now claims to have a 50% share versus its rival, helped by a deep discounting strategy. Heading into 2005, the company is focusing on growing the market for anemia therapy, rather than market share (² Also see "Aranesp Growth Tied To Market Penetration, Not Share Gains, Amgen Says" - Pink Sheet, 15 November, 2004., p. 19).

With the transition in the payment system, Amgen expects significant changes in the competitive dynamics.

"Contracting and rebating" will be "less important on a going forward basis," Morrow said. "Clinical data is going to be much more important, and that we think also favors our product line."

Morrow cautioned investors to be ready for continued declines in the published average sales price for Aranesp and Procrit. Although both companies say pricing has stabilized, Morrow noted that it will take "a couple more quarters" before the ASP - which is a 12-month average price - flattens out.

Once the ASP stabilizes, "hopefully at that point - given no more aggressive competitive moves - we actually expect the price to start gradually moving back up roughly along the level of inflation."

Morrow acknowledged that J&J did rollout a new Procrit contract at the start of the year, but he said it did not involve deeper discounts. "What they did is they took back-end rebates and took it off invoice."

The new contracts "will change their ASP, by the way," Morrow said. "You put that back-end rebate, your discount off invoice, it hits your ASP a lot sooner than it would have otherwise."

Going forward, Morrow continued, Amgen's mantra is that "portfolios beat products." It "is great to have a broad portfolio. It is great to have a pipeline. When we go out and talk to customers, they want to know if you are committed to them and their patients and practices long term, and, boy, are we in this field."

Amgen has several late stage oncology therapies in development (see ³ [A#00670060007]).

"There are some uncertainties" to be cautious about, Morrow continued. One is "the rate and extent of private payor response." Morrow cited "two anecdotes" of providers seeking to change payment to ASP+15% and ASP+25%.

"I do expect commercial payors to move in that direction," Morrow said. However, the first two prices are "not far from where we are right now."

Smaller providers may struggle more, Morrow said. "Fortunately, with our business, we have a disproportionate share of Aranesp business in the larger, more efficient practices. Obviously, they are the ones that are economically savvy" and took advantage of Amgen's discounting strategy. "But, having said that, we will continue to stay close to the small providers and do what we can to help them."

Amgen will also be "monitoring changes in practice patterns," and particularly whether providers start increasing the frequency of chemotherapy use in response to the administrative payment structure incentives. If providers do move to more frequent treatment schedules, that would undercut the advantage of a longer acting agent like Aranesp.

"Weekly chemo right now is really in the non-curative, metastatic setting," Morrow noted. "Will that move into the curative setting where we have the bulk of our business? Hopefully the data would drive that."

However, Morrow urged investors to be cautious in analyzing survey data about providers' intentions. "When you read surveys of doctors, they are mad. They say, 'We are going to push all these patients to the hospital.'" However, "when you really sit down with them and push comes to shove, they want to take care of their patients....Yes, they are going to do financial screening, but for the most part they are going to continue to treat their patients."

Medicare patients who lack copay insurance is "the group that we are most concerned about," Morrow noted. Amgen is increasing its funding to charitable foundations for copay insurance to $18 mil. in 2005 to help address that need. The announcement is "being well-received by our customers."

"A key to success is for oncology practices to keep patients in their practices. If you are just going to slough off lots of patients...shrinkage is going to be a self-fulfilling prophecy." If oncologists "push all Medicare patients who lack secondary copay insurance, there is no way the hospitals can absorb them," Morrow said. "That will become a crisis and that will become well known on the Hill."

Oncologists Embrace Part B Demo, Amgen Says; Big Test In Two Months

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