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Amgen Looking Anemic

Shares slump on worries about a Medicare move.

Updated from 10:07 a.m. EDT

Shares of

Amgen

(AMGN) - Get Amgen Inc. Report

sank Tuesday, at one point striking a 52-week low, after the biotech suffered another setback for its multibillion-dollar anemia drugs Epogen and Aranesp.

The latest blow came from the Centers for Medicare and Medicaid Services, which said it may limit payments for the drugs in response to rising reports of safety concerns. The proposal would restrict the types of cancers for which the drugs can be used and put limits on the length of treatment for chemotherapy-induced anemia.

The agency announced its proposal after the previous market session had ended, and investors wasted no time bailing out on Amgen when the new trading day began. Recently, the stock dropped $2.67, or 4.8%, to $53.39 on volume that was nearly triple the daily average for the past three months.

Amgen fell as low as $52.36, its worst level of the last year.

Last year, Aranesp's sales totaled $4.1 billion, and Epogen had revenue of $2.5 billion. Together, they accounted for 46% of Amgen's revenue.

The government's proposal also affects

Johnson & Johnson's

(JNJ) - Get Johnson & Johnson (JNJ) Report

Procrit, which is the same as Epogen and is licensed from Amgen. Shares of J&J slipped 44 cents to $62.17. A year ago, Procrit provided $3.2 billion in sales, or 6% of J&J's corporate revenue.

The anemia drugs are called erythropoiesis-stimulating agents, or ESAs. They are genetically engineered versions of a natural protein made by the kidney. The protein, erythropoietin, increases the number of red blood cells.

"Because there is a preponderance of emerging data for ESA use in the oncology setting, we have narrowed the focus of ... ESA use in cancer and related

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tumor conditions," Dr. Barry Straube, chief medical officer for the Medicare and Medicaid agency, said Monday.

The public has 30 days to comment on the proposal, and then the agency has 60 days to prepare final regulations.

Following the action, two investment banking firms cut their ratings on Amgen, bringing the number of downgrades this month to six.

Calling the government's decision a "surprisingly tough stance," the Robert W. Baird investment banking firm lowered its opinion to neutral from outperform. Analyst Christopher Raymond wrote in a research report that if the proposal is adopted, it could cut the use of Amgen's anemia drugs in cancer-chemotherapy patients by 20% to 30%.

"We see this development as a watershed event, possibly opening the door to significant ... private payer pressure for years to come," said Raymond. His firm expects to seek or receive investment-banking compensation from Amgen in the next three months.

The earlier downgrades came after an advisory panel to the Food and Drug Administration recommended

stricter limits on prescribing the medications. The panel also said the companies should conduct more tests to assess the risk of side effects.

The FDA isn't bound by its advisers' suggestions, but it usually adheres to them. Last week, the panel voted 17-0 for more clinical trials and 15-2 for more prescribing restrictions. Later this year, a panel of experts will review the safety and effectiveness of the drugs when they're given to patients with chronic kidney disease.

In March, the FDA told Amgen and J&J to place

tougher notices on the drugs' labels, alerting doctors and patients that higher-than-recommended doses of the drugs raise the risk of death, heart attack, stroke or blood clots. The FDA said the labels must contain a black box warning, its strongest alert. The FDA decision triggered the Medicare agency's proposal.

"We pay close attention to FDA black box warnings," Leslie V. Norwalk, acting administrator for Medicare and Medicaid, said Monday. "We have carefully examined the evidence surrounding these labeling changes and have issued this proposed decision to protect our beneficiaries."

After the FDA advisory panel meeting last week, "it was hard to believe things could rapidly get much worse" for Amgen and J&J, says Geoffrey Porges, of Sanford Bernstein, in a research note. "The government's proposal is "much more severe than even those we had contemplated."

Porges, who has market perform ratings on both companies, said the restrictions could cut the market in half for the affected anemia drugs. The proposal "could be the straw that breaks the camel's back," forcing Amgen "into serious and extensive restructuring to reduce their expense base," he says.

At the same time, Porges criticized the government's plan as the "end of evidence-based regulation," arguing that the FDA and the Medicare agency "are significantly over-reaching the available evidence of risk, or lack of benefit," from the anemia drugs.

His firm has provided noninvestment banking services for J&J.