Kevin Sharer must admire Tony Soprano. And here’s why. In July 2006, an Amgen sales director made a friendly visit to a small Baltimore chain of kidney dialysis clinics and, after chatting about the weather, issued a clear warning - if the chain switches from Amgen’s anemia drug to a forthcoming Roche drug, and then the Roche drug is taken off the market by an Amgen lawsuit, the chain may have to pay a much higher price to use Amgen’s drug again.

“And I was like, ‘Did I just meet with the mob?’” Tracey Mooney, the chain’s chief financial officer, tells The New York Times, adding that Amgen was effectively threatening to turn her clinics, run by the nonprofit Independent Dialysis Foundation, into a money-losing operation. With the anemia drug accounting for about a third of total costs, she concludes, Amgen “can make or break me.”

Amgen would not comment , saying the matter was part of its litigation with the competitor, the Swiss drug giant Roche — a case that could go to a federal jury in Boston this week. In its legal briefs, Amgen says that any “alleged threats,” even if they were made, were inconsequential. But there is nothing inconsequential about the looming clash, the Times writes in a detailed look at the closely watched litigation. Even as Amgen reels from recent safety questions about its anemia drugs, it is bracing for a possible assault by Roche on its franchise, worth $7 billion a year, the paper continues.

It is a war that will be waged not so much with medical studies as with marketing muscle and bare-knuckles pricing tactics intended to capitalize on the rules of Medicare, the Times continues, and because of quirks in those rules, the product with the higher price might have the competitive edge.

Roche says it expects the FDA to approve its drug, Mircera, by Nov. 14. If it reaches the market, Mircera will break the monopoly Amgen has had selling anemia treatments to American dialysis centers since the approval of its drug, Epogen, in 1989. Since then, Amgen has sold more than $25 billion worth of Epogen, including $2.5 billion worth last year. Most of those billions came from Medicare, which pays to treat almost all the nation’s 350,000 dialysis patients. Almost everyone whose kidneys stop functioning develops anemia.

Mircera would also compete with Amgen’s newer anemia drug, Aranesp, which now has even bigger sales than Epogen, and with Procrit, a drug sold by Johnson & Johnson under a license from Amgen. Aranesp and Procrit are used primarily to treat patients with kidney disease who are not on dialysis, as well as patients receiving chemotherapy for cancer. Roche is seeking approval of Mircera only as a treatment for kidney disease, not for use in cancer therapy.

Amgen’s first line of defense is its patent-infringement lawsuit in Boston. Because the judge has already ruled that Mircera infringes one Amgen patent, Roche must convince the jury that the patent itself is invalid. If Roche fails, Mircera might never reach the market. But if Roche prevails, the fight will move out of the courtroom and into the marketplace.

According to documents made public in the litigation, both companies have planned for years for their showdown, even conducting “war games” in which some execs acted as the competition to develop pricing strategy.

A crucial factor in the battle is that dialysis clinics can profit from drugs they administer on site, including the anemia drugs, which are usually infused intravenously during dialysis. The profits come from the difference between the clinics’ cost for the drugs and the often higher rates at which Medicare and private insurers reimburse them. Hospitals and doctors’ offices can also make money this way.

In the past, some drugmakers gamed this system by setting list prices far higher than actual prices, increasing profit for doctors as a way to win their loyalty. Drugmakers caught rigging the reimbursements in this way have been assessed big fines. Medicare has since changed its rules to greatly reduce the ability “market the spread,” as the tactic is known.

Medicare now reimburses doctors and clinics for med at 6 percent over the drugs’ actual average selling price, which is about $170 for an average weekly dose of Epogen. A small dialysis provider might make about $7 on that weekly treatment; a large chain, with bigger discounts from Amgen, could make much more. But there is a six-month lag in calculating the average price. So for the first six months a new product is on the market, Medicare generally reimburses at 6 percent above the wholesale price set by the maker.

Documents unsealed as evidence in the litigation indicate that Roche planned to use that six-month period to essentially buy market share by setting a wholesale price that, although a bit lower than Aranesp’s official list price, would be about 38 percent higher than Aranesp’s current average selling price and 78 percent higher than the Epogen price.

Roche could then offer big discounts off the wholesale price to clinics, hospitals and kidney centers — potentially allowing them several times the profit they would get from using Amgen’s products. If that happens, Economics 101 would be stood temporarily on its head. Rather than lowering prices, competition would end up raising Medicare’s costs, at least for the first six months.

Asked about the documents, George Abercrombie, the president of Roche’s North American pharma division, says the drugmaker hasn’t made a final decision on Mircera’s pricing. In a brief filed in the litigation, Roche said it needed to offer discounts to establish itself in the market and bring about competition. Abercrombie, declining to discuss the first six months, says, “We believe firmly that our availability will offer competition and will over time bring prices down in this market and save payers money.”

Herb Kuhn, the deputy administrator of Medicare, also says competition would kick in after six months. “New entrants have a profound effect on the downward push on prices,” he says, “and we don’t see that this would be any different.”

But Amgen, according to internal memos made public in the patent case, debated internally for years about how best to neutralize what it described as Roche’s “unfair pricing advantage.”

At one point, it even considered taking Epogen off the market for a year — forfeiting nearly $3 billion in sales — a period that under the rules would enable Amgen to resume Epogen sales using the same price tactic Roche has considered. Such a move, dialysis providers say, would have created severe medical and business disruptions for the patients and clinics.

An Amgen consultant also proposed having the company conduct clinical trials of its own drugs to “monopolize key trial sites” and impede Roche’s ability to perform the studies it needed for approval. “Every month we delay” Roche’s drug, the consulting firm, BAI, explained in a slide, is the equivalent of $100 million in extra sales for Amgen. It is not clear whether the idea was put into practice.

Amgen was especially worried that Roche would lure away two big dialysis chains, Fresenius and DaVita, which each account for about a third of the dialysis market. So it protected itself by making a pact in fall 2006 with Fresenius. The chain agreed to stay with Amgen exclusively for five years in exchange for additional Epogen discounts and rebates. And Roche was locked out of one-third of the dialysis market.

According to an internal Amgen slide, the contract “spends” $300 million to “buy insurance” against a potential loss of $2.5 billion in business from Fresenius.

Ronald Kuerbitz, the chief administrative officer of Fresenius Medical Care North America, says his company agreed to the deal because there was no evidence that Mircera, if it even reached the market, would be medically superior to Epogen. There were “so many unknowns about CERA,” he says, using another name for Roche’s drug, “that the smart move was to take the money offered to us, rather than risk that and hope the CERA product would turn out to be a better decision.”

Another Amgen strategy was to offer hospitals bigger discounts on two other drugs for which it has a virtual monopoly - Neupogen and Neulasta, both used against chemo side effects - if hospitals bought most anemia drugs from Amgen. Amgen, according to documents, also decided to emphasize to customers that it was confident it would win the patent case, to discourage the clients from switching to Mircera if the drug became available before the case was decided. Roche’s antitrust counterclaims in the patent suit are scheduled to be heard in a separate trial starting in December.

In legal filings, Amgen argues that its actions were normal competitive practices and that its extra discounts to Fresenius and to some hospitals lowered prices. It also says that even though there are hundreds of dialysis providers, Roche could cite only Mooney’s case and one other instance in which Amgen was said to have threatened reprisals for switching to Mircera. In neither case, Amgen argues, did the supposed threats result in loyalty to Amgen. In fact, they may have had the opposite effect.

“It’s that kind of threatening demeanor of the company that makes me want to go to the competition,” says Mooney, whose chain has recently become a paid consultant to Roche, teaching its sales force about the dialysis business.

Source: The New York Times