Medicare Whacks Oncology Drugs

Poor Cell Therapeutics (Nasdaq: CTIC). It agreed to license ZEVALIN from Biogen Idec (Nasdaq: BIIB) back in August, and now Medicare is about to reduce the reimbursement rate for that drug and GlaxoSmithKline's (NYSE: GSK) Bexxar.

The drugs, which treat non-Hodgkin's lymphoma, cost almost $30,000 per treatment, according to the companies. Effective Jan. 1, though, Medicare will only reimburse hospitals about $16,000 for each treatment with the drugs. Medicare is supposed to reimburse the hospitals at the lowest rate available, supposedly the price paid by various hospitals, so maybe the program's data is incorrect.

Like similar decisions about Sepracor's (Nasdaq: SEPR) asthma drug Xoponex and Amgen's (Nasdaq: AMGN) anemia-treating compounds, the lowered reimbursement rates will cut revenue derived from the drugs, but it could actually be worse for these oncology drugs. Federal rules bar hospitals that do not offer a drug to Medicare patients from administering the drug to other patients. If hospitals decide not to lose at least $10,000 per Medicare patient, the companies will also lose all the non-Medicare business from the hospitals as well.

There's still hope for the companies, though. The U.S. Senate finance committee is considering adopting a measure that would put Medicare payments in 2008 at 2007 levels.

It looks like Cell Therapeutics is the big loser, because it thought it was licensing a drug with around $16 million in annual sales. If those sales are cut substantially, it'll take a while to recoup its $10 million investment. That's a lot of money for a company that only had $38 million in cash and cash equivalents at the end of the latest quarter.

Ultimately, though, it doesn't matter how much Cell Therapeutics gains or loses on ZEVALIN. Its future rests on its lead drug XYOTAX, for which it hopes to submit a marketing application in the first half of next year.