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John Orwin – CEO

Analysts

Meredith Cheng – Lazard Capital Markets

Affymax, Inc. (OTCPK:AFFY) Lazard Capital Markets Healthcare Conference November 14, 2012 1:00 PM ET

Meredith Cheng – Lazard Capital Markets

Good afternoon everyone. I think we’re going to go ahead and get started. My name is Meredith Cheng, I am part of the biopharma team here at Lazard Capital Markets. And we’re pleased to have Affymax here with us this afternoon. And I'll turn it over to John Orwin, CEO.

John Orwin

Thank you very much and welcome. It’s a great pleasure to be here this afternoon and to provide an update on Affymax and the launch of our products OMONTYS. I should point out that we will be making forward-looking statements and our results may vary from projections that we may make and I would recommend that you look to our latest 10-Q on file for a complete discussion of our risk factors.

So this is actually the safety information of OMONTYS which comes along with actually having an approved product. So it’s actually better to have than not to have I suppose. OMONTYS was approved back in late March for the treatment chronic kidney disease in adult patients who are on dialysis in order to correct their anemia and as you’ll see, the label is very similar as are the warning for OMONTYS as exists for other ESAs including Aranesp. Here is a shot of the product itself. It represents the first one’s monthly ESA available in the United States. The market for ESA and dialysis has been primarily Epogen which is a 13 times a month product and again approved for treatment of anemia and this chronic kidney disease patients on dialysis.

So, first one once monthly product launch in the second quarter. We compete in a large market. it’s a little greater than $2 billion net in the US and we believed and I think it’s been affirmed in the marketplace that there was a strong desire to have therapeutic alternative to Epogen and Aranesp to the existing ESAs particularly in the dialysis setting which had up until we launched earlier this year than for all intents and purposes a monopoly market for over two decades. So we’re about four months into the launch and we’re happy to report on some terrific progress that we've made. Fresenius which is the largest dialysis provider in the US has undertaken a fairly large scale conversion. They've converted over 10,000 patients at this point and we have a supply agreement in place with them and we’ll be working toward a long term supply agreement. We announced last week on our earnings call that we signed two additional medium sized dialysis organizations or MDOs bringing the total to four out of the existing six, so roughly two things of the available business on the MOD side.

And then we've also achieve a meaningful penetration into the smaller and independent dialysis organizations as well which among them make up about 15% or $300 million of the total market.

As I'll describe in a bit, we have a very strong strategic alliance with Takeda Pharmaceuticals who have responsibility for OMONTYS ex-US and with whom we have collaboration and a profit split inside the United States. We also reported $100 million in cash and investments at the end of the third quarter.

So to begin with, OMONTYS is a differentiated product. It does bind to and stimulate the erythropoietin receptors in the way that conventional cell derived ESA such as Epogen do. But is a synthetic peptide based ESA. So non-cell derived. And in fact has no shared structural homology with either endogenous erythropoietin or the recombinant ESAs.

Safety and efficacy were demonstrated in a very large Phase III program in dialysis and particular two large randomized mutually supportive controlled trials. The evaluation was done for efficacy on the basis of non-inferiority looking at hemoglobin stability and control and each of those studies was independently powered for efficacy and met its primary and secondary endpoints.

Safety was evaluated on the basis of a blinded independently and judicated (ph) comprehensive cardiovascular safety analysis and were really the first product in this category to have done that evaluation and the safety analysis was a pool analysis across the two studies in dialysis as well as two studies in pre-dialysis again, meeting the primary and secondary endpoints for safety in this large analysis which included over 2,500 patients.

So as mentioned before, we’re approved for chronic kidney disease patients on dialysis but it’s important to point out that the label we were granted includes both maintenance patients, patients who can be switched from EPO as well as so called incident patients or patients who are new to dialysis. Its counter-indicated and uncontrolled hypertensive patients and patients with serious allergic reactions as is the case for other ESAs. As mentioned before, the pox warnings were all very similar.

The package insert also includes a conversion table, there is a nonlinear dose conversion from EPO to Amicus, but it’s actually very straight forward using the table that's included in the package insert. And that information allows you to correct dose either patients who are new to dialysis or patients who providers might be switching from Epogen. And then the product is also stable at room temperature for up to 30 days when its unused which actually is quite helpful to the dialysis centers themselves, the competitor products needing to be keep refrigerated.

Along with this exciting approval came couple of post marketing commitments that I'll share with you. The first and observational study which will evaluate and track the long term safety of OMONTYS, that will begin next year and complete in 2018. It’s mostly utilizing data that already exists as the centers capture and report a lot of information. So its OMONTYS’ financial effort but it will be very helpful to have this information long term.

We are also undertaking a randomized control trial in the setting of incident dialysis patients. Remember I mentioned before, our indication includes those patients but as with other ESAs, we provided approximately a couple 100 patients worth of data, most of our data was in the maintenance setting. So we will be undertaking roughly 1,000 patients plus randomized control trial. That will start 2013 and complete in 2019 and that is while Affymax will be running it, it’s a shared endeavor between Affymax and Takeda who are our partners.

And then we have four pediatric studies, all of which will begin next year and complete beginning in 2017 and all the way up to 2027 and Takeda will be running those trials but they will be billable to the collaboration.

So OMONTYS is available for monthly dosing in all patients. So we have always treated on monthly basis, all of our rests are for patients treated on a monthly basis. The product can be given either IV or subcutaneous and within the target range, but as similar doses, we launched initially with multi-use files. We do have other skews that are planned and approved but haven't been launched yet.

As I mentioned before, safety and efficacy have already walked you through very similar label to what exists for EPO but a very large and comprehensive evaluation of cardiac safety. Also very low incidence of neutralizing antibodies EnVivo (ph) and no cases of pure red cell platelet and that comes back to the mechanism of action I talked about before where there is no shared homology with the native erythropoietin.

So let`s take a look at the market now that we’re now in it. It is a very large but very concentrated market where two providers Fresenius and DaVita make up approximately two thirds between them of the total market and then the remaining third is divided among medium dialysis organizations, small and independent and then a small amount used in the hospital setting as well. So it’s very highly concentrated even within the remaining third of those MDOs are about six corporate entities that control roughly 15% of the business. So between those six and Fresenius and DaVita you basically have eight corporate entities who control about 85% of the utilization of ESAs in the United States.

So looking at the market opportunity itself, DaVita is about 30% patients share in the US. They did sign a long term exclusive arrangement with Amgen back last December. It calls for 90% utilization of ESA from Amgen and leaves 10% available for other manufacturers. Interestingly the rebate structure, at least in the near term was structured in such a way that the cost to DeVita actually went up in the short term which clearly indicates that they didn’t expect that there would be a competitor.

Fresenius makes up about 35% of the market, so somewhat bigger than DeVita. They signed a nonexclusive agreement with Amgen, they are a large multinational corporation and as I mentioned, we are in a significant conversion pilot with them with over 10,000 patients already treated.

And then the medium and small dialysis providers that make up that remaining third. It’s worth mentioning that they have historically paid much higher prices for EPO than have the large dialysis organizations. Again, between that and bundled reimbursement making them very actively interested in having an alternative to Epogen.

So Amgen, monopoly in dialysis for roughly 22 years. a bundled reimbursement went into effect which included ESAs in 2011 and this has resulted at least initially in a fair amount of ESA staring. So providers trying to use Epogen . We think that opportunity is now more or less past and so far as they've brought their EPO doses now and they've brought the hemoglobin targets down and now they are bumping up against higher rates of transfusion which after all is the purposes of ESA therapy.

Maybe on other point, once monthly of course provides the advantage of listeners in time, less administrative time, less drawing up of syringes and the costs associated with those. But there is also an impact potentially on patients in the hospital. So these patients have a lot of core mobilities and are fairly frequently admitted to hospital. During that time, they don't typically receive the short acting ESA. So a lot of times they come out of the hospital with a low and declining hemoglobin and they have to come back to the dialysis center who has to correct them and put them back up in the range. Everything else being equal, it would appear that OMONTYS provides pretty effective hemoglobin control as its once monthly for patients while they are in the hospital, another potential advantage for OMONTYS.

So we've laid this out before. This describes the process, this is a very unique market where we saw the uptake of OMONTYS broken out into four relatively discreet stages. The first where we would enter into contract discussion and pilot program discussions with providers, this began immediately upon arrival barely within a day of our March 27th approval date. Then we always anticipated that the second stage would be a refinement of our contract completing the supply agreement and then beginning the pilots and many of those pilots have already begun in small, medium and now large balances of organizations including Fresenius.

Then the idea is that with a certain amount of experience in data, the provider will look at that data and make a decision about how much of their business they want to convert to OMONTYS and then happy to say that at least anecdotally the feedback we've gotten so far has been very, very positive in terms of meeting their expectations both at the sort of corporate level but also in the individual centers which have founded very straight forward actually to make these conversions. And then we expect contracts including longer term agreements to follow from there.

The pricing strategy is essentially that we have parity pricing with EPO at the whack level or wholesale acquisition costs. That’s not the price that almost anybody pays. From the whack price they are on invoice discounts as is the case for Epogen and then below that are customer specific rebates typically in return for performance. The whole idea here was we have to be at parity at whack to be rewarding and incentivizing for a fast conversion and for higher penetration for those dialysis organizations who are committed to doing so and then in return, being able to provide them with a pretty significant cost savings which they had been unable to obtain with Amgen over the years.

So maybe a few words about the Fresenius agreements, in particular, the first agreement runs through April of 2013, supply agreement, they had made a commitment early on to adopt OMONTYS in over 100 centers treating roughly 10,000 patients, they met their goal sometime in the beginning of October and their plan is to evaluate the potential to expand to additional centers based on this experience and perhaps between now and when they make a definitive decision sometime in the first quarter. No financial terms of that agreement were disclosed.

So I mentioned that we signed agreements with four of the remaining six, U.S. Renal Care being one that was interested in participating with us in a press release. The others have chosen for various reasons not to announce their participation for competitive reasons. But these are the four of the six makeup a significant portion of that medium size dialysis organization. We define MDO as those centers or those corporate entities that have 4,000 patients a year.

These agreements are longer in duration in Fresenius contraction and they don't in anyway limit the number of patients that can be treatment. So an MDO can make a decision at any point that they want to convert all or none of their business. We believe based on the results that we've seen so far that several of them are interested and one in particular has said publicly that their intent is to convert their whole business to OMONTYS. Again financial terms were not disclosed.

This is a little bit of an eye chart, but it’s actually a very helpful slide because it shows you the number of patients for each of these different corporate entities and there are ten in total from highest to lowest beginning with Fresenius and DeVita down to centers for dialysis care. Six of the eight non-Fresenius and DeVita are what we would call the MDO. That gives you a sense of the size of the population we’re launching and Fresenius has 160,000 patients, DeVita has 140,000 patients and from there, drops up pretty quickly to 13,000 patients with DCI but still a very significant opportunity for all the corporate entities on this list.

So keys to commercial success for us. We believe that the intrinsic properties of the product to make it interesting, the less frequent dosing, the less nursing time, good hemoglobin stability and control and non-inferiority that was established, but we knew coming into this market with the bundle, customers would also want the opportunity to save money. So we have priced it in such a way that will allow them to achieve that through performance based rebate strategy. We have deployed a superb sales force of field organization about 80 reps on the medical side, complemented by medical science liaisons and 20 ramping up to 30 dialysis, nurses we actually deploy in the centers when they are making conversion and we then we have national accounts teams calling on the larger corporate entities. They are supported in turn by a payer account team at both Affymax and Takeda. We were fortunate enough to get a product specific Q-code issued to us very shortly after approval. That will be replaced beginning January 1st with a permanent J-code. So that's product specific and permanent and should put to rest any remaining reimbursement hitches which has gone quite well but it would be nice to have the pretty much completely behind us. This organization provides a very high level of support to centers and providers as they are converting.

Taking a look at our financial highlights. We reported $100 million in cash and investments at the end of third quarter, $15 million in the third quarter, net sales, so those are net product sales to the collaboration of OMONTYS. This was really our first full commercial quarter, very pleased with the early uptake and results. We also provided some expense guidance. We revised that downwards slightly. We've not given sales guidance but we did guide to expenses excluding stock based comp of between $130 million and $135 million which is down slightly from what we had previously guided to. Importantly this does not account for or include the 50% of OMONTYS related cost that are reimbursed back to us from Takeda. So the cost are in those growth numbers that I gave you but much of that, a fair portion of that is actually reimbursed back to us in our collaboration. And then stock based comp of about $10 million.

The partnership looks essentially like a 50-50 profit split in the US, Takeda and Affymax share all of the expenses and we put that into a product P&L so that sales force that I talked about before that we feel, those costs go into the profit split as do any commercial or medical affairs cost that Takeda may have. Also those post marketing commitment studies that I mentioned, all of those go into the collaboration as well. Takeda books the topline sales, the cost of goods and their own commercial expenses, we book our commercial expenses and then there is a payment made to us from Takeda that is essentially the profit equalization from them.

Looking ex-US, Takeda is exclusively responsible for development efforts and commercialization efforts outside of the United States in return for which we received royalty on product sales and NAA filing was accepted by the EMA in February of this year for the same indication essentially as in the US. Europe has a similar number of patients but it is much smaller market for ESA primarily because it is very fragmented and very competitive. Nevertheless we do see it as an opportunity for two once monthly product and as well Takeda is seeking a sublicensing partner in Japan as they don't have existing real franchise there.

So taking a look at the milestones on what's been a very productive and exciting year so far, the MAA application accepted by the EMA brought with it a $5 million milestone. The approval on March 27th was actually the earliest that we were likely to be approved that was our (inaudible) backdrop with a $50 million milestone from Takeda. The reimbursement first temporary and now permanent that I mentioned, the commercial launch we essentially had our entire commercial organization higher trained and deployed within about two months of the approval date. We had a lot of contingent offers out to people we've already identified the people we wanted on our team and that one’s already smoothly.

We've initiated pilot programs at many dialysis centers including over 100 with Fresenius alone and then a couple of weeks ago, we presented data at ASA and we’re roughly eight data sets that were highlighted. From now to the end of the year, we do expect the peer review publication of our Phase III data, we are also in discussions with other providers including other medium sized organizations and hope to be in a position to announce more agreements in the fairly near term. J-code, I talked about already, we expect a decision on that MAA filing in the first half of 2013.

So with that, I will take questions if you have any. There are only a couple minutes remaining. But I am joined by Sylvia Wheeler who is our VP of Investor Relations and Herb Cross who is Chief Financial Officer for Affymax.

Question-and-Answer Session

Unidentified Analyst

Just wanted to see if we could hear about any of the feedback that you’ve gotten so far from any of your pilots and also what type of metrics should we expect, you know the here ones that (inaudible) completed?

John Orwin

So far most of the feedback has been anecdotal and it relates to the experience that centers and nurses have had with converting patients and the feedback we've gotten has been very positive. The early information that we've got also anecdotal suggests that the product has essentially met the conversion efficiency that we thought it would. I mean that was based on a lot of experience and a lot of modeling but you don't know until its actually in the hands of the customers. And most of the pilots are not intended to really sort of evaluate in a comprehensive way safety and efficacy because we did have such a comprehensive program going into the review and approval. They want to understand what are the operational issues in converting a center and so far those have been very few and the feedback we've gotten is actually that it’s much easier than they would have anticipated given how long they have been using Epogen.

And then the other big thing that I think they want out of the pilot is they really want to know by looking at the data whether it’s a product in their hands and their patients delivers the level of value that we agreed upon and that all comes back to that non-liner dose conversion. We have created very significant data analytics capabilities to support that and we are working closely with our customers especially Fresenius and gathering that data, analyzing it and being sure that we can share assumptions going into the negotiations for a final agreement.

Unidentified Analyst

[Question Inaudible]

John Orwin

Yes obviously they have been in this space for a long time. I am sure their sales reps do a very good job. But they have been in the position of basically dictating price for over two decades and some of their customers, in particular the medium size and smaller dialysis organizations did not benefit at all from that pricing and there is a long sort of history there. So I think the reps I am sure are doing a great job. I think at the corporate level, it’s always an adjustment to find yourself after a long, long time staring down competition.

So far we haven't seen a huge response from them. We do know that they have locked up 90% DeVita’s business for seven years and we do think that that probably somewhat constrains their ability to respond on price. It doesn’t mean that they can’t do it, but we haven't seen it so far. And I think that at this point, they are taking a little bit of a wait and see approach to see how much progress we can make in the marketplace and again, I am very pleased with the progress that we've made.

So I am not terrible concerned about that near term. I mean we have to take all competition seriously. Looking further out, there is the possibility of a (inaudible) launch in July of 2014. We haven't seen anything to suggest that they are actively gearing up for a launch but the product is approved in the United States and that's a possibility.

And then longer term, we think there is a possibility for biosimilars in 2015 and beyond, probably a manageable competitive threat for us given that those will be 13 times a month and our product is once a month, but nevertheless important to take seriously, due in particular (inaudible) and Hospira.

Okay, with that, I think I am out of time and out of questions. Have a great afternoon.

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