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Affymax (OTCQB:AFFY), after being purchased in 1997, was spun off (77% of the Company) by Glaxo SmithKline (NYSE:GSK) to a venture capital firm for $4.3 million, and completed the circle by going public again in an IPO in late 2007 at a price of $25 a share. At that time its accumulated operating deficit was $165 million. In the intervening 5 years the deficit has been run up to $475 million according to the 3rd quarter 10-Q. In the 3rd quarter of 2012 alone, the first quarter of revenue produced by sales of its flagship and currently only drug, Peginesatide (Omontys), the net loss was $25 million, partly due to initial marketing start up costs.

The tremendous advance of the stock price in 2012 from a low of $6.75 at the beginning of the year to a high of $27.74 in October was largely attributable to the company's potential for capturing a large portion of the existing $2 billion-a-year U.S. market currently served by Amgen's (NASDAQ:AMGN) Epogen, an erythropoiesis stimulating agent (ESA) that stimulates red blood cell production for dialysis patients who suffer from anemia related to their treatment. Epogen was the first blockbuster billion dollar pharmaceutical that helped establish Amgen as the World's premier biotech company. Epogen allowed this category of dialysis patients to forgo biweekly transfusions and added years to their life span.

Now Affymax is facing the actual task of capturing a large portion of that market. If the Affymax sales agreements with Fresenius (NYSE:FMS), U.S. Renal Care, DSI Renal, and others leads to rapid adoption of Peginesatide by these companies for their dialysis treatments, Peginesatide revenues could potentially explode from $15 million in the 3rd quarter to as high as $175 million per quarter in the very near term. Along with this, the stock price of Affymax could see a dramatic rise. In 2012 Piper Jaffray was predicting 2015 year earnings of $1.57 a share and a 2013 Price Target of $36. R W Baird's price objective is $30 per share. And in fact Amgen, in looking to future competition from Peginesatide and possibly Roche's (OTCQX:RHHBY) Micera launching in July of 2014 and biosimilars potentially available in 2015, including the all oral options, has pre-notified its Longmont, Colorado, bulk Epogen plant employees of the planned shut down of the facility at some time after August 2013.

So what are some of the hurdles Affymax needs to cross to capture a large part of the ESA market?

1. Dialysis centers need to have confidence that RBC stabilization is achieved for patients who are transferred over to Peginesatide from Epogen. This may be somewhat tricky for Peginesatide, since it is only administered once a month, and there is opportunity for anemia to set back in before the next month's dose. The competition is claiming in a 3rd quarter conference call available on SeekingAlpha that clinical data shows 50% of Peginesatide patients are not being stabilized after one month.

2. With Fresenius and possibly other centers, Amgen has a price break built in for 90% adoption among their patients that may go away if the centers don't meet that goal. This means there is a financial penalty for converting to Peginesatide.

3. In March 2012, with its approval, the FDA accepted Affymax's EMERALD 1 and 2 studies which included 1600 patients with a determination that Peginesatide was effective and posed acceptable cardiovascular risks. However, a study of 101 chronic disease patients submitted in April 2012 and published recently in the Clinical Journal of the American Journal of Nephrology (Fishbane et al.), 40 serious adverse effects and 2 deaths were reported among the study population. The study was conducted on patients who were switched from treatment with Darbepoetin Alpha to Peginesatide and included both hemodialysis and non-dialysis patients. Efficacy for the once-monthly treatment of Peginesatide seemed to be adequate. With 10,000-plus patients switched over to Peginesatide at Fresenius centers, this will offer a larger population to further define the safety of Peginesatide. Adoption rates of Peginesatide by dialysis centers will likely be dependent on their perception of its safety.

4. Acceptance of Peginesatide is also dependent on decisions by treating nephrologists. According to BioTrends, nephrologists are aware of Peginesatide, but not rapidly adopting it. Perhaps from a nephrologist point of view, the well-established Epogen poses less of a safety risk factor and less of a liability factor than the new Peginesatide.

5. Clouding the issue is the situation that Takeda Pharmaceuticals (OTCPK:TKPYY), Affymax's Japanese partner with ex-US rights, is not commercializing Peginesatide in Japan, but is willing to license Peginesatide commercialization rights in Japan to a suitable third party, but thus far one has not been identified that would agree to terms.

Affymax also faces a financing issue if there are significant delays in commercialization of Peginesatide. Yes, even for rapid growth companies profit numbers matter. Affymax registered a $25 million loss in the 3rd quarter and ended the quarter with approximately $99 million in cash and short term investments available. With respect to the profit picture, unless the Company can introduce further cost controls, profitability will not be achievable until quarterly revenues from Peginesatide available to Affymax reach approximately $27 to $30 million. Since Affymax splits Peginesatide revenues equally with its partner Takeda, this would mean total quarterly revenues for Peginesatide would have to be at the $54 to $60 million level which would represent almost 4 times the third quarter's revenue of $15 million. Affymax reported $13.6 million in collaboration revenue for the 3rd quarter which included a profit equalization payment (profit sharing) of $10.377 million, a number which actually exceeds Affymax's 50-50 share of Peginesatide quarterly revenues ($7.5 milllion attributable to Affymax under a 50-50 split). Affymax does not provide revenue guidance for upcoming quarters.

The Centers for Medicare and Medicaid Services under pressure for cost savings may publish lower rates for dialysis services that could have a negative effect on pricing of Peginesatide and downward pressure on revenues.

According to Yahoo Finance, six analysts estimate on average that Affymax on or about the 14th of March will report revenue of $18 million in the fourth quarter of 2012. This represents nearly a 400% increase over the fourth quarter of 2011 and is driven by the anticipated acceptance of the Company's Peginesatide drug.

In conclusion, Affymax offers significant upside potential provided that there is rapid conversion from Amgen's Epogen to Peginesatide. Affymax also represents significant downside if the conversion rate is less than optimal. Investors would be able to make a more informed decision if the Company were to provide additional indication of its progress in commercialization of Peginesatide.

Source: Affymax: Investor Darling In 2012 Now Has To Perform In 2013