Affymax (AFFY) submitted its 4th quarter 2012 results and annual report yesterday, and it was not a pretty sight. AFFY wasn't financially prepared to deal with the recent recall of its dialysis drug, OMONTYS.
Its Q412 loss was $68.3 million (or $1.85 per share), a large chunk was from $45.0 million in impairment due to inventory and firm purchase commitments from its recall of OMONTYS. Interestingly, the company didn't set aside any funds in anticipation of the inevitable lawsuits from patients who had a severely bad reaction to OMONTYS.
Not Much Net Cash Left
As of February 28, 2013, AFFY's cash balance was approximately $67M, debt and commitments total $44M, and the estimated costs and expenses of the reduction in force comes to $8-$10. That leaves only about $13M-$15M net cash left.
As stated in the quarterly report, that net cash will have to pay for:
1. Expenses pursuant to and in continuation of AFFYs arrangement with Takeda under the collaboration agreement and conduct the ongoing investigation and support the recall of OMONTYS, and
2. Projected costs for maintaining ongoing operations as a significantly smaller public company.
However, what the quarterly report doesn't mention, is:
In the 10-K, on page 15, it mentions three lawsuits filed against AFFY. Two are shareholder class action suits, and one is from the California Superior Court for the County of Santa Clara accusing certain AFFY officers of breaching their fiduciary duties related to the clinical trials of OMONTYS.
Also on page 15, the report says:
Likewise, if product liability lawsuits are brought against us for injuries or deaths due to patients' adverse reactions to OMONTYS, we may be subject to additional liability. In any event, a potential product liability lawsuit would require significant financial and management resources.
Stockholder class action lawsuits are the least of AFFY's worries. The big lawsuits are going to be from the patients who died or had severe allergic reactions from OMONTYS. I think the market is discounting this because it wasn't mentioned in AFFY's quarterly report.
About 50 people who took OMONTYS have experienced severe allergic reactions to the drug. Since it was approved in March 2012, about 25,000 people have been treated with OMONTYS. Five patients have died due to the severity of their anaphylactic shock. 17 had severe allergic reactions requiring hospitalization.
Whether the lawsuits are merited or not, those who had severe reactions from the drug, or their remaining family members, are going to sue. I believe the lawsuits would be merited. The fact that AFFY had to take OMONTYS off the shelf proves that there is something wrong with the drug that the company and/or the FDA didn't catch. That shows that there was a certain degree of negligence involved somewhere.
Death is a serious adverse event, and the families of the people who died will do all they can to have some retribution. The five that died will probably get $1M apiece minimum, so that's another $5M minimum in expenses right there. Then the other 45 patients who experienced severe reactions will get compensated as well, probably an additional several hundred thousand dollars total. Add attorney fees and time spent, and the shareholder class action lawsuits and other lawsuits could cost AFFY $10M or more.
AFFY's $13M-$15M of net cash it has left will be gone within a couple months from now. Its only hope is to sell the rights to its drug, OMONTYS, for a sizeable sum. However, the millions of dollars in settlement costs will go to the firm that acquires OMONTYS, and that makes it even less attractive.
Past Settlements For Dangerous Drugs
The following are four companies that had to pay huge settlements and legal fees due to lawsuits related to unexpected, severe side effects from their drugs.
1. GlaxoSmithKline (GSK) had spent about $6.4 billion on settlements related to its Avandia diabetes drug that reportedly caused heart attacks. There were about 2000 death lawsuits from Avandia. That comes to about $3.2 million per death that GSK had to spend in total.
2. Merck (MRK) settled Vioxx lawsuits for $4.85 billion in 2007. Merck pulled Vioxx from the market in 2004. Vioxx was a painkiller for arthritis that 27,000 lawsuits claimed caused heart attacks and strokes. Merck still claimed it was not at fault over the drug.
3. In 2005, drugmaker Wyeth announced that it had set aside $21.1 billion to settle more than 60,000 Fen-phen lawsuits. Fen-phen was a diet drug that reportedly caused cardiac side effects.
4. Birth control pill Yaz, by Bayer (BAY), is still on the market. However, it has severe side effects and Bayer is being sued in 1100 lawsuits claiming that it causes a higher risk of blood clots. At $220K on average settlement, it could cost Bayer billions.
Affymax Only Has OMONTYS
AFFY only has OMONTYS as an asset, it doesn't have any other drugs in its pipeline. Any salvation for the company needs to be from the sale of OMONTYS. However, acquiring OMONTYS doesn't seem very appealing. If a big pharma company has an interest in acquiring OMONTYS, it would have a lot of work to do. First it would have to get the proper training from OMONTYS scientists and doctors to understand the details of how the drug works. Then, it would have to do studies to figure out what the exact problem was with OMONTYS and how to prevent further adverse reactions. Next, OMONTYS would have to go through more trials and be re-approved by the FDA. Then, even if the drug could be put back on the market, there's no guarantee that hospitals and clinics would want to use it because of its dangerous history. Also, there's no guarantee that dialysis patients would want to use OMONTYS because of its dangerous history and bad reputation of getting recalled.
Amgen (AMGN) might want to acquire OMONTYS to solidify its monopoly over the dialysis market. It already had a monopoly with Epogen before Affymax came along with OMONTYS. But I don't think Amgen needs to acquire OMONTYS. It has already been established from the recent disastrous results from OMONTYS that Epogen is safer.
A big pharma company might acquire OMONTYS to study it and try to improve on the drug. It might want to slightly change its chemical makeup to make it safer. However, usually a big pharma doesn't have to acquire the drug in order to make improvements on it. An improvement of a drug generally doesn't get in the way of patents if it's done right.
Deferred Tax Asset Probably Won't Be Realized
Many shareholders are hanging on hoping that AFFY's net operating loss (NOL) carryforwards will make it more appealing to an acquirer. This doesn't seem like it will happen.
In its 10-K on page 51, it states:
Due to our announcement of our voluntary recall of OMONTYS in February 2013, there has been an extremely high volume of trading of our stock, which may trigger a shift of ownership amongst our 5% stockholders that could result in an ownership change (greater than 50%) as defined by the Internal Revenue Code. This could result in a significant impairment of our NOLs and potential elimination of our gross deferred tax asset, which is currently subject to our valuation allowance as it had been previously determined by management that it is more likely than not that the deferred tax asset would not be realized. We are currently in the process of assessing the impact.
Without the NOL carryforward, I don't see the appeal for a big pharma company to spend very much to acquire AFFY and try and take a shot with OMONTYS. If OMONTYS doesn't get acquired from somewhere and for a price to keep the company alive, then AFFY will go bankrupt and shareholders will get nothing.