Affymax: Huge Speculative Upside With Near-Term Risks

| About: Affymax, Inc. (AFFY)

Editor's Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

The current market has produced some huge inefficiencies in stock prices that can be taken advantage of if you can properly identify them and manage to act on them in time. Enter Affymax, (AFFY) a highly interesting biotech play that may turn out to be one of those special situation (profit opportunities) that the market lays at our doorstep once in a great while. Last September it was Questcor (QCOR) at $18 - $20 and is currently trading at around $46.00.

In this article, I will make the case for AFFY and lay out the risks.

As a notable, longtime biotech trader and author this is a speculative Buy and Hold position for me. (See my Questcor and Vivus articles.) You should, of course, conduct your own due diligence, consult with your financial advisor and trade according to your investment plan.

I also wrote an article a few months back that was published on May 7, 2013 suggesting that the devastated share price could bounce. To my surprise, it did in fact bounce from around $0.80 cents to over $2.00 and then, it has since dropped back. I suspect that funds who have a charter not to hold stock over certain levels may have contributed to the sell-off. Most recently, the share price has fluctuated in the $1.10 to $1.15 range.

Brief Overview: Summary of the Affymax/OMONTYS Story

Affymax's sole drug product is OMONTYS® (peginesatide) Injection ("OMONTYS"), which was approved by the FDA in 2012 and well received by the medical community as a treatment for anemia due to chronic kidney disease (CKD) in adult patients on dialysis. The drug seemed destined to break Amgen's (NASDAQ:AMGN) monopolistic stranglehold on this large population therapeutic area, as both drug sales and AFFY share price rocketed.

Then the trouble started. (The cascading waterfall starts here.)

As it turned out, the drug performed very well in a controlled clinical trial environment. Both safety and efficacy surpassed expectations. However, outside the clinical trial environment and into the dialysis center environment where OMONTYS was distributed, results were different and in a very, very small percentage of patient cases, tragic.

Hypersensitivity reactions were reported for approximately 0.2% of the first 25,000 patients receiving OMONTYS, with approximately a third of these reactions serious in nature, including anaphylaxis requiring prompt medical intervention, and in some cases hospitalization. Three patient deaths were attributed to OMONTYS administration, though it is yet not settled whether the cause was the drug or human error, though statistically it points to human error as the most likely possibility.

Affymax and its partner, the global Japanese pharma company Takeda (OTCPK:TKPYY) (eighth largest pharma in the world), made the decision to VOLUNTARILY recall OMONTYS in February of this year. All lots of OMONTYS were affected by this recall. Takeda has committed to fully investigate exactly what happened to those affected patients in the dialysis centers through what it terms a "root cause analysis."

It should be noted that allergic and anaphylactic reactions did occur with a very, very small number of patients during the clinical trials, but the reactions were less than with other erythropoiesis-stimulating agents (ESAs) on the market, particularly those drugs marketed by Amgen, who has enjoyed a monopoly in this category dating back to the 1990s. ESAs are the category of drug to which OMONTYS belongs.

Nothing Is Certain, But It's A Sensible Conclusion That OMONTYS Returns To Market

I believe the safety problems that led Takeda to withdraw OMONTYS will be investigated, identified, and resolved in due time. In my research OMONTYS fatalities appear to be similar or lesser in scope to MANY other drugs currently on the market and particularly other ESA's which have had reactions and fatalities along the entire usage life-cycle.

Here is some evidence supporting my opinion that OMONTYS will resurface:

  1. When administered subcutaneously (under the skin), the drug works without any serious reactions. Serious reactions have only resulted from intravenous (in the vein) injections.
  2. All three fatalities occurred in a few dialysis centers believed to be owned by the same company, Fresenius (NYSE:FMS), who has a mound of safety issues filed against it. These fatalities occurred relatively soon after FDA approval.
  3. Takeda may identify post-approval patient reactions that did not surface during the extensive trials, and then the company will need to take definitive and demonstrable steps to remedy those newly identified reactions before any discussion of OMONTYS's return. But this is a highly unlikely scenario in my opinion and experience. The trials were extensive enough to uncover any pattern of severe patient reaction (specifically allergic/anaphylactic). Since the post-approval death rate was 3 out of 25,000 patients, it seems much more likely the cause will be identified as "human error" at the dialysis site. In this case, we could anticipate the immediate return of OMONTYS, with additional warning provisions and enhanced training requirements to be implemented and enforced at dialysis sites.
  4. Patient issues unrelated to OMONTYS may be discovered as the cause or a significant contributing cause to the severe reactions and the 3 deaths.
  5. New patients may have been given too high an initial dose. The severe reactions uniformly arose within 30 minutes of the first dose in new patients only.
  6. The age and/or frailty of the patient may be a significant factor.
  7. The severely affected patients may present with cancer and CKD, for which OMONTYS should Not have been prescribed.
  8. Patients without a diagnosis of CKD may have received OMONTYS, which is Not indicated for these patients.
  9. There may be other dosing factors. See the current dialysis issues involving dialysis products; namely GranuFlo and NaturaLyte. These dialysis solutions cannot be ruled out.
  10. Severe reactions may have been inadequately handled by healthcare givers, or correct procedures may not have been followed, or there could have been contamination of the drug within the facility.

At this juncture, the future of Affymax all comes down to Takeda identifying and correcting the issue(s) with OMONTYS or the actual clinical administration of the drug itself. If it is in fact "human error" or dosing errors, the fix could be as simple as further warnings, a more specific "black box" warning, and/or additional training for dialysis personnel in the potential and remedies for such hyper-reactions, though they were fairly well documented when approved by the FDA.

I want to note here that OMONTYS's fatality rates fall far below several other very popular prescription drugs that have been sustained in the market (including other ESA's). One has to go no further than watching many commercials advertising prescription drugs to hear the (extensive) cautionary provisions of side-effects and potential for death to know that there are many drugs with comparable or worse mortality statistics that have been sustained because the benefits outweigh the consequences which is a main determinant by The FDA for approving drugs.

My Immediate View on AFFY Has Not Changed: NOT ONE IOTA

Hold for Resolution of Takeda's Investigation

If AFFY's promising drug OMONTYS for dialysis patients (currently under voluntary recall) returns back to the market as I strongly believe that it will, the share price should by all rights significantly increase many fold and become a multi-bagger.

Fixing the safety problem(s) that surfaced in the dialysis centers and restoring OMONTYS is an obvious priority for Takeda, with some $600 million invested in the drug. No company, even as large as Takeda, will readily walk away from such an investment if the cause of the fatality and other less severe reactions can be remedied or was from human error. The statistics simply don't support abandoning OMONTYS at this time.

Once the safety problems are identified and fixed, the burden would be on Takeda (in conjunction with the FDA) to move forward. I believe we may see OMONTYS resubmitted to the FDA for a voluntary concurrence and within due time (within weeks or months) and back on the market. I have no crystal ball so patience will be key here.

Meanwhile, AFFY Is Preserving Its Cash Position (A Smart Move)

To date; the company has taken the following actions:

1. The Brenner Group (TBG) has been hired. TBG is a specialized turnaround firm hired by Takeda to manage Affymax until the investigation has been completed and OMONTYS restored to the market. It appears TBG is doing just that, successfully negotiating with banks and suppliers. Please read the SEC filings for more details.

2. The layoff of staff. There is no need for (highly compensated) dual management and overhead during the drug investigation since Takeda is handling these initiatives directly and paying the costs. Today, Affymax is effectively a non-operating, "shell" company with bare bones operating costs (TBG, plus some legal and accounting costs) and a largely cleaned up balance sheet that appears able to sustain Affymax for the future and I suspect will be more than enough time to get a final determination on OMONTYS restoration to market.

3. Auctioning off unnecessary property, plant and equipment. These moves have been made to conserve the company's cash position. We should be getting a new 10-Q filing to gain more perspective and a clearer financial picture in the coming week(s).

4. A recently amended milestone payments and royalties deal between Affymax and Takeda has been negotiated. Upon restoration of OMONTYS to the marketplace, this amended agreement would result in a revenue stream to Affymax in the hundreds of millions of dollars, (potentially more). It will need to be re-monetized to the current shareholders of Affymax, most likely in the form of a buyout based on discounted cash flow (DCF) of those milestone and royalty payments.

Number 4 above is the most telling and compelling development in my opinion. It is indicative of Takeda's strong commitment to keep Affymax investors secure and compensated based on both Affymax's $600 million investment in OMONTYS, the voluntary withdrawal from the market of OMONTYS and the potential for substantial returns once OMONTYS is fully restored to the market.

Think about it. If Takeda planned to walk away from AFFY and OMONTYS, most of the actions taken by TBG would have to happen (by law) AFTER a bankruptcy was announced, and not prior. The sequence of actions taken by Takeda appear like house cleaning to me, and the first steps in a plan to return OMONTYS to the market.

If Affymax can maintain a strong capital position and minimize operating during Takeda's investigation and the return to market of OMONTYS, the share price will likely surge. Let's not take this lightly though as critical updates are still needed from management about ongoing financial viability.

Affymax Right Now:

The estimated short interest stands near 10 million shares, and there is speculation that phantom shares (sold short) may be in the multi-millions as well. As usual, these short sellers have drowned investors and would-be investors with misleading information and half truths.

In all likelihood (I strongly suspect) there may be contrarians, or just plain value buyers in here accumulating shares who (like me) believe the company will get OMONTYS, and its best-in-class benefit of 1x per month administration, back on the market. The unmet need in the CKD dialysis market is very high. So, while options are being investigated, the stock may have found a bottom. Value buyers, contrarians, or contra type funds may be in here buying the last few weeks. A recent bounce has occurred despite management playing the potential bankruptcy card (standard boilerplate disclosures in many situations), spooking investors like they usually do.

Along with my experienced biotech investor network, I have spent countless hours examining this "special situation." We all feel highly confident that OMONTYS will return to the market. With that being said, investors will need to stay tuned for meaningful and relevant updates from Takeda through its regulatory filings.

If the return to market does in fact take place, you could very well be looking at an immediate $5.00 to $10.00+ pop in share price (or more), partially depending on whether or not the Fresenius dialysis centers will distribute the drug to patients. If not, then other avenues will need to be negotiated to get the drug to patients. Until that time, investors may continue to experience wild swings on news, distorted news, or a complete lack of news.

Takeda is taking direct aim at Amgen's ongoing anemia drug monopoly and OMONTYS was expected to play a major role in that initiative. Takeda has deep pockets and a keen reputation for not giving up too easily.

Please keep in mind that only positive investigation news can save Affymax at this point. The upside to such a positive outcome as described in this article is likely to be quite substantial.


Clearly there is some risk investing in Affymax as a speculative Buy and Hold opportunity. I see AFFY at the cusp of a point of inflection, meaning a point on a curve that can change from a minus to a plus on positive news. Statistically, the likely prospects of the return of OMONTYS and the Amended Agreement (milestone payments and perpetual royalties to Affymax from OMONTYS) between Affymax and Takeda pose an attractive opportunity for very significant upside to this investment at this point. The upside involving a positive outcome as described in this article is likely to be quite substantial. I envision a huge return and limited downside, almost like a $1.00 call option without an expiration date associated to it.

As always, trade according to your own risk tolerance and consult with your investment advisor before making any trades discussed in any articles published in print or over the Internet.

Disclosure: I am long AFFY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.