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Affymax, Inc. (OTCPK:AFFY) is a shell company that owns potential future royalty and milestone payments associated with the recently recalled drug Omontys (peginesatide). The odds are stacked against AFFY shareholders getting any money out of Omontys and we think Affymax is most likely worthless for the following reasons:

1. Omontys isn't safe (but Epogen is)

2. Takeda (OTCPK:TKPHF) doesn't think Omontys is coming back

3. Competition is lurking around the corner

4. Dialysis centers have been burned

5. The road back requires too many stars to align

Omontys isn't safe but Epogen is

Omontys is a synthetic, peptide-based erythropoiesis stimulating agent (ESA) designed to stimulate production of red blood cells used in the treatment of chronic kidney disease. Omontys was approved for the treatment of anemia in adult patients in March 2012 and was thought to present a challenge to Amgen's incumbent drug, Epogen. After Affymax and Takeda (collaboration partner) commercialized Omontys in the U.S. in 3Q 2012, the drug was "voluntarily" recalled in February of this year due to serious hypersensitivity reactions, including anaphylaxis resulting in death in certain instances. According to a WSJ article citing information obtained under the FOIA, severe allergic reactions actually began in August 2012. This was followed by relabeling of the drug in November (revised label here).

This compares to Amgen's Epogen, which has been administered in the U.S. since 1989 for the treatment of anemia associated with chronic renal failure. Epogen has a significantly lower incidence of reported adverse events than Omontys. Baird research analyst Christopher Raymond conducted the following analysis in a report published on February 25, 2013:

Baird Report Excerpt
(Click to enlarge)

In a New York Times article dated February 25, 2013, Dr. Daniel W. Coyne, a kidney specialist at Washington University in St. Louis was quoted saying, "two in 10,000 deaths on first exposure is unacceptable, compared to nothing like this [with Epogen]", so it's no surprise that given the safety and efficacy of Epogen, dialysis centers have flocked back to it in the wake of the Omontys recall. In fact, on its second quarter earnings call, Amgen noted "Epogen was up 15% quarter-over-quarter due to increased unit demand as a result of the peginesatide [Omontys] recall …"

The approximate equivalent of the FDA in Europe also believes that Omontys is unsafe, especially in comparison to other drugs available on the market. In response to Takeda's withdrawal of the Marketing Authorisation Application for Omontys, the Committee for Medicinal Products for Human Use (CHMP), had this to say (emphasis added):

CHMP Excerpt
(Click to enlarge)

Takeda doesn't think Omontys is coming back

On its 1Q 2014 earnings call held on July 31, 2013, Takeda said the following with respect to Omontys: "While Takeda has been working actively to investigate the root cause of these hypersensitivity reactions, the investigations and the root cause analysis and the determination of the risk mitigation plan is difficult to be completed during the European MAA procedure time frame." That sounded to us like Takeda didn't yet know what went wrong.

We spoke to investor relations at Takeda after the call and confirmed that Takeda hasn't figured out the cause yet. Takeda specifically noted that they could not exclude the possibility that something was wrong with the drug itself, and that they are not including Omontys in the company's financial forecast. The individual we spoke to at Takeda expressed great skepticism in the possibility of Omontys being reintroduced in the United States or elsewhere, and went so far as to say, "Although it's not completely dead, it's going to realistically be very, very difficult for it [Omontys] to come back."

Competition is lurking around the corner

Alternatives to Epogen with some of the same cost and efficiency benefits that Omontys touts have been safely administered in other parts of the world and may make their way to the U.S. in short order. Mircera, for example, with once-every-four-week intravenous or subcutaneous dosing, has been in use in Europe since 2007 and in Japan since 2011. Mircera is already approved for use in the United States by the FDA (November 2007), and Roche (OTCQX:RHHBY) has the ability to begin selling this drug in the United States in mid-2014 under the terms of a settlement agreement between Roche and Amgen (NASDAQ:AMGN). When the CEO of Fresenius Medical Care (NYSE:FMS) was recently asked about Fresenius's interest in using Mircera in the United States, he had this to say: "If it was left up to me, I'd try to go buy some tomorrow …"

Affymax clearly recognized this risk and disclosed it in its most recent 10-K, stating, "[Mircera] has been enjoined from being sold in the U.S. until mid-2014 under the terms of a limited license. If Mircera enters the U.S. market, we believe it will be in direct competition with OMONTYS, if we are able to reintroduce the product, because of Mircera's ability to be long-acting; therefore, it could potentially limit the market for OMONTYS."

Furthermore, ex-CEO, John Orwin had this to say on the Affymax 1Q 2012 earnings call: "… in the case of both biosimilars and Mircera, it's very important for us to have converted a substantial part, a meaningful part, of this market over to once-monthly OMONTYS in advance of those products being introduced … we believe that it's really critical for us to have converted a large piece of this market to OMONTYS well in advance of the introduction of those products."

Dialysis centers have been burned

In a research reported dated March 4, 2013, Lazard analyst Joshua Schimmer had this to say about Omontys and its unlikely future re-adoption by dialysis organizations after speaking to a dialysis specialist:

Lazard Excerpt

Epogen has been the gold standard ESA for over two decades in large part due to its track record of safety and efficacy. This is reinforced by Fresenius moving its patients who were on Omontys back to Epogen following their pilot.

In our conversations with Fresenius, they indicated to us that limiting the frequency of serious adverse events was "the most important thing" and that Fresenius is not going to "risk its franchise on a drug with unknowns like Omontys" given the years and years of data that is available on Epogen and Mircera (which Fresenius has experience within their European operations).

The road back requires too many stars to align

We think that something like the path laid out below would be the most likely road for Takeda to bring Omontys back to the market in the United States:

(i) Generate a hypothesis regarding what is likely wrong with Omontys,

(ii) Determine that it is ethical to run a clinical trial to confirm the hypothesis,

(iii) Design a trial and convince the FDA to permit the trial,

(iv) Run a clinical trial that complies with FDA requirements in order to test the hypothesis,

(v) Receive FDA approval to reintroduce Omontys to the market (separate and apart from running a compliant clinical trial),

(vi) Embark on a substantial marketing and physician education effort to get nephrologists back on board with a drug that has previously been recalled, and

(vii) Secure dialysis organization support in light of the dialysis providers being burned the first time around.

We have substantial doubts that on the basis of ethics, that the FDA or a human subjects review board would approve a further clinical trial for Omontys given the potential risk compared to the nonexistent potential benefit. David Wendler, a researcher in the NIH Clinical Center Department of Bioethics writes: "Many endorse the view that clinical research studies which offer no potential benefit to subjects and pose a high chance of serious risk, such as death, are unethical, independent of the magnitude of the social value to be gained." There are other drugs which are more effective and cause fewer serious adverse reactions. Moreover, Omontys is not a disease-altering drug.

If Takeda successfully navigates Omontys back to the U.S. market, then Affymax shareholders still need the company to NOT run out of cash. The legal bills related to the multiple shareholder lawsuits that have been filed will not be cheap, The Brenner Group is also earning fees for running the company, and there remain additional liabilities that need to be paid, such as the recently renegotiated office lease.

After all of that, Affymax shareholders can look forward to a $10mm milestone payment (~26c/share) upon the "first commercial sale after reintroduction of Omontys in the U.S.", and some highly uncertain future royalty stream that might not be worth anything at all if competition in the form of biosimilars (Hospira is in Phase III of clinical trials on Retacrit) or Mircera has made headway into the U.S. market.

The bull case is far fetched

Since May, AFFY has been the subject of four articles by EXPstocktrader pumping the "Huge Speculative Upside" in the company's shares predicated on a "sensible conclusion that Omontys returns to market" for which we can find no factual support. The bull case rests on the idea that something other than the drug itself is the root cause of the adverse reactions suffered by patients who were administered Omontys. There is no evidence to support this. As noted in the Adverse Event Comparison table above, Omontys's performance was vastly inferior to Epogen's performance on all measures of adverse events, not just deaths. Furthermore, on Fresenius Medical Care's 2Q 2013 earnings call held on 7/30/13, Fresenius CEO Rice Powell said, "… Takeda has been working FDA and they are just almost at the point of getting agreement with FDA on a study that will be done in our clinics. It is a DNA-type of study where they're going to be trying to understand what could potentially be within the individuals that had the reactions, is there something we can learn or understand there … we'll be participating in the study and don't know how long it will take." That does not sound like a CEO who is optimistic about any reintroduction of Omontys at all, let alone a swift one. Also, a "DNA-type of study" does not suggest Takeda is focused on isolating specific human error involved in manufacturing or administering the drug.

It is often cited that there are $180mm of potential Omontys-related milestone payments that Affymax would be entitled to subject to certain process and sales milestones. This figure grossly overstates what is realistically possible. $150mm of the $180mm of milestone payments are related to sales goals outside of the U.S. In Europe, the CHMP statement above clearly indicates that Omontys was not going to be approved even before considering the negative safety data that has subsequently caused the drug's withdrawal from the U.S. market. In Japan, Takeda stated back in 2011 that it would not commercialize Omontys. Our conversations with Takeda IR have indicated that Europe and Japan have always been distant secondary and tertiary markets, respectively, given the challenging competitive dynamics in those markets.

A plausible bull case based on Omontys sales in the United States resulting from a swift reintroduction of the drug would contain these components:

§ $10mm milestone payment upon "first commercial sale after reintroduction of Omontys in the U.S."

§ $20mm additional milestone payments from "U.S. sales-based milestones"

§ 15% royalty on U.S. sales (using the midpoint of the company's disclosure that "royalties are tiered in the range of 13% to 17% with respect to net sales in the U.S."

Prior to the recall, consensus estimates for Omontys sales in the U.S. in 2014 were approximately $250mm, implying $37.5mm in royalty payments at a 15% average royalty rate. Assuming Takeda is able to re-commercialize Omontys beginning in 2016 at this level and there are minimal sales after the patent expiry in 2024, we estimate the potential royalty payments are worth $4.38 in a best case scenario excluding the benefit of NOLs.

Upside Valuation
(Click to enlarge)

Affymax's ability to utilize its NOLs is highly suspect, and even the company acknowledges this in its public filings: "An ownership change could limit our ability to utilize our NOL and tax credit carryforwards for taxable years including or following such 'ownership change'. Prior to 2013, we experienced ownership changes as defined in Section 382 and 383 of the Internal Revenue Code. 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…as a result of the high trading volume, there may be a shift of ownership amongst our 5% stockholders that could result in an ownership change …"

This is a very generous valuation because it assumes that Omontys is able to reach new all-time record sales even though it will almost certainly be shunned, at least in the early years of its reintroduction. Also, this valuation does not take into account other potential liabilities such as the $8mm+ advance from Takeda, expenses from the shareholder lawsuits and the potential for significant limitations on the company's usage of its previously accumulated net operating losses to offset potential royalty payments. In reality, $4.38 per share is probably way too high as an upside case, but we present it as a low-probability risk to being short.


Our price target for AFFY is $0.44 per share, but the most likely outcome is that the stock is worthless. Our target price is based on a probability weighted basis whereby we assign a 90% probability to Omontys being worthless, and a 10% probability to the upside case of $4.38 per share, implying a $0.44 expected value. However, we believe that the data overwhelmingly shows Omontys is unsafe, too many bridges have been burned (FDA, dialysis centers, nephrologists, patients who suffered adverse reactions), and the hurdles for reintroduction are far too high. Therefore the most likely outcome is that Omontys never comes back and the Company is worthless. Remember, Ex-CEO John Orwin was selling at $1.02 a share on 6/27/13, and the folks at The Brenner Group now running the company are self-proclaimed experts "in guiding companies through bankruptcies, liquidation and wind downs."

Disclosure: I am short OTCPK:AFFY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.