Affymax: Putting The Pieces Together

| About: Affymax, Inc. (AFFY)
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Editor's Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

As a follow-up to an earlier article in July, I made a comment that 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. I think that I have found a real opportunity here in Affymax (NASDAQ:AFFY).

In this article, I will make a case for AFFY and lay out more of the pieces of the puzzle.

A Quick Overview for New Followers

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.

Next - Investors Were Blindsided

Despite the drug performing 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. (See AFFY's May 10Q for more details)

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."

The possibility of an OMONTYS Study in conjunction with Fresenius (NYSE:FMS)

Will the FDA approve more testing? Well, it sounds that way. Here's what I have uncovered. Working from the July 30, 2013 Fresenius earnings transcript conference call (specifically page 7):

Michael K. Jungling - Morgan Stanley (NYSE:MS), Research Division

I have 3 questions. Firstly, on the net income guidance, it seems that you need to deliver around sort of $305 million per quarter in the third and the fourth quarter to achieve your guidance. That's about $50 million or so per quarter higher than we've seen in the first half. Can you be a bit more detail as to how you think you'll achieve the extra $50 million per quarter in the second half? Secondly, on net interest, is the quarterly run rate in Q2 of $103 million a good guide for the remainder of the second half? And the third question I have is on OMONTYS. Do you have any more details as the why we had seen some adverse reactions when used in your clinics? Any more details as to that would be very appreciated.

Robert Maurice Powell - Chairman of Management Board
Michael, it's Rice. Nice to hear from you. Why don't we do this? Mike, if you want to take the first and second questions and then, I will come back around on OMONTYS with Michael.

Robert Maurice Powell - Chairman of Management Board
Michael, on OMONTYS, your timing's impeccable. What I can tell you is that Takeda has been working with 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 individual that had the reactions, is there something we can learn and understand there? So, it's a fairly scientific approach to what we're trying to do. But they continue to work and be very active in understanding what went wrong. So that is an update for you. And as I say, we'll be participating in that study. And I don't know how long it will take, I'll have to talk to the medical guys and see what they think it will take in terms of timing and evaluation of the data, things of that nature. But you should know that they have not stopped, they are continuing to work in trying to understand how they can make this better understood, if you will.

Assuming Some Additional Testing
I have seen on occasion post trial drug marketing that occurs while the drug is in the market. So, it would not be unusual for Takeda/Affymax to re-introduce its ESA drug back to the market with a "subcutaneous" label to administer to patients in low dosage. (sub-q = where no severe reactions have been documented). This can be done until they finalize whatever research, testing, investigation needs to happen over the course of the following months.

Takeda And Fresenius Working Together = Win Win
Given the above comments from the chairman of Fresenius if Takeda, Affymax and Fresenius all work together, this can only enhance the valuation of the relationship, bringing more value in the long-term for AFFY shareholders.

The Brenner Group's Affiliation With Affymax
Offering some clarity: The fact that The Brenner Group (TBG) does offer some clients bankruptcy work (according to its web site) has instilled undue fear by many shareholders. This type of visual disclosure may be good in the restructuring process when dealing with the banks and suppliers, but not to the loyal shareholders who found their way in the middle of a stock collapse from the high teens.

So, the fear is present to some extent that TBG is working for Affymax (to close their doors). I don't see it this way. Not with the new amendment of $180MM on the line and also with all of the restructuring that has already taken place with the suppliers and banks.

Here is the truth to the matter as I understand it; while TBG does on occasion some bankruptcy work, this is not all that they do. They do take on assignments whereby they are brought in as "interim management." They are fundamentally a turnaround firm. They generally do a lot of corporate restructuring. Sometimes it's customers have issues that are beyond revival and do in fact go away. It is my firm belief that with Affymax (backed by Japanese pharma leader Takeda) this is not the case here. It doesn't make sense that Takeda (who has many years and over $600MM invested in the dialysis market with OMONTYS) has a goal in mind in letting Affymax go under. That is why we have seen TBG take great strides in immediately cutting costs to keep the burn rate down and weather the storm.

TBG, as I see it, was hired to help turnaround Affymax and not to put them into bankruptcy. With this being said, there are still many hurdles to overcome and no one at this point can provide 100% assurances that bankruptcy cannot happen.

The longer the time span since the February recall, the more likely I feel that all of the parties are at the least communicating and trying to finalize the next steps - hopefully, the announcement of the strategic plan on the re-introduction of the once-promising drug.

Clearly, there is some risk investing in Affymax, (the drug may or may not return to the market), however the likely prospects of the return of OMONTYS and the recently Amended Agreement (milestone and perpetual royalties to Affymax from OMONTYS) between Affymax and Takeda pose a "unique" opportunity for very significant upside to this investment from our vantage point.

There is plenty of historical evidence that supports the return of OMONTYS to the market based on the fatality statistics alone. The return is pending the results of Takeda's investigation into the cause of death (and other serious reactions). There is enough trial information and corroborating clinical evidence at the Dialysis clinics to indicate that the cause of death was most likely human error. But this cannot be known with certainty until the investigation is complete and the results made public.

Should the cause of the 3 fatalities be something other than the specific risk factors (KNOWN hyper-reaction, allergic or anaphylactic responses) which were exhibited during clinical trials, it will be incumbent on Takeda (Affymax's Partner in OMONTYS) to provide a risk and response mitigation strategy that would (again, voluntarily) satisfy any potential FDA or Market concerns before returning OMONTYS to the market.

Reviewing A Past Conference Call With John Orwin - Link

This was a surprising turn of events.

Since the product was launched in 2012, over 25,000 patients have been treated with OMONTYS. The rate of overall hypersensitivity reactions reported is approximately 0.2%, with approximately 1/3 of these being serious in nature, including anaphylaxis, requiring prompt medical intervention and, in some cases, hospitalization.

Ultimately in collaboration with the FDA and Takeda, we decided to "voluntarily" recall the product nationwide.

To date, fatal reactions have been reported in approximately 0.02% of patients following the first dose of an intravenous administration. The reported serious hypersensitivity reactions have occurred within 30 minutes after such administration of OMONTYS.

Three cases of serious anaphylactic reactions associated with fatal outcomes were reported in February. Two deaths reported prior to February were deemed to be cardiovascular in nature. In these 2 cases, patients' symptoms were not consistent with hypersensitivity reactions, and in consultation with outside experts, these events at the time were not considered likely to be a result of drug-related hypersensitivity. These cases were reported to the Food and Drug Administration in accordance with regulations.

To date, and to be conservative, we are considering all of these cases in our evaluation and recall decision.

At this point, we are unable to prospectively identify which patients may be susceptible to hypersensitivity reactions. We are investigating potential ways to address this risk. It appears that in the rare cases that have been reported thus far, serious hypersensitivity is a first-dose phenomenon and has only been reported with intravenous administration of the drug. In the post-marketing setting, there have been no reports of such reactions following subsequent dosing in patients who have completed their dialysis session or in patients receiving the drug subcutaneously, although the subcutaneous patient numbers are limited.

The companies are actively investigating these cases to determine a root cause of these events. If we can identify and address the underlying cause, the FDA has said they would work with us on appropriate next steps for the product. In the meantime, we have suspended our promotional efforts and have instructed health care professionals that no new or existing patients should receive OMONTYS.

I am sure many of you have questions regarding this update. We continue to gather information related to the cases that have just recently come to our attention but are unable to provide guidance on the timing of resolution at this point.

In summary, we believe that although the majority of patients have tolerated OMONTYS well, suspension of promotional activities and a product recall is warranted at this time. Our priority is to attempt to determine and appropriately address the root cause of the hypersensitivity reactions and work with the FDA to reintroduce the product to the market.

In review, the drug was administered to 25,000 people but the errors occurred in February right before the recall? What happened differently in February that didn't occur for several months prior?

There are Other Mortality Stats with other companies who have products still on the market

Here are a few:

Feraheme® (ferumoxytol) - AMAG Pharmaceuticals' (NASDAQ:AMAG) lead product, is a therapeutic iron compound for the treatment of iron deficiency anemia in adult patients with chronic kidney disease (CKD).

Feraheme is an injectable drug designed to treat iron deficiency anemia in patients with chronic kidney disease. The drug has been known to cause hypersensitivity reactions, including anaphylaxis and/or anaphylactoid reactions. According to clinical studies, serious hypersensitivity reactions were reported in 0.2% (3/1,726) of subjects receiving Feraheme. Other adverse reactions potentially associated with hypersensitivity (e.g., pruritus, rash, urticaria or wheezing) were reported in 3.7% (63/1,726) of these subjects.

Although Feraheme will avoid the FDA's black-box warning, the drug label is now required to include bolded warnings and precautions that describe adverse events that have been reported following Feraheme use. According to the Boston Business Journal, the label will also instruct health care providers to increase the observation period following Feraheme administration from 30 to 60 minutes to observe patients for signs and symptoms of hypersensitivity.

Feraheme® warnings and precautions were added.

Tysabri from Biogen Idec (NASDAQ:BIIB) and Elan, was pulled from the market in 2005 after three patients in clinical trials contracted progressive multifocal leukoencephalopathy, a life-threatening brain infection. Two patients died. Two patients were also taking another Biogen drug for MS, Avonex. However, the FDA allowed Tysabri back on the market in 2006 under a program to manage its risks. There were about 20,000 to 25,000 patients on Tysabri, despite the PML experience.

Intuitive Surgical (NASDAQ:ISRG) - You can search the Internet for recent medical news and its daVinci surgical system issues. The product is still on the market.

Venofer® (iron sucrose injection, USP) distributes with the following statement:

"IMPORTANT SAFETY INFORMATION - Serious hypersensitivity reactions, including anaphylactic-type reactions, some of which have been life-threatening and fatal, have been reported in patients receiving Venofer® (iron sucrose injection, USP). Patients may present with shock, clinically significant hypotension, loss of consciousness, and/or collapse. If hypersensitivity reactions or signs of intolerance occur during administration, stop Venofer® immediately. Monitor patients for signs and symptoms of hypersensitivity during and after Venofer® administration for at least 30 minutes and until clinically stable following completion of the infusion. Only administer Venofer® when personnel and therapies are immediately available for the treatment of serious hypersensitivity reactions."

It would seem highly likely that OMONTYS may re-emerge with a similar statement.

More Research; Drugs With Anaphylaxis Warnings/Issues


Reports Of Anaphylaxis







Advair Diskus 100/50








































There are many others.....too many to list.

A Case For The Bulls
1) The New England Journal of Medicine (NEJM) stated in its summary report that Peginesatide, administered monthly, was as effective as epoetin, administered one to three times per week, in maintaining hemoglobin levels in patients undergoing hemodialysis.

2) The robust drug trials that went on for years, met safety and efficacy end points or else the drug would not have been approved by the FDA in the first place.

3) As a precaution, OMONTYS was recalled "voluntarily" for safety reasons. There was no FDA mandated recall. The purpose of any recall is to correct the problem(s).

4) The drug registered no severe side effects when administered sub-Q. Issues arose from intravenous administration only.

5) Human error during IV administration cannot be ruled out, especially in light of the very low percentage (.02%) of severe reactions. If there were severe reactions to the drug itself, one might expect the reactions to be more widespread or that they would have surfaced in the large trials.

6) There are $180MM in royalties at stake per the most recent Takeda amendment with Affymax. So, Takeda, AFFY and Fresenius have a huge vested in getting this drug back on the market.

7) AFFY creditors, including banks and suppliers and lease holders have been paid. This is an indicator of Takeda's intentions. No settlements at this stage of the game would have been negotiated if the company's intent were to bankrupt AFFY.

8) Current overhead has been responsibly minimized while Takeda investigates the reaction issues with OMONTYS.

9) The shorts now appear to be covering. The short interest was 18MM shares and is now only less than 7MM shares. Why? Wouldn't a company facing BK have an increase in weekly shorts rather than a decrease? This isn't adding up.

10) The huge net operating loss (NOL) to an acquiring company is worth something; certainly not zero.

11) Many drugs on the market exhibit a worse track record for severe reactions and deaths than OMONTYS. The solution for OMONTYS may well amount to a pointed "black box" warning on the labeling, once the cause of the severed reactions is determined.

A Case For The Bears
1) OMONTYS may have serious side effects including allergic reactions that could lead to anaphylaxis. While it hasn't been determined yet (by the ongoing investigation) the 3/25,000 deaths and other severe reactions are enough to cause hospitalization and may turn out to be a problem that keeps the drug off the market for an extended period.

2) The lawsuits will bury the company.

3) The company will run out of cash.

4) There is no company. It's just a shell (Truth is they have a royalty agreement. See above).

5) Takeda will ultimately short change AFFY shareholders.

6) Fresenius will refuse to administer the drug or Takeda will refuse to allow Fresenius to participate--effectively reducing the US and EU markets for the drug by a significant percentage, since Fresenius controls about half the dialysis centers in the US.

7) The FDA will take a hard line for re-launch, or insurers may decide to reimburse OMONTYS as a second line therapy.

Shorts Have Shown A Relentless Effort Saying AFFY To Zero on several message boards.

Folks, this stuff (derogatory messages from posters) does happen (I call it noise) and we saw it on a few other boards after some stocks were literally raided by the short camp:

  1. Questcor - QCOR (hitting new highs weekly)
  2. iStar Financial - SFI
  3. Genworth Financial - GNW
  4. Too Many Others To List

Industry experts have reviewed the News, Bio-Stats, Risks

Industry experts who have been informed about this Affymax recall say that 0.2% reactions are low and strongly feel that OMONTYS will return back to the market. The low error rate would have been higher across the country had it been the drug, per our research, and not coming from one dialysis company in two of its centers.

The filings have also eluded the fact that Takeda, Affymax and Fresenius have a huge vested interest here getting the once-promising drug back on the market to distribute worldwide. (The drug had issues in Feb.? What about the other months?

56,000 treatments and a few errors following the Fresenius pilot doesn't add up and the in depth research statistically points to "human error."

Stronger Warnings and Precautions can be issued.

Label Changes Do Occur - FDA Drug Label Changes For 2013

January 2013
February 2013
March 2013
April 2013
May 2013
June 2013
July 2013

Interview With DSI Renal - Centers For Dialysis Excellence

This week I spoke with the CEO of DSI Renal, Craig Goguen. Mr. Goguen has had extensive experience in the dialysis industry where he held senior positions at DaVita (NYSE:DVA). His company is one of the largest dialysis providers in the U.S., and in January 2013 agreed to adopt OMONTYS to treat their patients with chronic kidney disease. Also, the DSI contract put OMONTYS in 5 of the 6 medium-sized dialysis organizations in the U.S.

Goguen stated that his organization had a few clinics that were used in a pilot with the use of OMONTYS involving a few of its doctors. While he was not able to tell me exactly how many treatments that his company administered in the several weeks the drug was used, he did say that his centers had not documented any serious AEs (adverse events). Furthermore stating that; anyone would agree that the drug was doing what they said it would do, and we had no issues with it. Additionally, the dialysis industry would love to see a competitive drug to compete with Amgen's EPO, which is quite costly. What people in the industry need to know is that OMONTYS works clinically. Nephrologists need to know about any drug's safety and efficacy, and the appropriate evidence to bring OMONTYS back.

Summary Comments

Along with my experienced biotech investor network, I have spent countless hours (over 120 - 150 hours) examining this "special situation." I have spoken to several experts in the field of biotech research and nephrology and continue to do so weekly. Most experts are highly suspicious of the rapid recall. We feel highly confident that OMONTYS will return to the market under a new label based on the fact that 3 fatalities out of 25,000 is considered statistically insignificant.

The bottom line is a much larger ("widespread") death rate would have occurred folks, not just a few fatalities. Some dialysis centers in pilot programs experienced no AEs or very few if any adverse reactions at all. What's troubled me is that the drug worked for many thousands of patients month after month then suddenly we enter February 2013, and it didn't? Pow!

What would then need to happen is each dialysis provider would need Medical Advisory Board approval and assurance to use this drug. It is assumed that Takeda is working on this and keeping quiet for now while complying with the FDA. I strongly believe that experienced Nephrologists who used the drug according to the current label had little to no serious issues with the general population, as were reported in the tedious trials. Now as far as an inexperienced health care employee using this powerful 1x per month drug, there may have been some complications.

Think for a moment the scale of economy that large dialysis centers (Fresenius or DaVita) can benefit from the adoption of OMONTYS' treatments.

The medical community may have overlooked the tremendous savings in workforce overhead that dialysis centers will realize to their bottom line if they switch to O (perhaps a rational estimate would be at least a saving of 30% staffing).

I am not even calculating the paradigm shift that will be experienced with regards to the macro-economic impact of OMONTYS as it related to insurance cost reductions, as well as, Medicare and Medicaid spending.

Based on recent news released on July 29, 2013, Takeda's commitment to OMONTYS is clearly taking aim at Amgen's ongoing anemia drug monopoly to offer dialysis the much requested alternative to the costly EPO. As you may or may not know OMONTYS was expected to play a major role in that initiative. Takeda has deep pockets and a reputation for not giving up easily.

Sure, let's not discount that there is some risk investing in Affymax, but the likely prospects of the return of OMONTYS and the Amended Agreement (milestone and perpetual royalties to Affymax from OMONTYS) between Affymax and Takeda offer a huge vested interest between Fresenius, Takeda and Affymax.

As stated in my earlier news articles, if the return to market takes place, you could very well be looking at an immediate $5 to $10 pop in share price (or more), partially depending on whether or not Fresenius dialysis centers will distribute the drug. Until that time, investors may continue to experience wild swings on news, distorted news, or a complete lack of news.

Investors will need to stay tuned for relevant updates from Takeda and Affymax through its regulatory filings. 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. Expect more details to follow.

Drug Recalls and Warnings - Click here and see left side.

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.