Affymax: Dialysis Provider Pauses Omontys Pilot Expansion, Dead Money for Now

A letter from Fresenius Medical (FMS) on Tuesday stated that the nation-wide dialysis provider would pause expansion of its pilot program utilizing Omontys, Affymax’s (AFFY) approved erythropoeitin stimulating agent (ESA). Omontys is a once-weekly injection for chronic kidney disease (CKD) patients on dialysis, a major convenience benefit when compared to the three injections per week required by Amgen’s (AMGN) Epogen. Following disappointing sales and prescription figures from Affymax - trends had not recovered from the November fall off - PropThink wrote that the stock was likely to head lower. Importantly, the Street had to lower its revenue forecast for Omontys, suggesting that analysts do not have a strong understanding of the economics of this product at this point in time. While the Street (and we) remained optimistic that Fresenius would roll its pilot program into a full contract for Omontys at some point, the trends continued to suggest disappointment, hence our negative perspective. The letter from Fresenius on Wednesday takes a key theme in the investment thesis off the table (a seamless move from pilot to agreement), and the mention of safety issues is an embedded “red flag” in the news. With the stock recovering significantly from its pre-market lows, we believe shares will likely settle into the mid-teens until FMS publicly declares what it will do with Omontys on a long-term basis; the company will provide an update in the next week or two.

Optimism fueling the stock’s recovery centers on FMS’ communication that it will not cease the pilot program, but rather halt expansion to new centers, with physicians still allowed to prescribe Omontys to new patients. FMS noted that, “physicians and facilities that have been using Omontys who wish to continue prescribing it for new patients may choose to do so.” It was good news that FMS continued expanding the Omontys pilot program to 18,000 patients, well above the 10,000 patient goal that it had set for last September. This indicates real enthusiasm from the dialysis providers, who we believe are interested in backing a competitive product to counter AMGN’s Epogen monopoly, potential cost and dosing benefits aside. However, a key risk remains: if FMS choose not to contract Omontys on a broad basis, and today’s news increases that risk given the comments on safety, AFFY could trade significantly lower. It’s important to realize that AFFY was trading down before this news hit, and although some may consider Wednesday’s announcement a non-event, bear in mind that the company was missing estimates - sales and scripts - beforehand. With an update from Fresenius in a week or two, we’ll be looking at March options as a sensible way to stay involved in AFFY.