“We have suffered under a monopoly now for many years, and Amgen has done pretty much whatever they’ve pleased,” said Dr. John H. Sadler, chief executive of the Independent Dialysis Foundation, a small nonprofit dialysis provider in Baltimore.
Assuming prescription trends in December stage a recovery vs. the November numbers, and affirm continued market share gains for Omontys, AFFY is likely to trade back to the mid-$20 range.
Peer-Reviewed Article in NEJM Carries Significant Weight. The NEJM article adds incremental value for Affymax for a number of reasons: 1) The data have been in the public domain for some time, but are now validated in the gold standard of peer-reviewed journals; 2) The primary efficacy endpoint in the EMERALD Phase III trials (specifically Mean Hemoglobin Levels) clearly shows that Omontys and EPOGEN are equivalent, with curves from the studies that are essentially super-imposable; 3) Safety and tolerability are also statistically equal between the two therapies, and very much the same numerically; and 4) While Omontys’ dosing is quite different than EPOGEN, meaning adoption may take some time to effectively convert patients over, the cost savings and convenience benefits (once-monthly dosing for Omontys vs. 3x per week for Epogen) of Omontys are clear. In our view, sales reps armed with the NEJM article will be that much more convincing to doctors and dialysis centers when marketing Omontys as an alternative to Amgen’s Epogen.
AMGN Earnings Call Demonstrates Omontys Is Having Impact. AMGN’s ESA franchise, consisting of both Epogen and the longer-acting Aranesp product, have sales of about $2.7B annually in the U.S. alone. This suggests that Omontys needs to gain just over 5% of the market to justify its current market cap, and gains over that level of market penetration is upside. We calculate that by conceptualizing $150M in Omontys sales (5.5% of the market) and applying a 4x multiple on sales, which roughly equals the company’s current enterprise value (market cap less cash plus debt) of ~$640M. Analysts see peak sales of Omontys at roughly $500M in the U.S. alone, about 20% of the current market, which seems achievable and implies that the stock could more than double from current levels. Importantly, AMGN had to admit that Omontys is gaining market share, commenting on its earnings call that the year over year declines in Epogen sales in 4Q were due to “competition”, but of course waived off Omontys’ impact by noting that AMGN still has 96% of the market. To AFFY shareholders, this is very good news and highlights that there is plenty of market share for Omontys to take. Again, thinking about peak market share for Omontys in the U.S. and how much the dialysis providers would like to see AMGN lose to ensure long-term negotiating power, we certainly think that 20% is a reasonable level. While AMGN is an extremely strong competitor that has a lot to lose, we simply believe that dialysis providers must make sure AFFY gets its foothold in the market. In addition to these sales, AFFY has an opportunity to gain traction with Omontys in Europe, earning royalties from marketing partner, Takeda. Sales in international markets add even more potential upside to the story.
Below are interesting excerpts from AMGN’s 4Q 2012 earnings call:
“EPOGEN sales quarter-over-quarter were down 2%, however, the impact of competition continues to be modest, and primarily in the form of pilot programs. Dialysis providers continue to recognize the value of EPOGEN based on their long-term experience.”
“The 2% sequential decline in the fourth quarter was fundamentally all around competition but, as I said, we exited the year still in excess of 96% market share, so we continue to believe that the (inaudible) see the true value and benefit of EPOGEN based on this long history in the marketplace around both efficacy and safety.”
"We have not predicted any dramatic changes in the makeup of the market. Obviously we take every competitor seriously...and we have a highly experienced team out there every day talking about the benefit and the longer-term experience of EPOGEN."
The Omontys ramp is a long-term story, as the conversion process (from Epogen) has some complexity given the dosing differences between the two products. However, it is likely that many new dialysis patients will be started on Omontys. We don’t expect a steep growth trajectory, given the conversion lag for existing patients. Nevertheless, it looks like Street expectations are achievable. Affymax and partner Takeda have been improving uptake via the addition of medium-sized dialysis organizations, and Omontys is already being used in some of the largest dialysis centers in the U.S. in pilot programs, which are expected to convert to broader, longer-term contracts. As a result, at the current stock price, we continue to believe AFFY is a good bet.