Omontys Fourth Quarter Sales Disappoint; AFFY Heading Lower

Affymax's (AFFY) marketing partner Takeda announced weaker-than-expected sales for Omontys, Affmax’s erythropoeitin stimulating agent (ESA) for dialysis patients. Omontys was approved in the U.S. in March 2012 and is the key value driver for AFFY shares. Sales for the 9 month period ending Dec. 31 came in at $34.6M, which implies 4Q 2012 sales of $19.6M, significantly below Wall Street's 4Q sales expectations for $25M. While analysts are defending the stock, noting that reported sales are more reflective of ordering patterns rather than demand, we expect the stock to take a tumble on the news.

According to several data sources, prescription trends for Omontys were weak in November and did not recover as expected in December 2012, indicating that the launch ramp of the drug may have lost steam. The trends make sense, given that Omontys will undergo a staged roll out, with dialysis centers dispensing the product initially in "pilot" programs in which a select number of patients will try the drug before the center offers it to all patients. During this time period, dialysis providers are evaluating the conversion of patients from Amgen's (AMGN) Epogen to Omontys, which has some complexity when going from a three times weekly product (Epogen) to a once-monthly product (Omontys). Also, under the pilot programs dialysis centers will determine how cost effective Omontys is relative to Epogen, hence, longer-term contracts are expected to be put in place once economics are negotiated based on the experience in the pilot programs.

Analysts are holding on to the expectation that the largest dialysis provider in the U.S., Fresenius Medical Care (FMS), will convert its pilot program into a full blown contract in April when the agreement for the current pilot program is set to expire. We agree that dialysis providers have a vested interest in supporting Omontys in the marketplace in order to have a lever against AMGN, which has enjoyed a monopoly in the ESA market for many years (see prior story). As a result, we do expect Fresenius to convert its pilot contract to a broader contract for Omontys. Affymax provides an ESA with less frequent dosing requirements and subsequent cost/convenienceadvantages, which should be a long-term growth driver, even through a slower sales ramp than anticipated. However, the weaker-than-expected sales report coupled with the lackluster prescription trend data will cast doubt on Wall Street analyst forecasts, both short and long-term, and with the expectation that estimates will have to come down, we would expect shares of AFFY to come down as well on the news.