Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AFFY > SEC Filings for AFFY > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for AFFYMAX INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AFFYMAX INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2011 and our unaudited condensed financial statements for the three and nine month period ended September 30, 2012.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "intend", "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," "estimate," "future" and similar expressions intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding the commercialization of OMONTYS® (peginesatide) Injection, or OMONTYS, and the continuation and success of our collaboration with Takeda Pharmaceutical Company Limited, or Takeda. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q under Item 1A "Risk Factors," including risks related to the factors affecting the commercial potential of OMONTYS, the continued safety and efficacy of OMONTYS, the timing of patient accrual in ongoing and planned clinical trials, regulatory requirements, including the U.S. Food and Drug Administration's, or FDA's, post-marketing requirements and any additional requirements by the FDA or other regulatory authorities, potential regulatory approval outside the U.S., industry and competitive environment, controversy surrounding the class of erythropoiesis stimulating agents, or ESAs, reimbursement coverage, intellectual property rights and disputes and potential costs, disruptions and consequences of any litigation, financing requirements and ability to access capital, and other matters. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We are a biopharmaceutical company committed to discovering, developing and delivering innovative therapies that improve the lives of patients with kidney disease and other serious and often life-threatening illnesses. In March 2012, the FDA approved OMONTYS for the treatment of anemia due to chronic kidney disease in adult patients on dialysis. Anemia is a serious condition in which blood is deficient in red blood cells and hemoglobin. It is common in patients with chronic kidney disease, cancer, heart failure, inflammatory diseases and other critical illnesses, as well as in the elderly. If left untreated, anemia may lead to chronic fatigue or increase the risk of other diseases or death. Currently recombinant EPO, or rEPO, is used to manage the anemia of dialysis, non-dialysis and cancer patients. OMONTYS is a synthetic, peptide-based ESA, designed to stimulate production of red blood cells and is the only once-monthly ESA for anemia available to the adult dialysis patient population in the U.S. We are co-commercializing OMONTYS with our collaboration partner, Takeda. In February 2012, Takeda and its wholly owned subsidiary, Takeda Global Research & Development Center (Europe) Ltd., announced the acceptance from the European Medicines Agency, or EMA, of a Marketing Authorization Application, or MAA, for assessment of OMONTYS for the treatment of symptomatic anemia associated with chronic kidney disease in adult patients on dialysis. The application is currently under review by that agency.

In February 2012, as contemplated under our collaboration, we and Takeda entered into a Co-Promotion Agreement to further specify and formalize terms and conditions relating to the joint U.S. commercialization activities for OMONTYS including a corporate governance structure and division of roles and responsibilities between us and Takeda, including deployment of resources. We are responsible for the deployment of the sales force and the medical affairs field force but share marketing, account management and payer reimbursement related activities with Takeda. In addition, as we and Takeda split profits 50/50 in the U.S., the Co-Promotion Agreement provides further detail relating to the treatment of full time equivalent, or FTE, expenses used to calculate eligible commercial expenses incurred thereunder. Consistent with the terms of the collaboration, Takeda retains final decision making authority with respect to terms related to pricing and contracting and responsibility for distribution activities.


Table of Contents

In February 2012, the MAA filed by Takeda in early 2012 was accepted for review by the EMA, which triggered a $5.0 million milestone payment from Takeda which was received in the first quarter of 2012.

In March 2012, we received FDA approval for OMONTYS injection for the treatment of anemia due to chronic kidney disease in adult patients on dialysis which triggered a $50.0 million milestone payment from Takeda which was received in April 2012.

In March 2012, we entered into a loan and security agreement, or the Loan Agreement, with Oxford Finance LLC and Silicon Valley Bank, or, collectively, the Lenders, under which we may borrow up to a total of $30.0 million in two tranches. The first tranche of $10.0 million was borrowed in March 2012. In connection with the Loan Agreement, we issued the Lenders warrants to purchase 132,855 shares of our common stock, or the Warrants, which are exercisable at $11.855 per share. In September 2012, SVB Financial Group, the parent group of Silicon Valley Bank, exercised its Warrant for a net exercise of 23,453 shares of our common stock. In October 2012, Oxford Finance LLC exercised the remaining Warrants for a net exercise of 36,660 shares of common stock. Both of these Warrants were net exercised on a cashless basis.

In November 2011, we entered into a settlement and license agreement, or the Settlement and License Agreement, with Janssen Biotech, Inc. (a subsidiary of Johnson & Johnson), and certain of its affiliated companies, or, collectively, Janssen, under which we obtained from Janssen a non-exclusive license to the intellectual property in dispute, a covenant not to sue and a release of all claims associated with the arbitration and dispute. The Settlement and License Agreement also provides for the dismissal of all pending proceedings.

The Settlement and License Agreement provides for fixed payments by us to Janssen of $6.0 million within 30 days of execution thereof, which was paid in December 2011, and $2.0 million which was paid in June 2012. The Settlement and License Agreement also required us to make a $2.5 million milestone payment to Janssen upon FDA regulatory approval of OMONTYS, and requires us to make a $2.5 million milestone payment to Janssen upon regulatory approval of OMONTYS in the first major European country. In addition, Janssen will also be entitled to low, single-digit royalties on sales of OMONTYS in Europe, Japan and certain other countries outside of the United States until mid-2016. Upon execution of the Settlement and License Agreement in the fourth quarter of 2011, we recorded $8.0 million of research and development, or R&D, expense relating to the fixed payments. Upon FDA approval of OMONTYS in March 2012, we capitalized $2.5 million related to the first milestone payment during the first quarter of 2012. The resulting asset will be amortized over the expected life of the related patent family, the last-expiring patent of which expires in June 2016. This $2.5 million milestone payment to Janssen was paid in April 2012.

Concurrent with the execution of the Settlement and License Agreement, we and Takeda entered into an amendment to our collaboration in connection with the above settlement payments to Janssen. Under the terms of this amendment, Takeda has agreed to pay us up to $6.5 million in additional milestones in consideration of the upfront and milestone payments we are required to make to Janssen under the Settlement and License Agreement. $5.25 million of these milestones are earned based on regulatory and commercial events in the U.S. and the remaining $1.25 million is tied to regulatory events in the European Union or E.U. In March 2012, the FDA approval of OMONTYS triggered a $3.0 million milestone payment under this amendment, which we recognized as revenue in the first quarter of 2012 and received in the second quarter of 2012. In July 2012, an additional $2.25 million milestone was earned as a result of commercial progress on the OMONTYS product launch, which was recognized as revenue in the third quarter of 2012.

We have experienced significant operating losses since inception. We have funded our operations primarily through the sale of equity securities, reimbursement for development expenses and active pharmaceutical ingredient, or API, production, license fees and milestone payments from collaborative partners, issuance of notes payable, operating and capital lease financings, interest earned on investments and limited license fees and royalties from licensing intellectual property. As of September 30, 2012, we had an accumulated deficit of $475.4 million. Due to the recognition of revenues from milestone payments from our collaboration with Takeda, or the Arrangement, we were profitable in the three months ended March 31, 2012 and may have profitable quarters from time to time in the future. However, we may incur substantial losses in future periods depending on how successful we are in commercializing OMONTYS.

We believe that our existing cash, cash equivalents, investments, revenue generated from our collaboration with Takeda and other sources of available capital, together with the interest thereon will enable us to maintain our currently planned operations for at least the next 12 months. Further challenges or delays to commercialization of OMONTYS may require us to draw down on the remaining $20.0 million available to us under the Loan Agreement executed in March 2012, or to raise additional funding to successfully commercialize OMONTYS. We have experienced volatility in our stock price, which has impaired our ability to access capital on potentially favorable terms, and we expect to experience volatility in our stock price in the future. Our current view of the worldwide capital markets is that they are extremely volatile with limited accessibility and many biotechnology companies have been limited or unsuccessful in obtaining funding in this environment. The stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme price and


Table of Contents

volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm our stock price, regardless of our operating performance. In addition, various commercialization factors may further harm our stock price or cause volatility in our stock price, including our inability to achieve market acceptance and generate product sales, to comply with requirements of the FDA or other regulatory authorities and to ensure an efficient and consistent product supply chain.

We intend to evaluate the capital markets from time to time to determine whether to raise additional capital, in the form of equity, debt, or otherwise, depending upon market conditions relative to our need for funds at such time and our desire to take advantage of strategic opportunities at such time. Market conditions may significantly limit our ability to raise funds such that there can be no assurance we can raise the additional funds to support our continuing operations, and successfully commercialize OMONTYS, and funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, or generate sufficient revenue from our collaboration, we could be required to delay, scale back or eliminate some or all of our operations or delay our efforts to discover, develop or in-license any product candidates. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing would be dilutive to stockholders and debt financing, if available, may involve restrictive covenants that may limit our ability to conduct our business and increase our risk of defaults. Further, any strategic or licensing arrangements, if available, may require us to relinquish product rights that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business and operating results.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with United States, or U.S., generally accepted accounting principles, or GAAP. The preparation of these condensed financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition and clinical development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and the use of estimates are consistent with those noted in our Annual Report on Form 10-K for the year ended December 31, 2011 except as noted below:

Revenue Recognition

Collaboration Revenue

We recognize revenue in accordance with the Securities and Exchange Commission, or SEC, Staff Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin or SAB, No. 104, Revision of Topic 13 and Accounting Standards Codification, or ASC, 605-25, Multiple Element Arrangements. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting as defined in the authoritative guidance for revenue arrangements with multiple deliverables. Application of this guidance requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship. On January 1, 2011, we adopted Accounting Standards Update, or ASU, No. 2009-13, Multiple Deliverable Revenue Arrangements. This update amends the guidance on accounting for arrangements with multiple deliverables to require that each deliverable be evaluated to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. This update also establishes a selling price hierarchy for determining how to allocate arrangement consideration to identified units of accounting. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, or VSOE, if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and the estimated selling price of identified units of accounting for new agreements. During the commercialization phase, we have re-evaluated the deliverables to be performed under the Arrangement to determine if the deliverables can be treated as separate units of accounting. We continue to follow the guidance of ASC 605-25 to determine whether the components of the Arrangement represent separate units of accounting. To determine if a delivered item can be treated as a separate unit of accounting, we evaluate (1) if the delivered item has value to Takeda on a standalone basis; (2) there is objective and reliable evidence of fair value of the undelivered item(s) and (3) if a general right of return exists for the delivered item (eg. contingencies), delivery or performance of the undelivered item(s) is considered probable and is substantially within the control of the company.


Table of Contents

In June 2011, we moved into the commercialization period as defined under our Arrangement with Takeda. According to the Arrangement, this includes all activities undertaken before and after regulatory approval relating specifically to commercialization services such as pre-marketing, launch, promotions, marketing, sale and distribution of OMONTYS as well as development work that took place after our NDA was filed with the FDA but before OMONTYS received FDA approval. Prior to approval of OMONTYS and commencement of profit equalization payments, our primary source of revenue in the commercialization period has consisted of milestone payments and Takeda's reimbursement of pre-commercialization and development efforts including costs of internal and external activities. On March 27, 2012, we received FDA approval of OMONTYS injection for the treatment of anemia due to chronic kidney disease in adult patients on dialysis, and subsequently launched our product on April 24, 2012 when the product began shipping to wholesalers and distributors.

In addition to the reimbursement of the services described above, the Arrangement provides us the potential to earn substantive at risk milestone payments upon achievement of contractual criteria and profit equalization payments subsequent to product launch. Upon the successful achievement of clinical development and regulatory milestones, we are eligible to receive from Takeda an additional $20.0 million related to the June 2006 agreement and $33.0 million related to the February 2006 agreement (see Note 3 of Notes to Condensed Financial Statements), both of which are related to renal indications. In addition, we are eligible to receive up to $150.0 million of sales-based milestones based on certain aggregate net sales reached during a fiscal year.

During the commercialization period, our obligations include ongoing regulatory work to obtain and maintain FDA approval and commercialization efforts related to our product launch and sales and marketing of OMONTYS. Post-marketing development activities incurred during the commercialization period are related to activities to obtain and maintain FDA approval after our NDA was filed, ongoing clinical trial activity on our Phase 3b trial, and activities related to commercial readiness in anticipation of FDA approval and product launch. In addition, as mentioned in our approval action letter, the FDA outlined post-marketing requirements which include an observational study and a randomized controlled trial to evaluate cardiovascular safety and assess safety of long-term use in adult patients on dialysis, in particular in the incident patient population. We expect to start these studies in the near term.

For each source of collaboration revenue, we apply the following revenue recognition model:

† Revenues related to reimbursements by Takeda of third-party development expenses (70/30 split per the Arrangement) and commercialization expenses (shared 50/50 according to the Arrangement) are recognized as revenue, in the period the related costs are incurred. Revenues related to reimbursement of costs of full time equivalents or FTEs engaged in development related activities such as post-marketing studies, are recognized as revenue in the period the related costs are incurred. Such reimbursement is based on contractually negotiated reimbursement rates for each FTE as specified in the Arrangement. Subsequent to the launch of OMONTYS and recognition of product revenue by Takeda, reimbursement of commercialization expenses and development costs (both FTE and out of pocket costs) associated with post-marketing development activities, will be incorporated into the profit equalization payment required under the collaboration agreement in order to effect the 50/50 profit split, as described below.

† Subsequent to the launch of OMONTYS, Takeda makes quarterly profit equalization payments to us in order to effect the 50/50 profit split called for by the Arrangement. The profit equalization payment is calculated as the payment required to ensure that the profit or loss realized by both Affymax and Takeda on the product equates to 50% of the total product profit or loss. The profit equalization payment to us from Takeda for the three months ended September 30, 2012 was $10.4 million. Total product profit or loss on OMONTYS is calculated as gross product sales recorded by Takeda, less the following deductions: rebates and discounts, cost of goods and other gross-to-net adjustments incurred by Takeda; royalty expense incurred by us, commercialization expenses (FTE related and out of pocket costs) incurred by both Takeda and us, and certain development costs associated with post-marketing development activities (FTE related and out of pocket costs) incurred by both Takeda and us. The profit equalization payment is recognized as revenue in the period the product sales occur and product revenue is recognized by Takeda and in which the related expenses are incurred.

† Payments received from Takeda for the shipment of commercial API are recorded as deferred revenue as the earnings process is not complete until either (1) the finished goods produced from each batch of API are sold and utilized for commercial purposes and charged back to us through the profit equalization payment each period until we have completed our obligations under the Arrangement or (2) the Arrangement has been terminated by Takeda or us.

† Amounts received from Takeda under the launch allowance, which is further described in Note 3 of Notes to Condensed Financial Statements, have been recorded as a liability under the caption "Advance from Takeda"


Table of Contents

as there is no certainty whether those amounts will be recouped by Takeda. Amounts are recognized as revenue as Takeda recoups the amounts withheld via reductions in OMONTYS product sales included in the profit equalization payment each period.

† We account for milestones under ASU No. 2010-17, Milestone Method of Revenue Recognition. Under the milestone method, contingent consideration received from the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved, which we believe is more consistent with the substance of our performance under the collaboration. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance,
(ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the entity. A milestone is substantive if the consideration earned from the achievement of the milestone is consistent with our performance required to achieve the milestone or the increase in value to the collaboration resulting from our performance, relates solely to our past performance, and is reasonable relative to all of the other deliverables and payments within the collaboration.

Inventory

Upon receiving FDA approval of OMONTYS, we commenced capitalization of manufacturing costs related to the manufacturing of API for OMONTYS. Previously, we expensed manufacturing costs related to the production of inventory as R&D expense in the period incurred. We continue to expense costs associated with clinical trial material as R&D expense.

We value our inventories at the lower of cost or net realizable value. We determine the cost of inventory using the specific identification method on a first-in, first-out basis. We analyze our inventory levels quarterly and write down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value, as well as any inventory quantities in excess of expected requirements. Any expired inventory is disposed of and the related costs are recognized as expense in the statement of comprehensive loss.

Restructuring Charges

As a result of the May 2010 amendment to our operating lease, we took possession of approximately 16,000 square feet of additional office space adjacent to our corporate headquarters in Palo Alto, California in May 2011. During the year ended December 31, 2011, management concluded that we would not occupy this additional office space, and we have been actively seeking to sublease this space. Given these plans and the fact that this space is adequately separable from our existing facilities, we recorded total restructuring charges of $869,000 during the year ended December 31, 2011, which represents the present value of the estimated future facility costs for which we will obtain no future economic benefit over the term of our lease, net of estimated future sublease income. The $869,000 charge, as well as $72,000 of accretion was recorded during the year ended December 31, 2011 in selling, general and administrative, or SG&A, expenses in the statement of operations.

The estimates underlying the fair value of the lease-related restructuring liability involve significant assumptions regarding the time required to contract with a subtenant, the amount of space we may be able to sublease, the range of potential future sublease rates and the level of leasehold improvements expenditures that we may incur to sublease the property. We have evaluated a number of potential sublease scenarios with differing assumptions and have probability weighted these scenarios and calculated the present value of cash flows based on management's judgment. We continue to monitor and update the liability balance when future events impact our cash flow estimates related to this excess space.

. . .

  Add AFFY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AFFY - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.