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AFFY > SEC Filings for AFFY > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for AFFYMAX INC

Form 10-Q for AFFYMAX INC


31-Jul-2014

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, 2013 and our unaudited condensed financial statements for the three and six month period ended June 30, 2014.

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. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q under Item 1A "Risk Factors," and in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in Part I, Item 2 of this Form 10-Q. 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 restructuring operations and our Board has approved, subject to stockholder approval, a plan of dissolution and liquidation of the Company. In March 2012, the U.S. Food and Drug Administration, or FDA, approved the Company's first and only product, OMONTYSŪ (peginesatide) Injection for the treatment of anemia due to chronic kidney disease in adult patients on dialysis. OMONTYS is a synthetic, peptide-based erythropoiesis stimulating agent, or ESA, designed to stimulate production of red blood cells and has been the only once-monthly ESA available to the adult dialysis patient population in the U.S. We co-commercialized OMONTYS with our collaboration partner, Takeda Pharmaceutical Company Limited, or Takeda during 2012 until February 2013, when we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of safety concerns. Effective April 1, 2013, we entered into an amendment of our collaboration agreement with Takeda pursuant to which Takeda assumed full responsibility for OMONTYS, including responsibility for the ongoing recall and investigation with the FDA, and we granted them an exclusive license to OMONTYS in consideration for potential royalties and milestones.
On June 10, 2014, Affymax, Inc. received from Takeda Pharmaceutical Company Limited, a written notice of termination of the Collaboration and License Agreement between the Parties, dated June 27, 2006, as amended, and the Agreement will be terminated effective as of September 10, 2014. Takeda's decision to terminate the Agreement is a result of its detailed investigation of safety concerns of OMONTYS, which confirmed no quality or manufacturing issues were present, but did not identify a specific root cause for the reactions that were observed in patients treated with the product. Based on these findings and related discussions with Takeda, Affymax has determined not to exercise its rights with respect to OMONTYS and Takeda will work with the FDA to withdraw the OMONTYS New Drug Application (the "NDA"). Restructuring
In March 2013, we implemented plans to restructure our operations in order to reduce operating costs and focus on the OMONTYS safety and other related FDA issues associated with the recall of the product. As of December 31, 2013, we completed a reduction in force of almost all our personnel, including all of our commercial and medical affairs field forces as well as other employees throughout the organization. We have recorded $16.1 million in restructuring charges related to the workforce reduction during the year ended December 31, 2013. As a result of this restructuring and the recall, we also recorded impairment charges of $4.4 million with respect to our property and equipment and intangible assets related to our


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license from Janssen Biotech, Inc. (a subsidiary of Johnson & Johnson) and certain of its affiliated companies, collectively referred to as Janssen, in the year ended December 31, 2013.

In April 2013, as part of our efforts to restructure our operations in order to reduce costs, in addition to our reduction in force, we engaged an experienced restructuring firm, The Brenner Group, Inc. With the engagement of the restructuring firm, we terminated the employment of our remaining executive officers, including our Chief Executive Officer and Chief Financial Officer. Takeda Amendment
Effective April 1, 2013, we and Takeda, collectively the Parties, entered into the Fourth Amendment, or the Amendment, to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we have granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. This Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA. The arrangement with Takeda including the Amendment is referred to as the Arrangement.
The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS New Drug Application, or NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
On June 10, 2014, Affymax, Inc. received from Takeda Pharmaceutical Company Limited , a written notice of termination of the Collaboration and License Agreement between the Parties, dated June 27, 2006, as amended, and the Agreement will be terminated effective as of September 10, 2014. Takeda's decision to terminate the Agreement is a result of its detailed investigation of safety concerns of OMONTYS, which confirmed no quality or manufacturing issues were present, but did not identify a specific root cause for the reactions that were observed in patients treated with the product. Based on these findings and related discussions with Takeda, Affymax has determined not to exercise its rights with respect to OMONTYS and Takeda will work with the FDA to withdraw the NDA.
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 API production, license fees, milestone payments and profit equalization revenue from Takeda, issuance of notes payable, capital lease financings, interest earned on investments and limited license fees and royalties from licensing intellectual property. As of June 30, 2014, we had an accumulated deficit of $552.3 million.

On June 24, 2014, we issued a press release announcing that our Board of Directors determined that it is in the best interests of Affymax's stockholders to liquidate Affymax's assets and to dissolve Affymax. The Affymax, Inc. Plan of Liquidation was unanimously approved by the Board, but is subject to stockholder approval. Affymax intends to hold a special meeting of stockholders to seek approval of the Plan. Affymax will file proxy materials with the U.S. Securities and Exchange Commission in advance of that meeting. In connection with the proposed dissolution, Affymax intends to distribute to its stockholders all available cash, if any, other than as may be required to pay expenses and pay or make reasonable provision for known and potential claims and obligations of Affymax, as required by applicable law. If approved by Affymax's stockholders, Affymax intends to file a certificate of dissolution, pay, satisfy, resolve or make reasonable provisions for claims and obligations as well as anticipated costs associated with the dissolution and liquidation as soon as reasonable, practicable and financially prudent.

Litigation

Shareholder Litigation


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On February 27, 2013, a securities class action complaint was filed in the United States District Court for the Northern District of California, naming as defendants the Company, certain of its officers, Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals U.S.A., Inc. and Takeda Global Research & Development Center, Inc. A second complaint naming the same defendants was filed on March 6, 2013. On May 2, 2013, the securities class action complaint that was filed on February 27, 2013 was voluntarily dismissed by the plaintiff. On May 21, 2013, the Court appointed a lead plaintiff in the remaining securities class action complaint that had been filed on March 6, 2013. On July 22, 2013, a consolidated amended class action complaint was filed on behalf of purported stockholders of the Company, naming as defendants the Company and certain of its former officers. The consolidated amended complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connection with allegedly false and misleading statements made by the defendants regarding OMONTYS, the Company's business practices, financial projections and other disclosures between August 8, 2012 and February 22, 2013, or the Class Period. The plaintiff seeks to represent a class comprised of purchasers of the Company's common stock during the Class Period and seeks damages, costs and expenses and such other relief as determined by the Court. On September 20, 2013, the Company and the individual defendants (collectively, "Defendants") filed a motion to dismiss the consolidated amended complaint. On November 19, 2013, the plaintiff filed her opposition to the motion to dismiss and on December 19, 2013, Defendants filed their reply in support of their motion to dismiss. The hearing on the motion to dismiss occurred on January 15, 2014. On January 21, 2014, the Court issued its order granting the motion to dismiss regarding violations of Section 20(a) against all Defendants and it granted the motion to dismiss in part, denying the motion to dismiss in part, and providing plaintiffs with an opportunity to amend the complaint. On February 18, 2014, the Court, pursuant to a stipulation by the parties, stayed the litigation for ninety days to allow the parties to conduct settlement discussions. On July 2, 2014, the parties executed a Stipulation of Settlement of the securities class action suit. The Stipulation, which is subject to court approval, provides in part for a settlement payment of $6.5 million and the dismissal of all claims against the defendants in connection with the securities class action suit. The $6.5 million settlement payment, less any remaining retention at the time of payment, which is estimated to be less than $100,000, will be paid by the Company's insurance provider under its insurance policy. On July 3, 2014, plaintiffs filed a motion for preliminary approval of the settlement. The preliminary approval hearing is set for August 27, 2014.

On March 19, 2013 and March 29, 2013, respectively, two derivative lawsuits were filed purportedly on behalf of the Company in California Superior Court for the County of Santa Clara naming certain of our current and former officers and directors as defendants (the "State Court Derivative Action"). The lawsuits allege that certain of the Company's officers and directors breached their fiduciary duties related to the clinical trials for OMONTYS and for representations regarding the Company's business health, which was tied to the success of OMONTYS. The lawsuits also assert claims for unjust enrichment and corporate waste. On May 31, 2013, the Court consolidated the two actions and appointed lead plaintiff. On June 11, 2013, lead plaintiff designated the complaint filed on March 29, 2013 as the operative complaint. On August 6, 2013, the Court stayed the State Court Derivative Action pending the outcome of the motion to dismiss in the securities class action. Subsequent to the order regarding the motion to dismiss in the securities class action, on January 31, 2014, the Court ordered that the State Court Derivative Action be stayed in its entirety until resolution of the securities class action. On May 29, 2014, the parties entered into a Stipulation of Settlement of the State Court Derivative Action. The Stipulation, which is subject to court approval, provides in part that the Company will enter into certain corporate governance reforms, that the Company shall cause to be paid an attorneys' fee to plaintiffs of $375,000 (subject to court approval), and for the dismissal of all claims against the defendants in connection with the State Court Derivative Action. On July 16, 2014, the Court entered an order preliminarily approving the Stipulation and setting a final approval hearing date for September 19, 2014.
On August 19, 2013, another derivative lawsuit was filed purportedly on behalf of the Company in the United States District Court for the Northern District of California naming certain of our current and former officers and directors as defendants (the "Federal Derivative Action"). The lawsuit's allegations are substantially similar to the allegations in the State Court Derivative Action. On October 21, 2013, the Court ordered a stay in the Federal Derivative Action pending the outcome of the motion to dismiss in the securities class action. Subsequent to the order regarding the motion to dismiss in the securities class action, on January 31, 2014, the Court ordered that the Federal Derivative Action be stayed until resolution of the securities class action. On April 30, 2014, plaintiff in the Federal Derivative Action filed a notice of voluntary dismissal without prejudice. On May 7, 2014, the Court dismissed the Federal Derivative Action without prejudice.
Additional complaints may be filed against us and our directors and officers related to our recall of OMONTYS.

Product Liability Litigation


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On or about February 13, 2014, a complaint was filed by an individual plaintiff in the Fourth Judicial District Court (Ouachita Parish) of the State of Louisiana, naming as defendants the Company, Takeda Pharmaceuticals America, Inc., Takeda Pharmaceuticals U.S.A., Inc., Takeda Development Center Americas, Inc., Takeda Pharmaceuticals International, Inc., Takeda Pharmaceutical Company Limited, Fresenius Medical Care Monroe, LLC, and Fresenius Medical Care Holdings, Inc., and indicating an intention to add two physicians as defendants. The plaintiff seeks to hold the defendants liable in connection with the death of her husband on February 15, 2013. The complaint alleges that the Company and certain other defendants are liable under the Louisiana Products Liability Act, La.R.S. 9:2800.51, et seq., other Louisiana statutes, and otherwise in connection with their alleged acts and omissions with respect to OMONTYS. The plaintiff seeks various categories or types of damages, including, without limitation, damages for her and her late husband's alleged losses and injuries, punitive or exemplary damages, the price of OMONTYS and reasonable expenses occasioned by the sale of that drug, and other relief as set forth in the complaint. On April 11, 2014, we filed our initial response to the claim, denying that the Company is liable for the plaintiff's damages as set forth in the complaint. The Company has product liability insurance which we believe is adequate and we believe a material loss is not probable. However, it is possible losses could exceed the insurance coverage or coverage may be denied. Although this is the only product liability lawsuit that the Company is aware of at this time, there can be no assurances that additional product liability complaints will not be brought.

Additional complaints may be filed against us and our directors and officers related to our recall of OMONTYS. Our management believes that we have meritorious defenses and intends to defend these lawsuits vigorously. However, these lawsuits are subject to inherent uncertainties, the actual cost may be significant, and we may not prevail. We believe we are entitled to coverage under our relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient.

Financial Outlook

On June 24, 2014, we issued a press release announcing that our Board of Directors determined that it is in the best interests of Affymax's stockholders to liquidate Affymax's assets and to dissolve Affymax and had approved a Plan of Liquidation, subject to stockholder approval. Affymax intends to hold a special meeting of stockholders to seek approval of the Plan. Affymax will file proxy materials with the U.S. Securities and Exchange Commission as soon as practicable and in any event in advance of that meeting in accordance with applicable laws. In connection with the proposed dissolution, if approved by Affymax' stockholders, Affymax intends to distribute to its stockholders all available cash, if any, other than as may be required to pay expenses and pay or make reasonable provision for known and potential claims and obligations of Affymax, as required by applicable law. If approved by Affymax's stockholders, Affymax intends to file a certificate of dissolution, pay, satisfy, resolve or make reasonable provisions for claims and obligations as well as anticipated costs associated with the dissolution and liquidation as soon as reasonable, practicable and financially prudent.

Results of Operations

Revenue

During the commercialization period we received reimbursement for certain collaboration expenses. Takeda bore responsibility for 70% of third-party expenses related to U.S. development and 50% of third party expenses related to the commercialization of OMONTYS in the U.S. incurred by us and we were responsible for the reciprocal amount of development and commercialization expenses. Certain employee-related expenses supporting preparation for commercialization of OMONTYS in the U.S. were also shared equally. Such employee-related costs included the cost of certain employees that are required to commercialize OMONTYS such as field sales representatives, sales operations, medical science liaisons, nurse educators, conversion specialists, national accounts managers and reimbursement specialists. In addition, costs of employees in clinical, regulatory and other development functions supporting any post-marketing development activity required by the FDA or separately agreed to by the parties in the U.S. were generally shared equally.


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OMONTYS sales by Takeda commenced in September 2012. Subsequent to the launch of OMONTYS and recognition of product revenue by Takeda, our collaboration revenue consisted of profit equalization revenue generated from our Arrangement with Takeda, milestone payments, reimbursements of certain eligible development and commercial expenses, net of Takeda's own eligible expenses, and revenue previously deferred related to payments we received associated with previously expensed API, which have been sold by Takeda. Revenue from profit equalization was calculated on a quarterly basis as the amount required so that the profit or loss realized by both Affymax and Takeda on OMONTYS equated to 50% of the total product profit or loss. Total product profit or loss on OMONTYS was calculated as gross product sales recorded by Takeda, less the following deductions recorded by Takeda: rebates and discounts, cost of goods and other gross-to-net adjustments incurred by Takeda, royalty expense incurred by us, commercialization expenses (full-time equivalents or 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.

Revenue as compared to the prior year is as follows (in thousands):

                                       Three Months Ended June                        Six Months Ended June
                                                 30,               Percent Change              30,              Percent Change
                                           2014          2013                           2014         2013
Collaboration revenue                 $          -     $  525           (100 )%      $       -     $ 1,364           (100 )%
License and royalty revenue                     42          -            100  %             42           5             88  %
Total revenue                         $         42     $  525            (92 )%      $      42     $ 1,369            (97 )%

Revenue decreased $0.5 million from $0.5 million for the three months ended June 30, 2013 to $0.0 million for the three months ended June 30, 2014. The collaboration revenue received in the three months ended June 30, 2013 was the final payment received from Takeda for reimbursement of certain personnel costs incurred by us to assist in the transition of regulatory responsibilities, including the OMONTYS NDA, and all manufacturing, and development responsibilities from us to Takeda. Collaboration revenue decreased from $1.3 million for the six months ended June 30, 2013 to $0.0 million for the six month ended June 30, 2014. The decrease was primarily the result of receipt of the final profit sharing payment from Takeda, as a result of the product recall of OMONTYS and the one time payment for transition services.

The following table presents our collaboration revenue, by revenue type, for the periods presented (in thousands):

                                                 Three Months Ended June       Six Months Ended
                                                           30,                     June 30,
                                                     2014         2013         2014        2013
Net expense reimbursement after CAPM             $        -     $   525     $      -     $ 1,364
Total collaboration revenue                      $        -     $   525     $      -     $ 1,364

Takeda Amendment

On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS as a result of post marketing reports regarding safety concerns, including anaphylaxis, which can be life-threatening or fatal. As a result of the voluntary recall of OMONTYS, all marketing activities were suspended.

Effective April 1, 2013, we and Takeda, collectively the Parties, entered into the Fourth Amendment, or the Amendment, to the February 13, 2006 and June 27, 2006 Collaboration and License Agreements to amend and restate the ongoing respective roles and responsibilities and related commitments and financial terms between the Parties, including the termination of the Collaboration and License Agreement dated as of February 13, 2006, under which we have granted Takeda a certain right and license for the development and commercialization in Japan of OMONTYS, as amended by the First Amendment, dated April 1, 2007, the Second Amendment, dated January 1, 2008 and the Third Amendment, dated November 7, 2011, as well as the related manufacturing supply, safety, quality and co-promotion agreements between the parties. The Amendment revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure to us effective as of April 1, 2013. This Amendment is part of our ongoing restructuring efforts resulting from the voluntary recall announced on February 23, 2013 related to OMONTYS, the suspension of U.S. marketing and promotional activities, and the ongoing investigation with the FDA. The arrangement with Takeda including the Amendment is referred to as the Arrangement.


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The Amendment effectuated a transfer of regulatory responsibilities, including the OMONTYS New Drug Application, or NDA, and all manufacturing, and development responsibilities from us to Takeda. Takeda received a worldwide, exclusive royalty-bearing license under our and joint Takeda-Affymax patents to develop, manufacture and commercialize OMONTYS.
On June 10, 2014, Affymax, Inc. received from Takeda Pharmaceutical Company Limited, a written notice of termination of the Collaboration and License Agreement between the Parties, dated June 27, 2006, as amended, and the Agreement will be terminated effective as of September 10, 2014. Takeda's decision to terminate the Agreement is a result of its detailed investigation of safety concerns of OMONTYS, which confirmed no quality or manufacturing issues were present, but did not identify a specific root cause for the reactions that were observed in patients treated with the product. Based on these findings and related discussions with Takeda, Affymax has determined not to exercise its rights with respect toOMONTYS and Takeda will work with the FDA to withdraw the NDA.
Research and Development Expenses
The major components of R&D expenses include clinical trial expenses, consulting and other third-party costs, API manufacturing costs incurred prior to FDA approval, salaries and employee benefits, license fees paid to third parties for use of their intellectual property, supplies and allocations of various overhead and occupancy costs. Clinical trial expenses include, but are not limited to, contract research organization, or CRO, and investigator fees, site costs, comparator drug costs and clinical research organization costs. All R&D expenses are expensed as incurred. R&D expenses, as compared to the prior year are as follows (in thousands):

                                        Three Months Ended                             Six Months Ended
                                             June 30,           Percent Change             June 30,              Percent Change
. . .
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