How Much Higher Can Affymax Fly?

Shares of Affymax (Nasdaq: AFFY) hit a 52-week high today. Let's look at what's driving these gains to understand what lies over the horizon. Are there clear skies ahead? We'll have a better forecast once we examine the details.

How it got here
When we last looked at Affymax's incredible 2012 performance, it had gained about 130% in the trailing-12-month period to July. Since then, that trailing return has more than doubled, and is now one of the market's absolute best past-year performers. It trails only a very small group of stratospheric stocks, particularly Arena Pharmaceuticals (Nasdaq: ARNA), which has been riding the post-approval rollercoaster of its potential megablockbuster anti-obesity drug Belviq.

AFFY Total Return Price data by YCharts.

Affymax shareholders, unlike those on the Arena rocket, have been content to hold on while their stock keeps going up. And why not? Affymax's Omontys anemia treatment might have more established competition in the form of Amgen's (Nasdaq: AMGN) Epogen, but it has one key advantage. As my fellow Fool Rich Duprey points out, Epogen's twice-weekly treatment schedule is somewhat more onerous for patients than the once-a-month Omontys.

Investors haven't been turned off by Amgen's established market presence. Affymax will have to compete against a drugmaker that has an exclusive long-term contract with DaVita (NYSE: DVA), the nation's largest dialysis service provider. Affymax is banking on its convenience and cost advantages, and last month, in partnership with Takeda Pharmaceuticals, the company announced a supply deal with privately held U.S. Renal Care.

What you need to know
Affymax shareholders have had a lot of ups and downs over the past few years, and shares remain below their 2007 levels. However, recent gains could soon bring the stock back to a flat five-year performance -- and those who got in last year or later have enjoyed much better growth.

Development-stage biotechs don't exactly have financial metrics to follow in the same way established companies do. What we can look at is Affymax's share dilution and its commitment to research. For a company in its position, Affymax hasn't tapped the secondary-offering well too often. Its R&D spending might explain why, as it's well below the levels reached five years ago. Affymax's R&D spending has been on a multiyear decline:

AFFY Total Return Price data by YCharts.

Now that Affymax has gotten Omontys through the FDA gauntlet, it's probably expecting drug revenues to bring in more than enough to fund future research. Negative press for Amgen's anemia drugs -- which are also licensed by pharma giant Johnson & Johnson (NYSE: JNJ) and which experienced a Medicare reimbursement scandal that dinged both companies' reputations -- could easily push patients toward Omontys. Once that happens, what's next for Affymax? It's a one-drug drugmaker, which limits the stock's upside now that that one drug is approved and its numbers fairly well-crunched.

What's next?
Affymax presents an attractive takeover target for a larger pharmaceutical company. That could drive the stock higher, but it's not likely to bring similarly outsize rewards as the past 52 weeks have. Any news could push Affymax around significantly, so shareholders will need to watch closely.

The Motley Fool's CAPS community has given Affymax a two-star rating, but 76% of our CAPS players expect it to continue outperforming. The low star ranking is likely because of most CAPS players only offering short-term outperform calls.

Interested in tracking this stock as it continues on its path? Add Affymax to your free watchlist now, for all the news we Fools can find, delivered to your inbox as it happens. Now that Affymax's potential is well-known, it may be time to start looking for the next hidden gem. The Fool's found three, and we think they've got so much opportunity that they could make you a millionaire. Learn all about the three superstar stocks Wall Street's too rich to notice in our brand-new free report -- click here for your copy.