Affymax (OTC:AFFY) fell a whopping 85% yesterday after announcing over the weekend that it's recalling Omontys, a treatment for patients on dialysis with chronic kidney disease, because of potentially fatal allergic reactions in some patients. Check out Brenton Flynn's and Sean Williams' coverage for a rundown of the facts. It isn't pretty.
Combing through the wreckage, I found a winner, some losers, and an investment lesson in the mess.
Winner by default
On paper, Amgen (NASDAQ:AMGN) is the winner here. Its Epogen drug competes directly with Omontys. With no Omontys, Epogen basically has a monopoly on the market.
In reality, I'm not sure Amgen was ever really losing. Shares of the biotech giant were up 3% yesterday on the news, but I have a hard time seeing how that's really warranted. Affymax's marketing partner Takeda Pharmaceuticals only managed to sell $15 million worth of Omontys in the third quarter compared to Epogen sales of $491 million in the same time period.
Omontys' demise could also help Keryx Biopharmaceuticals (NASDAQ:KERX). It's developed a drug, Zerenex , to lower phosphate in the same types of dialysis patients that get Omontys or Epogen. Since the drug is iron-based, it increases iron levels, which lowers the need for Omontys or Epogen. Even if it makes it back to market, doctors will likely try to avoid using Omontys and Epogen, which has had its own fair share of risk-benefit issues.
Of course, Omontys' safety issues could also backfire for Keryx if it causes doctors to worry about prescribing a new drug in the frail population. It might be hard for Zerenex to gain traction over drugs such as Sanofi's Renvela and Fresenius' Phoslo that doctors already have experience with, even though Zerenex seems to have advantages over the current offerings.
Affymax didn't see the same severity of allergic reactions in the clinical trials it ran on Omontys. One possibility is that there's some new manufacturing issue that's causing the reaction. That might actually be solvable, and the drug could get back on the market minus whatever ingredient is causing the issue.
The bigger problem for the industry as a whole is if the active drug is the source of the severe reactions. Deaths occurred in 0.02% of all cases where Omontys was administered. You need fairly large clinical trials to detect something that rare.
That doesn't mean the FDA won't try.
Before this blow up, it seemed like the agency was actually becoming a little looser with its standards. I'm a little worried Omontys' issues will derail that movement.
Sarepta Therapeutics (NASDAQ:SRPT), for instance, hasn't seen any major safety issues for its Duchenne muscular dystrophy drug, eteplirsen, but the drug has been tested on only a handful of patients. Given the latest wakeup call, will the FDA demand a larger number of patients be tested in clinical trials before it's used on everyone with the disease? I hope not, but it's hard to know how safety data from one drugmaker might change the culture of the agency.
The investment lesson
Biotechs dropping 85% isn't all that uncommon. Clinical trials fail. The FDA refuses to approve drugs. It's just part of investing in the sector.
What's different about Affymax is that it was impossible to see this coming. At least with binary events, you know there's a potential for a major drop in the stock price. New side effects of already-approved drugs tend to come out of nowhere and can cripple a company. It took Merck's shares two years to recover after Vioxx was pulled from the market in 2004. Elan (NYSE:ELN) convinced the FDA to let Tysabri back on the market and it still took three years for the shares to recover to their pre-withdraw level .
The lesson here is that if you're going to own drugmakers -- especially biotechs with only one drug on the market -- you'd better make sure you're being rewarded appropriately. Drugmakers become less risky once their drugs are on the market, but the risk doesn't go to zero. Look for biotechs with a margin of safety or stay on the sidelines.