10-K 1 affy1231201310-k.htm 10-K AFFY 12.31.2013 10-K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________ 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number 001-33213
___________________________________ 
 
AFFYMAX, INC.
(Exact name of registrant as specified in its charter)
 ___________________________________ 

Delaware
 
77-0579396
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S.  Employer
Identification Number)
 
19200 Stevens Creek Blvd. Suite 240
Cupertino, CA 95014
(650) 812-8700
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

 Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common stock, par value $0.001 per share
 
Over The Counter (OTC)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer x
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 The aggregate market value of the registrant's common stock, $0.001 par value, held by non-affiliates of the registrant as of June 30, 2013 was $38,370,661 (based upon the closing sales price of such stock as reported on the Over-the-Counter electronic market on such date). Excludes an aggregate of 237,026 shares of the registrant's common stock held by officers, directors and affiliated stockholders. For purposes of determining whether a stockholder was an affiliate of the registrant at June 30, 2013, the registrant has assumed that a stockholder was an affiliate of the registrant at June 30, 2013 if such stockholder (i) beneficially owned 10% or more of the registrant's common stock and/or (ii) was affiliated with an executive officer or director of the registrant at June 30, 2013. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

As of February 28, 2014, 37,490,095 shares of the registrant’s common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Proxy Statement for the 2014Annual Meeting of Stockholders (the "Proxy Statement"), to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2013, are incorporated by reference into Part III of this Annual Report on Form 10-K. Except with respect to information specifically incorporated by reference into this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

 



AFFYMAX, INC
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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This Annual Report on Form 10-K 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” and similar expressions intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our ability to continue our business, operations, and investigation following the recall of OMONTYSand the continuation and success of our collaboration with Takeda Pharmaceutical Company Limited. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, timing or achievements to be materially different from any future results, performance, timing or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K under Item 1A “Risk Factors.” 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 Annual Report on Form 10-K 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.

PART I.
Item 1.    Business.
Overview
We are a biopharmaceutical company in the process of restructuring operations. In March 2012, the U.S. Food and Drug Administration, or FDA, approved the Company’s first and only product, OMONTYS® (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 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.
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, in addition to transitioning many of the ongoing activities to our collaborator, Takeda, 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 ending 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 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 former executive officers, including our Chief Executive Officer and Chief Financial Officer.

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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 had 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 was part of our 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.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to $180.0 million which consists of the following: (a) $10.0 million is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b) $10.0 million and another $10.0 million relates to U.S. sales-based milestones, and (c) $150.0 million relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5.0 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of 13% to 17% with respect to net sales in the U.S. and in the range of 13% to 24% depending on the level of net sales by Takeda worldwide outside of the U.S.
In 2012, we co-commercialized OMONTYS with Takeda. The commercial launch of the product occurred in April 2012. To commercialize OMONTYS, we established commercial and medical affairs infrastructures in 2012. The functions of our commercial and medical affairs infrastructures included marketing and sales, medical education, coverage and reimbursement and account management.
In 2012 and in 2013 up until the recall of OMONTYS, we marketed our product primarily to dialysis organizations. Associated costs are included in selling, general and administrative costs or SG&A in our accompanying financial statements.

In 2012 and in 2013 up until the recall of OMONTYS, Takeda was responsible for account management, pricing and contracting. Specifically, Takeda had sole responsibility for invoicing and collection of receivables with regard to sales of OMONTYS. Takeda also had the rights and responsibility for establishing and modifying terms and conditions with customers with respect to the sale of OMONTYS in the U.S., including pricing discounts available to third-party payers, price adjustments and other allowable discounts and allowances. Both parties also had shared responsibilities such as joint marketing activities, business analytics and account management allocated by customer segments.
Prior to the Amendment, outside of the U.S., Takeda held an exclusive license to develop and commercialize OMONTYS and has primary responsibility for filing regulatory submissions and obtaining product approvals in those territories.
We were incorporated in Delaware in July 2001 under the name Affymax, Inc. The address of our principal executive office is 19200 Stevens Creek Boulevard, Suite 240, Cupertino, California 95014, and our telephone number is (650) 812-8700. Our website address is www.affymax.com. We do not incorporate the information on our website into this Annual Report on Form 10-K, and you should not consider it part of this Annual Report on Form 10-K.
Our Product: OMONTYS
In March 2012, the FDA approved our first product, OMONTYS, for the treatment of anemia due to chronic kidney disease in adult patients on dialysis. In February 2013, the product was recalled nationwide and all promotion and marketing activities have been suspended.
Anemia Background

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Anemia is a serious condition in which blood is deficient in red blood cells and hemoglobin. Red blood cells are normally formed in the circulating blood from precursor cells which are initially present primarily in the bone marrow. These cells are stimulated to divide and differentiate and are mobilized into circulation by erythropoietin, or EPO, a hormonal factor produced by the kidney. EPO acts by binding to and activating the EPO receptor on precursor cells. The activation of the EPO receptor stimulates the proliferation and maturation of the precursor cells to form red blood cells that contain hemoglobin. Hemoglobin is an iron-containing protein in red blood cells that functions primarily in the transport of oxygen to, and carbon dioxide from, the tissues of the body.
Anemia generally exists in men when the hemoglobin level in blood, which is a measure of red blood cells, is less than 12 g/dL, or the hematocrit, which is a ratio of the volume packed red blood cells to the volume of whole blood, is less than 36%, and in women when hemoglobin is less than 11 g/dL or hematocrit is less than 33%. Anemia 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, ESAs are used to treat chemotherapy-induced anemia in cancer patients and to treat anemia due to chronic kidney disease in patients on dialysis and not on dialysis.
Anemia and Chronic Kidney Disease
One of the most common forms of chronic anemia occurs in patients with chronic kidney failure. According to the Center for Disease Control, chronic kidney failure affects over 20 million adults in the U.S. As kidney function deteriorates due to the underlying disease, the ability of the kidney to produce adequate EPO is impaired, resulting in decreased production of new red blood cells and anemia.
Over time, chronic kidney disease usually progresses to irreversible end-stage renal disease, the most severe stage of the disease. End-stage renal disease patients require either lifetime dependence on renal dialysis, a medical procedure in which blood is cleansed of impurities, or a kidney transplant. Patients with end-stage renal disease are nearly always moderately to severely anemic unless treated with an ESA. According to U.S. Renal Data System, there were approximately 415,000 end-stage renal disease patients on dialysis in the U.S. in 2010.
Anemia Therapy and Limitations
Prior to the introduction of OMONTYS, all ESAs were recombinant EPO, or rEPO. Forms of rEPO variants have been used successfully to manage the anemia of dialysis, non-dialysis and cancer patients. rEPOs are similar, but not necessarily identical, to a patient's naturally occurring EPO. Differences exist among rEPOs with regard to composition and structure. As a result, differences also exist among rEPOs with regard to frequency of dosing, duration of effect and rate of rise in hemoglobin.
Since its initial U.S. market introduction in 1989, rEPO has revolutionized the treatment of patients with anemia resulting from chronic diseases. Two current ESAs, epoetin alfa and epoetin beta, are biologically engineered hormones produced in mammalian cells by recombinant DNA technology. Both are relatively short-acting forms of rEPO that typically require frequent dosing, one to three times per week or up to every two weeks, to obtain a sustained correction of anemia in chronic kidney disease patients on dialysis.
OMONTYS Voluntary Recall
In February 2013 and in consultation with the FDA, we and Takeda voluntarily recalled OMONTYS nationwide from the market as a result of post-marketing reports regarding serious hypersensitivity reactions, including anaphylaxis, which can be life-threatening or fatal. In connection with the recall, we and Takeda suspended all promotional and marketing activities for OMONTYS. 

Effective April 1, 2013, we entered into an amendment of our collaboration 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.
Manufacturing and Supply
Until the product recall in February 2013, final OMONTYS drug product was manufactured as a buffered aqueous solution for intravenous or subcutaneous administration. Under our collaboration with Takeda, we were responsible, through our contract manufacturing organizations, or CMOs, for the manufacture and supply of all quantities of OMONTYS active pharmaceutical ingredient, or API, to be used in development and commercialization worldwide, and Takeda was responsible for final drug product manufacture and control.


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In connection with the recall and in consultation with Takeda, we have terminated manufacturing activities. Effective April 1, 2013, we entered into an amendment of our collaboration 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. In addition, Takeda assumed full responsibility for any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We provided transition support to Takeda through April 30, 2013. After April 30, 2013 we have no performance obligations under our agreement with Takeda.

Intellectual Property
We protect our technology through the use of patents, trade secrets and proprietary know-how. As previously announced in our Report on Form 8-K, filed April 10, 2013, we entered into the Fourth Amendment (the "Amendment") between us and Takeda Pharmaceutical Company Limited amending the Collaboration and License Agreement of 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 Affymax has 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 (collectively, as amended, the "Agreement"). The Amendment changed not only the financial terms of the relationship but also involved the transfer to Takeda of all the intellectual property rights, including the control of patent prosecution matters.
Throughout the course of the year, Takeda has elected to limit or terminate the continued prosecution of the various U.S. and international patents covering OMONTYS, including those covering most of the European countries. We have elected, as is our right under the Agreement, not to continue prosecution of those patents when Takeda has determined to terminate its prosecution rights for such patents. Accordingly, we or Takeda will likely not be able to maintain patent protection for OMONTYS in any country, including the U.S., should the product be reintroduced into the market.
Third Party Intellectual Property
We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our products, product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents was found to cover our products, product candidates, proprietary technologies or their uses, we or our collaborators would be required to pay damages and could be restricted from commercializing our products, product candidates or using our proprietary technologies unless we or they obtain a license to the patent. A license may not be available to us or our collaborators on acceptable terms, if at all. In addition, during litigation, the patent holder might obtain a preliminary injunction of other equitable right, which could prohibit us from making, using or selling our products, technologies or methods.
There is substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including but not limited to, litigation expenses, substantial damages, attorney fees, injunction, royalty payments, cross-licensing of our patents, redesign of our products or processes and related fees and costs.
Research and Development Expenses
We have made substantial investments in research and development, or R&D. We have conducted clinical trial activities using both our internal staff and third-party contract clinical trial service providers. However, we have suspended further investment in R&D, including suspending conduct of clinical trials pending consideration of next steps with OMONTYS.
Prior to approval of OMONTYS for commercial sale in March 2012 by the FDA, we had expensed all costs associated with the production of API as R&D expense. R&D expenses were $11.9 Million, $51.7 million, and $76.3 million, for the years ended December 31, 2013, 2012 and 2011, respectively.



Business Relationships
Our Collaboration with Takeda

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We entered into a collaboration to develop and commercialize OMONTYS with Takeda pursuant to an agreement in February 2006 and an agreement in June 2006.  The February 2006 agreement and the June 2006 agreement are collectively referred to herein as the Arrangement. Under the Arrangement, we and Takeda will co-develop and co-commercialize OMONTYS in the U.S., and Takeda received an exclusive license to develop and commercialize OMONTYS outside of the U.S.  Takeda has primary responsibility and bears all costs for OMONTYS clinical development in support of regulatory approval for all territories outside the U.S. and is required to pay us a variable royalty based on annual net sales of OMONTYS outside the U.S. 
Revenues in 2013, 2012, and 2011 were derived almost exclusively from collaboration revenue from Takeda. From our inception through December 31, 2013, we have received an aggregate of $537.5 million from Takeda consisting of $122.0 in upfront license fees, $115.3 million in milestone payments and $300.2 million related to profit equalization payments for our share of product profit or loss, the reimbursement of development and commercialization expenses and the purchase of API.
In November 2011, we and Takeda entered into a Commercial API Supply Agreement to formalize our respective responsibilities as they relate to the manufacture and supply of OMONTYS.  Under the terms of the agreement, we are responsible for the manufacture and supply of all quantities of API to be used in the development and commercialization of OMONTYS worldwide. Takeda is responsible for the fill and finish steps in the manufacture of OMONTYS worldwide.
Finally, in February 2012, we and Takeda entered into a Co-Promotion Agreement to further specify and formalize the terms and conditions relating to our joint U.S. commercialization activities for OMONTYS, including corporate governance structure and division of roles and responsibilities.  Under the Co-Promotion Agreement, we deploy the sales and medical affairs field force but share marketing, account management and payor reimbursement related activities with Takeda.  We and Takeda split profits or losses 50/50 in the U.S. To implement our profit equalization arrangement, 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 by us and Takeda. Consistent with the terms of the Arrangement, Takeda retains final decision making authority with respect to terms related to pricing and contracting and responsibility for distribution activities.
In connection with the recall and in consultation with Takeda, we have terminated manufacturing activities. Effective April 1, 2013, we entered into an amendment of our collaboration 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. In addition, Takeda assumed full responsibility for any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We provided transition support to Takeda through April 30, 2013. After April 30, 2013 we have no performance obligations under our agreement with Takeda.

Our License, Manufacturing and Supply Agreement with Nektar
In April 2004, we entered into a License, Manufacturing and Supply Agreement with Nektar under which we obtained from Nektar a worldwide, non-exclusive license, with limited rights to grant sublicenses, under certain intellectual property covering pegylation technology to manufacture, develop and commercialize OMONTYS. The license we obtained consists of a license under intellectual property owned by Nektar and a sublicense under intellectual property owned by Enzon Pharmaceuticals, Inc., or Enzon, licensed to Nektar pursuant to a cross-license agreement between Nektar, Inhale Therapeutic Systems, Inc. and Enzon.
In consideration of the license grant, we agreed to pay royalties on the sales of OMONTYS, which began with the launch of the product in the U.S. in 2012. We also agreed to pay base milestones plus possible additional milestones in connection with our partnering activities relating to OMONTYS, all of which have been paid.
    
Contract Manufacturing Organization (CMO) Settlements

We initiated orders for API with our CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally commenced once there was a contractual commitment for the API from Takeda. As of
December 31, 2012, we had future purchase commitments amounting to $34.6 million. These future commitments were
comprised of $5.8 million for firm purchase commitments of PEG, and the remaining $28.8 million of manufacturing
obligations relate to API, and were based on firm demand forecasts from Takeda. We paid $1.7 million in payments to our
CMOs in the first quarter of 2013 which reduced the accrual balance to $32.9 million.

We finalized settlement agreements with the CMOs in the second quarter of 2013 and made a total of $11.0 million in
payments resulting in a favorable adjustment to our 2013 operating results of $21.9 million. As of December 31, 2013 we have no remaining future purchase commitments for manufacturing activities.

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Marketing and Sales
In 2012, we co-commercialized OMONTYS under our Arrangement with Takeda. The commercial launch of the product occurred in April 2012. We established commercial and medical affairs infrastructures in 2012. The functions of our commercial and medical affairs infrastructures included marketing and sales, medical education, coverage and reimbursement and account management. We marketed our product primarily to dialysis organizations. Associated costs are included in selling, general and administrative, or SG&A, costs in our accompanying financial statements. On February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS and we suspended all the promotional activities and marketing of OMONTYS.
Before the voluntary recall of OMONTYS, Takeda was responsible for account management, pricing and contracting. Specifically, Takeda had sole responsibility for invoicing and collection of receivables with regard to sales of OMONTYS. Takeda sold primarily to pharmaceutical wholesale distributors in the U.S. and Puerto Rico as the principal means of distributing OMONTYS to healthcare providers, which are primarily large dialysis organizations and to a lesser extent medium and small dialysis organizations. Under our Arrangement with Takeda, Takeda also has the rights and responsibility for establishing and modifying terms and conditions with customers with respect to the sale of OMONTYS in the U.S., including pricing discounts available to third-party payors, price adjustments and other allowable discounts and allowances. In connection with the recall and in consultation with Takeda, we have terminated sales and marketing activities. Effective April 1, 2013, we entered into an amendment of our collaboration 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. In addition, Takeda assumed full responsibility for any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We provided transition support to Takeda through April 30, 2013. After April 30, 2013 we have no performance obligations under our agreement with Takeda.
Competition
We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies and private and public research institutions. Many of our competitors have significantly greater financial, product development, manufacturing and marketing resources than us. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. These companies also have significantly greater research capabilities than us. Many universities and private and public research institutes are active in chronic kidney disease research, some in direct competition with us. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
If OMONTYS is able to be reintroduced, competing drugs include EPOGEN and potentially Aranesp, which are both marketed by Amgen, Inc., or Amgen. Aranesp, introduced in 2001, has significant market share in the U.S, particularly in the oncology and the non-dialysis markets, although it is approved for treatment in dialysis patients as well. In Europe, Roche has obtained regulatory approval to market, and has launched, a PEGylated ESA called Mircera. Mircera reportedly has greater plasma stability than any of the currently marketed products. PEG is a polymer that increases the time rEPO remains in the circulation and consequently can be dosed less frequently. Mircera has also obtained regulatory approval in the U.S., but as a result of Roche and Amgen's patent infringement litigation, Mircera has been found to infringe several U.S. patents owned by Amgen and has been enjoined from being sold in the U.S. until mid-2014 under the terms of a limited license. If Mircera enters the U.S. market, we believe it will be in direct competition with OMONTYS, if Takeda is able to reintroduce the product, because of Mircera's ability to be long-acting; therefore, it could potentially limit the market for OMONTYS.
The introduction of biosimilars into the rEPO market in the U.S. will constitute additional competition for OMONTYS if Takeda is able to reintroduce the product. A biosimilar product is a subsequent version of an existing, branded biologic product. The patent for the existing, branded product must expire in a given market before biosimilars may enter that market. The patents for epoetin alfa, a version of rEPO, expired in 2004 in the E.U., and the remaining patents expired in 2012 through 2015 in the U.S. Several biosimilar versions of rEPO are available for sale in the E.U. and biosimilar versions of rEPO are currently being studied in clinical trials in the U.S. For example, in January 2012, Hospira, Inc. announced the beginning of its Phase 3 clinical program for its biosimilar with results anticipated in 2013, and in October 2012, Sandoz announced the beginning of its Phase 3 clinical program for its biosimilar with results anticipated in 2014. Upon entry into the U.S. market, biosimilars will compete with OMONTYS, when and if Takeda reintroduces the product, and will drive down its price and sales volume, which would adversely affect our revenues.
OMONTYS may also face competition from potential new anemia therapies if and when Takeda reintroduces OMONTYS.  There are several product candidates in various stages of active development for anemia indications by potential competitors that may promote the production of naturally-occurring EPO in patients, and some of these product candidates may

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enter the market as early as 2015.  If these product candidates enter the market they may be in direct competition with OMONTYS if and when it is reintroduced.  In addition, certain companies are developing potential new therapies for renal-related diseases that could reduce ESA utilization and thus limit the market for OMONTYS if and when it is reintroduced.
If and when Takeda is able to reintroduce OMONTYS, which is highly uncertain, it will be even more challenging to compete in view of the recall and related safety concerns particularly due to the long-term experience with currently marketed products and negative perceptions of OMONTYS' safety.
Government Regulation and Product Approvals
FDA and EMA
OMONTYS is subject to regulation by various authorities in the U.S., the E.U. and other countries, including the FDA in the U.S. and the European Medicines Agency, or EMA, in the E.U. In the U.S., pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. The FDA has very broad enforcement authority and failure to abide by applicable regulatory requirements can result in administrative or judicial sanctions being imposed on us, including warning letters, refusals of government contracts, clinical holds, civil penalties, injunctions, restitution, disgorgement of profits, recall or seizure of products, total or partial suspension of production or distribution, withdrawal of approval, refusal to approve pending applications, and criminal prosecution.
Product development and approval within these regulatory frameworks takes a number of years, and involves the expenditure of substantial resources. Regulatory approval is required in all major markets in which products will be tested in development. At a minimum, such approval requires evaluation of data relating to quality, safety and efficacy of a product for its proposed use. The specific types of data required and the regulations relating to these data differ depending on the territory, the drug involved, the proposed indication and the stage of development.
In the U.S., specific pre-clinical data, chemical data and a proposed clinical study protocol must be submitted to the FDA as part of an Investigational New Drug application, or IND, which, unless the FDA objects, will become effective 30 days following receipt by the FDA. Phase 1 trials may commence only after the IND application becomes effective. Prior regulatory approval for human healthy volunteer studies is also required in member states of the E.U. Currently, in each member state of the E.U., following successful completion of Phase 1 trials, data are submitted in summarized format to the applicable regulatory authority in the member state in respect of applications for the conduct of later Phase 2 trials. In the U.S., following successful completion of Phase 1 trials, further submissions to regulatory authorities are necessary in relation to Phase 2 and 3 trials to update the existing IND. Authorities may require additional data before allowing the trials to commence and could demand discontinuation of studies at any time if there are significant safety concerns. In addition to regulatory review, a clinical trial involving human subjects has to be approved by an independent body. The exact composition and responsibilities of this body differ from country to country.
Information generated in the clinical trial process is susceptible to varying interpretations that could delay, limit, or prevent regulatory approval at any stage of the approval process. Failure to demonstrate adequately the quality, safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product and even if clinical trials were successfully completed, there could be no assurance that applications for required authorizations to manufacture or market potential products would be submitted, or that any such application would be reviewed and approved by appropriate regulatory authorities in a timely manner, if at all. In order to gain marketing approval, a dossier must be submitted to the relevant authority for review, which is known in the U.S. as an NDA, and in the E.U. as a Marketing Authorization Application, or MAA. In February 2012, Takeda submitted a MAA that was accepted by the EMA. However, in light of the recent OMONTYS recall for safety concerns, in 2013 the MAA submission was withdrawn.
U.S. Approval Process
OMONTYS is regulated by the FDA as a drug. In the U.S., no manufacturer may market a new drug until it has submitted a NDA to the FDA, and the FDA has approved it. The steps required before the FDA may approve a NDA generally include:
preclinical laboratory tests and animal tests conducted in compliance with FDA's good laboratory practice requirements;
development, manufacture and testing of API and dosage forms suitable for human use in compliance with current good manufacturing practices, or GMP;

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the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin;
adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its specific intended use(s);
the submission to the FDA of a NDA; and
FDA review and approval of the NDA.
FDA approval of the NDA is required before marketing of the product may begin in the U.S.
E.U. Approval Process
In the E.U., there is, for many products, a choice of two different authorization routes: centralized and decentralized. Under the centralized route, one marketing authorization is granted for the entire E.U., while under the decentralized route a series of national marketing authorizations are granted. In the centralized system, applications are reviewed by members of the Committee for Medicinal Products for Human Use, on behalf of the EMA. The EMA will, based upon the review of the Committee for Medicinal Products for Human Use, provide an opinion to the European Commission on the safety, quality and efficacy of the product. The decision to grant or refuse an authorization is made by the European Commission. In circumstances where use of the centralized route is not mandatory, we can choose to use the decentralized route, in which case the application will be reviewed by each member state's regulatory agency. If the regulatory agency grants the authorization, other member states' regulatory authorities are asked to "mutually recognize" the authorization granted by the first member state's regulatory agency. Approval can take several months to several years or be denied. The approval process can be affected by a number of factors. Additional studies or clinical trials may be requested during the review and may delay marketing approval and involve unbudgeted costs. Regulatory authorities may conduct inspections of relevant facilities and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each drug manufacturing facility must be approved. Further, inspections may occur over the life of the product. An inspection of the clinical investigation sites by a competent authority may be required as part of the regulatory approval procedure. As a condition of marketing approval, the regulatory agency may require post-marketing surveillance to monitor adverse effects, or other additional studies as deemed appropriate. After approval for the initial indication, further clinical trials are usually necessary to gain approval for additional indications. The terms of any approval, including labeling content, may be more restrictive than expected and could affect product marketability. In February 2012, Takeda submitted a MAA that was accepted by the EMA under the centralized authorization route. However, in light of the recent OMONTYS recall for safety concerns, the MAA submission was withdrawn.
Federal and State Healthcare Laws
Pharmaceutical companies are subject to various federal and state healthcare laws. These healthcare laws include: federal "sunshine laws" that require transparency regarding financial arrangements with healthcare providers; the federal Anti-Kickback Law that prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration in exchange for referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as Medicare and Medicaid; federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting false claims for payment from Medicare, Medicaid or other third-party payors; and state law equivalents of each of these federal laws. Because of the far-reaching nature of these laws, there can be no assurance that we will be able to strictly comply with these laws.
Coverage and Reimbursement
The Centers for Medicare and Medicaid Services, or CMS, the government agency that manages Medicare and is responsible for coverage of OMONTYS for Medicare beneficiaries, has significantly restricted coverage of ESAs in response to the FDA's boxed warning, ESA class labeling changes, and public health advisories. As the costs of the Medicare program continue to grow, CMS may also be compelled to make difficult decisions regarding the trade-offs of certain public health expenditures over others.

Further, prior to January 1, 2011, CMS reimbursed healthcare providers for use of ESAs at average selling price plus 6%. However, under the 2008 Medicare Legislation a new bundled payment system commenced in January 2011 for facilities that furnish renal dialysis services to Medicare beneficiaries with end-stage renal disease. Under the new bundled payment system, providers are reimbursed a fixed amount per patient, including for ESAs such as OMONTYS.  In January 2013, Congress enacted legislation to reduce the overall bundled payment to dialysis providers beginning in January 2014. This new capitated reimbursement payment methodology has created incentives for significantly lower utilization or dosing of ESAs, including OMONTYS, and has reduced the commercial potential for the product.
 

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Finally, as a result of CMS coverage and reimbursement changes, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. Third-party payors have begun to follow CMS' restrictive reimbursement policies, which has further decreased the market for ESAs. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of ESAs, which in turn will put pressure on the pricing and utilization of the product. When and if we reintroduce OMONTYS, and coverage and reimbursement are available, which is uncertain, we expect to experience pricing pressures in connection with the sale of OMONTYS due to the trend toward managed health care and the adoption of government coverage and reimbursement policies.
Employees
As of December 31, 2013, we had 4 employees, all of whom were engaged in G&A functions.
Available Information
We file electronically with the U.S. Securities and Exchange Commission our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934. We make available on our website at www.affymax.com, free of charge, copies of these reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Further, copies of these reports are located at the Securities and Exchange Commission's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov. The information contained in, or that can be accessed through, our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.
Item 1A.   Risk Factors
Our business faces significant risks, some of which are set forth below to enable readers to assess, and be appropriately apprised of, many of the risks and uncertainties applicable to the forward-looking statements made in this Annual Report on Form 10-K. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition. If any of the events or circumstances described in the following risks actually occurs, our business may suffer, the trading price of our common stock could decline and our financial condition or results of operations could be harmed. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, may also adversely affect our business.


Risks Related to Our Business

In February 2013, we recalled OMONTYS nationwide due to safety concerns and OMONTYS may not be reintroduced to the market unless Takeda is able to identify and successfully address the causes of the safety concerns with the FDA. OMONTYS was our only product and the recall has severely harmed our business. We face significant challenges to our business and we have ceased most company operations and may not be able to continue our business as a result of the recall.

In February 2013, we announced the voluntary nationwide recall of OMONTYS from the market resulting from serious allergic reactions reported in patients receiving the product, including anaphylaxis related to deaths occurring after first administration of OMONTYS. While Takeda continues to investigate these cases and the nature and causes of the safety concerns, if Takeda is unable to rapidly identify and rectify the causes, the product could be permanently withdrawn from the market. The recall has severely harmed our business and financial condition and prospects as a going concern and we have ceased most company operations and may not be able to continue our business.

In order to address the safety concerns resulting in the recall of OMONTYS, Takeda would have to complete its ongoing thorough investigation, identify the causes of the serious allergic reactions and provide a suitable plan to the FDA for approval. To date, no causes have been identified and we are unable to predict when, or if, this process may be completed or the associated costs. Further, in an effort to continue our operations in the near term with our limited resources, we have substantially reduced our operating costs, including a reduction in force of nearly all of our employees and cessation of most

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operating functions. The Brenner Group, Inc., a restructuring firm, has been retained to oversee and implement the ongoing operations.

There can be no assurance that our business can continue or OMONTYS can be shown to be sufficiently safe to meet the requirements of the FDA for reintroduction by Takeda. Moreover, even if OMONTYS could be reintroduced, the commercial prospects for the product may be permanently diminished, coverage and reimbursement may not be available, and the product may no longer be commercially viable.


We have incurred significant operating losses since inception and anticipate that we will incur continued losses for the foreseeable future without revenues from OMONTYS, which was our only product. We have undertaken a restructuring and have limited resources with which to continue basic company operations until the future of OMONTYS (if any) is determined. If the Takeda led investigation takes an extended period, or results in OMONTYS not being reintroduced commercially to the market, we may need to cease operations.
 
We have experienced significant operating losses since our inception in 2001. At December 31, 2013, we had an accumulated deficit of $558.1 million. Due to the recall of OMONTYS, the subsequent restructuring and the uncertainty of when or if we may receive any potential royalties or milestones based on any revenues from the product under our amended collaboration with Takeda, we have limited resources with which to continue our operations and we have substantial ongoing obligations. In particular, we expect to continue to spend significant amounts in defense of our existing and potential future litigation.

As a result of the recall and the subsequent restructuring, we believe that we have enough cash to fund our resources through the third quarter of 2014. Even with our restructuring efforts, including the termination of substantially our entire workforce, there is no assurance that our reduced resources will be sufficient to meet our existing obligations and conduct ongoing operations.  If Takeda is not able to reintroduce OMONTYS or we are not able to obtain additional funding, our cash resources will rapidly be depleted and we may need to cease operations.

To date, our sources of cash have been limited primarily to the proceeds from the sale of our securities to private and public investors and payments by Takeda under our collaboration agreements. Further challenges or delays related to Takeda's potential reintroduction of OMONTYS or our restructuring efforts could require us to raise additional funds to continue our operations. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, if available, our stockholders may experience significant dilution.
 
If Takeda is unable to identify the causes of the OMONTYS safety concerns and commercialize OMONTYS successfully, or we are unable to negotiate and satisfy our obligations, or raise additional funds when required or on acceptable terms, we may have to:

discontinue operations;

abandon or relinquish some or all of our existing rights to OMONTYS milestones, royalties or other existing rights; or

pursue alternatives such as a sale of the Company or its assets, a corporate merger, wind-down of operations or even bankruptcy proceedings.
 
Our ability to obtain potential royalties or milestones from Takeda under our amended collaboration and our ability to continue as a going concern depend directly on Takeda's ability to successfully reintroduce and commercialize OMONTYS, which is highly uncertain and challenging.  OMONTYS will require significant marketing efforts and substantial investment before it can provide any meaningful revenue, if ever. Even if the underlying causes of the safety concerns can be identified, which is uncertain, the timelines associated with the investigation and the feasibility and costs associated with implementing solutions to address the safety concerns to the satisfaction of the FDA are highly uncertain.


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We may be unable to continue our operations or meet our ongoing obligations as a result of the loss of services of substantially all of our personnel as part of our restructuring.
 
As of June 30, 2013 we dramatically reduced our workforce and engaged an experienced restructuring firm, The Brenner Group, Inc. With our engagement of The Brenner Group, Inc., we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer. As a result of the loss of services of substantially all of our personnel, including all of our executive officers, we may be unable to continue our operations and meet our ongoing obligations even with our engagement of the restructuring firm.

Our independent registered public accounting firm has indicated that our financial condition raises substantial doubt as to our ability to continue as a going concern.
Our independent registered public accounting firm has included in their audit opinion on our financial statements for the year ended December 31, 2013, a statement with respect to substantial doubt as to our ability to continue as a going concern. Our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we became unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement in the report of our independent registered public accounting firm, our lack of cash resources, and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital or continue our operations.

If we fail to maintain our collaboration with Takeda as recently amended, such termination would have a further material adverse effect on our business and operations. Our business has already been severely harmed by the recall of OMONTYS, and any termination of the collaboration agreement would substantially reduce our ability to meet our obligations, and may increase the likelihood of having to cease our operations, even with the ongoing restructuring efforts.
 
 The maintenance of our collaboration with Takeda for OMONTYS is an essential part of our business. Completion of the OMONTYS recall, investigation and reintroduction, for which Takeda assumes full responsibility, is critical to our ability to achieve any further cash flows through potential royalties or milestones. Takeda has full decision-making authority as to whether OMONTYS may be reintroduced if Takeda completes the investigation and addresses the safety concerns to the satisfaction of the FDA.

Moreover, Takeda has the right to terminate our collaboration upon an uncured material breach by us or even in the absence of a material breach with three months notice prior to reintroduction of OMONTYS, which termination would have a further material adverse effect on OMONTYS and our business and operations, as we would be highly unlikely to be able to assume the regulatory responsibilities required to maintain the NDA. In the past, events such as the suspension of the OMONTYS oncology program, the impact of the Phase 3 results on the renal program particularly on the non-dialysis indication, and the decreased market opportunity for ESAs increase the possibility that Takeda may elect to terminate the collaboration or limit the resources Takeda is willing to commit to OMONTYS. The safety concerns with OMONTYS combined with the recent U.S. recall may negatively impact the EMA decision if the MAA is resubmitted and Takeda's view of the collaboration and its overall commitment to OMONTYS, including in the U.S., our major market opportunity.

We are currently subject to securities class action litigation and derivative litigation as well as product liability litigation and we may be subject to similar or other litigation in the future.

We and certain of our former officers are defendants in a lawsuit filed in the United States District Court for the Northern District of California, brought on behalf of stockholders of the Company that alleges violations of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the defendants regarding OMONTYS and our business practices, financial projections and other disclosures between August 8, 2012 and February 22, 2013, or the Class Period. The plaintiffs seek to represent a class comprised of purchasers of our common stock during the Class Period and seek damages, costs and expenses and such other relief as determined by the Court.
In addition, in March 2013 and August 2013, a total of three derivative lawsuits were filed purportedly on behalf of the Company in California Superior Court for the County of Santa Clara naming certain of our officers and directors as defendants.  The lawsuits allege that certain of our current and former officers and directors breached their fiduciary duties related to the clinical trials for OMONTYS and for representations regarding our business health, which was tied to the success of OMONTYS.  The lawsuits also assert claims for unjust enrichment and corporate waste. We believe we are entitled to coverage

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under our relevant insurance policies, subject to a retention, but coverage could be denied or prove to be insufficient. In addition, it is possible total liability could exceed our insurance limits.
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.  We are continuing to review the complaint with our partner, Takeda and there can be no assurances that additional products liability complaints will not be brought.
While we believe we have meritorious defenses and intend to defend these lawsuits vigorously, we cannot predict the outcome of these lawsuits. We believe that there may be additional suits or proceedings brought in the future. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities and we cannot predict how long it may take to resolve these matters. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. A decision adverse to our interests on these actions or resulting from these matters could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position.
Likewise, if additional product liability lawsuits are brought against us for injuries or deaths due to patients' adverse reactions to OMONTYS, we may be subject to additional liability. Regardless of the outcome, product liability claims may result in injury to our reputation, withdrawal of clinical trial participants, significant costs, diversion of management's attention and resources, substantial monetary awards, loss of revenue, and additional distractions from our efforts to address safety concerns that may allow us to reintroduce OMONTYS. Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the reintroduction of OMONTYS.

With respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses we may suffer in contesting and concluding such lawsuits. Substantial litigation costs or an adverse result in any litigation may adversely impact our business, operating results or financial condition.

Our ability to obtain potential royalties and further milestone payments from Takeda depends solely on Takeda's efforts to complete the investigation and, if feasible, to reintroduce OMONTYS.
 
Our ability to obtain potential royalties and milestones from OMONTYS depends on Takeda's efforts to complete the investigation and, if feasible, to reintroduce the product and effectively and profitably commercialize it when and if it is reintroduced. There is no assurance that Takeda can identify and address the underlying cause of the serious hypersensitivity reactions. If Takeda fails to demonstrate the safety of OMONTYS, Takeda will not be able to reintroduce the product and we will not be able to obtain any potential royalties or milestones from the product. When and if Takeda reintroduces OMONTYS, our success will depend on Takeda's ability to:

create market demand for OMONTYS through education, marketing and sales activities, including the ability to establish or demonstrate the safety of the product; 

build a qualified commercial and medical affairs organization and field force; 

achieve market acceptance and generate product sales through Takeda's execution of agreements with the major operators of dialysis clinics on commercially reasonable terms;

support the efforts of dialysis clinics to safely and effectively administer OMONTYS to dialysis patients on a different treatment plan than for the other approved erythropoiesis stimulating agents, or ESAs;


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receive adequate levels of reimbursement from third-party payors, including government healthcare programs such as Medicare and Medicaid and private insurance programs;

comply with the post-marketing requirements established by the FDA, including the Risk Evaluation and Mitigation Strategy, or REMS, and any other requirements established by the FDA in the future;

comply with other healthcare regulatory requirements;

ensure that the Active Pharmaceutical Ingredient, or API, for OMONTYS and the finished product are manufactured in sufficient quantities and in compliance with requirements of the FDA and similar foreign regulatory agencies and with an acceptable quality and pricing level in order to meet commercial demand; and

ensure that the entire supply chain for OMONTYS - from API to finished product - efficiently and consistently delivers OMONTYS to customers.
 
When and if Takeda reintroduces OMONTYS, which is highly uncertain, it will be even more challenging for Takeda to accomplish these activities in view of the recall and related safety concerns particularly due to the long-term experience with currently marketed products and negative perceptions of OMONTYS' safety. If Takeda is unable to successfully reintroduce and commercialize OMONTYS, then we will not obtain any potential royalties or milestones from the product, which will have a material adverse impact on our business and our prospects.

Even if Takeda is able to reintroduce OMONTYS, Takeda may not be able to commercialize the product successfully.
 
If Takeda is able to reintroduce OMONTYS, Takeda must have, or build, internal sales, marketing, medical affairs, contracting, reimbursement and distribution capabilities with the training and experience necessary to commercialize the product successfully. If Takeda is unable to address these capabilities internally, then Takeda may need to identify third-party providers to support these efforts, which may lead to delays and additional costs as well as potential confusion to customers of OMONTYS.  In addition, to the extent that Takeda enters into co-promotion or other arrangements with respect to OMONTYS, any revenues Takeda receives from the product will depend upon the efforts of both parties, which may not be successful and will be only partially in Takeda's control. These factors may hinder Takeda's ability to commercialize OMONTYS successfully when and if it is reintroduced, which would adversely affect our ability to obtain potential royalties or milestones from the product.

Even if Takeda is able to reintroduce OMONTYS, Takeda would need to attain significant market acceptance for the product among physicians, patients, health care payors, and the major operators of dialysis clinics, and Takeda would need to reach a long-term agreement with either or both of the largest operators of dialysis clinics.
 
Until the approval of OMONTYS, only EPOGEN and Aranesp, the ESAs of Amgen, Inc., or Amgen, have been used for the treatment of anemia due to chronic kidney disease in adult patients on dialysis in the U.S. This dialysis market is highly established and concentrated, with EPOGEN and Aranesp serving a significant majority of all dialysis patients on Medicare. These two products are the current standard of care, and it may be difficult to encourage healthcare providers to consider OMONTYS, should it be reintroduced, as an alternative to these products with which they and their patients have a longstanding relationship.  Physicians, who make the ultimate decision to prescribe a product, may not prescribe OMONTYS, in which case Takeda's ability to sell the product would be adversely impacted.  Similarly, dialysis clinics using EPOGEN or Aranesp could incur substantial expense in administration and training if they were to convert to OMONTYS. Finally, healthcare providers may not receive adequate levels of reimbursement for OMONTYS from third-party payors, including government healthcare programs such as Medicare and Medicaid and private insurance programs.  Some or all of these factors may hinder Takeda's efforts to attain significant market acceptance of OMONTYS should it be reintroduced, which would pose a risk to our ability to obtain potential royalties or milestones from the product.
 
Even if Takeda is able to reintroduce and achieve market acceptance of OMONTYS, if Takeda is unable to reach a long-term supply agreement with either or both of the largest operators of dialysis clinics in the U.S, Fresenius Medical Care North America and DaVita, Inc., or Fresenius and DaVita, respectively, on favorable terms or on a timely basis, then the revenue opportunity for OMONTYS could be significantly reduced. Takeda may not be able to reach a long-term supply agreement with either Fresenius or DaVita because both entered into a long-term supply agreement with Amgen that began in January 2012.  In particular, Fresenius entered into a “multi-year” agreement with Amgen whereby Amgen would supply EPOGEN on a “non-exclusive” basis to Fresenius, and DaVita entered into a seven-year agreement with Amgen whereby Amgen would supply EPOGEN to meet at least 90% of DaVita's requirements for ESAs used in providing dialysis services in the U.S.  The specific terms of the Amgen-Fresenius agreement and the Amgen-DaVita agreement have not been publicly

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disclosed, and we cannot predict how these agreements may impact the commercial opportunity for OMONTYS should it be reintroduced. But these agreements may limit the market opportunity for the product and adversely impact our ability to obtain potential royalties or milestones from the product.
    
The opportunity to reintroduce OMONTYS is highly uncertain and challenging as a result of the negative perception of the safety of the product and erythropoiesis-stimulating agents, or ESAs as a class.

    The safety concerns resulting in the OMONTYS recall and the safety concerns for ESAs as a class may make it challenging for Takeda to reintroduce OMONTYS and may significantly reduce the potential market for the product.  For example:
 
In 2007, as a result of concerns associated with administering ESAs to target higher hemoglobin levels, the FDA required that revised warnings, including boxed warnings, be added to the labels of currently marketed ESAs advising physicians to monitor hemoglobin levels and to use the lowest dose of ESA to increase the hemoglobin concentration to the lowest level sufficient to avoid the need for red blood cell transfusions.
 
In late 2009, Amgen announced the results from the Trial to Reduce Cardiovascular Endpoints with Aranesp Therapy, or TREAT, its large, randomized, double-blind, placebo-controlled Phase 3 study of patients with chronic kidney disease (not requiring dialysis), anemia and type-2 diabetes. In this study, Aranesp was used to treat anemia to a target hemoglobin of 13 g/dL, which was higher than the 10 g/dL - 12 g/dL range previously approved by the FDA in the label.  Study results reportedly failed to show benefit compared to the control group with regard to composite of time to all-cause mortality or cardiovascular morbidity (including heart failure, heart attack, stroke, or hospitalization for myocardial ischemia) and a composite of time to all-cause mortality or chronic renal replacement. In addition, higher rates of stroke were reported among patients treated with Aranesp compared to the control group. Finally, among a subgroup of patients with a history of cancer at baseline, a statistically significant increase in deaths from cancer was observed in the Aranesp-treated patients compared to placebo-treated patients.
 
In January 2010, FDA officials published an editorial in the New England Journal of Medicine noting that a number of randomized trials, including TREAT, had attempted to show that using ESAs to raise hemoglobin concentrations to higher targets improves clinical outcomes but rather suggested the opposite. Accordingly, the article indicated that more conservative hemoglobin targets (well below 12 g/dL), more frequent hemoglobin monitoring, and more cautious dosing, should be evaluated.
 
In February 2010, the FDA announced that ESAs must be prescribed and used under a REMS to ensure the safe use of the drugs. As part of the REMS, a medication guide explaining the risks and benefits of ESAs must be provided to all patients receiving ESAs for all indications, and the manufacturer has reporting and monitoring obligations to ensure compliance.
 
In June 2011, the FDA cited increased risks of cardiovascular events as a basis for more conservative dosing guidelines for use of ESAs in chronic kidney disease and announced related changes to ESA labeling.  The FDA removed the prior target range of 10-12 g/dL and while separately issuing guidance for non-dialysis patients, the FDA recommended that dialysis patients initiate treatment when the hemoglobin is less than 10 g/dL and to reduce or interrupt dosing if hemoglobin level approaches or exceeds 11 g/dL. The FDA also required Amgen to conduct additional clinical trials to explore dosing strategies, including in dialysis patients to minimize hemoglobin variability, rates of change and excursions.

In February 2013, in connection with the recall, the FDA announced that due to the severity of the public health risk, the FDA wanted to be certain that health care providers stop using OMONTYS and that it would investigate products and facilities associated with the recall and would provide updates.

The controversy surrounding ESAs and FDA safety concerns has, and may, further negatively affect OMONTYS when and if it is reintroduced. In addition, recent and future FDA actions represent additional challenges to the market for ESAs as a class and may affect the timing or costs associated with implementing a solution to address the safety concerns resulting in the OMONTYS recall to the satisfaction of the FDA. We cannot predict what additional actions, if any, the FDA may take, which may include additional label restrictions, the use of informed consents, further lowering or removal of target hemoglobin levels, or even the removal of indications from the label. Further, regardless of whether or not the FDA takes additional action, the Centers for Medicare and Medicaid Services, or CMS, and other third-party payors may still decide separately to discontinue or limit coverage or lower reimbursement as CMS has recently adopted changes and continues to evaluate coverage and

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reimbursement policy for ESAs as class. Any of these factors could significantly delay or negatively impact the commercialization of OMONTYS when and if it is reintroduced by Takeda, which would significantly affect our ability to obtain potential royalties and milestones from the product

In addition, any negative perception of the safety of OMONTYS relative to other ESAs as a result of our Phase 3 clinical results could significantly reduce the market opportunity for the product when and if it is reintroduced by Takeda.  Specifically, in June 2010, we announced preliminary top-line results from the OMONTYS Phase 3 clinical program for the treatment of patients with anemia associated with chronic kidney disease. Our Phase 3 clinical program included four open-label, randomized controlled clinical trials: PEARL 1 and PEARL 2 conducted in non-dialysis patients and EMERALD 1 and EMERALD 2 conducted in dialysis patients.  Analysis of efficacy and safety for all of the Phase 3 trials were based primarily on assessments of non-inferiority to the comparator drugs.  While OMONTYS met the statistical criterion for non-inferiority for the assessment of safety for the cardiovascular composite safety endpoint, or CSE, which was composed of death, stroke, myocardial infarction, congestive heart failure, unstable angina and arrhythmia from a pooled safety database across the four Phase 3 trials, some differences were observed when secondary analyses were conducted, including a difference in a subgroup analysis conducted in the PEARL trials where the frequency of CSE events was higher in the OMONTYS group relative to the comparator in non-dialysis patients.  Since OMONTYS was launched, over 25,000 patients have been treated with the product. Serious hypersensitivity reactions, including anaphylaxis, which can be life-threatening or fatal, have been reported. As a result, on February 23, 2013, we and Takeda announced a nationwide voluntary recall of OMONTYS and suspended the promotional activities and marketing of the product. This has severely harmed our business and future financial results. Any negative perception of OMONTYS' safety relative to other ESAs could further significantly limit any potential opportunity for Takeda to reintroduce and successfully commercialize the product, which would significantly limit any potential opportunity for us to obtain potential royalties and milestones from the product.
 
Finally, any negative perception of the safety of OMONTYS relative to other ESAs as a result of any new medical data or product quality issues that suggest new risks or side effects, or increase concern over previously identified risks or side effects would significantly negatively impact the commercial potential as well as any possible reintroduction of OMONTYS.

Takeda has continuing regulatory obligations with respect to OMONTYS and FDA approval remains subject to certain post-marketing requirements that could significantly increase costs or delay or limit Takeda's ability to successfully commercialize the product when and if it is reintroduced. If results, data or information with respect to Takeda's continuing obligations are negative or Takeda is unable to fulfill its continuing obligations to regulatory authorities or its post-marketing requirements, there may be changes to the product label or Takeda may be required to withdraw the product from the market.

The FDA approved OMONTYS subject to certain post-marketing requirements.  An observational study and a randomized controlled trial must be conducted with final reports submitted in 2018 and 2019, respectively, to evaluate cardiovascular safety and assess safety of long-term use in adult patients on dialysis. Pediatric studies must be conducted with target dates for completion between 2016 and 2027.  A REMS must be implemented, which includes a requirement to send “Dear Healthcare Provider” letters to nephrology healthcare providers informing them that OMONTYS is not indicated in patients with chronic kidney disease not on dialysis.  

Even if Takeda is able to address the safety concerns resulting in the recall of OMONTYS to the satisfaction of the FDA, maintaining regulatory approval for the product will be increasingly difficult.  If Takeda is unable to fulfill the requirements of regulatory authorities or the post-marketing requirements or to the extent there are other unfavorable results, data or other information arising therefrom, then there may be limitations imposed on the product label or Takeda may be required to permanently withdraw the product from the market.

 Competition in the pharmaceutical industry is intense. The OMONTYS recall means that the product will have to overcome significant competitive issues relative to other approved ESAs on the market.

When and if OMONTYS is reintroduced, Takeda will face competition from established pharmaceutical and biotechnology companies, in particular companies that have an approved ESA on the market. The commercial opportunity for OMONTYS will be reduced or eliminated if competitors develop and commercialize products that are more effective, have fewer side effects or are less expensive than OMONTYS. The OMONTYS recall and the uncertainty of whether the product will be available on the market at all may mean that the product will be at a significant disadvantage upon the entry of competing products.

When and if OMONTYS is reintroduced, we anticipate that it will compete with EPOGEN and potentially Aranesp, which are both marketed by Amgen, and NeoRecormon and Mircera, which are currently marketed outside the U.S. by Roche. 

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Mircera reportedly has greater plasma stability and is longer acting than any rEPO product that was on the market in the U.S. prior to OMONTYS. As a result of the patent litigation between Roche and Amgen, Mircera was found to infringe several U.S. patents owned by Amgen and was enjoined from being sold in the U.S. until the expiration of these patents in mid-2014 under a limited license. If Mircera enters the U.S. market, we believe it will be in direct competition with OMONTYS, if Takeda is able to reintroduce the product, because of Mircera's ability to be long-acting; therefore, it could potentially limit the market for OMONTYS.

The introduction of biosimilars into the ESA market could also prove to be a significant threat when and if Takeda reintroduces OMONTYS as biosimilars could not only limit the market for the product, but could also drive down the price of ESAs.
Takeda may also face competition from potential new anemia therapies when and if OMONTYS is reintroduced.  There are several product candidates in various stages of active development for anemia indications by potential competitors that may promote the production of naturally-occurring EPO in patients, and some of these product candidates may enter the market as early as 2015.  If these product candidates enter the market they may be in direct competition with OMONTYS when and if it is reintroduced.  In addition, certain companies are developing potential new therapies for renal-related diseases that could reduce ESA utilization and thus limit the market for OMONTYS when and if it is reintroduced.
 When and if Takeda reintroduces OMONTYS, the U.S. market opportunity for the product may deteriorate significantly after the entry of biosimilars in the U.S.

In March 2010, federal legislation gave the FDA authority to create an abbreviated approval path for biological products that are demonstrated to be “biosimilar” to, or “interchangeable” with, an FDA-approved biological product. In February 2012, the FDA released three draft guidance documents regarding this abbreviated approval path for biosimilar products and the FDA accepted public comments on these documents. A biosimilar product would be a subsequent version of an existing, branded FDA-approved biologic product. The patent for the existing branded product must expire in a given market before biosimilars may enter that market.

The patents for epoetin alfa, a version of recombinant human erythropoietin, or rEPO, expired in 2004 in the European Union, or E.U., and the remaining patents expire from 2012 through 2015 in the U.S. Several biosimilar versions of rEPO are available for sale in the E.U. and biosimilar versions of rEPO are currently being studied in clinical trials in the U.S. For example, in January 2012, Hospira, Inc. announced the beginning of its Phase 3 clinical program for its biosimilar with results anticipated in 2013, and in October 2012, Sandoz announced the beginning of its Phase 3 clinical program for its biosimilar with results anticipated in 2014.

We expect that biosimilars, including rEPO, will be sold at a discount to existing branded products when they are launched in the U.S. as in the E.U. The introduction of biosimilars into the rEPO market in the U.S. could prove to be a significant threat to OMONTYS if they are able to demonstrate biosimilarity to existing rEPO. Biosimilars will constitute additional competition for OMONTYS should it be reintroduced, and are expected to drive down its price and sales volume, which would adversely affect the commercial success of the product and our ability to obtain potential royalties or milestones from it.

With the amendment of our collaboration, the reintroduction and commercial success of OMONTYS in the U.S. depends entirely on the efforts of Takeda. Similarly, outside of the U.S., we are solely dependent on the efforts and commitments of Takeda, either directly or through third parties, to reintroduce or further commercialize OMONTYS.  If our collaboration with Takeda does not continue, our ability to receive future royalties would be significantly reduced.

Our dependence on Takeda for our global collaboration subjects us to a number of risks, including our sole reliance on Takeda to reintroduce OMONTYS in the U.S. and either directly or through third parties to obtain and maintain regulatory approvals and achieve market acceptance of the product outside the U.S.

 As a result of the recent amendment to the collaboration with Takeda, Takeda holds an exclusive license to develop and commercialize OMONTYS worldwide. We have no control or influence over Takeda's decision-making as to OMONTYS. If Takeda is unwilling to continue to make further investments of time, resources and fund in OMONTYS, including the completion of the ongoing investigation, which may not be feasible or successful, we may have no recourse and the product may never be reintroduced in the U.S. or approved in any other territories, including in Europe and Japan. As a consequence, any progress and commercial success in any territory is dependent solely on Takeda's efforts and commitment to the program, which may be substantially reduced as a result of the recall. Takeda's decision in December 2011 not to commercialize the product in Japan and the delay or failure to secure a third party to commercialize the product in a timely manner may

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significantly reduce the commercial opportunity in that territory when and if Takeda reintroduces OMONTYS.  In addition, Takeda may delay, reduce or terminate investigation and reintroduction efforts in the U.S. and development efforts relating to the product elsewhere, independently develop products that compete with the product, or fail to commit sufficient resources to the marketing and distribution of the product. Competing products or programs, either developed by Takeda or to which our collaboration partners have rights or acquire in the future, may result in our partners' withdrawal of support for the product.

Takeda's obligations to exercise diligence under the collaboration, as amended, are suspended until after approval by the FDA for reintroduction of OMONTYS without additional investigative, non-clinical or clinical activities. In the event that Takeda fails to diligently pursue the investigation or reintroduce OMONTYS, our collaboration agreement provides us the right to allege breach only after FDA approval for reintroduction and in limited circumstances which may be difficult to prove. Even if we were to successfully assert breach, termination of Takeda's rights in certain instances may not provide us with ability to realize any economic value from OMONTYS in view of our ongoing restructuring. Further, our ability to enforce the diligence provisions and establish breach of Takeda's diligence or other obligations so as to obtain meaningful recourse within a reasonable timeframe is uncertain. Further, any decision to pursue available remedies including termination would impact the potential success of OMONTYS, and we may choose not to terminate as we may not be able to find another partner and any new collaboration likely will not provide comparable financial terms to those in our arrangement with Takeda.  In the event of our termination, this may require us to commercialize the product on our own, which is unlikely to be feasible with the recent reductions in substantially all of our workforce. Significant changes in Takeda's business strategy, resource commitment and the willingness or ability of Takeda to complete its obligations under our arrangement could materially affect the potential success of the product, including the reintroduction of OMONTYS when and if it occurs.

With the recent amendment of the collaboration, Takeda has assumed full responsibility for manufacturing of OMONTYS, including for API as well as finished product and as a consequence, we have limited ability to control risks associated with future manufacturing. Manufacturing difficulties, disruptions or delays could delay reintroduction of OMONTYS and have a further material adverse effect on our business.

Since the recall and as we have transferred manufacturing responsibility to Takeda for OMONTYS, we plan to suspend or terminate manufacturing activities to the extent practicable in order to decrease our ongoing manufacturing costs and commitments, including but not limited to, termination of orders and agreements. These actions may negatively impact the ability to reintroduce OMONTYS as Takeda will need to separately establish manufacturing contracts or capabilities which may require significant effort and cause delay.

Even if Takeda is able to reintroduce OMONTYS, the OMONTYS manufacturing process is complicated and time consuming. Manufacture of OMONTYS API involves long lead times. Manufacturing difficulties, disruptions or delays could limit reintroduction and supply of the product. 

OMONTYS is a new chemical entity and the manufacturing process for commercial scale production in accordance with applicable regulatory guidelines remains challenging and as such, there are risks associated with the commercial scale manufacture of the API. Similar challenges exist for the manufacture of finished product that must meet a variety of regulatory requirements that vary from country to country and continue to change. Any of these risks and others may prevent or delay Takeda from successfully reintroducing and commercializing OMONTYS, including the following: 

product quality issues; 

cost overruns, process scale-up, process reproducibility; 

changes in demand forecasts that result in inventory write-offs;

difficulties in maintaining or upgrading equipment and manufacturing facilities on a timely basis; and 

regulatory issues or changes that may cause significant modifications in the manufacturing process or facilities or otherwise impact our ability to offer competitive product presentations or formulations.

As we have transferred responsibility for the manufacture of OMONTYS to Takeda, and we therefore have limited control and ability to address risks associated with the manufacturing process, including single-sourced arrangements, leaving OMONTYS at greater risk of supply interruptions, potential delays and failure to be successfully reintroduced or commercialized.


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Takeda and our third-party manufacturers are required to comply with applicable FDA manufacturing practice and other applicable regulations. If there is any failure to maintain compliance with these regulations, the production of OMONTYS could be interrupted, resulting in delays and additional costs should reintroduction of OMONTYS be feasible. Further, Takeda's lack of experience providing reliable supply of product, particularly as to the manufacturing of API, may cause delays in reintroduction of OMONTYS, and deter health care providers and dialysis centers from selecting, or switching to, OMONTYS from our competitors' products or from continuing to use OMONTYS should it be reintroduced.

Our receipt of potential royalties and milestone payments associated with OMONTYS is based on the strength of the exclusive license to Takeda under our proprietary rights. We are dependent to a large extent on Takeda to protect our proprietary rights as we have given Takeda control in the first instance over such rights, and we may not be able to ensure their protection.

Our ability to receive potential royalties and milestones in connection with the reintroduction of OMONTYS will depend in part on obtaining and maintaining patent protection and trade secret protection of OMONTYS. Under the recent amendment to the collaboration, we have granted Takeda the first right, but not the obligation, to pursue prosecution and maintenance of these proprietary rights as well as successfully defending these patents against third-party challenges. The ability to protect OMONTYS from unauthorized making, using, selling, offering to sell or importation by third parties is dependent upon the extent to which we have rights under valid and enforceable patents, or have trade secrets that cover these activities and the extent to which Takeda pursues enforcement. We have limited resources to pursue any enforcement ourselves that Takeda chooses not to pursue.

We have licensed from third parties rights to numerous issued patents and patent applications. The rights that we acquire from licensors or collaborators are protected by patents and proprietary rights owned by them, and we rely on the patent protection and rights established or acquired by them. The remaining patent terms may not provide meaningful protection. Moreover, third parties may challenge the patents, patent applications and other proprietary rights held by our licensors or collaborators. We generally do not unilaterally control the prosecution of patent applications licensed from third parties, and any such control has generally been conferred to Takeda in connection with the amendment of our collaboration. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we may exercise over internally developed intellectual property.

Even if we are able to obtain issued patents, any patent may be challenged, invalidated, held unenforceable or circumvented. The existence of a patent will not necessarily protect us from competition or from claims of a third party that our products infringe their issued patents. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the U.S. The biotechnology patent situation outside the U.S. is even more uncertain. Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our licensed patents, in our patents or in third-party patents or applications therefor.

The degree of future protection to be afforded by our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

others may be able to make similar compounds but that are not covered by the claims of our patents, or for which we are not licensed under our license agreements;

we or our licensors or collaborators might not have been the first to make the inventions covered by our pending patent applications or the pending patent applications and issued patents of our licensors;

we or our licensors or collaborators might not have been the first to file patent applications for these inventions;
 
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

it is possible that our pending patent applications will not result in issued patents;

our issued patents and the issued patents of our licensors or collaborators may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;


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we may not develop additional proprietary technologies that are patentable; or

the patents of others may have an adverse effect on our business.

We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

Our R&D collaborators may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

Substantial costs may arise as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.

The ability to reintroduce and commercialize OMONTYS will depend, in part, on the ability to obtain patents, enforce those patents and operate without infringing the proprietary rights of third parties. The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions. We have filed multiple U.S. patent applications and foreign counterparts related to OMONTYS and other programs as well as underlying platform technologies and Takeda may file additional U.S. and foreign patent applications related thereto. There can be no assurance that any issued patents we or Takeda own or control will provide sufficient protection to conduct our business as presently conducted or as proposed to be conducted, that any patents will issue from the patent applications owned by us, or that we will remain free from infringement claims by third parties.

The failure to obtain adequate patent protection would have a material adverse effect on us and may adversely affect our ability to enter into, or affect the terms of, any arrangement for the further development and marketing of any product. There can also be no assurance that patents owned by us will not be challenged by others. We could incur substantial costs in proceedings, including interference proceedings before the U.S. Patent and Trademark Office and comparable proceedings before similar agencies in other countries in connection with any claims that may arise in the future. These proceedings could result in adverse decisions about the patentability of our inventions and products, as well as about the enforceability, validity or scope of protection afforded by our patents. We have limited financial resources with which to maintain and enforce patent protection should Takeda choose not to take protective action.

Patent applications in the U.S. and elsewhere are published only after 18 months from the priority date. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Therefore, patent applications relating to products similar to OMONTYS and any future products may have already been filed by others without our knowledge. In the event an infringement claim is brought against us, we may be required to pay substantial legal and other expenses to defend such a claim and, if we are unsuccessful in defending the claim, we may be prevented from pursuing related product development and commercialization and may be subject to damage awards.

Any future patent litigation, interference or other administrative proceedings will result in additional expense and distraction of our personnel. An adverse outcome in such litigation or proceedings may expose us or our collaborators to loss of our proprietary position or to significant liabilities, or require us to seek licenses that may not be available from third parties on commercially acceptable terms or at all. In addition, we may be restricted or prevented from manufacturing or reintroducing and commercializing OMONTYS or from developing, manufacturing and selling any future products in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. If it is determined that we have infringed an issued patent, we could be compelled to pay significant damages, including punitive damages.

Virtually all of our competitors are able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation

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of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations, in-license technology that we need, out-license our existing technologies or enter into collaborations that would assist in commercially exploiting any technology.

Risks Related to Our Industry

Even though OMONTYS' approval by the FDA has not been permanently withdrawn, the OMONTYS approval is subject to continued FDA inspection of the safety concerns leading to the recall. Ongoing FDA review may result in significant additional expense and limit Takeda's ability to reintroduce and successfully commercialize OMONTYS.

Although the FDA approval of OMONTYS has not been withdrawn, the FDA may choose to do so as the investigation continues or to subject Takeda to various post-marketing requirements, including additional clinical trials, and the labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. The recent cases of reported patients' serious hypersensitivity reactions to OMONTYS and any other subsequent discovery of previously unknown problems with the product, including adverse events of unanticipated severity or frequency, may result in withdrawal or restrictions on the marketing of the product, and could include regulatory actions from the FDA.  The actions the FDA may take include, permanent withdrawal, additional studies or label restrictions, the use of informed consents, the addition of more restrictive REMs, further lowering of target hemoglobin levels, or even the removal of indications from the label altogether. In addition, the FDA's policies may change and additional government regulations may be enacted that could prevent or delay successful reintroduction and commercialization of OMONTYS. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. If Takeda is not able to maintain regulatory compliance or the FDA imposes additional requirements, then Takeda may not be able to reintroduce and successfully commercialize OMONTYS, which would prevent us from obtaining potential royalties or milestones from the product.

If we fail to comply with federal and state healthcare laws, including fraud and abuse and healthcare privacy and security laws, we could face substantial penalties that could adversely affect our business, financial condition and results of operations.

We are subject to federal and state healthcare laws, including fraud and abuse and healthcare privacy and security laws.  The healthcare laws that may affect our ability to operate include:

federal “sunshine” laws that require transparency regarding financial arrangements with healthcare providers, such as the reporting and disclosure requirements imposed on drug manufacturers by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, regarding any “transfer of value” made or distributed to prescribers and other health care providers;

the federal healthcare programs' Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters;

the Federal Food, Drug and Cosmetic Act, which prohibits, among other things, individuals or entities from introducing into interstate commerce any food, drug, device or cosmetic that has been adulterated or misbranded; and

state law equivalents of certain of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

In addition, California, and other states such as Massachusetts and Vermont, mandate implementation of comprehensive compliance programs to ensure compliance with these laws.

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Many of these laws have not been fully interpreted by applicable regulatory authorities or the courts and their provisions are subject to a variety of interpretations, which increases the risk that we may be found in violation of these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. The recall has severely harmed our business and financial condition and prospects as a going concern and we may not be able to continue the business and operations of the Company. Accordingly, we may face challenges to maintain operations and a compliance program that are in material compliance with these laws. Because of the far-reaching nature of these laws and the significant disruption to our operations resulting from the recall, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance, or that the occurrence of one or more violations would not result in a material adverse effect on our financial condition and results of operations.
 
Failure to obtain regulatory approval in foreign jurisdictions will prevent Takeda from marketing OMONTYS abroad, which will prevent us from obtaining potential royalties and milestones through our amended collaboration with Takeda .

We and Takeda co-marketed OMONTYS in the U.S. before the product recall, and through our amended collaboration agreement with Takeda we are entitled to potential royalties and milestones related to marketing the product in foreign jurisdictions. When and if Takeda reintroduces OMONTYS, in order to market the product in the E.U. and other foreign jurisdictions, Takeda or a sublicensee must obtain separate regulatory approvals. The regulatory approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. In addition, there are a number of ESAs available in the E.U. and other foreign markets, and therefore it may be more challenging to obtain regulatory approval in such markets because the risk/benefit analysis for approval may be different than in the U.S. Foreign regulatory approvals may not be obtained on a timely basis, if at all. If Takeda is not able to obtain regulatory approval in any foreign market, then Takeda will not be able to commercialize OMONTYS in any foreign market, and we will not obtain certain regulatory milestones or royalties from Takeda.

Foreign governments often impose strict price controls, which may adversely affect the future profitability of OMONTYS.

When and if Takeda reintroduces OMONTYS in the U.S., Takeda intends to seek approval to market the product in foreign jurisdictions. If Takeda obtains approval in one or more foreign jurisdictions, Takeda will be subject to rules and regulations in those jurisdictions relating to OMONTYS. In some foreign countries, particularly in the E.U., prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, Takeda may be required to conduct a clinical trial that compares the cost-effectiveness of OMONTYS to other available therapies or a clinical trial that studies pharmacoeconomic benefits. If reimbursement of the product is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, Takeda may be unable to achieve or sustain profitability of the product, which would adversely affect our ability to obtain potential royalties or milestones for the product.

We may incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We have used hazardous chemicals and radioactive and biological materials in our business and are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials. Although we believe our safety procedures for handling and disposing of these materials and waste products comply with these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages. We are uninsured for third-party contamination injury.




Risks Related to the Ownership of Our Common Stock
We have been named as a defendant in securities class action lawsuits and related derivative lawsuits. These lawsuits could result in substantial damages.
    

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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 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 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.
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. In addition, it is possible total liability could exceed our insurance limits.

We have been delisted from The NASDAQ Stock Market and our shares currently trade Over The Counter. We remain subject to additional expenses and administrative burden as a public company.

On May 28, 2013, we received a determination letter from the Nasdaq Stock Market indicating that Nasdaq believes that our stock should be delisted pursuant to Rule 5101 of the Nasdaq Listing Rules.  Specifically, Nasdaq notified us that in their opinion we are operating as a “public shell” and has determined that, following the Company’s announcement regarding the voluntary recall of OMONTYS, we no longer have an operating business.

Nasdaq has determined that public shells could be detrimental to the interests of the investing public. Nasdaq Listing Rule 5100 provides Nasdaq with discretionary authority to apply more stringent criteria for continued listing and the ability to terminate the inclusion of particular securities based on any event, condition or circumstance that exists or occurs that in the opinion of Nasdaq makes inclusion of the securities on Nasdaq inadvisable or unwarranted.

24



We did not appeal this determination and as a result, on the opening of business June 6, 2013, we were suspended from the Nasdaq Stock Market and began trading on the Over The Counter electronic market (OTCQB). On July 19, we received notice from the Nasdaq Stock Market that Nasdaq filed a Form 25 with the Securities and Exchange Commission to complete delisting.

The risk resulting from Nasdaq delisting and the potential for additional securities litigation may be particularly relevant for us because we have experienced greater than average stock price volatility, as have other biotechnology companies in recent years.  OTC markets are generally considered less liquid which may lead to greater stock price volatility. We are currently subject to securities class action and other litigation and we may be subject to additional lawsuits or proceedings in the future. The securities class action litigation could result in substantial costs and divert management's attention and resources, which could harm our business, operating results and financial condition.

In addition, as a public company, we continue to incur significant legal, accounting and other expenses and our administrative staff is required to perform additional tasks, such as adopting additional internal controls, disclosure controls and procedures, retaining a transfer agent and bearing all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws.


The market price of our common stock has been highly volatile and is likely to remain highly volatile, and you may not be able to resell your shares at or above your purchase price.

The trading price of our common stock has been highly volatile. For the 52 weeks ended December 31, 2013, the closing price of our common stock ranged between a high of $21.56 per share and a low of $0.76 per share. The closing price for our common stock as reported by The OTCMKTS Stock Market on March 12, 2014 was $0.89 per share.

Our stock is expected to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

Takeda's ability to rapidly identify and address the cause of the safety concerns related to OMONTYS;

Takeda's ability to demonstrate safety of OMONTYS to the satisfaction of the FDA and reintroduce the product;

our ability to fund our operations and continue as a going concern;

litigation, including the securities class action lawsuits and derivative lawsuits pending against us and certain of our officers; 

changes in the market valuations of similar companies; 

actual or anticipated results from, and any delays in, commercialization of OMONTYS should Takeda reintroduce the product;

actual or anticipated contractual arrangements for OMONTYS should Takeda reintroduce OMONTYS or competing products;

actual or anticipated changes in our funding requirements, capital resources and our ability to obtain financing and the terms thereof;

actual or anticipated actions taken by regulatory agencies including the FDA and CMS with respect to ESAs generally or OMONTYS specifically;

new products or services introduced or announced by Takeda or our competitors, including Roche's Mircera or biosimilars, and the timing of these introductions or announcements; 

actions taken by regulatory agencies with respect to clinical trials, manufacturing process or sales and marketing activities for OMONTYS; 


25


changes in laws or regulations applicable to OMONTYS; 

developments concerning our amended collaboration arrangement with Takeda;

actual or anticipated variations in our quarterly operating results due to our restructuring efforts; 

conditions or trends in the biotechnology and biopharmaceutical industries;

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

general economic and market conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors;

sales of common stock or other securities by us or our stockholders in the future; 

the loss of services of substantially all of our personnel, including all of our executive officers; 

developments relating to proprietary rights held by us or our competitors; 

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; and

trading volume of our common stock.

In addition, the stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme price and 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 the market price of our common stock, regardless of our operating performance.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We have not identified any material weaknesses in our internal controls during the years ended December 31, 2013, 2012 or 2011. Because we are not an accelerated filer, as defined by rule 12b-2 of the exchange act, Ernst and Young LLP was not required to issue an opinion on our internal control over financial reporting pursuant to Section 404 of the Sarbanes Oxley Act of 2002. We cannot assure you that material weaknesses in our internal controls will not be identified in future periods. We may have particular difficulty maintaining segregation of responsibilities with only four employees plus the services of the The Brenner Group, Inc. There can be no assurance that we will successfully and timely report on the effectiveness of our internal control over financial reporting in future periods. If we do experience a material weakness in internal controls in future periods, then investor confidence, our stock price and our ability to obtain additional financing on favorable terms could be adversely affected.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. The recall of OMONTYS and our workforce reductions have severely harmed our business and financial condition so we may have challenges in maintaining our disclosure controls and procedures and our internal control over financial reporting.



Future sales of our common stock in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market that were previously restricted from sale, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. In the event that we do raise capital through the sale of additional equity securities, the dilution represented by the additional shares of our equity securities in the public market could

26


cause our stock price to fall, in which case investors may not be able to sell their shares of our equity securities at a price equal to or above the price they paid to acquire them.

Our ability to use net operating loss carryforwards and tax credit carryforwards to offset future taxable income will be limited and may be further limited in the future due to ownership changes that have occurred or may occur in the future.

In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, and certain other tax assets to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years). An ownership change could limit our ability to utilize our NOL and tax credit carryforwards for taxable years including or following such “ownership change”. Prior to 2013, we experienced ownership changes as defined by Sections 382 and 383 of the Internal Revenue Code. Due to our announcement of our voluntary recall of OMONTYS in February 2013, there has been an extremely high volume of trading of our stock, which has caused a significant drop in the value of our stock. As a result of the high trading volume, there may be a shift of ownership amongst our 5% stockholders that could result in an ownership change, under Section 382 of the Internal Revenue Code of 1986, as amended. Limitations imposed on the ability to use NOLs and tax credits to offset future taxable income could require us to pay U.S. federal income taxes earlier than would otherwise be required if such limitations were not in effect and could cause such NOLs and tax credits to expire unused, in each case reducing or eliminating the benefit of such NOLs and tax credits. Similar rules and limitations may apply for state income tax purposes.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Provisions in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders.

These provisions include:

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; 

limiting the removal of directors by the stockholders; 

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
 
eliminating the ability of stockholders to call a special meeting of stockholders; 

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings; and 

our board of directors is classified, consisting of three classes of directors with staggered three-year terms, with each class consisting as nearly as possible of one third of the total number of directors.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.


Item 1B.    Unresolved Staff Comments.
Not applicable.



27


Item 2.    Properties.
In June 2013 we moved our remaining four employees into our offices in Cupertino, California and vacated all of our facilities in Palo Alto, California. We recorded an expense of $2.5 million related to the termination of use of our previous office buildings. In August 2013 we signed an agreement with our landlord for the termination of the lease on our previous office buildings. The termination payment included forfeiture of our deposit of $50,000, release of a letter of credit for $1.1 million and cash payment of $1.4 million. Cash collateral for the letter of credit was held by our bank and shown as restricted cash on our balance sheet as of December 31, 2012. This cash was used to fund release of the letter of credit. There is no cash held as collateral or restricted cash as of December 31, 2013.
We currently lease approximately 1,500 square feet of office space in Cupertino, California under a lease agreement that terminates in July 2014.

Item 3.   Legal Proceedings
 
Shareholder Litigation

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 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 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.
Additional complaints may be filed against us and our directors and officers related to our recall of OMONTYS.

28


Product Liability Litigation
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.  We are continuing to review the complaint with our partner, Takeda and there can be no assurances that additional products liability complaints will not be brought.

  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. 

 

Item 4.   Mine Safety Disclosures
 
Not applicable.

29


 
PART II.

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market For Our Common Stock
Since June 6, 2013 our common stock is currently traded on the Over The Counter Electronic Market (OTCQB) under the symbol "AFFY". Prior to June 6, 2013, our common stock was traded on the NASDAQ Global Select Market. As of February 28, 2014, there were approximately 76 holders of record of our common stock. The following table sets forth, for the periods indicated, the range of high and low intraday sales prices of our common stock as quoted on the NASDAQ Global Select Market and Over The Counter Electronic Market.
 
High
 
Low
2013
 
 
 
4th Quarter
$1.33
 
$0.76
3rd Quarter
$1.99
 
$0.96
2nd Quarter
$2.08
 
$0.80
1st Quarter
$21.56
 
$1.05
 
High
 
Low
2012
 
 
 
4th Quarter
$27.74
 
$18.28
3rd Quarter
$22.00
 
$11.73
2nd Quarter
$14.95
 
$10.86
1st Quarter
$16.25
 
$6.35
The closing price for our common stock as reported by the Over The Counter Market on March 12, 2014 was $0.89 per share.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
Except as previously reported in our quarterly reports on Form 10-Q filed with the SEC during the year ended December 31, 2013, there were no unregistered sales of equity securities by us during the year ended December 31, 2013.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the fourth quarter of the year ended December 31, 2013.
Performance Graph(1)
The following graph shows the total stockholder return of an investment of $100 in cash on December 31, 2007, through December 31, 2013 for (i) our common stock, (ii) the Nasdaq Composite Index (U.S.) and (iii) the Nasdaq Biotechnology Index as of December 31, 2013. Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on our common stock to date. The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

30



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Affymax Inc., the NASDAQ Composite Index, and the NASDAQ Biotechnology Index







_______________________________________________________________________________
*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
____________________________________________________________________________
(1)
This Section is not "soliciting material," is not deemed "filed" with the Commission and is not to be incorporated by reference into any filing of Affymax, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Item 6.    Selected Financial Data.
The following selected financial data should be read together with our audited financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other financial information included in this Annual Report on Form 10-K. The selected financial data in this section is not intended to replace our audited financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

31


 
Year ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands, except per share data)
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Collaboration revenue
$
1,364

 
$
94,358

 
$
47,703

 
$
112,503

 
$
114,883

License and royalty revenue
5

 
12

 
17

 
18

 
16

Total revenue
1,369

 
94,370

 
47,720

 
112,521

 
114,899

Operating expenses:
 
 
 
 
 
 
 
 
 
Impairment of inventory and losses under firm purchase commitments

 
44,957

 

 

 

Research and development
11,857

 
51,738

 
76,308

 
93,638

 
157,125

Selling, general and administrative
27,529

 
89,714

 
32,818

 
33,331

 
36,716

Collaboration cost reimbursement
(43,451
)
 

 

 

 

Impairment (gain on disposal) of prepaid expenses, fixed assets and intangible assets
4,414

 

 

 

 

2013 Restructuring charge
16,066

 

 

 

 

Total operating expenses
16,415

 
186,409

 
109,126

 
126,969

 
193,841

Loss from operations
(15,046
)
 
(92,039
)
 
(61,406
)
 
(14,448
)
 
(78,942
)
Interest income
21

 
77

 
169

 
275

 
934

Interest expense
(1,565
)
 
(1,442
)
 
(144
)
 
(140
)
 
(105
)
Other income (expense), net
8

 
(34
)
 
15

 
239

 
171

Loss before provision (benefit) for income taxes
(16,582
)
 
(93,438
)
 
(61,366
)
 
(14,074
)
 
(77,942
)
Provision (benefit) for income taxes
(2,158
)
 
(26
)
 
1

 
1

 
(1,411
)
Net loss
$
(14,424
)
 
$
(93,412
)
 
$
(61,367
)
 
$
(14,075
)
 
$
(76,531
)
Net loss per common share:
 
 
 
 
 
 
 
 
 
Basic and diluted (1)
$
(0.39
)
 
$
(2.57
)
 
$
(1.84
)
 
$
(0.57
)
 
$
(4.06
)
Weighted-average number of common shares used in computing basic and diluted net loss per loss common share
37,448

 
36,342

 
33,288

 
24,488

 
18,865

 
December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
5,597

 
$
77,982

 
$
98,504

 
$
97,081

 
$
160,588

Receivable from Takeda

 
18,365

 
6,937

 

 
18,561

Long-term investments

 
2,323

 

 
19,876

 
7,978

Total assets
7,443

 
118,217

 
118,995

 
131,387

 
211,510

Payable to Takeda

 

 

 
5,958

 

Deposit from Takeda

 
559

 
1,998

 

 

Advance from Takeda
8,189

 
27,715

 
6,121

 

 

Notes payable

 
8,844

 

 

 

Accumulated deficit
(558,137
)
 
(543,713
)
 
(450,301
)
 
(388,934
)
 
(374,859
)
Total stockholders' equity (deficit)
$
(1,428
)
 
$
8,281

 
$
75,997

 
$
72,547

 
$
66,905

_______________________________________________________________________________
(1)
Please see Note 2 of Notes to Financial Statements for an explanation of the method used to calculate the net loss per common share and the number of shares used in the computation of the per share amounts.

32







Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
We are a biopharmaceutical company in the process of restructuring operations. In March 2012, the U.S. Food and Drug Administration, or FDA, approved the Company’s first and only product, OMONTYS® (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.
Restructuring
In March 2013, we began implementing 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, in addition to transitioning many of the ongoing activities to our collaborator, Takeda, 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 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 former 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.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to $180.0 million which consists of the following: (a) $10.0 million is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b) $10.0 million and another $10.0 million relates to U.S.

33


sales-based milestones, and (c) $150.0 million relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5.0 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of 13% to 17% with respect to net sales in the U.S. and in the range of 13% to 24% depending on the level of net sales by Takeda worldwide outside of the U.S.
Previous Agreement with Takeda
In 2012, we co-commercialized OMONTYS with Takeda. The commercial launch of the product occurred in April 2012. To commercialize OMONTYS, we established commercial and medical affairs infrastructures in 2012. The functions of our commercial and medical affairs infrastructures included marketing and sales, medical education, coverage and reimbursement and account management.
In 2012, we marketed our product primarily to dialysis organizations. Associated costs are included in selling, general and administrative costs or SG&A, in our accompanying financial statements.

In 2012, Takeda was responsible for account management, pricing and contracting. Specifically, Takeda had sole responsibility for invoicing and collection of receivables with regard to sales of OMONTYS. Takeda also had the rights and responsibility for establishing and modifying terms and conditions with customers with respect to the sale of OMONTYS in the U.S., including pricing discounts available to third-party payors, price adjustments and other allowable discounts and allowances. Both parties also had shared responsibilities such as joint marketing activities, business analytics and account management allocated by customer segments.
Prior to the Amendment, outside of the U.S., Takeda holds an exclusive license to develop and commercialize OMONTYS and has primary responsibility for filing regulatory submissions and obtaining product approvals in those territories.
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 December 31, 2013, we had an accumulated deficit of $558.1 million.

Shareholder Litigation

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 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

34


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 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.
  Additional complaints may be filed against us and our directors and officers related to our recall of OMONTYS.
Product Liability Litigation
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.  We are continuing to review the complaint with our partner, Takeda and there can be no assurances that additional products liability complaints will not be brought.

    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.


 

Results of Operations
 
Revenue

During the commercialization period, which commenced in June 2011, and ended in the first half of 2013, we received reimbursement for certain collaboration expenses. Takeda was responsible 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 include 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. are generally shared equally.

During the development period under the Arrangement with Takeda, which ended in May 2011 upon the submission of our NDA to the FDA for review, collaboration revenue was recognized using the Contingency Adjusted Performance Model, or CAPM.  As a result, any payments from Takeda under the Arrangement were recorded as deferred revenue and recognized ratably

35


over the estimated development period. Prior to the approval of OMONTYS, collaboration revenue had consisted of reimbursement of development and commercial expenses, net of Takeda's own eligible expenses, and milestone payments.

OMONTYS sales 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 collaboration agreement 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 equates 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.

In February 2013, 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.

Revenue as compared to prior years is as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Collaboration revenue
$
1,364

 
$
94,358

 
$
47,703

 
(99
)%
 
98
 %
License and royalty revenue
5

 
12

 
17

 
(58
)%
 
(29
)%
Total revenue
$
1,369

 
$
94,370

 
$
47,720

 
(99
)%
 
98
 %

Revenue decreased $(93.0) million from $94.4 million in 2012 to $1.4 million in 2013. The decrease was due to the cessation of sales of OMONTYS upon the recall in February 2013. There have been no further sales of OMONTYS since the recall.

Revenues increased $46.7 million from $47.7 million in 2011 to $94.4 million in 2012. The increase in collaboration revenue for the year ended December 31, 2012 compared to the year ended December 31, 2011 was primarily due to the recognition of $60.3 million in milestone payments from Takeda related to FDA approval of OMONTYS, the European Medicines Agency, or EMA’s acceptance for review of the Marketing Authorization Application or MAA submitted by Takeda, and commercial progress on the OMONTYS product launch and our profit equalization revenue(1) related to the commencement of OMONTYS sales, and revenue previously deferred related to previously expensed API, which is partially offset by a decrease in amounts eligible for reimbursement under our Arrangement with Takeda.


 The following table presents our collaboration revenue, by revenue type, for the periods presented (in thousands):
 
Year ended December 31,
 
2013
 
2012
 
2011
Profit equalization revenue (1)
$
5

 
$
26,544

 
$

Milestone payments

 
60,250

 
10,000

Revenue previously deferred related to API

 
936

 

Revenue recognized under CAPM

 

 
26,606

Net expense reimbursement after CAPM
1,364

 
6,628

 
11,097

Total collaboration revenue
$
1,369

 
$
94,358

 
$
47,703


______________________________________________________ 
(1) Revenue from profit equalization is calculated on a quarterly basis as the amount required such that the profit or loss realized by both Affymax and Takeda on the product equates to 50% of the total product profit or loss.  Total product profit or loss on OMONTYS is calculated as gross product sales recorded by Takeda, less the following deductions also 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 (FTE related and out of pocket costs) incurred by both Takeda and us, and certain development

36


costs associated with post-marketing development activities (FTE related and out of pocket costs) incurred by both Takeda and us.  Profit equalization revenue is recognized as revenue in the period product revenue is recognized by Takeda. 

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 and sales were ceased.

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.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. If Takeda decides to reintroduce OMONTYS, all of which is highly uncertain, we are eligible to receive royalties and (i) potential commercial milestone payments totaling up to $180.0 million which consists of the following: (a) $10.0 million is payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.; (b) $10.0 million and another $10.0 million relates to U.S. sales-based milestones, and (c) $150.0 million relates to sales-based milestones in amounts as previously disclosed outside of the U.S. but now including Japan as a result of the Amendment and (ii) a potential development milestone payment of $5.0 million payable either upon regulatory approval in the E.U. or Japan. The royalties are tiered in the range of 13% to 17% with respect to net sales in the U.S. and in the range of 13% to 24% depending on the level of net sales by Takeda worldwide outside of the U.S.
Operating expenses incurred by us which have been subject to reimbursement by Takeda under the Arrangement, excluding API manufacturing costs are as follows (in thousands):

 
Year ended December 31,
 
2013
 
2012
 
2011
Research & development
$
525

 
$
15,480

 
$
22,412

Selling, general & administrative

 
43,748

 
8,471

Total
$
525

 
$
59,228

 
$
30,883


Due to the recall of OMONTYS all activities related to the product which were performed by Affymax were transferred to Takeda per the fourth amendment of the license agreement. The reimbursements received in 2013 were for payroll costs incurred by Affymax employees to assist in the transition of those activities.

The change in the mix of costs subject to reimbursement in 2012 compared to 2011 was primarily due to our company shifting from being a R&D company to a commercial company. In 2012, we commercially launched OMONTYS which resulted in much larger commercial-related reimbursements. In 2011, our primary focus was obtaining FDA approval which was more R&D-related. We expect collaboration revenue to fluctuate with changes in revenue related to the profit equalization of the collaboration and with changes in the amount of reimbursable expenses for our direct development. Revenue/loss from profit equalization is influenced by a number of factors, some of which may impact the sales of OMONTYS and reimbursement of collaboration expenses more significantly than others, including, but not necessarily limited to, our ability to reintroduce OMONTYS following the February 2013 recall and the level of reimbursable costs incurred by us versus those incurred by Takeda including costs associated with the recall, costs of the investigation and potential write offs of API or drug product

37


inventory by Takeda. We do not expect an income statement charge for these as we believe that our exposure is adequately covered under our Advance from Takeda as of December 31, 2012. Although we are eligible to receive future milestones from Takeda, timing and amounts are extremely uncertain due to the recall.

Cost of Manufacturing API for the Collaboration
The cost of manufacturing API is not reflected in our statement of comprehensive (loss) income as we were reimbursed by Takeda for all costs we incurred with third parties. At the time of FDA approval in March 2012, we had produced approximately $20.5 million of commercial grade API that had been expensed previously as R&D expenses. As of December 31, 2012, we had a remaining balance of $17.8 million in deferred revenue related to previously expensed API shipped to Takeda. As a result of the recall, the remaining balance of deferred revenue has been reversed during the year ended December 31, 2013.

Revenue in the year ended December 31, 2012 was benefited by API material previously expensed. Our collaboration revenue related to API for the year ended December 31, 2012 was $0.9 million, compared to $0.2 million that would have been recorded as revenue if the API were not previously expensed. As of December 31, 2012, we had a remaining balance of $17.8 million in deferred revenue related to previously expensed API. Given the uncertainty of any profit equalization revenue in future periods we have recharacterized our deferred revenue as an Advance from Takeda, which is reflected as a current liability in our December 31, 2013 financial statements. As a result of the recall, we also wrote off $8.4 million of inventory and prepayments made to our contract manufacturing organizations or CMOs. Given the uncertainty in future revenues at this time, we cannot predict if or when we will start recognizing revenues from API.

Impairment of Inventory and Losses on Firm Purchase Commitments
Impairment of inventory and losses on firm purchase commitments, as compared to prior years are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2012/2011
 
2011/2010
Impairment of inventory and losses on firm purchase commitments
$

 
$
44,957

 
$

 
N/A
 
N/A

Prior to the Amendment, we initiated orders for API with our contract manufacturing organizations, or CMOs based on forecasts from Takeda, which were based on expected demand for OMONTYS. Orders generally have commenced once there was a contractual commitment for the API from Takeda.

As a result of the inability to sell OMONTYS and the uncertainty of future revenues, we have written down our API inventory and prepayments for API being produced by our CMOs to a net realizable value of zero and have recorded a $10.4 million impairment charge related to this writedown during the year ended December 31, 2012. We have also recorded a $34.6 million loss on firm purchase commitments by applying the same lower of cost or market approach that is used to value inventory during the same period.

Collaboration cost reimbursement

Collaboration cost reimbursement as compared to the prior year are as follows (in thousands):

 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Collaboration cost reimbursement
$(43,451)
 
$

 
$

 
N/A
 
N/A

We recorded a benefit of $20.3 million in the quarter ended March 30, 2013, primarily related to the Takeda Q1 profit equalization payment, which represented recovery of amounts included in the $45.0 charge for impairment of inventory and loss on CMO purchase commitments in 2012. We had the right under the Arrangement to submit to Takeda for reimbursement for a portion of those charges. However because we had not presented such amounts to Takeda for reimbursement, and such reimbursements would be subject to Takeda's approval, we had not recorded a receivable for such amounts as of December 31, 2012.

38


In the three months ended June 30, 2013, we settled our future purchase commitments with our CMOs. We originally recorded a CMO liability of $32.9 million comprised of $5.4 million for firm purchase commitments of PEG, and the remaining $27.5 million of manufacturing obligations relate to API. We were able to settle these obligations for $11.0 million less than the contractual amounts, and realized favorable adjustments to our operating results of $21.9 million.
As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA.

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 prior years are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Research and development expenses
$
11,857

 
$
51,738

 
$
76,308

 
(77
)%
 
(32
)%

R&D expenses declined $39.9 million from 2012 to 2013. The reduction in R&D expenses in 2013 compared to 2012 was due to the recall of OMONTYS in February 2013. After the recall, we undertook a restructuring of the Company which involved the cessation of all R&D activity and a significant reduction in workforce including all R&D personnel.

R&D expenses declined $24.6 million from 2011 to 2012. The decrease in R&D expenses in 2012 compared to 2011 was primarily due to reduced consultant costs as a result of both the completion of our filing of our NDA in May 2011 and of the preparation for our FDA advisory committee meeting which occurred in December 2011 and reduced personnel related costs related to the reduction in force implemented in the third quarter of 2011.  This was partially offset by ongoing clinical trial activity on our Phase 3b trial, and a Phase 2 study in Pure Red Cell Aplasia, or PRCA patients.

Selling, General and Administrative Expenses
SG&A expenses consist principally of salaries, employee benefits, consulting, professional fees for legal, auditing and tax services, marketing and commercial support for OMONTYS, allocation for overhead and occupancy costs and royalty expense. SG&A, expenses as compared to prior years are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Selling, general and administrative expenses
$
27,529

 
$
89,714

 
$
32,818

 
(69
)%
 
173
%
 
SG&A expenses decreased $62.2 million from 2012 to 2013. The reduction in SG&A expenses in 2013 compared to 2012 was due to the recall of OMONTYS in February 2013. After the recall, we undertook a restructuring of the company which involved a significant reduction in workforce including all but four SG&A personnel.

SG&A expenses increased $56.9 million from 2011 to 2012. The increase in SG&A expenses in 2012 compared to 2011 was primarily due to higher commercialization expenses related to expansion of our commercial capabilities, including the establishment of a field sales force and other activities to support our commercialization efforts.  In addition, as a result of our FDA approval, we also expensed a one-time milestone payment of $2.0 million to Nektar Therapeutics AL Corporation, or Nektar, during the three months ended March 31, 2012 and also incurred $1.8 million in royalty expense resulting from the introduction of OMONTYS in 2012.
As a result of the voluntary recall of OMONTYS, all product was recalled and all marketing activities were suspended. As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including the ongoing recall and investigation of

39


OMONTYS as well as any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We expect selling, general and administrative expenses for the foreseeable future to include a lower level of salaries, benefits, and professional fees to maintain the corporate administrative responsibilities.

Impairment (Gain on Disposal) of Prepaid Expenses, Fixed Assets and Intangible Assets
Impairment of prepaid expenses, fixed assets and intangible assets and percentage changes as compared to the prior year are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Impairment (gain on disposal) of prepaid expenses, fixed assets and intangible assets
$
4,414

 
$

 
$

 
N/A
 
N/A

As a result of the product recall and related restructuring activities that occurred in the year ended December 31, 2013, we incurred impairment charges of $4.4 million. The impairment related to our prepaid expenses, fixed assets and our intangible assets related to our license with Janssen was $1.3 million, $1.9 million and $1.9 million, respectively. For the year ended December 31, 2013 we have realized a total gain upon the sale of property and equipment of $0.7 million.
Restructuring Charges
Restructuring charges and percentage changes as compared to the prior year are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Restructuring charges
$
16,066

 
$

 
$

 
N/A
 
N/A

Beginning in March 2013, we undertook plans to reorganize 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. By June 30, 2013, in addition to transitioning most activities to our collaborator, Takeda, we completed a reduction in force of most of our remaining employees, including all of our commercial and medical affairs field forces as well as other employees throughout the organization and we engaged an experienced restructuring firm, The Brenner Group.  With the engagement of the restructuring firm, we terminated the employment of our former executive officers, including our Chief Executive Officer and Chief Financial Officer. We have incurred $16.1 million in restructuring charges related to the workforce reduction during the year ended December 31, 2013. 
In June 2013 we moved our remaining four employees into new offices in Cupertino, California and vacated all of our previous office buildings in Palo Alto, California. In the quarter ended June 30, 2013, we recorded an expense of $2.5 million related to the termination of use of our previous office buildings. In August 2013 we signed an agreement with our landlord for the termination of the lease. The lease termination payment included forfeiture of our deposit of $50,000, release of a letter of credit for $1.1 million and cash payment of $1.4 million. Cash collateral for the letter of credit was held by our bank and shown as restricted cash on our balance sheet as of December 31 2012. This cash was used to fund release of the letter of credit in 2013.

Interest Income (Expense), Net
Interest income (expense), net as compared to prior years are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Interest income
$
21

 
$
77

 
$
169

 
(73
)%
 
(54
)%
Interest expense
$
(1,565
)
 
$
(1,442
)
 
$
(144
)
 
9
 %
 
901
 %
Interest income (expense), net
$
(1,544
)
 
$
(1,365
)
 
$
25

 
13
 %
 
(5,560
)%
 

40


The increase in interest income (expense), net during the year ended December 31, 2013 compared to the same period in 2012 was due primarily to final payment of interest and prepayment fees associated with the discharge of obligations under our loan agreement with Lenders, our launch allowance with Takeda, lower interest rates and lower average cash balance.

The increase in interest income (expense), net during the year ended December 31, 2012 compared to the same period in 2011 was due primarily to interest expense related to our notes payable with the Lenders and our launch allowance with Takeda and lower interest rates and lower average cash balance.

 
Other Income (Expense), Net
Other income (expense), net as compared to prior years are as follows (in thousands):
 
Year ended December 31,
 
Percent Change
 
2013
 
2012
 
2011
 
2013/2012
 
2012/2011
Other income (expense), net
$
8

 
$
(34
)
 
$
15

 
(124
)%
 
(327
)%

Other expense, net, for the year ended December 31, 2013 includes $10,000 of unused flex spending account funds. Other expense, net, for the year ended December 31, 2012 includes a $30,000 loss on disposal of fixed assets. Other income, net, for year ended December 31, 2011 includes a $13,000 insurance refund.

Provision for Income Taxes

We are subject to federal and state income taxes. While we did generate net income during the second quarter of 2013 due to adjustment of charges for the impairment of inventory and purchase commitments in the period, resulting in a gain during the second quarter, we were in a net operating loss position for the year 2013 and therefore have not recorded any federal or state taxes, other than $2.2 million tax benefit, which was recorded in the second quarter of 2013 as a result of statute of limitations lapsing on a previously recorded uncertain tax position, and the minimum statutory California tax, for the year ended December 31, 2013. We also did not record any tax liability for the year ended December 31, 2012 and 2011 other than the minimum statutory California tax due to the anticipated tax loss position for the year ended December 31, 2012 and 2011.
.
As of December 31, 2012, we had a net deferred tax asset balance of $7.2 million in consideration of the uncertainty in income taxes liability recorded for the same amount. In 2013, the Company adopted Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This standard resulted in the offset of the deferred tax asset with the uncertain tax position on the balance sheet such that there are no deferred tax assets or liabilities presented on the balance sheet as of December 31, 2013. We have incurred significant operating losses since inception and anticipate that we may incur continued losses in the future.


Liquidity and Capital Resources
 
Our cash, cash equivalents, and investments at December 31, 2013 and 2012 are as follows (in thousands):
 
 
December 31,
 
2013
 
2012
Cash and cash equivalents
$5,597
 
$68,265
Short-term investments

 
9,717

Long-term investments

 
2,323

 
As of December 31, 2013, we had $5.6 million in cash and cash equivalents.,
Working Capital. Working capital (deficit) was $(2.6) million at December 31, 2013, a decrease of $6.0 million from working capital as of December 31, 2012. The change in working capital was primarily attributable to:

41


a decline of $72.4 million in cash, cash equivalents and marketable securities
a decrease of $51.9 million in accrued liabilities, primarily related to accrued potential losses on firm purchase commitments in 2012 which were settled in 2013
a decrease of $19.5 million in Advance from Takeda
a decrease of $8.8 million in the current portion of debt.
a decrease of $18.4 million in accounts receivable from Takeda.
We believe we have sufficient cash to fund our operations through the third quarter of 2014. However, there is significant uncertainty as to whether we will have sufficient existing cash to fund our operations beyond the third quarter of 2014. Our liabilities exceed our assets. Given our limited resources, there is no assurance that we will be able to reduce our operating expenses enough to meet our existing and future obligations. If Takeda is not able to reintroduce the product or we are not able to obtain additional funding in the near future, our cash resources will rapidly be depleted and we will be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships. If we do not have sufficient funds to continue operations, we could be required to liquidate our assets, including relinquish some or all of our existing rights to OMONTYS, seek bankruptcy protection or other alternatives and it is likely that investors will lose all or some of their investment in us. Any failure to dispel any continuing doubts about our ability to continue as a going concern could make it more difficult to obtain required financing on favorable terms or at all, negatively affect the market price of our common stock and could otherwise have a material adverse effect on our business, financial condition and results of operations.
Our independent registered public accounting firm, in their most recent audit report, expressed substantial doubt about our ability to continue as a going concern.


Cash Flows during the Years Ended December 31, 2013, 2012, and 2011

In summary, our cash flows for the periods presented are as follows (in thousands):
 
December 31,
 
2013
 
2012
 
2011
Net cash used in operating activities
$
(67,339
)
 
$
(37,180
)
 
$
(71,966
)
Net cash provided by (used in) investing activities
14,400

 
27,995

 
8,001

Net cash provided by (used in) financing activities
(9,729
)
 
23,111

 
54,805


Net cash used in operating activities for the years ended December 31, 2013, 2012, and 2011, was $67.3 million, $37.2 million, and $72.0 million, respectively. Net cash used in operations for all periods reflects our net loss partially offset by the benefit of payments received from Takeda related to milestone payments, non-cash expenses related to impairment of inventory and losses on firm purchase commitments and reimbursement for development and commercial expense. Cash used in operating activities in 2013 as compared to 2012 increased by $30.2 million primarily due to higher non-cash expenses related to impairment of inventory and losses on firm purchase commitments and a reduction in accrued liabilities and accounts payable in 2013 compared to 2012. Cash used in operating activities in 2012 as compared to 2011 decreased by $34.8 million primarily due to higher noncash expenses related to impairment of inventory and losses on firm purchase commitments that occurred in 2012 compared to 2011.

Net cash provided by investing activities for the year ended December 31, 2013 of $14.4 million was primarily due to maturities of investments, sale of securities, proceeds from the sale of property and equipment and change in restricted cash.  Net cash provided by investing activities for the year ended December 31, 2012 of $28.0 million was primarily due to maturities of investments, partially offset by the purchases of investments and property and equipment and payments related to OMONTYS intellectual property. Net cash provided by investing activities for the year ended December 31, 2011 of $8.0 million was primarily a result of purchases of investments partially offset by proceeds from maturities and sales of investments.
 
Net cash used in financing activities for the year ended December 31, 2013 was primarily attributable to repayment of notes payable of $10.0 million. In March 2012, we entered into the Loan Agreement, with the Lenders, under which we borrowed $10.0 million. On April 3, 2013, we entered into a Letter Agreement, relating to the Loan Agreement dated March 26, 2012, with the Lenders. Pursuant to the terms of the Letter Agreement: (i) we paid all amounts due and owing so

42


as to discharge our obligations thereunder totaling $9.8 million including remaining principal, interest, final payment and prepayment fees, (ii) we waived any rights to seek additional credit extensions or unfunded commitments under the Loan Agreement, and (iii) the security interest granted to Lenders relating to substantially all of our assets, other than our intellectual property, was terminated. As of December 31, 2013, we have no amounts outstanding or owing on the Loan Agreement.





Contractual Obligations and Significant Commitments
 Our future contractual obligations, including financing costs, at December 31, 2013, are as follows (in thousands):
 
 
Payments Due by Period
Contractual Obligations
Total
 
2014
 
2015 -2016
 
2017 -2018
 
Thereafter
Operating lease obligations
$
23

 
$
23

 
$

 
$

 
$

Total fixed contractual obligations
$
23

 
$
23

 
$

 
$

 
$



In addition the amounts reflected in the table above, we have recognized as a liability on our balance sheet an Advance from Takeda of $8.2 million which may be contingently offset against future royalties that may be due to us from Takeda. Takeda funded the first $20.0 million of U.S. commercial expenses.  Amounts received under the launch allowance are non-refundable. As part of the launch allowance, Takeda is entitled to deduct up to 8% of net sales from the profit share amounts which would have otherwise been due to us each period until they have recouped an amount equal to $11.0 million (see Note 3 of Notes to Financial Statements). To date, Takeda deducted a total of $2.8 million against the profit equalization. Future royalties, if any, may be offset against the launch allowance of $8.2 million which is classified as Advance from Takeda in the balance sheet

Off-Balance Sheet Arrangements
At December 31, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Securities and Exchange Commission, or SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

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 financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these 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 impairment of long-lived assets, restructuring charges, 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. We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

Our critical accounting policies and the use of estimates are summarized below:


43


Critical accounting policy
Status as of December 31, 2013
 
 
Revenue recognition - During 2013, we recognized $1.4 million of revenue under our collaboration with Takeda.
Effective April 1, 2013, we and Takeda entered into an amendment which revised the economics from a profit-sharing arrangement to a milestone and royalty-based compensation structure. The Amendment effectuated a transfer of all significant responsibilities from us to Takeda. As a result of the Amendment, Takeda assumed full responsibility for OMONTYS, including any subsequent decisions as to whether the product may be subject to reintroduction if Takeda is able to complete the investigation and address the safety concerns to the satisfaction of the FDA. We do not expect to have any future revenues unless Takeda is able to and decides to re-launch OMONTYS, which is highly uncertain. No revenues were recognized in the six-month period ended December 31, 2013.
Inventory and manufacturing commitments - During 2012, we recorded a $10.4 million charge for the write-down of inventory to a net realizable value of zero and we recorded estimated losses on firm inventory purchase commitments of $34.6 million
During 2013, we entered into a final settlement agreement with Takeda for collaboration cost reimbursement and we recognized a benefit of $43.4 million during 2013 for the resolution of the collaboration cost reimbursement and the settlements of the inventory purchase commitments. As of December 31, 2013, there are no remaining inventory balances or inventory purchase commitments.
Restructuring and asset impairment charges - During 2013, we recorded $16.1 million of restructuring costs related to a reduction of force and the exit of our leased facilities. We also recorded $4.4 million of impairment charges.
As of December 31, 2013, our restructuring activities are substantially complete. Substantially all termination payments and lease exit costs have been paid as of December 31, 2013. The remaining restructuring accrual of $0.3 million as of December 31, 2013 relates to retention bonuses for key personnel. This retention bonus is expected to be paid in 2014. During 2013, we disposed of all fixed assets in an auction and as of December 31, 2013 there are no recorded inventories or fixed assets.




Recent Accounting Pronouncements
There are no recent accounting pronouncements which are expected to have a material effect on our financial condition or results of operations.


Item 7A.    Quantitative and Qualitative Disclosure About Market Risk
 
As of December 31, 2013, we hold no investment or marketable securities and have no debt obligations outstanding. We have no material exposure to market risk related to interest rate changes as of December 31, 2013.
.

44



Item 8.    Financial Statements and Supplementary Data.

 
 
 
Page
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2013 and 2012
Statements of Operations for the years ended December 31, 2013, 2012, and 2011
Statements of Comprehensive Loss for the years ended December 31, December 31, 2013, 2012, and 2011
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2013, 2012, and 2011
Statements of Cash Flows for the years ended December 31, December 31, 2013, 2012, and 2011
Notes to Financial Statements



45


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Affymax, Inc.
We have audited the accompanying balance sheets of Affymax, Inc. as of December 31, 2013 and 2012, and the related statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Affymax, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, there is significant uncertainty as to whether the Company will have sufficient financial resources to fund its operations for the next 12 months. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to this matter are also described in Note 1. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.


 
 
 
 
 
/s/ Ernst & Young LLP
Redwood City, California
March 31, 2014



46




AFFYMAX, INC.
BALANCE SHEETS
(in thousands, except share data)
 
 
December 31,
 
2013
 
2012
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
5,597

 
$
68,265

Short-term investments

 
9,717

Receivable from Takeda

 
18,365

Deferred tax assets

 
363

Prepaid expenses
725

 
2,731

Other current assets

 
3,069

Total current assets
6,322

 
102,510

Property and equipment, net

 
2,981

Restricted cash

 
1,135

Long-term investments

 
2,323

Deferred tax assets, net of current

 
6,876

Other assets
1,121

 
2,392

Total assets
$
7,443

 
$
118,217

Liabilities and Stockholders’ Equity (Deficit)
 

 
 

Current liabilities
 

 
 

Accounts payable
$
101

 
$
6,591

Accrued liabilities
581

 
52,522

Accrued clinical trial expenses

 
2,844

Deposit from Takeda

 
559

Advance from Takeda
8,189

 
27,715

Notes payable, current

 
8,844

Total current liabilities
8,871

 
99,075

Long-term income tax liability

 
10,062

Other long-term liabilities

 
799

Total liabilities
8,871

 
109,936

Commitments and contingencies (Note 9)

 

Stockholders’ equity (deficit)
 

 
 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding

 

Common stock: $0.001 par value, 100,000,000 shares authorized, 37,490,095 and 37,396,717 shares issued and outstanding at December 31, 2013 and 2012, respectively
37

 
37

Additional paid-in capital
556,672

 
551,959

Accumulated deficit
(558,137
)
 
(543,713
)
Accumulated other comprehensive income

 
(2
)
Total stockholders’ equity (deficit)
(1,428
)
 
8,281

Total liabilities and stockholders’ equity (deficit)
$
7,443

 
$
118,217

 
The accompanying notes are an integral part of these financial statements.

47


AFFYMAX, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)

 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Revenue:
 

 
 

 
 
Collaboration revenue
$
1,364

 
$
94,358

 
$
47,703

License and royalty revenue
5

 
12

 
17

Total revenue
1,369

 
94,370

 
47,720

Operating expenses:
 

 
 

 
 
Impairment of inventory and losses on firm purchase commitments

 
44,957

 

Research and development
11,857

 
51,738

 
76,308

Selling, general and administrative
27,529

 
89,714

 
32,818

Collaboration cost reimbursement
(43,451
)
 

 

Impairment (gain on disposal) of prepaid expenses, fixed assets and intangible assets
4,414

 

 

2013 Restructuring charge
16,066

 

 

Total operating expenses
16,415

 
186,409

 
109,126

Loss from operations
(15,046
)
 
(92,039
)
 
(61,406
)
Interest income
21

 
77

 
169

Interest expense
(1,565
)
 
(1,442
)
 
(144
)
Other income (expense), net
8

 
(34
)
 
15

Loss before provision (benefit) for income taxes
(16,582
)
 
(93,438
)
 
(61,366
)
Provision (benefit) for income taxes
(2,158
)
 
(26
)
 
1

Net loss
$
(14,424
)
 
$
(93,412
)
 
$
(61,367
)
Net loss per share:
 
 
 
 
 
Basic and diluted
$
(0.39
)
 
$
(2.57
)
 
$
(1.84
)
Weighted-average number of shares used in computing basic and diluted net loss per share
37,448

 
36,342

 
33,288

 
The accompanying notes are an integral part of these financial statements.

48


AFFYMAX, INC.
STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)


 
Year Ended December 31,
 
2013
 
2012
 
2011
Net loss
$
(14,424
)
 
$
(93,412
)
 
$
(61,367
)
Other comprehensive loss:
 
 
 
 
 
Change in unrealized gains (losses) on investments
2

 
(20
)
 
(13
)
Other comprehensive loss
2
 
(20)
 
(13)
Comprehensive loss
$
(14,422
)
 
$
(93,432
)
 
$
(61,380
)


The accompanying notes are an integral part of these financial statements.


49


AFFYMAX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
 
 
 
Additional
Paid-In
Capital
 
Deferred
Stock-Based
Compensation
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholder's Equity
 
Shares
 
Amount
 
Balance at December 31, 2010
25,451,338

 
$
25

 
$
461,425

 
$

 
$
(388,934
)
 
$
31

 
$
72,547

Issuance of common stock upon exercise of stock options
95,917

 

 
371

 

 

 

 
371

Issuance of common stock upon vesting of restricted stock units
255,782

 

 

 

 

 

 

Proceeds from common stock issued upon public offering, net of issuance costs
9,745,762

 
10

 
53,615

 

 

 

 
53,625

Issuance of common stock related to the employee stock purchase plan
184,382

 
1

 
807

 

 

 

 
808

Deferred stock-based compensation

 

 
(5
)
 
5

 

 

 

Amortization of deferred stock-based compensation

 

 

 
(5
)
 

 

 
(5
)
Employee stock-based compensation

 

 
9,773

 

 

 

 
9,773

Nonemployee stock-based compensation related to consultants

 

 
(10
)
 

 

 

 
(10
)
Nonemployee stock-based compensation related to former CEO

 

 
268

 

 

 

 
268

Change in unrealized loss on marketable securities

 

 

 

 

 
(13
)
 
(13
)
Net loss

 

 

 

 
(61,367
)
 

 
(61,367
)
Balance at December 31, 2011
35,733,181

 
36

 
526,244

 

 
(450,301
)
 
18

 
75,997

Issuance of common stock upon exercise of stock options
1,129,422

 
1

 
12,028

 

 

 

 
12,029

Issuance of common stock upon vesting of restricted stock units
222,093

 

 

 

 

 

 

Issuance of common stock related to the employee stock purchase plan
224,908

 

 
1,082

 

 

 

 
1,082

Issuance of warrants related to Loan and Security Agreement

 

 
1,394

 

 

 

 
1,394

Issuance of common stock upon net exercise of warrants
60,113

 

 

 

 

 

 

Deferred stock-based compensation

 

 
87

 
(87
)
 

 

 

Amortization of deferred stock-based compensation

 

 

 
87

 

 

 
87

Employee stock-based compensation

 

 
11,055

 

 

 

 
11,055

Nonemployee stock-based compensation

 

 
69

 

 

 

 
69

Change in unrealized loss on marketable securities

 

 

 

 

 
(20
)
 
(20
)
Net loss

 

 

 

 
(93,412
)
 

 
(93,412
)
Balance at December 31, 2012
37,369,717

 
37

 
551,959

 

 
(543,713
)
 
(2
)
 
8,281

Issuance of common stock upon exercise of stock options
30,918

 

 
271

 

 

 

 
271

Issuance of common stock upon vesting of restricted stock units
89,460

 

 

 

 

 

 

Deferred stock-based compensation

 

 
(3
)
 
3

 

 

 

Amortization of deferred stock-based compensation

 

 

 
(3
)
 

 

 
(3
)
Employee stock-based compensation

 

 
4,445

 

 

 

 
4,445

Change in unrealized loss on marketable securities

 

 

 

 

 
2

 
2

Net loss

 

 

 

 
(14,424
)
 

 
(14,424
)
Balance at December 31, 2013
37,490,095

 
$
37

 
$
556,672

 
$

 
$
(558,137
)
 
$

 
$
(1,428
)
   The accompanying notes are an integral part of these financial statements.

50


AFFYMAX, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Year ended December 31,
 
2013
 
2012
 
2011
Cash flows from operating activities
 
 
 

 
 

Net loss
$
(14,424
)
 
$
(93,412
)
 
$
(61,367
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 

 
 

Collaboration cost reimbursement
(43,451
)
 

 

Impairment of prepaid expenses, fixed assets and intangible assets
5,118

 

 

Noncash restructuring charge
307

 

 

Impairment of inventory and losses on firm purchase commitments

 
44,957

 

Depreciation and amortization
722

 
1,987

 
2,182

Amortization of premium on investments
1

 
75

 
55

Stock-based compensation expense
4,442

 
11,211

 
10,025

Loss on (gain) on disposal of property and equipment
(704
)
 
30

 
11

Noncash interest expense
811

 
827

 
144

Changes in operating assets and liabilities:
 
 
 

 
 

Receivable from Takeda
18,365

 
(9,600
)
 
(6,937
)
Inventory

 
(4,515
)
 

Prepaid expenses
(441
)
 
(5,085
)
 
272

Other current assets
3,028

 
(2,732
)
 
(77
)
Other noncurrent assets
73

 
(2
)
 
(289
)
Accounts payable
(6,490
)
 
5,650

 
620

Accrued liabilities
(28,335
)
 
3,849

 
2,405

Accrued clinical trial expenses
(2,844
)
 
(521
)
 
(7,882
)
Payable to Takeda

 

 
(5,958
)
Deferred revenue

 
(5,174
)
 
(13,322
)
Deposit from Takeda
(559
)
 
(1,438
)
 
1,998

Long-term income tax liability
(2,159
)
 
(27
)
 
18

Advance from Takeda

 
17,767

 
6,121

Other long-term liabilities
(799
)
 
(1,027
)
 
15

Net cash used in operating activities
(67,339
)
 
(37,180
)
 
(71,966