Affymax IPO Gets Investors' Blood Racing

Shares of the pharma, which is developing an anemia treatment, surged in their public debut Friday

by Alex Halperin

Investors looking to get the measure of the initial public offering climate could do worse than look to Affymax (AFFY). Even after the pharmaceutical development outfit with no product revenues priced shares at $25, above the expected price range, investors still jumped aboard pushing shares to $33.88 by the close.

The company is developing a drug called Hematide designed to treat anemia, a reduction in red blood cells, often found in patients with advanced kidney disease and cancer. The company hopes for to begin Phase III clinical trials for kidney disease patients in 2007 so the drug is still a few years from commercialization. And that's if all goes well. Its clinical trials for cancer patients, the drug is not as far along.

Hematide is a synthetic peptide-based erythropoiesis stimulating agent, a product designed to spur production of red-blood cells. Affymax believes that it has the potential to provide longer acting care than existing therapies, reducing the cost and the complexity of mitigating anemia.

The deal raised $92.5 million for the company. It plans to use the bulk of the proceeds to fund late stage clinical trials for Hematide.

If Hematide wins Food and Drug Administration approval, Affymax investors stand to make a bundle. The Biotech company Amgen (AMGN) markets recombinant human erythropoietin to treat anemia in kidney disease patients as Epogen and licenses it out to Johnson & Johnson (JNJ) for use in non-dialysis patients under the name Procrit. Both rack up billions in annual sales.

So maybe that explains why investors were so keen on a company that has accumulated a net loss of $164.6 million since its founding in 2001 through the end of September. Such losses would be seen as red flags in other industries but in drug development it's part of the M.O. Even small companies like Affymax have to fund long and expensive clinical trials to win FDA approval. If they succeed, a big if, they can reap in jackpot returns.

Despite the risks Palo Alto (Calif.) -based Affymax has strong credentials. As a start-up it received funding from big name venture capital investors including MPM Capital and Sprout Group. It also has a partnership with Japanese pharmaceutical outfit Takeda.

The company initially filed to go public in July. With major indexes surging, the IPO was one of 18 to go out this week with a total value of $2.9 billion the third highest this year, according to Dealogic.

Making matters still more complicated is that the company is involved in an intellectual property dispute with Johnson & Johnson that could hamper Affymax's ability to profit from the Hematide. Of course, the biggest obstacle the company will face for some time is getting the drug approved.

Halperin is a reporter for BusinessWeek.com in New York.