Speculation on Affymax's disaster

Affymax (AFFY) was a very successful biotech company just a few days ago. It had a newly approved anti-anemia drug on the market, OMONTYS (peginesatide) , competing with Amgen which used to be dominating the market on anemia. But its fate had totally changed a week ago, upside down more precisely. See the chart below. AFFY lost 85% of its market cap overnight, from $18 to around $2. Omontys is its only drug but it has been associated with fatal anaphylaxis, for which the drug was withdrawn from the market. It was almost a fatal blow to Affymax. AFFX is now trading at its cash level: it has cash of $2.66 per share and its stock price is $2.68 at closing today. So why am I interested in AFFY at this time?

 

Back in my mind, I'm asking what if Affymax finds its way to get the drug back to the market in some way. I used to be working with GSK and remembered GSK withdraw a drug called Lotronex for irritable bowel syndrome in less than a year after it was approved. However, GSK soon found out that the fatal colitis was largely associated with some patients with certain risk factors and could still be relatively safely used for other patients. With some safety measures in place, GSK successfully brought back Lotronex to the market (see the story here). With this successful story as an example, I'm sure Affymax management would not simply sit there to pray but is likely actively working to find a way out. Maybe such fatal allergic reactions only happen to some patients but not others and there is still a room for the drug in the market. If this turns out to be true, I think it will easily double the share price of Affymax, given how small Affymax is.

 

But I must say this is purely a speculation with no certainty at all and I don't know anything about the drug. Even if this will eventually happen, I don't know how long it will take. However, if you want to play with this speculation, buying the stock directly or cheaper, buying its 2015 call options, is one way to do it. A better way is to buy the 2015 call options and sell its 2015 put options simultaneously. This combo strategy will not only cost you nothing but even pay you a bit upfront to wait for its turnaround: you pay for about $1.30 per share for buying the $3 calls but get paid for about $1.50 per share for selling the $3 puts, a $0.20/share credit in favor of you. It is a rather sophisticated option strategy not many people understand and is certainly difficult to explain here. Just an idea to share with you in case you do understand the option techniques.