August 30, 2016 - 2:52pm EST by
2016 2017
Price: 0.06 EPS 0 0
Shares Out. (in M): 38 P/E 0 0
Market Cap (in $M): 2 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 2 TEV/EBIT 0 0

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  • NOLs


This is an event-driven microcap idea suitable as a small buy-and-forget position for personal accounts, with the potential for very attractive returns from an eventual transaction unlocking the value of its substantial NOL tax assets.

Executive summary

Affymax (AFFY) is a nonoperating shell company with almost $1 billion in face value of federal and state NOL carryforwards, which is currently managed by Jonathan Couchman, an investor specializing in unlocking value at similar NOL shells who has a positive track record of delivering >100% returns to shareholders in two comparable previous situations. AFFY has federal and state net operating loss carryforwards of $481.0 million and $491.0 million, which begin to expire in 2028 and 2018 respectively if not utilized. The company additionally has federal research tax credit carryforwards of $9.0 million which begin to expire in 2022, and state research tax credits of $7.0 million which are carried forward indefinitely. With an outstanding share count of 37.5 million, the current $2.22 million market cap assigns negligible value to this substantial NOL.

AFFY's previous business involved the development of an PEGylated erythropoetin analog called peginesatide (brand name Omontys) as a treatment for anemia; despite a successful Phase 3, sales were eventually discontinued in 2014 due to safety concerns in a small but significant number of patients (including fatal allergic reactions in 0.02% of subjects), causing the company to prepare for an orderly liquidation and transition future responsibilities for Omontys to Takeda Pharmaceuticals, its development partner.

In late 2014, Jonathan Couchman filed a 13D disclosing a 5% stake purchased on the open market (the maximum possible before triggering a potential Section 382 ownership change), and pressing the Board to consider strategic alternatives to maximize the value of the NOL. After issuing a final cash distribution to shareholders in December 2014, AFFY adopted a tax benefit preservation plan and agreed to appoint Couchman as CEO to pursue strategic opportunities for the remaining shell.


Potential upside optionality from Omontys milestones/royalties

Although I view this as highly unlikely and assign no value to this outcome, if Takeda were able to resolve prior clinical concerns (for example by developing a screening method that could successfully identify the small number of patients at risk of allergic reaction) and eventually reintroduced Omontys, AFFY is contractually eligible to receive royalties of 13% to 17% on to net sales in the US, and ranging from 13% to 24% on ex-US net sales; in addition to potential commercial milestone payments totaling up to $180 million, which consist of the following:

  • $10 million payable upon the first commercial sale after reintroduction of OMONTYS in the U.S.
  • up to $20 million in U.S. sales-based milestones
  • up to $150 million in sales-based milestones outside of the U.S.

I assign no value to any of the above and do view this posssibility as extremely unlikely, however note that assigning even a very minimal 1% probability to a relaunch event capturing a fraction of Epogen/Procrit peak sales of $2-5 billion could still reasonably represent some significant additional value from upside optionality relative to the current $2.22MM market cap.


Management and track record

As an aside, Couchman also currently controls a similar ex-biotech NOL shell named Myrexis (MYRX) recently presented in a 10/13 writeup by ElmSt14, which is also valued at a fraction of its approximately $150 million NOL carryforwards. Previously to AFFY and MYRX, Couchman successfully executed reverse mergers at two similar microcap shell companies to unlock value for shareholders from their substantial NOL tax assets.

From 2007-2010, Couchman and colleague Michael Pearce oversaw the wind-down and sale of Golf Trust of America (GTA), a former golf course REIT with a $85 million NOL, eventually culminating in a reverse merger with Pernix Therapeutics that delievered a 150% return for GTA shareholders from the time of their involvement to the announced transaction.

Couchman subsequently served as "Chief Wind-down Officer" and CEO/CFO at Footstar, a failing discount shoe retailer with a NOL of $123 million. Following wind-down of operations and a cash distribution to shareholders, Couchman led a review of strategic alternatives which culminated in the shell company acquiring CPEX Pharmaceuticals (beneficiary of a stream of royalties from Auxilium Pharmaceuticals and Allergan) for $76.0 million financed with $64.0 million of debt and a small amount of equity, leading to a gain of 140% for FTAR shareholders from the date of its last liquidating distribution on 9/30/10 to the announced transaction - $30 million in incremental value representing approximately 25% of the $123 million NOL. If AFFY were to realize 25% of the value of its $481.0 million federal NOL only, the $120MM in incremental value would represent almost 50X the current market cap.

I cannot predict the timing or nature of an eventual transaction or the proportion of NOL value that will be realized, but at a current market cap of just over $2.2 million I do think this is a case of not needing to know a man's exact weight to know he's fat. Risks include the unknown timing of a potential transaction, and the fact that an identified reverse merger target may not have positive long-term returns (investors in GTA and Footstar/Xtelos would have been better off taking profits on announcement/execution of their respective transactions rather than continuing to hold). Small positions in AFFY and MYRX should both be attractive additions to a microcap value portfolio, with reasonable prospects of a significant value-creating transaction within the next several years.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Announcement of reverse merger to realize value for shareholders from the company's substantial NOL tax assets

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