Drug Approved, Sales Battle Begins

This drug battle will be anything but anemic. In one corner, we have Epogen, sold by entrenched leader and biotech powerhouse Amgen (NAS: AMGN) . In the other is Affymax (NAS: AFFY) , backed by Japanese giant Takeda Pharmaceutical, and their new anemia drug Omontys (peginesatide), which the Food and Drug Administration approved yesterday.

Omontys has the clear advantage for convenience. The new offering has to be taken only once a month rather than multiple times a week, as is required with Epogen. But don't expect Omontys to suddenly take over the entire dialysis-patient market. What Amgen lacks in convenience, it makes up for in more than two decades of experience selling the anemia drug and the ability to offer large dialysis centers a substantial discount. Amgen smartly locked up the largest U.S. dialysis provider, DaVita (NYS: DVA) , in an exclusive long-term contract a few months ago and has a non-exclusive contract with Fresenius Medical Care (NYS: FMS) .

Affymax is setting up Omontys as a cost-lowering alternative to Epogen for smaller dialysis centers that can't leverage their size to get substantial discounts from Amgen. Undercutting the competition -- and leaving the convenience factor as icing on the cake -- is a good move to get business quickly. It worked for Regeneron Pharmaceuticals (NAS: REGN) , which undercut Roche's Lucentis to swiftly grab a decent chunk of the macular degeneration market.

Affymax has doubled since the beginning of the year, but at this point investors seem to be taking a wait-and-see attitude. Shares are trading lower today than where it closed on Monday before the approval announcement.

With a market cap of less than $500 million, very little of the $2 billion dialysis market is built into the valuation; call it $100 million to $250 million in sales, depending on what kind of price-to-sales multiple you want to assign. If Affymax and Takeda can take a substantial portion of the market, keeping in mind that Affymax gets only half of it, there's still upside in the stock. Another double, albeit not as quickly as the last, is certainly possible.

Just remember that in David-versus-Goliath battles, David doesn't always win. Sometimes Goliath squashes the underdog.

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At the time thisarticle was published Fool contributorBrian Orelliholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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