Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to          

Commission File Number 001-33213

AFFYMAX, INC.

(Exact name of registrant as specified in its charter)

4001 Miranda Avenue
Palo Alto, CA 94304
(650) 812-8700

(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

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 o  No o

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.

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

As of July 31, 2010, 24,369,977 shares of the registrant’s common stock, $0.001 par value, were outstanding.

Table of Contents

AFFYMAX, INC

TABLE OF CONTENTS

2

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

AFFYMAX, INC.

CONDENSED BALANCE SHEETS

(in thousands)

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

3

Table of Contents

AFFYMAX, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

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

4

Table of Contents

AFFYMAX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

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

5

Table of Contents

AFFYMAX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.                 The Company

Affymax, Inc., a Delaware corporation, was incorporated on July 20, 2001. We are a biopharmaceutical company committed to developing novel drugs to improve the treatment of serious and often life-threatening conditions. Our product candidate, Hematide TM/peginesatide (USAN or nonproprietary name), is a synthetic peptide-based erythropoiesis stimulating agent, or ESA, designed to stimulate production of red blood cells. As previously reported in our Current Report on Form 8-K dated June 21, 2010, we recently announced preliminary top-line results from the Hematide Phase 3 clinical program for the treatment of patients with anemia associated with chronic renal failure.

2.                 Summary of Significant Accounting Policies

Basis of Presentation

Our accompanying condensed financial statements have been prepared following the requirements of the Securities and Exchange Commission, or SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by United States or U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted. The condensed financial statements are unaudited and reflect all adjustments, consisting of only normal recurring adjustments, which in the opinion of management, are necessary to fairly state the financial position at, and the results of operations and cash flows for, the interim periods presented.  In February 2010, the Financial Accounting Standards Board, or FASB, amended certain recognition and disclosure requirements for events that occur after the balance sheet date but before financial statements are issued.  We have evaluated subsequent events through the date the financial statements were issued and filed with the SEC.  The financial information included herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009, which includes our audited financial statements and the notes thereto.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in the condensed financial statements and accompanying notes may not be indicative of the results for the full year or any future period.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) plus the change in unrealized gains and losses on investments. At each balance sheet date presented, our accumulated other comprehensive income (loss) consists solely of unrealized gains and losses on investments. Comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 are as follows (in thousands):

6

Table of Contents

Concentration of Risk and Uncertainties

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents and investments. We deposit excess cash in accounts with three major financial institutions in the U.S. Deposits in these banks may exceed the amount of insurance provided on such deposits. We have not experienced any realized losses on our deposits of cash and cash equivalents. Although our guideline for investment of excess cash is designed to maintain safety and liquidity through our policies on diversification and investment maturity, as of June 30, 2010, we held fair value of investments in auction rate securities, or ARS, totaling $12.3 million that have failed in auctions and all were subsequently sold in July 2010.

At June 30, 2010, we had an accumulated deficit of $365.4 million. Due to the recognition of revenues from milestone payments from our collaboration with Takeda Pharmaceutical Company Limited, or Takeda, we were profitable in the three and six months ended June 30, 2010.  Prior to the three and six month periods ended June 30, 2010, we had incurred net losses since our inception. We continue to expect to incur substantial additional operating losses for the next several years and will need to obtain additional financing in order to complete the development and commercialization of Hematide. In addition, we have generated no revenue from product sales to date and we have funded our operations to date principally from our collaboration agreements with Takeda and the sale of equity securities. There can be no assurance that such financing will be available or will be at terms acceptable to us.

Our accounts receivable balance contains receivables in connection with our two separate collaboration agreements, or the Arrangement, with Takeda.  We have not experienced any credit losses from our Arrangement with Takeda and none are expected. We do not require collateral on our receivable.

We are currently developing our first product offering, Hematide, and have no products that have received regulatory approval. Hematide will require approval from the U.S. Food and Drug Administration, or FDA, and/or foreign regulatory agencies prior to commercial sales. There can be no assurance that Hematide will receive the necessary approvals. If we are denied such approvals or such approvals are delayed, it would have a material adverse effect on us. To achieve profitable operations, we must successfully develop, test, manufacture and commercialize Hematide. There can be no assurance that Hematide can be developed successfully or manufactured at an acceptable cost and with appropriate performance characteristics, or that Hematide will be successfully commercialized. These factors could have a material adverse effect on our future financial results.

Further, some of our suppliers and manufacturing arrangements, including the provision of bulk poly(ethylene) glycol reagent for the manufacture of Hematide from Nektar Therapeutics AL, Corporation are currently single-sourced, leaving us at greater risk of supply interruptions and potential delays.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update, or ASU, No. 2009-13, multiple deliverable revenue arrangements. This update provides amendments to the criteria in ASC Topic 605, “Revenue Recognition, “ for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on vendor-specific objective evidence, or VSOE, if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. ASU No. 2009-13 also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently assessing the potential impact that the adoption of ASU No. 2009-13 will have on our financial statements.

In April 2010, the FASB issued ASU No. 2010-17, revenue recognition — milestone method (Topic 605), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.  However, the FASB clarified that, even if the requirements in ASU No. 2010-17 are met, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. ASU No. 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  Early adoption is permitted.

7

Table of Contents

We are currently assessing the potential impact that the adoption of ASU No. 2010-17 will have on our financial statements.

Investments

Investments are classified as available-for-sale and are carried at their fair market value based upon quoted market prices for these or similar instruments at the balance sheet date. Unrealized gains and losses are reported as a separate component of stockholders’ equity until realized. The amortized cost of these securities is adjusted for amortization of premiums and accretions of discounts to maturity. Such amortization as well as realized gains and losses are included in interest income. We assess our investments for potential other-than-temporary impairment based on factors including the length of time and extent to which the fair value has been below our cost basis and the current financial condition of the investee.  We do not intend to sell an impaired security and it is not more likely than not that we will be required to sell the security before the recovery of its amortized cost basis. If we conclude that an other-than-temporary impairment exists, we recognize an impairment charge to reduce the investment to fair value and record the related charge as a reduction of interest to other income (expense), net.

Revenue Recognition

We recognize revenue in accordance with the authoritative guidance, revenue recognition in financial statements. When evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting as defined in the authoritative guidance for revenue arrangements with multiple deliverables. Application of this guidance requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

We evaluated the multiple elements under the combined single arrangement in accordance with the provisions of the guidance for revenue arrangements with multiple deliverables. We recognize revenue using the Contingency-Adjusted Performance Model, or CAPM. Under CAPM, revenue is eligible for recognition in the period the payment is earned under the Arrangement including amounts that are either received or due from Takeda. Revenue initially recognized is based on the percentage of time elapsed from inception of the Arrangement in June 2006 to the period in which the payment is earned in relation to the total projected development period.  The remaining portion of the payment is then recognized on a straight-line basis over the remaining estimated duration of the development period of the Arrangement.  Payments during the development period include amounts due for upfront license fees, milestone payments earned, purchases of active pharmaceutical ingredient, or API, and reimbursement of development and commercial expenses.  We had previously estimated the development period to end on January 1, 2011. Based on the announcement on June 21, 2010 of our top-line results from our Phase 3 clinical program, we re-evaluated our development period and determined that the development period is now estimated to end in the first half of 2011.  The extension of the development period will result in the remaining deferred collaboration revenue to be recognized over a longer period. The change in estimate resulted in a decrease to revenue recognized by $961,000 or $0.04 per share for the three and six months ended June 30, 2010. During the development period, we expect collaboration revenue to be directly affected by milestone payments and expenses that are eligible for reimbursement from Takeda under the Arrangement in future periods. Included in the reimbursable expense is the cost of API that we manufacture and supply to Takeda during the development period, which we will also supply during the commercialization period. Further changes in the estimated term of the development period could materially affect the amount of collaboration revenue recognized in future periods.

We have recognized $54.3 million and $26.9 million of collaboration revenue during the three months ended June 30, 2010 and 2009, respectively, and $89.0 million and $52.8 million for the six months ended June 30, 2010 and 2009, respectively.  As of June 30, 2010, the amount receivable from Takeda was $10.3 million.

Clinical Trial Expense and Accruals

We record expense for estimated clinical study external costs, which are a significant component of research and development, or R&D, expense. These clinical trial costs were $10.1 million and $23.8 million during the three months ended June 30, 2010 and 2009, respectively, and $23.1 million and $48.2 million during the six months

8

Table of Contents

ended June 30, 2010 and 2009, respectively. Clinical studies are administered by third-party contract research organizations, or CROs. CROs typically perform most of the total start-up activities for the trials, including document preparation, site identification, pre-study visits, training as well as on-going program management. For the Phase 3 studies, which represent the vast majority of the clinical trial expense, the expense recorded is based on reporting received from CROs and internal analyses. We accrue costs for work performed by CROs based on the achievement of contracted activities during the period. Expense for investigator fees, which include patient costs, is based on internal estimates of activities using patient enrollment and contractual or estimated rates. For the Phase 2 studies, the expense is activities based such as patient monitoring as reported by the CROs and achievement of milestones. Other costs such as testing and drug materials are expensed as incurred. For all studies, CRO reporting is reviewed by us for appropriateness.

There is a significant degree of estimation involved in quantifying the expense associated with the clinical trial activity. The complexity and magnitude of the activities and, as such, the expense can be significant and subject to frequent change, especially for our Phase 3 trials, which may require negotiation or amendment of our CRO contracts from time to time. The activities in our trials are performed globally, in many sites and countries, involving numerous CROs and third parties. If we do not receive complete and accurate information from the CRO or third parties on a timely basis or correctly estimate the outcome of negotiations or activity levels, we may have to record adjustments, which could potentially impact R&D expense in subsequent periods. During the three months ended March 31, 2010, we concluded negotiations and finalized amendments for activities completed in 2009 resulting in adjustments to estimates recorded in our expense for the year ended December 31, 2009. These changes in estimate decreased expense by $553,000 or $0.02 per share in the three months ended March 31, 2010. Additional changes in estimate may result as the reconciliation activities are completed on our clinical trials.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period less the weighted-average unvested shares subject to repurchase, without consideration for potential common shares.

Diluted net income (loss) per share is computed similarly to basic net income (loss) per share, except that the denominator is increased to include all dilutive potential common shares using the treasury stock method.  For purposes of this calculation, options to purchase common stock, common stock issuable pursuant to the 2006 Employee Stock Purchase Plan, restricted stock units and warrants are considered to be potential common shares and are only included in the calculation of diluted income (loss) per share when their effect is dilutive. The computations for basic and diluted net income (loss) per share were as follows (in thousands):

9

Table of Contents

The following were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have an antidilutive effect (in thousands):

3.                 Stock-Based Compensation

We recognized stock-based compensation expense related to employee and director stock options, restricted stock units and stock purchase rights of $2.9 million and $2.3 million for the three months ended June 30, 2010 and 2009, respectively, and $5.5 million and $4.8 million for the six months ended June 30, 2010 and 2009, respectively, under the authoritative guidance for share-based payments.  As of June 30, 2010, unrecognized compensation costs related to employee and director stock options and restricted stock units totaled $21.2 million. The cost is expected to be recognized over a weighted-average amortization period of 1.87 years.

4.                 Investments and Fair Value Measurements

The following is a summary of our available-for-sale marketable securities (in thousands):

10

Table of Contents

Fair Value Measurements

We measure certain financial assets at fair value on a recurring basis, including cash equivalents and available for sale securities.  The fair value of these assets was determined based on a three-tier hierarchy under the authoritative guidance for fair value measurements and disclosures that prioritizes the inputs used in measuring fair value as follows:

·                  Level 1 — observable inputs such as quoted prices in active markets.

·                  Level 2 — inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

·                  Level 3 — unobservable inputs in which there is little or no market data, which would require us to develop our own assumptions.

Effective January 2010, we adopted the provisions of the authoritative guidance for improving fair value disclosures. Our cash equivalents and investments, other than ARS, are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.  The types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities.  The valuation technique we used to measure fair value of our Level 1 money market securities is a market approach, using prices and other relevant information generated by market transactions involving identical securities.  The types of investments that are generally classified within Level 2 of the fair value hierarchy include certificates of deposits and U.S. government securities.  The valuation technique we used to measure fair value of our Level 2 investments is a market approach, which we review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical investments was not available, we used market pricing and other observable market inputs for similar investments obtained from various third party data providers. These inputs represent quoted prices for similar investments in active markets or these inputs have been derived from observable market data. Our investments in ARS and ARS Rights are classified within Level 3 of the fair value hierarchy because of the lack of observable inputs.  The valuation technique we used to measure fair value of our Level 3 ARS and UBS AG of Series C-2 ARS Rights, or ARS Rights, is an income approach, which we used a discounted cash flow analysis.  As of June 30, 2010, there were no transfers in and out between the fair value hierarchy Level 1, Level 2 and Level 3 and there were no changes in our valuation technique.  Our policy is to recognize transfers into or out of Level 3 classifications as of the actual date of the event or change in circumstances that caused the transfer.

ARS are structured to provide liquidity by an auction process that resets the applicable interest rate at predetermined calendar intervals, usually every 28 days but have stated or contractual maturities that are generally greater than one year.  Through mid-February 2008, every auction reset date of the ARS held by us was successful.  In mid-February, overall market liquidity concerns resulted in the failure of a majority of the auctions in the ARS

11

Table of Contents

markets, which continued until the current date. The majority of the ARS held by us continue to pay interest, most recently in a range of 1-3%, though certain student loan issuances are temporarily at a zero coupon rate due to the particular interest provisions of the issuances. The ARS held by us are rated A through AAA by a major credit rating agency. Our sales or redemptions of ARS through June 30, 2010 have not resulted in any loss of principal, except for a $62,000 loss of par value upon acceptance of a tender offer below market.

As of June 30, 2010, our $15.0 million of par value of ARS were comprised of $12.4 million of municipal issuances that are collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program and a $2.6 million closed end preferred issuance, all of which were subsequently sold in July 2010. We exercised our ARS Rights on June 30, 2010 which resulted in repurchase by UBS of the ARS at par of $10.4 million on July 1, 2010.  In July, we also sold our long-term ARS securities with a par value of $4.6 million for $3.7 million which resulted in a loss of $158,000 of fair value upon acceptance of a tender offer below market. We currently do not maintain any ARS in our investment portfolio.

As a result of the continued auction market failures, quoted prices in active markets are not available. Due to the lack of observable inputs, we determined the fair value of our ARS at June 30, 2010 using a discounted cash flow analysis. The analysis considers, among other things, the amount and timing of coupon payments, contractual terms, underlying collateralization and credit risk. In addition, we included in our analysis an illiquidity factor to estimate the discount necessary to sell a security for which there is no active market. The analysis considers that issuers have continued to meet interest payment obligations and are expected to continue to do so at levels consistent with issuer’s credit risk. The analysis is based on dynamic market conditions and changes in our assumptions could lead to a significant change in determined value. Our analysis resulted in no net decrease in fair value of ARS for the six months ended June 30, 2010.  For the six months ended June 30, 2009, our analysis resulted in a net decrease in fair value of ARS totaling $160,000 that was deemed to be other-than-temporary and was recorded as impairment charges to other income (expense) net.  Upon sale or redemption, the other-than-impairment charges were reversed to the extent that the proceeds from the sale or redemption exceeded the fair value of the ARS. We reversed other-than-temporary impairment charges of $695,000 and $27,000 for the six months ended June 30, 2010 and 2009, respectively.

As a result of a settlement between various regulatory agencies, including the SEC, and UBS entities relating to sales and marketing practices of ARS, in October 2008, we received an offer from ARS Rights in connection with the $10.4 million of par value of ARS as of June 30, 2010 that were purchased through UBS.  In November 2008, we accepted the terms of the ARS Rights and delivered the required legal release of claims against the UBS entities. These ARS Rights give us the option to require UBS to repurchase, at par, the ARS beginning on June 30, 2010, which we exercised on June 30, 2010 as described above.  In connection with the ARS Rights, UBS also offered, through UBS Financial Services, Inc., an affiliate of UBS AG, a loan facility that allows draws of up to 75% of the stated value of our ARS portfolio, as determined by UBS Financial Services, Inc.  In December 2009, we obtained a loan of approximately $9.2 million, which was secured by the ARS and ARS Rights as collateral.  See Note 5 to our Condensed Financial Statements — UBS Loan.  As of June 30, 2010, the balance of the loan was $5.4 million and classified as short-term debt, which we repaid as part of our ARS Rights cash settlement on July 1, 2010.

We determined that the ARS Rights do not meet the definition of a derivative security as described in the authoritative guidance for accounting for derivative instruments and hedging activities because the ARS Rights are non-transferrable, and we must tender the related ARS to receive the cash settlement.  Therefore, we elected to measure the ARS Rights separately under the authoritative guidance pertaining to the fair value option for financial assets and financial liabilities in order to partially offset the changes in the fair value of the ARS to the ARS Rights. We did not elect to adopt the guidance for the fair value option for financial assets and financial liabilities to measure financial instruments, except for the ARS Rights. We determined the fair value of our ARS Rights using a discounted cash flow analysis based on, among other things, the timing and likelihood of the recovery of the par value of the ARS from UBS. Our analysis resulted in no net increase in the fair value of our ARS Rights for the six months ended June 30, 2010.  For the six months ended June 30, 2009, our analysis resulted in a net increase in the fair value of our ARS Rights of $57,000 and was recorded as an other current asset with a corresponding credit to other income (expense), net. Upon sale or redemption of the related ARS, the fair value of our ARS Rights was decreased by $604,000 and $8,000 for the six months ended June 30, 2010 and 2009, respectively, and was recorded as a charge to other income (expense), net.

12

Table of Contents

The following table presents our investments measured at fair value on a recurring basis classified by the fair value measurements and disclosures valuation hierarchy (in thousands):

The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the six months ended June 30, 2010 and 2009 (in thousands):

13

Table of Contents

5.                 UBS Loan

In connection with the settlement with UBS AG relating to our ARS, we entered into a loan agreement with UBS Financial Services, Inc., an affiliate of UBS AG.  In December 2009, we obtained a loan of approximately $9.2 million, the full available amount, which was secured by the ARS. The loan amount was based on 75% of the fair value of the ARS as assessed by UBS at the time of the loan. This “no net cost loan” bears interest at a rate that will not exceed the average rate of interest paid on the pledged ARS such that the net interest cost to us will be zero As of June 30, 2010, the balance of the loan was $5.4 million and classified as short-term debt. As described above, we repaid the loan on July 1, 2010 as part of our ARS Rights cash settlement on July 1, 2010.

As required by UBS, we applied the net interest received in and the proceeds from the sales and redemptions of ARS to the principal of the loan.  For the three months ended June 30, 2010, we paid $29,000 of interest expense associated with the loan and received $42,000 in interest income from the collateralized ARS.  For the three months ended June 30, 2010, the net interest earned of $13,000 and $3.7 million from sales and redemptions was applied to the principal of the loan. For the six months ended June 30, 2010, we paid $54,000 of interest expense associated with the loan and received $143,000 in interest income from the collateralized ARS. For the six months ended June 30, 2010, the net interest earned of $89,000 and $3.7 million from sales and redemptions was applied to the principal of the loan. The carrying amount of the loan with UBS approximates its fair value due to the loan’s short-term nature.

6.                 Contingencies

We have initiated binding arbitration and related litigation with Johnson & Johnson, Ortho-McNeil Pharmaceutical, Inc., Ortho Pharmaceutical Corporation, The R.W. Johnson Pharmaceutical Research Institute and Johnson & Johnson Pharmaceutical Research and Development, L.L.C., or, collectively, J&J, over ownership of intellectual property related to certain erythropoietin receptor, or EPO-R, agonists (ESA compounds capable of binding to and activating the EPO-R). This intellectual property is the subject of a number of U.S. and international patents and patent applications assigned to us and/or J&J, including a U.S. patent currently assigned to J&J, several U.S. patents currently assigned to us and a European patent application currently assigned to J&J that may issue in the near future and relates to specified ESA peptide compounds (“J&J’s European Patent Application”).  In this section, we refer to the patents and patent applications subject to the arbitration collectively as the “intellectual property in dispute.” We believe that we are the sole owner or co-owner of the intellectual property in dispute, including J&J’s European Patent Application.  J&J, on the other hand, alleges that they are the sole owner or co-owner of the intellectual property in dispute, including several U.S. patents on which we are currently named as sole owner that relate to specified ESA peptide compounds.

In June 2004, we filed a civil complaint in the Munich Regional Court in the Federal Republic of Germany against J&J alleging that we are an owner or co-owner of J&J’s European Patent Application and other related technology.  In October 2005, J&J filed its response to our complaint, denying our claims of inventorship and ownership. In April 2006, we requested the court to dismiss the complaint so that the issues it raised could be resolved pursuant to the arbitration proceeding described below. The court has done so.

In September 2004, we filed a civil complaint in the U.S. District Court for the Northern District of Illinois, or the Illinois case, against J&J alleging claims for correction of inventorship and ownership of the above-referenced patents and patent applications assigned to J&J, for corresponding declaratory and injunctive relief, for breach of contract, and for unjust enrichment and constructive trust. The complaint alleges that the Affymax Research Institute scientists are sole or co-inventors of the intellectual property in dispute, including the above-referenced J&J patents and patent applications, and that we are the sole or co-owner of them. The complaint also alleges that J&J breached the three-year Research and Development Agreement or the R&D Agreement between Affymax N.V. and a division of Ortho Pharmaceutical Corporation, a subsidiary of J&J, by, among other things, engaging in a course of conduct designed to obtain patents for itself and to deny Affymax N.V. patents on its scientists’ inventions. The complaint

14

Table of Contents

further alleges that we have suffered damages as a result of J&J’s breaches and that J&J has been unjustly enriched through its misconduct and should be subject to the imposition of a constructive trust.

J&J denied all material claims in our complaint and, among other things, counterclaimed that its employees are the true inventors of the intellectual property in dispute and that it is therefore entitled to sole or co-ownership of the above-referenced patents and patent applications assigned solely or jointly to us. J&J also brought related claims for breach of contract, breach of fiduciary duty, unjust enrichment and constructive trust. J&J alleges, among other things, that Affymax N.V., Affymax Technologies, N.V. and Affymax Research Institute, or the Affymax Entities, filed in their own name certain patent applications allegedly claiming inventions of J&J employees without notifying or consulting with J&J, that during patent prosecution the Affymax Entities improperly removed the names of J&J employees from certain patent applications on which those employees had been identified as inventors, and that these and other alleged breaches entitle J&J to damages and waive all rights we may have had to the intellectual property in dispute.

J&J requested that the Illinois case be dismissed and the matter decided under the R&D Agreement’s arbitration provisions. In February 2006, the Illinois court entered an order that the appropriate forum for us and J&J to resolve the inventorship, ownership, breach of contract and related claims was binding arbitration under the American Arbitration Association, or AAA, rules in Illinois. The Illinois court held that the claims pending in the German court were also subject to arbitration and required us to dismiss the German complaint, which we have done. The Illinois court further stated that it will retain jurisdiction over the subject matter during the arbitration in Illinois.

In April 2006, we filed a demand for arbitration with the AAA claiming that we are the owner or co-owner of the intellectual property in dispute and alleging claims for correction of inventorship and ownership of the above-referenced patents and patent applications assigned to J&J, for corresponding declaratory and injunctive relief, for breach of contract, for unjust enrichment and constructive trust, and for breach of fiduciary duty. In May 2006, J&J filed its answer and counterclaims, substantially restating their allegations made in the U.S. and German courts. The AAA appointed a panel of arbitrators, and the arbitration has commenced.

In June 2007, J&J filed a motion to compel discovery of information relating to Hematide and then filed a substitute motion to compel.  In July 2007, we filed an opposition to J&J’s motion to compel and a motion for protective order. In September 2007, the arbitrators ruled that J&J could obtain limited discovery on Hematide, but that J&J could not obtain discovery on Hematide product formulas, sequences, laboratory notebooks containing such information, experimental results, clinical trial results and strategies, or internal business planning.  The arbitration hearing is near completion and the decision is expected in second half of 2010. The outcome of the matter is uncertain and regardless of outcome, the matter may have an adverse impact on us because of legal costs, diversion of management resources and other factors.

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.

7.                 Development and Commercialization Agreements with Takeda

In February 2006, we granted an exclusive license to Takeda for development and commercialization of Hematide in Japan. Pursuant to this agreement, Takeda paid us approximately $27 million, consisting of $17 million in upfront licensing fees and approximately $10 million for the purchase of equity. In January 2007, Takeda paid us a $10 million cash milestone payment for the completion of the first Phase 1 trial of Hematide in Japan. In March 2010, Takeda paid us a $5 million cash milestone payment for the initiation of Japan’s Phase 3 renal indication.  In addition, we are eligible to receive clinical and regulatory milestone payments of up to an aggregate of $60 million upon Takeda’s successful achievement of clinical development and regulatory milestones in Japan. Takeda is responsible for all development and commercialization costs in Japan and will purchase the API for Hematide from us. Assuming Hematide is approved and launched in Japan, we will receive a royalty from Takeda on Hematide sales in Japan.

15

Table of Contents

In June 2006, the parties expanded their collaboration to develop and commercialize Hematide worldwide, which includes the co-development and co-commercialization of Hematide in the U.S. Takeda received an exclusive license to develop and commercialize Hematide outside of the U.S. Takeda bears 70% of the third party U.S. development expenses while we are responsible for 30% of the expenses. We retain responsibility for 100% of our internal development expenses. In addition, third party expenses related to the commercialization of Hematide in the U.S. are equally shared by both parties.  Certain employee expenses related to commercialization will also be equally shared, which we expect to occur in the first half of 2011. Takeda will have primary responsibility and bear all costs for Hematide clinical development in support of regulatory approval for all territories outside the U.S. Under the June 2006 agreement, Takeda paid us an upfront license fee of $105 million.  In May 2010, Takeda paid us a $15 million milestone payment for database lock of the non-dialysis Phase 3 clinical trials and in June 2010, Takeda paid us an additional $15 million milestone payment for database lock of the dialysis Phase 3 clinical trials.  We are eligible to receive from Takeda a $10 million milestone payment upon FDA acceptance of the submission of the New Drug Application, or NDA, for the dialysis indication and an additional $50 million milestone payment upon approval by the FDA for dialysis as the first renal indication as well as $25 million milestone payments for clinical development and regulatory milestones for the dialysis indication for territories outside the U.S.  In addition to milestone payments for dialysis as the first renal indication, to the extent we pursue other indications, an aggregate of approximately $165 million of milestone payments may be payable to us by Takeda upon the successful achievement of clinical development and regulatory milestones of which $75 million relate to the non-dialysis indication as a second renal indication (including $10 million milestone payments upon FDA acceptance of the submission of NDA and $45 million of milestone payments upon approval by the FDA) and the remainder of milestones relate to oncology indications. Further, we may receive from Takeda up to an aggregate of $150 million upon the achievement of certain worldwide annual net sales milestones. We and Takeda will share equally in the net profits and losses of Hematide in the U.S., which include expenses related to the marketing and launch of Hematide. Takeda will pay us a variable royalty based on annual net sales of Hematide outside the U.S. The arrangement establishes a joint steering committee to oversee the development, regulatory approval and commercialization of Hematide.

We share responsibility with Takeda for clinical development activities required for U.S. regulatory approval of Hematide. Specifically, we have primary responsibility for Hematide’s clinical development plan and clinical trials in the dialysis and non-dialysis indications, while Takeda has primary responsibility in the chemotherapy induced anemia and anemia of cancer indications to the extent any such indication is developed. We and Takeda have agreed to suspend the development of Hematide to treat chemotherapy-induced anemia and to focus all development efforts for Hematide on the treatment of chronic renal failure anemia. We are responsible for U.S. regulatory filings in the dialysis, non-dialysis, chemotherapy induced anemia and anemia of cancer indications, including holding the NDAs for those indications. Takeda is responsible for regulatory filings outside the U.S. and the creation of a global safety database.

We are also responsible for the manufacture and supply of all quantities of API to be used in the development and commercialization of Hematide worldwide. Takeda is responsible for the fill and finish steps in the manufacture of Hematide worldwide.

The parties have agreed to jointly develop the initial commercial marketing plan for Hematide in the U.S. pursuant to which we and Takeda will divide Hematide promotional responsibilities in the U.S. We and Takeda will jointly decide on promotional responsibility for markets outside of these initial indications if any.

Under the February 2006 agreement, Takeda also obtained a right of first negotiation to any backup products for Hematide developed by us or our third-party partners. Specifically, during the first ten years of the agreement, if we or third-party partners develop a product that advances to Phase 2 clinical trials and competes with Hematide in the renal or oncology indications, we are obligated to offer to Takeda the right to develop and commercialize such product in Japan before offering the product opportunity in Japan to any other third party.

16

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2009 and our unaudited condensed financial statements for the three and six month periods ended June 30, 2010.

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements.  These forward-looking statements include statements regarding the timing, design and results of our clinical trials, drug development program and registration strategy, the continuation and success of our collaboration with Takeda, and the timing and likelihood of the commercialization of Hematide. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q under Item 1A “Risk Factors,” including risks relating to timing of and regulatory requirements for approvals, including the FDA’s interpretation of the data from the Phase 3 studies, in particular with respect to the secondary analyses in the non-dialysis patients, risks relating to the continued safety and efficacy of Hematide in clinical development, the potential for once per month dosing and room temperature stability, the timing of patient accrual in ongoing and planned clinical trials, regulatory requirements and approvals, research and development efforts, the factors affecting the commercial potential of Hematide, industry and competitive environment, controversy surrounding the class of erythropoiesis stimulating agents, reimbursement coverage, intellectual property rights and disputes, financing requirements and ability to access capital, and other matters.  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 Quarterly Report on Form 10-Q 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.

Overview

We are a biopharmaceutical company committed to developing novel drugs to improve the treatment of serious and often life-threatening conditions. Our product candidate, Hematide TM/peginesatide, is designed to treat anemia associated with chronic renal failure. Anemia is a serious condition in which blood is deficient in red blood cells and hemoglobin. It is common in patients with chronic renal failure, 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 recombinant EPO, or rEPO, is used to manage the anemia of dialysis, non-dialysis and cancer patients. According to IMS Health Incorporated, rEPO generated $6.3 billion in the United States or U.S. revenues for 2009, of which we estimate that over one-half is attributable to use of rEPO in patients with chronic renal failure, and the remainder is attributable to other indications, primarily cancer patients. Hematide is a synthetic peptide-based erythropoiesis stimulating agent, or ESA, designed to stimulate production of red blood cells. Hematide is designed to be longer acting than currently marketed ESAs in the U.S. and therefore has the potential to offer both better care for patients and reduced cost and complexity for healthcare providers.

In late June 2010, we announced preliminary top-line results from the Hematide Phase 3 clinical program for the treatment of patients with anemia associated with chronic renal failure.  Our Phase 3 clinical program included four open-label, randomized controlled clinical trials. Of these trials, two trials, called PEARL 1 and PEARL 2,

17

Table of Contents

were conducted in non-dialysis patients and designed to evaluate the safety and efficacy of Hematide compared to darbepoetin alfa to correct anemia and maintain hemoglobin in a corrected range over time. The other two trials, called EMERALD 1 and EMERALD 2, were conducted in dialysis patients and designed to evaluate the safety and efficacy of Hematide and its ability to maintain hemoglobin levels in a corrected range compared to epoetin alpha or epoetin beta when switched to Hematide. Analysis of efficacy and safety for all of the Phase 3 studies were based on assessments of non-inferiority to the comparator drugs. The primary efficacy endpoint, the mean change in hemoglobin from baseline, in each of the four Phase 3 studies met the statistical criteria for non-inferiority. In addition, Hematide met the statistical criterion for non-inferiority for the assessment of safety for the cardiovascular composite safety endpoint (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 studies.  However, some differences were observed when secondary analyses were conducted as previously described in our Current Report on Form 8-K dated June 21, 2010.

We are continuing to conduct further analysis of the PEARL and EMERALD studies which evaluated the efficacy and safety of Hematide in chronic renal failure patients with anemia. Before year end, we plan to discuss with the U.S. Food and Drug Administration, or FDA, the U.S. registration strategy for Hematide. Subject to feedback from the FDA, the plan is to pursue a New Drug Application, NDA, for treatment of anemia in dialysis patients, while continuing to evaluate the non-dialysis indication. The timeline for possible submission of the NDA will be aimed for first half of 2011, but will be finalized after the FDA meeting.

Despite meeting the primary efficacy endpoints and the CSE for Hematide, the differences observed in the Phase 3 secondary analyses present risks to our ability to obtain regulatory approval for Hematide particularly in the non-dialysis setting due to the heightened concerns surrounding safety of ESAs. Further, any negative perception of Hematide’s safety relative to other ESAs would significantly limit the likelihood of obtaining regulatory approval for Hematide. The issues arising from the Phase 3 results have caused significant delay and may continue to negatively impact the timelines for development and the likelihood, scope or conditions surrounding regulatory approval.  Any or all of these factors may significantly reduce the ultimate commercial potential of Hematide.

To date, we have not generated any product revenue. We have funded our operations primarily through the sale of equity securities, reimbursement for development expenses and active pharmaceutical ingredient, or API, production, license fees and milestone payments from collaborative partners, operating and capital lease financings, interest earned on investments and limited license fees and royalties from licensing intellectual property. Prior to the three and six month periods ended June 30, 2010, we had incurred net losses since our inception.  However, due to the recognition of revenues from milestone payments from our collaboration with Takeda Pharmaceutical Company Limited, or Takeda, we were profitable in the three and six months ended June 30, 2010 and may have profitable quarters from time to time.  We continue to expect to incur substantial and increasing losses for the next several years in order to complete the development and commercialization of Hematide. As of June 30, 2010, we had an accumulated deficit of $365.4 million.

We believe that our existing cash, cash equivalents and investments together with the interest thereon will enable us to maintain our currently planned operations for at least 12 months. However, we expect that we will need to raise additional funding to complete the development and commercialization of Hematide. Since the announcement in late June 2010, we have experienced a severe decline in our stock price, which has impaired our ability to access capital on potentially favorable terms. In contrast, our need to raise funding has only increased as the Hematide development program has suffered delays and due to the reduction of potential milestone payments from Takeda associated with the non-dialysis indication.  As we continue to analyze the data, we may experience further challenges or delays to approval of Hematide if issues arise or additional requirements are imposed based on our discussions with the FDA.

Our current view of the worldwide capital markets is that they are extremely volatile with limited accessibility, and many biotechnology companies have been limited or unsuccessful in obtaining funding in this environment.  We intend to evaluate the capital markets from time to time to determine whether to raise additional capital, in the form of equity or otherwise, depending upon market conditions relative to our need for funds at such time. Continuation of this market and the issues arising from our Phase 3 results significantly limit our ability to raise funds such that there can be no assurance we can raise the additional funds to support our continuing operations and maintain

18

Table of Contents

current development timelines, and funding may not be available to us on acceptable terms, or at all. Further, we have had to reduce our research capabilities and efforts, including the elimination of certain research programs, and even some activities related to the support of Hematide. If we are unable to raise additional funds when needed, we could be required to further delay, scale back or eliminate some or all of our development programs and other operations, which could negatively impact our ability to complete development or commercialize Hematide. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing, particularly at our recent stock trading levels, would be difficult to obtain, if accessible at all, and our current stockholders may be significantly diluted. Further, our equity facility with Azimuth Opportunity Ltd., or Azimuth, is subject to a number of conditions that limit our ability to draw against such facility as our stock price has fallen below the minimum price established under the facility. Any debt financing, if available, may involve restrictive covenants or security interests in our assets. Further, any strategic or licensing arrangements, if available, may require us to relinquish product rights that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business and operating results.

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 condensed financial statements, which have been prepared in accordance with United States or U.S. generally accepted accounting principles, or GAAP. The preparation of these condensed financial statements requires us to make estimates and assumptions 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 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.

Our critical accounting policies and the use of estimates are consistent with those noted in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Revenue

We have recognized $54.3 million and $26.9 million of collaboration revenue during the three months ended June 30, 2010 and 2009, respectively, and $89.0 million and $52.8 million for the six months ended June 30 2010 and 2009, respectively.  The increase in collaboration revenue for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 was due to the continued amortization of collaboration revenue under the Contingency-Adjusted Performance Model, or CAPM, from expense reimbursements and milestones received from Takeda in prior periods and increased recognition of payments received or due from Takeda in the current period as the estimated remaining development period continued to decrease prior to the changes in the estimated development period described below.  In March 2010, we received a $5 million cash milestone payment from Takeda for the initiation of Japan’s Phase 3 renal indication.  In May 2010, Takeda paid us a $15 million milestone payment for database lock of the Phase 3 non-dialysis clinical trials and in June 2010, Takeda paid us an additional $15 million milestone payment for database lock of the dialysis Phase 3 clinical trials. 

19

Table of Contents

We had previously estimated the development period to end on January 1, 2011. Based on the announcement on June 21, 2010 of our top-line results from our Phase 3 clinical program, we re-evaluated our development period and determined that the development period is now estimated to end in the first half of 2011.  The change in estimate resulted in a decrease to revenue recognized by $961,000 or $0.04 per share for the three and six months ended June 30, 2010.  The extension of the development period will result in the remaining deferred collaboration revenue to be recognized over a longer period.  Further changes in the estimated term of the development period could materially affect the amount of collaboration revenue recognized in future periods.  We expect collaboration revenue to be directly affected by milestone payments and expenses that are eligible for reimbursement from Takeda under the Arrangement in future periods.

Research and Development Expenses

The decrease in research and development expenses for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 was primarily due to the completion of the treatment and follow up of our Phase 3 clinical trials at the start of 2010 and we expect such expenses in 2010 to continue to remain below 2009 levels.

General and Administrative Expenses

The decrease in general and administrative expenses for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 was primarily due to lower legal fees.  The increase in general and administrative expenses for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 was due to higher external commercial expenses. We expect to incur increasing general and administrative expenses in future periods to support our preparation for the NDA for Hematide and expansion of commercial capabilities.

Interest Income (Expense), Net

The decrease in interest income, net, was due primarily to lower interest rates during the three and six months ended June 30, 2010 compared to the same periods in 2009.

20

Table of Contents

Other Income (Expense), Net