The shares of Keryx Biopharmaceuticals (NASDAQ:KERX) have catapulted about 300% in the last 10 days or so of trading, most of it in 3 sessions starting Monday, Jan. 28. The flight up was triggered by the announcement of Phase 3 results in regard to the effectiveness of its product Zerenex™ (ferric citrate) as "a treatment for hyperphosphatemia in end-stage renal disease patients on dialysis." This should be very welcome news indeed for investors in the company.
Here I point out some facts relevant to the consideration of value in the company at its current prices. In my view, even before its meteoric rise in price, Keryx could barely pass the screen for a good investment speculation, if one was looking for small or micro cap biotech companies with several products in clinical trials, and enough funds to keep going. Two weeks ago KERX had a market cap of about 200M and just one product in clinical trials. It used to have two, when perifosine, a potential cancer drug, licensed from Aeterna Zentaris (NASDAQ:AEZS) is included. But that trial failed, bringing the stock price from around $5 to under $2 in April 2012. Currently the company's website lists only Zerenex as being in its pipeline.
Considering the large market connected with kidney dialysis and its attendant problems, one might suppose that the positive results from KERX's Phase 3 study justify the rise in valuation. Perhaps, so, but consider the following.
The company now reflects a close to 700M capitalization, it has just one product, yet to be approved by the FDA. This cap figure of 700M does not take into account that the company is seizing the opportunity to issue shares to raise capital (up to 9.5M shares at $8.49). If prices remain where they are now on the last day of January, the JP Morgan clients who subscribe to the secondary offering stand to gain a quick 10% if they (are able to) immediately flip it.
The big question is about the market potential of Zerenex. Others point out that it will still face stiff competition with existing drugs some of which will become generic soon.
The glaring fact is that Zerenex, despite its trade name, is simply Ferric citrate, which would seem to be a compound not hard to make. There is ferric citrate already on the non-pharmaceutical market. Sigma-Aldrich sells it for $173.50 a kilogram.
Furthermore, Keryx does not own Zerenex. It is licensed from Panion, Inc. The following is a relevant section from its last quarterly report (p. 15).
"Pursuant to our license for Zerenex (ferric citrate) with Panion & BF Biotech, Inc., or Panion, we have the exclusive commercial rights to a series of patent applications worldwide, excluding certain Asian-Pacific countries. These patents and patent applications cover a composition of matter and method of treatment of hyperphosphatemia in patients with ESRD (expiring in the second half of 2017, with possible patent term extension through 2020 or later), as well as a method for the manufacture of ferric citrate (expiring 2023). We have also filed a patent application relating to the formulation of ferric citrate drug product."
Not all patent application may be granted. Also, the company notes the potential limitations of patent protection in the following statements in the above document (p. 16). Some of this is standard language, but the highlighted portion in what is cited below seems particularly relevant to ferric citrate as a drug.
"The patent rights that we own or have licensed relating to our product candidates are limited in ways that may affect our ability to exclude third parties from competing against us if we obtain regulatory approval to market these product candidates. In particular: … Our composition of matter patent covering Zerenex expires in the second half of 2017 and we cannot assure you that we can obtain an extension to 2022 (the maximum term of extension under the patent term restoration program). Composition of matter patents can provide protection for pharmaceutical products to the extent that the specifically covered compositions are important. Upon expiration of our composition of matter patents for … Zerenex, competitors who obtain the requisite regulatory approval can offer products with the same composition as our products so long as the competitors do not infringe any other patents that we may hold, such as method of use patents. · Our method of use patents only protect the products when used or sold for the specified method. However, this type of patent does not limit a competitor from making and marketing a product that is identical to our product that is labeled for an indication that is outside of our patented method, or for which there is a substantial use in commerce outside our patented method."
The fact of the matter is that you can buy iron citrate from your health food store (for instance, try checking for availability on Amazon). True, "iron" does not guarantee that it is "ferric." Most of the time what is taken for iron deficiency is Fe (II), ferrous, iron. That is probably owing to the fact that most ferrous salts are better absorbed than ferric. However, there does not seem to be any law that prevents any company from selling ferric iron salts to be used as iron supplement. The chemistry of iron is such that in normal conditions it is harder to maintain the ferrous form since on exposure to the oxygen in the air they slowly turn to ferric. All of this is simply to point out that ferric citrate may not be all that hard to produce or even make available over the counter.
So, in my opinion, the hard question is estimating how much revenue Zerenex (=ferric citrate), which is under license from another company, is going to bring Keryx, when ferric citrate can potentially appear as a natural product supplement. This is all that KERX has for revenue at the moment. Does that justify a close to 700M dollar capitalization?
Another thing to note. The meteoric rise in price must be in some part due to short covering. As of January 15, 15.8% of the float was short, representing a short ratio of 7.8. When that is done, will the demand remain?
Additional disclosure: I have no business or other relation of any kind to any publicly traded firm or brokerage. I consider myself long if I own one share at the moment. I do not sell short but have a nominal position with put options on KERX.