Shares of Keryx Biopharmaceuticals (NASDAQ:KERX) have been on a wild ride since the company announced positive Phase III results for Zerenex™ (ferric citrate), an oral, ferric iron-based compound indicated for the treatment of hyperphosphatemia in end-stage renal disease [ESRD] patients on dialysis. Specifically, the stock shot up over 160% after the announcement, but fell a dramatic 21% last Friday on heavy volume. This dramatic rise in PPS was followed by a number of analyst upgrades, with an average target price of $12 a share. Although KERX certainly looks like a strong buy at current levels, I discuss in this article why I believe KERX is a short candidate, and the hype around Zerenex is overblown.
Despite the robust Phase III results for Zerenex, Keryx faces several challenges in terms of gaining market share in already crowded phosphate binder market, assuming it can gain FDA/EMA approval for Zerenex in the near future. Namely, the standard care for hyperphosphatemia is currently Sevelamer, marketed by Genzyme under the brand names Renagel (sevelamer hydrochloride) and Renvela (sevelamer carbonate). Sevelamer has been shown to be an effective treatment for hyperphosphatemia in patients with chronic kidney disease [CKD], with minimal side effects (bowel obstruction being the most serious). As such, Zerenex needs clear clinical advantages over Sevelamer to gain significant market share.
In addition to Sevelamer, Zerenex will also compete with Fosrenol in the phosphate binder space upon FDA/EMA approval. Fosrenol is a chewable tablet that delivers the carbonate salt of the element lanthanum, which dissolves to yield ionic lanthanum. Ionic lanthanum binds to dietary phosphate, whereby lowering serum phosphate levels. Given that Fosrenol is indicated for use in patients suffering from ESRD, this will likely be Zerenex's chief competitor in the phosphate binder space. Analysts have suggested that Zerenex has distinct competitive advantages over Fosrenol including fewer side effects, fewer daily doses, and the fact that Fosrenol is chewable. Some analysts have argued that chewable iron tablets are "undesirable", especially by older patients.
On its recent conference call discussing the top line Phase III results, Keryx made the case that Zerenex indeed has the potential to become the market leader in the phosphate binder space, and will clearly be differentiated from its competitors. Specifically, Keryx designed its Phase III long-term study to assess key secondary endpoints of Zerenex versus an active control group receiving either (Renvela® [sevelamer carbonate] and/or Phoslo® [calcium acetate]). The secondary endpoints the company believes differentiate Zerenex from the pack include increasing ferritin and transferrin saturation [TSAT], and reducing the use of intravenous (IV) iron and erythropoiesis-stimulating agents (ESAs) versus the active control group. Keryz therefore believes that Zerenex has excellent potential to overtake Sevelamer as the standard for care in the phosphate binder space, and to become the first FDA-approved oral iron supplement. Overall, the company believes the potential market value for Zerenex sits around $2.4 billion per year, once all of its potential indications are realized.
Although Keryx is painting an idyllic picture of Zerenex's future, I have serious doubts this orally administered phosphate binder will live up to the hype. Chief amongst my concerns for Zerenex's market potential is the fact that ferric citrate is already widely available through over the counter supplements. Although another Seeking Alpha article hammered this point home here, I reiterate this concern as its hard to understand why a patient would take a more expensive pill simply because its "FDA approved". At the end of the day, ferric citrate is ferric citrate, despite who manufacturers it.
Secondly, Zerenex will likely have another direct competitor in the phosphate binder market from the privately held Vifor Pharma. Vifor Pharma is developing yet another iron-based phosphate binder called PA21, and the company released top-line Phase III results last year. Although some analysts had predicted that Zerenex would be significantly more efficacious in terms of reducing serum phosphate levels, the two drugs actually show highly similar levels of efficacy. PA21 is a large pill, designed to be taken half as often as the leading therapy Sevelamer. Presently, patients have to take Sevelamer 3-4 times a day, so taking a single pill once or twice a day is a real benefit to ESRD patients. In sum, Zerenex's only real competitive advantage over other phosphate binders appears to be that it is not chewable, and I am unsure this is a major advantage.
In conclusion, Keryx has suggested that Zerenex could one day reach a $2.4 billion dollar market share, if it was approved for a wide variety of electrolyte disorders. While I am convinced Zerenex will receive FDA approval based on its Phase III results, I remain unconvinced that the drug will become the blockbuster suggested by the company, and a number of analysts. My baseline guesstimate for market share is somewhere around $200 million at its peak, which is based on the fact that Forensol currently sells about $325 million annually. Zerenex may indeed overtake Forensol, but it's hard to see how it can overcome the significant first mover and marketing advantages Sevelamer currently has over Zerenex. PA21 looks like it will also be approved by the FDA, which will further dilute the phosphate binder market. With all of these headwinds in the phosphate binder market, I think KERX is overvalued at $7 a share, and should be valued closer to $5 per share, making KERX a good short candidate. Indeed, Friday's strong reversal appears to be a harbinger of things to come for KERX shares.
Disclaimer: This article was researched in part by a biotech intern (YK) at Enhydris Private Equity, Inc.