By Jake King
On Friday, Feb. 1, a report from research firm IPD Analytics took nearly 22% out of Keryx Biopharmaceuticals (KERX) by questioning the novelty and intellectual property (IP) position on Zerenex, the company's primary value driver, which just released stellar Phase III clinical trial results (see prior report). Rising nearly 250% after the impressive Phase III results were announced, KERX had some vulnerability at nearly $10 a share, and the IPD report was well-timed to remove value from the stock. IPD Analytics is typically known by professional investors as a provider of high quality analysis. However, points made in the KERX report are not necessarily solid, in our view, and additional IP that could be generated from the recent Phase III clinical results may render the report irrelevant. The report created doubt about KERX's ability to obtain Patent-Term Extension (PTE) for a key Zerenex patent and NCE (new chemical entity) status for the drug. Also, the report questioned the viability of other patents to fend off generic competition in the longer term.
Based on our initial analysis of these three issues, we believe that: 1) KERX has a high probability of obtaining PTE for Zerenex's base patent (the '706 patent), 2) other patents also have a high probability of protecting the product through at least 2024, and 3) the company does have a chance at NCE status (although not as high probability as the other protections). This report focuses on the ability of KERX to obtain PTE for the '706 patent, and our conversations with regulatory experts and chemists have convinced us that the company will be able to obtain a patent extension. Hence, KERX should recover its losses from Feb. 1. Additionally, we are a bit surprised that the IPD report did not even mention the prospect of new patents on the surprisingly strong Phase III results that the company just generated with Zerenex, which could protect the drug beyond 2030. We believe that the results of the Phase III trial were quite unexpected and novel, and that the company has a major opportunity to wrap long-term IP around Zerenex based on these data.
We still believe KERX could trade into the low to mid-teens, and now investors have a chance to step in at a great price in front of the realization that the IPD report was informative but contained incomplete analysis. There is now significant indication of the market's view of Zerenex's value, with the company raising approximately $70 million at $8.49 a share and the stock trading up 17% right after the capital raise was complete. In fact, our market sources tell us that there was actually demand for the company to raise hundreds of millions of dollars on the deal, suggesting significant pent-up demand for KERX shares. For those who missed the first KERX trade on the Phase III Zerenex results, the pullback from the IPD report comes as a blessing. Expect the shares to recover from Friday's loss rapidly, as much of the analysis in the IPD report is refuted.
PTE likely the first item to be refuted and to send KERX higher. From what we are told, the IPD report acknowledges the ability of Keryx's '706 patent (U.S. Patent No. 5,753,706) to firmly block generic competition, but also notes that this patent expires in 2017. IPD calls into question KERX's ability to obtain PTE for the '706 patent. Due to this assertion in the IPD report, much work is currently being done by investors and chemistry/regulatory experts to determine whether or not ferric citrate (the active ingredient in Zerenex) is a salt of ferric ammonium citrate (the active ingredient in a previously approved product, Ferriseltz). We note that Ferriseltz, when it was on the market in the U.S., was used as a contrast imaging agent rather than a phosphate binder or as a remedy for anemia in patients with kidney disease like Zerenex.
Nevertheless, if the two compounds are found to be salts of one another, then the '706 patent is more likely to expire in 2017 as IPD asserts. However, if the two compounds are found to be distinct, which we believe is the case, then a PTE is expected to be granted and Zerenex will remain protected by the '706 patent through 2022. Chemistry and regulatory experts that we have spoken with were confident that ferric citrate (Zerenex) and ferric ammonium citrate (Ferriseltz) are two distinct compounds, and not related salts for the following reasons:
- Ferric citrate is not a "salt" of ferric ammonium citrate as you cannot make ferric ammonium citrate simply by combining ferric citrate and ammonia, nor can you mix ferric citrate and ferric ammonium citrate together to make additional salts of one or the other. These compounds will not react with each other, as ammonia is a weak acid.
- The chemical structures of the two compounds in question are different (in fact, ferric ammonium sulfate itself has two different compositions, and the structures of these compositions are "undetermined").
- Ferric ammonium citrate (i.e., Ferriseltz) is available as a highly pure substance, hence no ferric citrate is contained in the formulation. As a result, Ferriseltz likely does not contain any ferric citrate, and therefore ferric citrate has never been before the FDA.
- Ferric citrate and ferric ammonium citrate behave differently, with different dissolution characteristics and different pH results upon dissolution.
- The specific ferric and citrate components of Zerenex may each exert important effects on a patient, hence these components taken together may make up the "active ingredient" in Zerenex.
As a result, we believe that the Patent and Trade Office (PTO) is likely to see these two compounds as distinct and will grant the PTE for Zerenex. Supporting information in favor of a PTE include a completely different indication for Zerenex vs. Ferriseltz (backed by a very comprehensive clinical development program conducted for Zerenex), and that the regulatory application for Zerenex will be filed as a rigorous NDA (likely under 505(b) and includes toxicology, pre-clinical, etc.). We spoke with a regulatory expert who has significant PTE experience who noted that these additional items carry some weight in the eyes of the PTO. This expert also cited well-established case law, in which the Federal Circuit Court established that salts of the same active moiety can obtain PTE. This case precedent (see here) also supports Zerenex's chances for PTE, despite the prior FDA approval of Ferriseltz.
Confidence in PTE should send KERX shares higher; NCE is upside. Importantly, most analysts are currently modeling U.S. Zerenex patent exclusivity through 2021/2022, which indicates that KERX could trade back to the $9-plus range as investors get comfortable that PTE will be granted (Wall St. analyst price targets for KERX average ~$12). We note that the PTO does not have to see Zerenex as a NCE to grant PTE. Additionally, a pharma company seeking to acquire KERX is also unlikely to require NCE status if it can get comfortable that PTE will be granted. We expect the market to find resolution around the PTE issue in the near term as more analysts and investors complete their work on the subject. Yet, if point No. 5 in the analysis above is accepted by the FDA (ferric and citrate are both active in Zerenex), then the chance for Zerenex obtaining NCE status -- in addition to a PTE -- goes substantially higher. This is upside to the story, in our view.
Additional patents likely to protect Zerenex in the long run. We believe that the near-term focus on KERX will center on the potential for Zenerex to obtain a PTE, as this is the first step in supporting Zerenex's exclusivity in the U.S. Should investors get comfortable with Zerenex obtaining PTE status, then shares of KERX will likely continue their upward trajectory. We believe that closure on this issue will come soon given our discussions with chemists. Regardless, other questions in the IPD report refer to patents on Zerenex related to dissolution rates (U.S. Patent No. 7,767,851) and surface area size of ferric citrate (U.S. Patent No. 8,093,423) that protect the drug out to 2024 and 2026, respectively, if generic drug companies are unable to "invent around" them. Importantly, we point out that both patents are in place, so in fact a generic company would have to "invent around" both the surface area and the dissolution rate patents to replicate Zerenex without violating the company's intellectual property.
Also, the unexpected anemia benefits from the Phase III study results for Zerenex offer a significant opportunity, in our view, for the company to obtain intellectual property that could protect the drug for decades. The chance that generic manufacturers will be able to formulate a copycat of Zerenex without violating the surface area and/or the dissolution patients, as well as convincing the FDA that their formulation will have the same phosphate binding and anemia benefits as Zerenex is low. Zerenex's current and future patent protection is likely to keep generics off the market for a long period of time. Meanwhile, in Europe, where 30% of the phosphate binder market exists, KERX is likely to get the typical 10-year data exclusivity on top of its patent protection for Zerenex.
Evidence suggests PTE analyses will soon support KERX. We expect there to be much more written and debated on the Zerenex PTE issue, but at this juncture, our research concludes that KERX has a high probability of obtaining the PTE. We believe KERX shares are likely to rise as more investors and analysts arrive at the same conclusion and the issue is put to bed in the eyes of the market. As far as digging into the other patent issues and the opportunity for KERX to benefit from the robust Zerenex IP, we will save that analysis for another article. Meanwhile, we believe the IPD report gave investors a real chance to own more (or initiate a position in) KERX, as the company has multiple means to support Zerenex's long-term exclusivity in the U.S.
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