By Jake King
Keryx Biopharmaceuticals' (NASDAQ:KERX) CEO, Ron Bentsur, spent much of the company's 4Q/YE12 earnings conference call reviewing patents, pending patents, and potential exclusivity designations for Zerenex, the company's late-stage phosphate-binder for dialysis patients (read more on Zerenex). While the Phase III data for Zerenex were significantly better than expected, and the stock soared over 200% on the results (PropThink has been behind the stock since mid-2012), KERX has fallen off of its recent highs due to a belief that U.S. patent protection is insufficient. In other words, because of its intellectual property (IP) position, some investors believe that Keryx may not be able to affect a significant marketing partnership for the drug or an outright sale of the company.
Interestingly, on its earnings call, KERX did note that it is having discussions with pharmaceutical companies about potential strategic deals, indicating that there is interest in Zerenex and its market potential from drug companies. It appears that the industry interest is there, but Zerenex's IP position certainly remains a key issue for investors, standing between the stock's current $7 range and its prior highs of nearly $10 a share. In fact, TheStreet.com Wednesday morning highlighted a short-seller's rebuttal of Keryx's argument, raising the specter of this issue. We won't do any rebutting of KERX's arguments or the short-seller's comments, but both bull and bear arguments have valid strengths and weaknesses. Most importantly, there are an array of points to argue, which in our view, favors Keryx; the company most likely needs to win on just one of its points to put the Zerenex IP issues to bed. As Bentsur pointed out in his comments, if the 2024 patents hold up (dissolution and surface area formulation patents), these two patents could keep generics at bay long enough for Zerenex U.S. exclusivity to be attractive to strategic partners. As we've stated in our prior analysis of Zerenex's IP position (see here), generics would have to get around both of these patents and prove that their own novel formulation achieves the same phosphate-binding, IV iron-sparing, and ESA-sparing benefits that Zerenex produces. Not an easy trick, and one that most generic companies are likely to avoid.
EU and Japan opportunities alone are worth $5.60; little risk for the U.S. and CKD opportunities. For investors seeking a base valuation for KERX, the company's Japanese partnership is worth roughly $1.00 a share, and based on our models, estimated Zerenex sales in the EU (10 or 11 years of exclusivity) are worth $4.60 a share; we forecasted Zerenex revenue to Keryx from Japan and the EU in PropThink's prior report. Our value for the EU opportunity assumes a 4x Price/Sales multiple on peak revenue in Europe estimated at $92.7M. We estimate value for Zerenex in the U.S. at $7.00 a share, and the chance for this oral iron supplement to be used in the pre-dialysis (CKD) population could lead to a valuation that is multiples higher than the dialysis (ESRD) market. It's important to note that data from Jt Torii on its Japanese CKD trial will be out within the next several months. The data will offer clarity on Zerenex's performance in CKD patients, but given that the company filed for this indication in Japan, we expect the data is positive. As a result, we see the opportunity for KERX as significantly skewed to the upside.
As the question over Zerenex's U.S. IP position rages on, investors should be aware that KERX has significant upside from current levels, limited downside, and that comfort in the U.S. patent position could send the shares back to recent highs. Apparently, the pharmaceutical companies interested in Zerenex have some level of comfort in the asset, as, according to the company, they remain at the negotiating table following their own due diligence.
Highlights from KERX's conference call and the company's arguments that Zerenex IP is strong.
- Keryx believes that Zerenex is strongly protected in the market through 2024 based on issued API (active pharmaceutical ingredient), surface area, and intrinsic dissolution patents.
- The company refuted that OTC ferric citrate is a threat to Zerenex sales based on the concentration of iron in its formulation. According to KERX, there are 210mg of ferric iron in the 1g Zerenex tablet and 280mg ferric iron in the 1.3g tablet. The OTC version is a 25mg capsule, thus necessitating 8-11 capsules to equal 1 Zerenex tablet (Note that up to 12 grams of Zerenex are needed per patient per day).
- Keryx referenced its pending formulation patent (to protect Zerenex through 2029), which according to the company has already had an office action. KERX believes this patent will be issued.
- The company noted that standard bio-equivalency and PK assays do not apply to phosphate binders (blood levels irrelevant as the drug works in the intestinal tract). The company cited vancomycin as a key example of the difficulty in gaining generic approval for a product with these kinds of challenges.
- In discussing a New Chemical Entity (NCE) designation, KERX cited Ferrlecit as a comparator, an IV iron ferric gluconate compound that was able to obtain NCE when there were already two ferric dextran IV iron formulations approved. Bentsur stated, "...the sponsor was able to prove to the FDA from an inorganic chemistry perspective that Ferrlecit's physiochemical properties, mainly its high molecular weight complex structure, were critical for its improved activity as an IV iron formulation compared to the other IV iron compounds...If only ferric was the active moiety in our ferric citrate complex, how come no other oral ferric compound, or even more specifically ferric citrate compound, has ever demonstrated the phosphate binding or iron storage increases that we have?"
- With regard to the potential for patent term extension (PTE), Keryx addressed the bear argument that ferric ammonium citrate could be an impediment to Zerenex obtaining PTE. The company believes that ferric ammonium citrate is altogether a different salt and complex molecule with a different USP classification: "Its activity as a phosphate binder has never been clinically proven, and arguably, it would have a very different activity profile." Keryx noted that ferric ammonium citrate would likely cause metabolic acidosis due to the ammonium component. Further, one of the impurity tests for making ferric ammonium citrate is the absence of ferric citrate.
- KERX addressed older ferric citrate filings, as detractors have raised this issue as another possible hurdle to PTE. The company cited the 1962 Kefauver Harris Amendments, which required efficacy studies to support approval of drugs from that point forward. According to Keryx's CEO, all four older ferric citrate filings were pulled from the market on that date, meaning no ferric citrate approval appears after that date.
Again, Adam Feuerstein's (TheStreet.com) article is worth reading for a look at the alternative thesis. Overall, we like the risk/reward in KERX, with downside support provided by Zerenex's EU and Japanese opportunities.
Disclosure: I am long KERX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.