By Jake King
Following our conference call with Dr. Scott Chambers on Thursday, we're quite comfortable with the short-term and long-term patent protection on Zerenex, Keryx's (KERX) novel phosphate binder. And with the market still factoring in some uncertainty around the Zerenex patent estate, investors gaining confidence in the IP package could send shares of Keryx Biopharmaceuticals back to their late-January highs. The story, then, begins to shift from the IP overhang to the market opportunity for Zerenex as it approaches approval, and shares could break through this level on continuing news flow. Importantly, this news flow-- three key events in the next six months - is de-risked significantly given that the company has already released top-line Phase III results and that Keryx's Japanese partner has filed for regulatory approval in Japan for both the End-Stage Renal Disease (ESRD) and Chronic Kidney Disease (CKD) indications. Full data sets are to be released in the next couple of months, and importantly, major dialysis providers continue to incorporate Zerenex results into their forward strategies for managing patient care. Interestingly, we received a question on our Zerenex IP Conference Call this week from a member of DaVita's team, and in the past, DaVita (DVA) has presented pharmacoeconomic data on the potential use of Zerenex at major nephrology conferences. This article focuses on the upcoming catalysts for KERX as well as DaVita's interest in Zerenex, which indicates that the drug should have strong penetration in its first anticipated indication in the U.S. and EU - ESRD. The CKD indication provides significant upside potential to KERX, and the upcoming publication of the Japanese data for CKD is likely to convince investors and potential strategic buyers/partners of the prospects for treating pre-dialysis patients.
Existing evidence, which we'll detail below, has essentially de-risked three major events for KERX over the next two quarters, creating predictable inflection points for the stock. Namely, 1) the release of the full Phase III data set for Zerenex; 2) details from the late-stage trials in Japan that supported a regulatory filing in both End-Stage Renal Disease and Chronic Kidney Disease; and 3) results from Keryx's own Phase II trial in pre-dialysis patients with Chronic Kidney Disease. With the market familiar with the ESRD market opportunity and still pricing in some long-term patent uncertainty (our conference call provided clarity on a number of concerns), these events should take shares of KERX back to previous highs. We remain bullish on KERX in the long run, but these three key events present a compelling and de-risked short-term trading opportunity for the stock.
DaVita-Sponsored Presentations Back Zerenex Opportunity. Leading dialysis provider DaVita, as one might expect, is highly interested in the potential utility of Zerenex, and the real-time evidence is clear. DaVita actually sponsored presentations (here) at the American Society of Nephrology Kidney Week in November of 2011, and at the National Kidney Foundation's 2012 Spring Clinical Meetings (here and here) that highlighted the potential pharmacoeconomic advantages of using Zerenex based on existing clinical trial data at the time. These presentations speak to both nephrologist's behavior in the real world upon observation of improving iron parameters, and the cost savings of Zerenex's IV Iron and ESA-sparing capabilities. But it's important to point out that the savings calculated by DaVita in these presentations used KERX's earlier 4-Week Zerenex Phase III results, which understate the true anemia management and phosphate-binding benefits of the drug if used chronically. The DaVita presentations above were worked up using increases in Ferritin of 15-25% and TSAT increases of 10%, which compare to the long-term Zerenex Phase III study that resulted in a 51% increase in Ferritin and a 26% increase in TSAT levels - more than double the benefit featured in DaVita's pharmacoeconomic estimates. As such, the savings that DaVita (and potentially Fresenius (FMS) - the other leading dialysis provider) can expect is much greater than the initial DaVita calculations. We extrapolate DaVita's initial pharmacoeconomic estimates (savings of $1080 per patient/year based on the modest Zerenex 4-week trial benefit), and calculate ourselves that fully penetrated, the cost-savings for dialysis patients (400,000 in the U.S.) could be over $800M annually, which is an indication of Zerenex's potential value to the U.S. dialysis market alone. It's important to note that this does not include the value for Zerenex in international markets, nor does it take into account the potential CKD market opportunity. In fact, a member of DaVita's team asked a question on our Conference Call this week, a nice indicator that this leading dialysis treatment provider remains focused on the drug candidate. We believe DaVita's clear and open interest in Zerenex, and the drug's potential benefits for improving dialysis patient care and saving the healthcare system money, supports that there is a real market for this therapy. Our annual estimate for Zerenex's implied cost-savings in the U.S. alone exceeds the full market cap of KERX today, suggesting that this stock remains undervalued.
The Full Data Set from the Phase III ESRD Trial in June. The top-line Phase III results for Zerenex released in January were a home run for Keryx shareholders (the stock tripled with their release), but investors have yet to see a full data set and there remains some speculation about the strength of the findings and trial design. It is important to remember that Keryx ran this study under a Special Protocol Assessment (SPA), which means that the FDA agreed with the trial design an approvability with a positive outcome. In late-May/early-June, Keryx will present the full study results for its Zerenex Phase III ESRD trial at the International Society of Nephrology's World Congress of Nephrology in Hong Kong. In terms of un-expectancies, Keryx enrolled the sickest of the sick in this trial, essentially CKD patients in the final stages of disease progression, therefore we don't anticipate major inconsistencies in patient condition between the arms of the trial. Adverse events overall were relatively benign, with the Zerenex arm actually showing a 10% lower rate of serious events than the control.
Of course, the statistical significance of the findings in the Phase III ESRD trial leave little wiggle room for doubt about the clinical benefit of Zerenex. And how Keryx demonstrated reductions in the need to use IV iron and erythropoeitin stimulating agents (ESAs like Amgen's (AMGN) Epogen) was, again, agreed to by the FDA. Overall, we're not expecting any new points of controversy, and elaboration on the details of the study should strengthen the overarching case that Zerenex effectively binds phosphate while sparing IV-iron and ESA (Erythropoietin Stimulating Agent) use. Upside here will be primarily from short-covering once the full data results are released.
JT Torii's Late-Stage ESRD and CKD data coming soon and is a major catalyst. Keryx's Japanese partner JT Torii filed for the approval of Zerenex in Japan late last year, and as is standard practice in Japan, the company has not released data from the clinical trials that supported the filing. Regardless, it's critical to note that Jt Torii filed for a broad label for Zerenex, both in CKD and ESRD, thus we can reasonably assume that their late-stage studies demonstrated a strong clinical benefit and good safety for both pre-dialysis CKD and ESRD patients. Considering that Zerenex's opportunity in the anemic CKD population is 4x times the size of the ESRD opportunity, a glimpse at these data is likely the most important near-term value-driver for KERX.
Results for JT Torii's late-stage Zerenex trials are expected anytime in the next couple of months. While the Japanese company has not indicated when or where the results will be presented, both the 50TH ERA-EDTA Congress in mid-May or the World Congress of Nephrology in May/June are clear front-runners. Keryx's own CKD trial is ongoing (details below), but JT Torii filing for both indications implies that the data from their late-stage studies were favorable to both sets of patients. Late stage Zerenex results from Japan, which JT Torii will present soon, is a clear catalyst for KERX.
Keryx's Phase II CKD Results Expected in 3Q. Currently, Keryx is running a Phase II trial in 150 CKD patients not on dialysis (NCT01736397), with a primary completion date of June 2013. Allowing for 1-2 months of analysis, top-line data should be released late in the third quarter of 2013. Again, considering JT Torii's filing for a broad CKD label and Keryx's strong Phase III ESRD results, it's reasonable to assume that Zerenex works in this patient population. In September, before seeing the clear IV and ESA-sparing benefits of Zerenex, our model demonstrated that the CKD and ESRD opportunity for Zerenex could be worth $230M at peak. After seeing the strong indication of anemia benefit in the Phase III ESRD trial, however, which we believed would indicate 35% market penetration, our model appears conservative. But even sticking with a peak penetration estimate of 35%, utilizing a 4x sales multiple on the $230M market opportunity values KERX at approximately $12.35 per share. ESA and iron-sparing benefits were much greater than anyone expected, thus our expectations for market penetration could be markedly low depending on Zerenex pricing. And, with a closer look at JT Torii's data expected before Keryx's Phase II read-out, this event will be further de-risked, and the market is likely to give the company credit for a favorable result before the data are released.
Keryx's three most pertinent upcoming events are significantly de-risked in our eyes, and holding the stock over the next six months is a compelling risk/reward prospect, long-term investment opportunity aside. BlackRock, in fact, doubled down on its prior 5% stake in the company on Wednesday, suggesting that institutions have gotten more comfortable with the IP estate and the Zerenex market opportunity, and are positioning to benefit from the event-driven next two quarters.
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