The shares of Keryx Pharmaceuticals (KERX) almost tripled in price in the final four days of January, following the January 28th early-morning release of top-line data from a clinical trial assessing its lead (and only) new-drug prospect Zerenex in the treatment of patients with ESRD (end-stage renal disease) on dialysis; the price reached a high of $9.98 on the 31st, compared with the stock's 52-week low of $1.65 last April. Wall Street's overwhelming reaction was in response to potential game-changing results that confirmed the iron-based product to not only be a safe and viable, much-needed alternative to the phosphate binders already on the market but also offered the unique, differentiating commercial advantage of reducing the need for intravenous iron and expensive anemia-treating drugs like Amgen's (AMGN) Epogen.
KERX shares have retreated considerably from the January 31st highs, however, pressured, in part, by a report issued by an independent research firm IPD Analytics that questioned the company's ability to convince the Food & Drug Administration to grant Zerenex New Chemical Entity status. All in all, we think the data released in late January justified the market's reaction and believe the shares still have considerable upside potential, to be realized in the quarters and years ahead. In this report, we review the Phase III clinical study and its bottom-line implications. As well, we outline the numerous potential catalysts that could ignite additional investor interest in the stock. The price range detailed above underscore the stock's extraordinary volatility, though, and clearly dictate that it's suitable only for very aggressive investors. This category of investors would undoubtedly include those comfortable holding the shares of Sarepta Therapeutics (SRPT), which we reviewed unfavorably on April 24th.
Keryx Biopharmaceuticals Inc.
Keryx Biopharmaceuticals is developmental stage biopharmaceutical company that's focused on the acquisition, development and commercialization of medically important products for the treatment of renal disease. Following the failure last spring of Perifosine in a Phase III trial for the treatment of colon cancer, the New York City headquartered concern has just one new-drug prospect in its research and development program; Perifosine was licensed from AEterna Zentaris Inc. and returned to same after the failure. Keryx's one prospect is Zerenex (ferric citrate), an oral, ferric iron-based compound that has the capacity to bind to phosphate and form non-absorbable complexes. The product has completed a U.S.-based Phase III clinical program for the treatment of hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal disease (ESRD), conducted under a Special Protocol Assessment agreement with the FDA, and regulatory filings seeking marketing approval are expected in both the United States and Europe in the second quarter of 2013. Moreover, the company's Japanese partner, Japan Tobacco Inc. (JPAF.PK) (JTI) and its subsidiary Torii Pharmaceutical Co., Ltd. filed a New Drug Application (NDA) for marketing approval of ferric citrate in Japan for the treatment of hyperphosphatemia in patients with chronic kidney disease (both end-stage and pre-dialysis). Significantly, too, Zerenex is in Phase II development in the U.S. for the management of phosphorus and iron deficiency in anemic patients with Stage 3 to 5 non-dialysis dependent chronic kidney disease.
Keryx was incorporated in October 1998 and commenced operations in November 1999. It only has about 25 employees and has a history of losing money, with a cumulative deficit of approximately $400 million. Since-inception revenues are modest, stemming mostly from licensing and milestone payments received from JTI, $35 million thus far, including $7 million in January in conjunction with filing the NDA. Most of the expenses are for R&D, which totaled $13.7 million and $26.2 million in 2010 and 2011, respectively. R&D outlays were probably around $20 million in 2012 and they should fall further this year since the large Phase III study concluded last year. The company has a decent balance sheet, with no debt and cash reserves, bolstered by the sale of 8.2 million shares (in January) for $8.49 a share, of $87.3 million (at March 31, 2013). Following the public offering, there are approximately 81.7 million shares outstanding, giving Keryx a market capitalization of around $655 million. Zerenex was licensed in November 2005 from Panion & BF Biotech, Inc. It has cost $3.6 million to date, and the licensor is eligible to receive additional milestone payments of up to $8 million, along with royalties if the product is commercialized. The company's agreement with JTI, meantime, could still produce another $65 million in milestone payments and royalties on sales.
Like the shares of virtually all small biotechs, KERX stock is extraordinarily volatile, sporting a Beta of greater than 3.0. The stock plunged last spring following the failure of Perifosine, triggering a slew of lawsuits that have become all too common in recent years, and soared last month on the release of news concerning Zerenex. Keryx reported last night (May 7, 2013) first quarter revenues, net loss, and share net of $7.0 million, $2.3 million, and a deficit of three pennies, respectively. The results aren't particularly important, however, with the stock now being driven almost exclusively by Zerenex.
According to data from the U.S. Renal Data System, there are approximately 600,000 Americans with end-stage renal disease, and the number of ESRD patients is projected to rise in the future. The majority of these patients, over 400,000, require dialysis. Worldwide, there are approximately 2.8 million patients with ESRD, with over 2 million requiring dialysis. Hyperphosphatemia is the result of phosphate retention in patients with ESRD on dialysis and is associated with secondary hyperparathyroidism, renal osteodystrophy, soft tissue mineralization, and progressive renal failure. ESRD patients usually require treatment with phosphate-binding agents to lower and maintain serum phosphorus at acceptable levels. There are three approved phosphate-binding agents, but it's generally recognized that there is a need for an alternative, given the increasing prevalence of ESRD and the significant shortcomings with all current therapies. As is, the current worldwide market for phosphate binders to treat hyperphosphatemia is roughly $1.5 billion.
Aluminum-type phosphate binders were widely used in the past, but the systemic absorption of aluminum from these agents and the potential toxicity associated with their use no longer make them a viable long-term treatment option. Calcium-type phosphate binders are commonly used to bind dietary phosphate. They promote positive net calcium balance, however, and increase the risk of metastatic calcification in many patients, especially in those patients taking vitamin D analogs and those with adynamic bone disease. Non-calcium-based, non-absorbed phosphate binders, including sevelamer hydrochloride and sevelamer carbonate, are currently among the most prescribed phosphate binders in the United States, as they are associated with fewer coronary and aortic calcifications compared with the calcium-type binders. Sevelamer hydrochloride can cause metabolic acidosis and gastrointestinal problems, while sevelamer carbonate can affect concomitant vitamin K and vitamin D treatment. Lanthanum-type phosphate binders are another alternative. Lanthanum is a rare earth element and is minimally absorbed in the gastrointestinal tract. Lower level tissue deposition, particularly in bone and liver, has been observed in animals, and the long-term impact of the accumulation of lanthanum in these tissues is still unclear.
The leader in the phosphate binder market, with a share of more than 50%, is polymer-based Renagel/Renvela, which is made by Genzyme, a division of Sanofi (SNY), and generates annual revenues of approximately $800 million. Noncompliance is a serious problem with this treatment, however, due mainly to a high pill burden, requiring, on average, that the patient take 10 to 12 pills per day. A distant second is Shire's (SHPG) lanthanum-based Fosrenol, with annual sales at the $325 million level. Concern about lanthanum accumulation is a limiting factor, as the fact that it's a chewable, which is not a preferred means of administration in the dialysis setting. The third phosphate binder is calcium-based PhosLo, which is available generically but has to contend with the risk of hypercalcemia.
Top-line Phase III Results for Zerenex
On January 28, 2013, Keryx Biopharm announced Zerenex met both the primary endpoint and all key secondary endpoints in a Phase III long-term study as a treatment for hyperphosphatemia in end-stage renal disease patients on dialysis. In the study, the ferric citrate demonstrated a highly significant change in serum phosphorus versus placebo over the four-week efficacy assessment period. Secondarily, Zerenex increased ferritin and transferrin saturation, reducing the use of intravenous (IV) iron and erythropoiesis-stimulating agents (ESAs) versus the active control (Renvela and/or PhosLo) over the 52-week safety assessment period of the study. The study was a multicenter, randomized, open-label, safety and efficacy clinical trial in 441 ESRD patients on hemodialysis or peritoneal dialysis. Zerenex was administered using a 1 gram oral caplet formulation.
The primary efficacy endpoint of this trial was the mean change in serum phosphorus from baseline (Week 52) to end of the four-week Efficacy Assessment Period (Week 56) versus placebo in the Intent-to-Treat group. Zerenex met the primary efficacy endpoint with a highly statistically significant result (p<0.0001). During the 52-week Safety Assessment Period, the drug maintained serum phosphorus in the normal range, with highly statistically significant changes in mean serum phosphorus concentration at Weeks 12, 24, 36, 48, and 52 as compared to baseline (Day 0). Additionally, meeting a requirement of the European Medicines Agency, Zerenex successfully achieved the non-inferiority endpoint versus Renvela at Week 12 of the Safety Assessment Period in terms of change from baseline (Day 0) in serum phosphorus. As well, Zerenex met all the key secondary efficacy endpoints related to iron with statistically significant treatment differences versus the active control group, Renvela and/or PhosLo. Important, too, Zerenex showed a markedly favorable safety and tolerability profile vis-à-vis the active control group.
First, the company will probably submit a NDA with the FDA and a Marketing Authorization Application with the European Medicines Agency for Zerenex in about three months (per this morning's conference call). Second, results from the ongoing Phase II study evaluating the drug for pre-dialysis patients will likely be reported in either the third or fourth quarter of the year, possibly boosting the sales potential dramatically since the addressable patient population would essentially quadruple in size. A little further out, in the first half of 2014, would be decisions on the marketing applications by regulators in Japan, the U.S. and Europe. Other possible stock-moving catalysts in the months ahead are potential agreements with DaVita Healthcare Partners and Fresenius Medical Care, which are leading operators of dialysis clinics. Finally, given Zerenex's prospects, an extraordinary transaction would not be surprising.
The Bottom-Line Implications
Considering Zerenex's efficacy, safety, and administration advantages, versus the three main rivals in the market, as well as its unique ability to provide iron benefits, Keryx's ferric citrate has the potential to become the leading phosphate binder in the world. Indeed, since the drug's "iron benefits" could reduce the cost of treating kidney patients in the U.S. considerably - management estimates $750 million annually, just in terms of IV iron and ESA, which cost about $2.4 billion - demand from dialysis treatment providers like DaVita could ramp up rapidly; note that the estimate doesn't include savings in labor costs associated with administering the IV iron and ESA. Assuming all three marketing applications are approved by the middle of next year, we think sales could approximate $40 million in 2014 and rise to $120 million and $200 million in 2015 and 2016, respectively. All told, peak sales of at least $600 million seem feasible in the dialysis setting, and considerably higher if ultimately approved for pre-dialysis patients. These sales figures should help the company's bottom line make its initial foray into positive territory in next year's second half and support earnings per share of roughly $0.55 and $0.95 in the subsequent two years.
Assessing appropriate valuations and price targets for developmental stage biotechnology stocks is as much art as science. That said the recently released top-line data strongly suggest that Keryx has a potential large seller in its portfolio, one that could generate considerable earnings in the years ahead. As such, we think a one-year price target of $15 is reasonable, discounting a roughly 30 multiple on 2015 earnings and 15 multiple on the 2016 figure. A decision by Japanese regulators should be known by this time next year, giving us a better sense of how Zerenex might fare in the U.S. and Europe. On the flip side, any unexpected setback of any significant consequence with the product could have the shares plummeting to essentially cash value, in the $1 neighborhood.
Given the stock's substantial upside potential as well as its large downside risk, the premiums on both the call and put options are steep. The January 2015 $7 calls, for example, would cost about $3.70, with the underlying stock closing yesterday's (May 7, 2013) trading session at $7.99, while the puts with the same expiration and strike price would cost about $2.70. These steep prices make the implementation of an options-based strategy very expensive. At the same time, the various potential catalysts diminish the appeal of selling premium-generating covered calls or the initiation of vertical spreads. All in all, based on our expectation that Zerenex will be approved and KERX shares will perform very well over the next 14 months or so, we think the best way to participate in this opportunity might be to purchase the January 2015 $5 call. With a bid/ask spread of $4.10/$4.50, the option could probably be had for $4.40, equating into time premium of $1.41 and making the break-even price $9.40. Purchasing the call option would reduce the capital at risk by some $3.59 a share, while providing almost the same upside potential.
Keryx stock's volatility and the company's dependence on one product clearly underscore the fact that this small company is unsuitable for conservative investors. Patent-related uncertainties add to the risk. These types of concerns are almost commonplace in the biotech space, however, and numerous parties, including PropThink, have come out in robust refutation of the IPD questions. As well, one would expect JTI and Keryx to have conducted substantial due diligence before committing tens of millions of dollars into the drug's development. The company's chief executive Ron Bentsur also has made spirited and convincing arguments for its IP position in recent months; exclusivity is expected through 2024. All things considered, the shares look attractive on a risk-adjusted basis.