Keryx Biopharmaceuticals (KERX) has a pending new drug application (NDA) filing for Zerenex, which treats hyperphosphatemia in patients on dialysis with end stage renal disease (ESRD). The company has indicated that it will submit its NDA to the United States Food and Drug Administration (FDA) by August of this year. Based on publicly available scientific literature and clinical data, we believe that the FDA will accept this NDA and then ultimately approve Zerenex. As outlined below, we also believe that these events will have a substantial positive impact on Keryx's stock price.
Keryx Biopharmaceuticals focuses on the acquisition, development, and commercialization of pharmaceuticals for the treatment of renal diseases. In 2010, Keryx licensed Zerenex from Taiwan-based Panion & BF Biotech. Zerenex has been developed for the treatment of hyperphosphatemia in ESRD patients on dialysis. Hyperphosphatemia, characterized by an increase in the level of phosphate in the blood, can lead to brittle bones and cause damage to the cardiovascular system. Hyperphosphatemia occurs universally in ESRD patients. These patients often require phosphate-binding agents to lower and maintain serum phosphorus at an acceptable level. In the United States, there are approximately 600,000 patients with ESRD, more than 400,000 of whom require dialysis. Worldwide, there are approximately three million patients with ESRD, with the majority of them--over two million--requiring dialysis.
Phosphate is a common additive in processed food and soda drinks. Consequently, it is difficult to control phosphate intake through diet alone. Typically, hyperphosphatemia is treated through oral administration of phosphate binders that sequester excess phosphate derived from ingested food. Relevant phosphate-binding drugs include Renagel by Genzyme/Sanofi (SNY), Fosrenol by Shire Pharmaceuticals (SHPG), and over-the-counter drugs, such as Oyster Cal and Calphron. These drugs function by reacting with phosphate anions to form insoluble precipitates that the body then secretes, thereby lowering the amount of phosphate in the blood. However, these drugs also have quite meaningful limitations. Calcium or aluminum found in phosphate binders can accumulate and cause ectopic tissue calcification. Furthermore, although Fosrenol tablets are supposed to be chewed, they present a choking hazard because patients sometimes attempt to swallow the tablets without chewing them first. In contrast to existing therapies, Zerenex is an iron-based phosphate binder. Its effective component is ferric citrate, which binds to phosphate and forms non-absorbable complexes that do not result in calcium accumulation. Additionally, Zerenex is produced as a relatively small pill that does not require chewing, thus avoiding the risk of choking.
The efficacy and safety profiles of Keryx are impressive
In early June 2013, Keryx released phase III clinical trial results for Zerenex. The trial was conducted pursuant to a special protocol assessment (SPA) with the FDA. This SPA represents a dialogue between the FDA and Keryx through which predetermined goals were set prior to the formal drug approval process. Absent any extreme circumstances, Zerenex should receive FDA approval if Keryx demonstrates that Zerenex performs as expected in one or more trials carried out in accordance with the SPA.
As outlined in the SPA, Keryx's phase III clinical program for Zerenex consisted of two studies: a relatively short-term study to assess safety and a longer-term study to more fully assess both safety and efficacy. The short-term efficacy study evaluated whether the drug has a dose-dependent effect on phosphate in the blood. The results met all of the study's primary endpoints. The longer-term trial was a three-period, multicenter, safety-and-efficacy trial designed as follows: the first segment was a 2-week washout period, the second segment was a 52-week safety assessment period, and the third segment was a 4-week efficacy assessment period. In this trial, more than 400 ESRD patients on dialysis were randomized 2:1 (Zerenex to control) during the safety assessment. During the subsequent 4-week efficacy assessment, only patients who received Zerenex during the safety assessment were again randomized 1:1 to either continue treatment with Zerenex or to switch to placebo.
All primary endpoints of the safety and efficacy studies specified in the SPA were reached. Serum phosphate levels were measured over both safety and efficacy assessment periods. Patients in Zerenex had well maintained serum phosphorus levels -- 5.1 mg/dL at baseline (week 0 of the 4-week efficacy period) and 4.9 mg/dL at the end of the 4-week efficacy period. In contrast, the placebo group experienced an almost 40% increase in mean serum phosphate -- from 5.4 mg/dL at baseline to 7.2 mg/dL at the end of the four week period (p < 0.0001).
Zerenex also produced favorable and consistent serum phosphate levels during the 52-week safety assessment period, reducing serum phosphate levels by 27%, 30%, 30%, 28%, and 28% (relative to the baseline at week 0) at weeks 12, 24, 36, 48 and 52, respectively. In terms of safety, Zerenex appears to be comparable, if not superior, to current commercial phosphate binders. The side-effect profiles of Zerenex and the active control group are similar, with the most common events being mild to moderate in severity and gastrointestinal in nature.
Zerenex's dual action is a game changer
One significant advantage of Zerenex over its competitors is that patients on Zerenex seem to require substantially less intravenous iron supplementation and erythropoietin stimulating agents (ESAs). Most patients on dialysis need to receive iron supplementation because their kidneys do not function properly. In particular, the kidneys of dialysis patients often fail to make enough erythropoietin to sustain a healthy red blood cell count. Often, iron can limit the red blood cell count of these patients. Zerenex, being an iron compound, may provide an added benefit to ESRD patients, a boon that was highlighted in Keryx's phase III clinical trial. For patients on Zerenex, the need for intravenous iron supplementation was reduced over the study's 52-week assessment period. Moreover, the use of ESAs to stimulate red blood cell production has been the subject of controversy due to its propensity to stimulate tumor growth and the formation of blood clots. Notably, Zerenex induces the production of red blood cells, moderately raising patients' red blood cell count, possibly without the carcinogenicity risk associated with ESAs. We believe that this dual function of Zerenex is a substantial improvement in the phosphate-binder field and that the FDA will view this aspect of Zerenex very favorably.
Summary of the Clinical Trials for Zerenex
Zerenex offers ESRD patients on dialysis an alternative to currently marketed drugs. Keryx's drug is quite distinct from other phosphate-lowering drugs in that it reduces such patients' reliance on intravenous iron supplementation with no overt concern of ectopic calcification. In our opinion, the most salient concerns with Zerenex are only marginally significant and the efficacy-to-safety ratio Zerenex is high. We conclude that the FDA will likely accept Keryx's NDA in the near term and then approve Zerenex in the first half of 2014.
Since January, Keryx stock has traded mostly sideways due to concerns of patent protection, lack of partnership, and market exclusivity surrounding Zerenex. In terms of financials, the company burned through $2.2M in cash last quarter. At the end that quarter, the company held $87.3M in cash and cash equivalents, suggesting that it has sufficient capital to cover costs leading up to the FDA approval date. The debt to equity ratio for Keryx is zero, as it relies exclusively on equity financing. The company has raised $74.8M via stock issuance. Further stock dilution is unlikely leading up to the FDA approval date, given the surplus of cash on hand.
Putting It All Together
Keryx stock is extremely volatile with a beta greater than three and a 52-week range between $1.68 and $9.98. On July 19, 2013, the stock price closed at $8.61 and has been driven in large part by news of Zerenex, for example additional phase III data released by the company at health conferences. We expect Keryx to submit its NDA application before the end of this year and receive favorable approval from the FDA in the first half of next year. Failure to submit the NDA by the company or unfavorable FDA review would trigger waves of selling and could bring the stock price to near its 52-week low.
Analysts on average have a price target of $13 per share for Keryx. Additionally, the price after approval would likely be higher if Keryx were acquired by a larger pharmaceutical firm looking to more fully address the ESRD market. Nevertheless, there is a slight risk that the FDA may overweight preclinical animal studies revealing gastrointestinal bleeding and liver toxicity in canine models being treated with Zerenex. Given that these concerns were not meaningfully substantiated in subsequent human trials, our view is that these results reflect nothing more than the vagaries of drug behavior in different biological species. However, if the FDA were to recommend either further clinical studies prior to approval or comprehensive post-marketing studies related to these potential safety issues, the price of Keryx stock could substantially decline.
Therefore, a straddle option -- a purchase of both long and short options with the same strike price -- may be suitable to hedge against the downside. Currently, the last price (excluding trading fees) of the $8 strike price straddle option with January expiration is around $4.00, resulting in profits below $4 or above $12. The purchase of a mixed ratio such as four to one (or higher) call/put ratio would allow downside protection but an unlimited upside to take advantage of a positive FDA approval decision and the potential take-out event.