A good starting point for biotechnology investors is to look for stocks with upcoming catalysts. These catalysts can serve as share price drivers and perhaps even attract attention from highly coveted institutional investors such as hedge funds. One stock, Keryx Biopharmaceuticals (KERX), has plenty of upcoming catalysts in addition to having a strong business that seems to offer investors plenty of potential for share price appreciation.
Keryx Biopharmaceuticals is focused on the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of renal disease. The company has had an impressive run over the past year because of its impressive trial results to date.
Keryx continues to seek to in-license or acquire additional clinical-stage drug candidates to bolster its portfolio. Keryx has established an internal in-licensing team for the assessment of prospective candidates from other companies and academic institutions. This team, coupled with the track record and experience of senior management, positions Keryx well for the identification of attractive clinical-stage compounds and future in-licensing transactions.
Stock Takes Off
As the 1 year chart below shows, shareholders in Keryx have seen their shares appreciate by more than 350% during the past year.
In addition to the impressive run over the past year, the stock appears to have a nice trading range between 8 and 9. It also appears on an uptrend over the past two months. Given the significant catalysts ahead during the second half of this year, the time may be now to invest.
The main product for Keryx is called Zerenex. Zerenex is an oral, ferric iron-based compound that has the capacity to bind to phosphate and form non-absorbable complexes. The company is attempting to use Zerenex for two different target indications.
As mentioned above, the company is using Zerenex to attempt to treat two target indications.
The first indication is for hyperphosphatemia in patients with end-stage renal disease. Hyperphosphatemia is an electrolyte disturbance in which there is an abnormally elevated level of phosphate in the blood. The Phase III trial was completed in January 2013 with extremely positive results that caused the share price to soar, as seen in the stock chart above. In the study, Zerenex met the study's primary endpoint, demonstrating a highly statistically significant change in serum phosphorus versus the placebo over the four-week Efficacy Assessment Period of the study. In addition, Zerenex met the key secondary endpoints of increasing ferritin and transferrin saturation [TSAT] and reducing the use of intravenous iron and erythropoiesis-stimulating agents.
The second indication is for the management of serum phosphorus and iron deficiency in anemic patients with Stage 3 to 5 non-dialysis dependent chronic kidney disease. The Phase II trial was started in November 2012 and is currently ongoing. Should the trial results be positive, shares of AMAG Pharmaceuticals (AMAG) are likely to see a substantial hit given that the company sells Feraheme, which an IV iron marketed to patients suffering from CKD. However, data reveals that patients will no longer need Feraheme once they are using Zerenex.
When evaluating trials and the potential share price impact of an approval, investors need to examine the market potential and the potential revenue generation.
For both of Keryx's target indications, the potential is staggering. According to data from the U.S. Renal Data system, there are approximately 600,000 patients with end-stage renal disease, and that number is projected to rise in the future. The majority of these patients, over 400,000, require dialysis. Across the world, there are approximately 2.8 million patients with end-stage renal disease, and over 2 million of them require dialysis.
For non-dialysis dependent chronic kidney disease, it is estimated that approximately 10 to 15% of the U.S. adult population suffers from the disease. According to the latest U.S. census, the U.S. population is 314 million. Of this, 76.5% are classified as an adult. So the potential market for Keryx's chronic kidney disease treatment could be 31 to 45 million. Of course, it's not likely that Keryx would capture that whole market, but it speaks to the potential.
J.P. Morgan analyst Cory Kasimov said he expects Zerenex to be approved and reach the market in 2014. He said combined annual sales in the U.S. and European Union could reach $500 million a year. Kasimov also expects that Zerenex will receive patent protection until 2014. Kasimov has set a $13 share price on Keryx shares.
Given the potential and the analyst estimates, it is very possible that Keryx could be ripe for a takeout. The most likely candidate to acquire them would be Amgen (AMGN). The company currently sells Epogen used to treat a lower than normal number of red blood cells caused by chronic kidney disease. Amgen may feel that Zerenex would be a nice complementary product and would further cement their
As mentioned earlier, catalysts are extremely important for development stage biopharmaceutical stocks such as Keryx. They can help take the share price to new highs and also attract investor attention from institutional investors. Luckily, Keryx has several events that investors should be aware.
First, the partner of Keryx, JT Torii, will publish the chronic kidney disease results that were part of the Japanese regulatory filing. These results are expected at some point this summer. These results should provide insight into what Keryx's own CKD results will show when they are announced during the third quarter.
Based on the impact that a positive end-stage renal Phase III trial had on the share price, a successful CKD Phase II will likely have an even bigger impact given that the market potential for that disease is much larger.
When examining biotechs, it's also critical to look at the underlying financial health of a company in addition to the potential. Because if that potential fails, all that's left are the fundamentals. In the land of biotechnology, cash is king. Since most of these companies are running with heavy operating losses, the cash available is critical as it will decide how long the company can run without needing more of it. Based on the quarterly statement filed at the end of March 2013, the available cash for Keryx was $87.3 million. This is a significant increase compared to the end of 2012 when the company only had $14.7 million. The large increase was due to a secondary offering that was filed the on January 29, 2013. Although no investor wants to see a secondary offering, this was an incredibly smart decision by Keryx management, as they held off long enough to issue shares at a much higher share price. In the end, this results in less dilution than if the company had not waited.
Total liabilities on the balance sheet came in at $8.7 million. Since the company was also able to generate $7 million in revenue for the quarter, the company's operating loss came in at $2.2 million. This was a massive improvement over the prior quarter when the company lost $6.7 million.
Given that the company has $87 million in cash and only lost $2.2 million last quarter, it is clear that Keryx has plenty of room to cover their liabilities and then some. I don't foresee any secondary offerings until well after the company faces the FDA for Zerenex approval.
There are several risks facing Keryx that investors should be aware of. The primary concern is failed data from their CKD Phase II trial. These results will be announced during the third quarter and will have a material impact on the share price. Additionally, the company still has to face the FDA for Zerenex approval to treat end-stage renal disease. This will be another event that will have a major impact on the share price. Although most expect it to receive approval, the FDA can be a funny business sometimes and nothing is guaranteed.
Another risk is from generic competition. If Zerenex were to not receive patent protection, the $500 million annual revenue estimate would be considerably less. Investors need to take this into account when deciding how much, if anything, to invest here in Keryx.
Despite the risks ahead for Keryx, I see the potential as outweighing the potential negatives. The company currently has a market cap of roughly $700 million, but given the potential for Zerenex to generate annual revenue of $500 million, that market cap could soar later in the year once the catalysts are revealed. As always diversification is critically important for biotech stocks, but Keryx certainly seems worth at least a small investment.