Keryx Biopharmaceuticals (Nasdaq: KERX) – Should See Double Digit Prices Again
Recent news for Keryx Biopharmaceuticals was big, but as investors know, the bigger news is yet to come. Even with a recent price move, Keryx is extremely undervalued. Prior to the American Society of Clinical Oncology (ASCO) meeting in June, I expect Keryx to easily double, and I expect to see $14 per share by 2011. The details of my analysis will be presented later in this article, but first, I will address the key drivers that make Keryx a compelling “buy and buy more” proposition:
Keryx has two fast-track drugs, 3 Special Protocols and Orphan Drug Status. Perifosine is the more valuable drug and Keryx has exclusive rights to it in the U.S., Canada , and Mexico. The drugs, indications, and status are summarized below:
Phase 3 ongoing, under SPA
ZerenexTM (ferric citrate)
Hyperphosphatemia in patients with end-stage renal disease
U.S. Phase 2 complete;
Dr. Aschoff, Sr. Analyst at Brean, Murray states:
I've covered Keryx for six years and it's really nice to see perifosine, their Akt-inhibiting cancer drug and main value driver, find two niches where it had positive data in multiple myeloma and in third-line colorectal cancer. In multiple myeloma patients who are failing Velcade, the most widely used drug in multiple myeloma, perifosine resensitizes them to Velcade. Perifosine is also in third-line metastatic colorectal cancer, where it beat Xeloda in a head-to-head trial. So after looking for a niche for this drug ever since I knew the company in early 2004, they have found two really definable areas where perifosine is likely to have a measurable benefit that's worthy of approval… Perifosine is the more valuable of their two drugs, and clearly the market cap of Keryx does not capture the success of just perifosine.
Below, I will provide my estimates which clearly support Dr. Aschoff’s view.
Keryx also has an SPA for Zerenex, its hyperphosphatemia drug, which will start Phase III soon.
Cash Availability and Cash Burn
As any experienced biotech investor knows, cash availability and cash burn are critical to monitor, because most biotechs are development stage companies. Even if a company has a great breakthrough but poor cash management, it can become a trap for an investor. Many go under or do dilutive financing.
Keryx greatly exceeds my standards on the cash test. The company ended 2009 with cash, cash equivalents, interest receivable, and investment securities of $35.9 million, as opposed to $22.7 million at Dec 31, 2008. This is plenty of cash to fund all three phase III studies without any need to dilute equity investors or take on additional debt.
According to the American Cancer Society, colorectal cancer is the third most common form of cancer diagnosed in the United States , with nearly 146,000 people diagnosed with some form of colorectal cancer and over 49,000 patients dying from colorectal cancer in 2009. Despite the presence of many products such as Sanofi-Aventis' (SNY) Eloxatin (oxaliplatin), Roche's (RHHBY.PK) Avastin (bevacizumab), Merck’s (MRK) Erbitux (cetuximab), Pfizer's (PFE) Camptosar (irinotecan) in the field of colorectal cancer, the demand still remains unmet.
Keryx has many potential applications of its pipeline, and as stated above, the colorectal cancer application is large. But to be conservative in the valuation estimate, let’s consider only the Myeloma application, which is the first Phase III trial. Back in Q3 of 2009, Ron Bentsur, Chief Executive Officer of Keryx, commented:
The Orphan-Drug designation for perifosine in multiple myeloma is a very important milestone for Keryx, as the market exclusivity protection provided by this designation significantly enhances the commercial opportunity of perifosine in this indication.
To simplify the analysis and be more conservative, let’s just analyze the U.S. market. According to the National Cancer Institute there were 20,580 new cases of multiple myeloma in 2009 with 10,580 deaths as a result of the disease. Assuming that 50% of the 10,580 deaths are to receive Perifosine and that the average cost of treatment is $5,000 per month (Velcade is $45,000). Also note the average course of treatment is 22.5 months (average survival rate from the phase II trial), but for simplicity and a more conservative estimate, I will just assume that treatment is received for only 12 months. Thus, the number of patients to go on and off treatment each month is equal.
- $5,000 per month X 5,290 patients X 12 months/year= $317,400,000 Sales / year
Now, let’s assume net profit of 18% (Average Pharmaceutical Industry Profit)
- $317,400,000 X 18%= $57,132,000 Net Income
Now, divide by shares outstanding to get net income per share:
- $57,132,000 / $56,000,000 shares = $1.02 net income per share
Now, if we multiply that by the average P/E of the pharmaceutical industry:
- $1.02/EPS * 14.15 P/E = $14.44 per share
Clearly from this analysis based on Myeloma alone, Keryx is extremely undervalued with a market cap of less than $200 million and a price per share of under $3.50. I expect that Keryx will easily see a double prior to the ASCO meeting in June and should see double-digit prices by the end of this year.
The last stock I bought with such potential was Dendreon (DNDN), which has provided investors enormous returns. I look forward to similar returns with KERX.
Disclosure: Long KERX and DNDN.