Keryx Biopharmaceuticals: Is The High Valuation Justified?

Summary

KERX stock appreciated more than 100% in the last one year, and over 400% since 2012.

Keryx is a one-drug company with no prior experience of interaction with the FDA, as it does not have any approved drug.

That one drug too is not fully owned by the company, but licensed and sub-licensed from third-parties.

The stock saw heavy insider selling in March 2014.

The current sell-off in the biotech, as evidenced by the 13.72% fall in iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) in one month, has unveiled many buying opportunities. However, at the same time, it has also brought in focus high valuations of stocks like Keryx Biopharmaceuticals (NASDAQ:KERX) that appreciated more than 100% in the last one year, and more than 400% since 2012.

Investor interest in Keryx became more prominent in November 2013, when shares of the company jumped from October's sub-$9 levels to $14.28, amid reports that its new drug, Zerenex, could get approved for non-dialysis dependent as well as dialysis-dependent patients. The drug could also be used for reducing dependence on or eliminating the need of IV iron and ESAs for anemia patients.

Lately, Keryx has been in the news once again, which has sent the stock surging ahead once again, up 26% since January 2014. The most recent event that is being touted as a big positive for the company is Congress' proposal to delay, by eight years, the inclusion of end-stage renal disease drugs (ESRD) into the ACA-mandated payment bundle until 2024.

Keryx's Zerenex is intended for treatment of high serum phosphorus levels, or hyperphosphatemia, in patients with ESRD. A New Drug Application (NDA) for the drug has been filed with the FDA, and June 6, 2014 fixed as its PDUFA date.

Zerenex (KRX-0502) is an investigational, ferric citrate, oral compound that binds to phosphate. In January 2014, Keryx's partner, Japan Tobacco Inc., was granted manufacturing and marketing approval for ferric citrate by the Japanese regulator as an oral treatment of hyperphosphatemia in patients with chronic kidney disease.

On April 2, 2014, the company announced validation by the European Medicines Agency of its marketing authorization application for Zerenex.

All eyes on June 6, 2014

The market is evidently responding to news of imminent approval and realization of the full potential of Zerenex - as a treatment for both dialysis-dependent and non-dialysis dependent patients and, additionally, as a more beneficial treatment as compared to Amgen's (NASDAQ:AMGN) IV Epogen used for treating anemia resulting from CKD. Until 2010, Epogen was the single-largest drug expenditure ($2 billion) by Medicare, at $8,447 per patient per year.

Hyperphosphatemia and anemia is a common complication in CKD patients. The question, however, is whether the forthcoming catalyst (FDA approval of Zerenex) has already been factored in the CMP - is the stock fairly valued? On March 31, 2014, the stock had achieved its 52-week high of $17.46.

Valuation

The market has ascribed a value of $1.45 billion to Keryx Biopharmaceuticals, or shall we say, to Zerenex. Let us also have a look at other numbers as well.

According to a PDX Pharmaceuticals/Oregon Health Sciences University report, the market size of hyperphosphatemia treatment is approximately $1 billion per year. According to the company's own estimates, full market potential for the drug is $2.4 billion.

However, the estimated potential of Zerenex hinges on certain factors which can potentially upset the apple cart.

For starters, the company does not fully own Zerenex. The reality is that it has been licensed and sub-licensed to it by third-parties, a fact that it disclosed in its 2012 annual report. Not only does the license require the company to "meet development milestones" and impose "development and commercialization due diligence" on the company, it also must pay royalties on net sales of the product. Failure to meet the obligations under the agreement may result in termination of the licensing agreement.

Another matter of concern is the grant of exclusivity, or New Chemical Entity status. Ferriseltz, a product of Otsuka of Japan, was approved by the FDA in 1997 for use in MRI procedures. There is a possibility that the active ingredient of Zerenex, ferric citrate, is a salt of ferric ammonium citrate, the active ingredient in Ferriseltz. Keryx would have to convince the FDA that it is not so, failing which it could be denied the five-year market exclusivity that accompanies an approval for such drugs. This could open the door for competition from generic drug manufacturers.

If that were not enough, there are existing treatments (phosphate binders) to contend with. The market is currently dominated by Sanofi (NYSE:SNY), whose phosphate binder has annual sales of $861 million. The rest of the market is shared by Shire (NASDAQ:SHPG) and Fresenius Medical Care (NYSE:FMS). There is also another iron-based phosphate binder, PA 21 of Vifor Pharma, in Phase III clinical development.

The final word

The stock is riding on seemingly positive news. In my opinion, the market is ignoring certain factors that must be taken into account.

Keryx is a single-drug company with no prior experience of interaction with the FDA, as it does not have any approved drug. In addition, in light of the doubts raised above, the scheduled June 6, 2014 meeting may not turn out the way it is being portrayed.

In addition, it would be worthwhile to take notice of insider transactions (particularly those of the company's CFO, James Oliviero, who has sold 396,525 Keryx shares in March 2014).

In my opinion, the valuation is pretty overstretched - buying at this level is out of the question; sell if you own the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.