Keryx Should Move Substantially In The Next 2 Months

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 |  About: Keryx Biopharmaceuticals, Inc. (KERX)
by: Zvi Bar

Summary

Keryx is a small biotech company with the license to a novel treatment for chronic kidney disease that the FDA is reviewing, with a goal date of September 7th.

The drug, Zerenex, received Japanese approval earlier this year, and the phase 3 results were very positive, and even published in the Journal of the American Society of Nephrology.

Baupost, a highly respected value investing hedge fund, owns about 10 percent of Keryx equity, all of which it acquired within 2014, indicating it sees value here.

Keryx Biopharmaceuticals (NASDAQ:KERX) has a very good chance of getting its phosphate binder, Zerenex, approved by the FDA in early September. If this does occur, it is likely that shares of Keryx will substantially appreciate. Of course, if it does not get approved, the company would likely substantially decline. The company's recent phase 3 study, which was published in the Journal of the American Society of Nephrology ("JASN"), indicates the drug is highly effective and reasonably well tolerated, which should help the drug gain both FDA approval and broad interest by the nephrologists that prescribe such medications.

Zerenex is a proposed treatment for individuals who suffer from chronic kidney disease. More than 26 million Americans suffer from chronic kidney disease ("CKD"), including nearly 450,000 with end-stage renal failure that requires dialysis and potentially a kidney transplant. This is a large market that is growing and which is likely to require medication and related treatment for life.

Studies indicate that Zerenex is an effective controller of phosphate and studies indicate that it can increase iron storage and reduce use of erythropoiesis-stimulating agents ("ESAs"). Zerenex is an oral pill that is taken daily, whish is far simpler to administer than standard phosphate binders, which are injected.

According to Julia Lewis, MD, the studies lead investigator, nephrologist and Professor of Medicine at Vanderbilt University Medical Center, "Zerenex effectively reduces serum phosphorus levels within the KDOQI range (3.5 mg/dL to 5.5 mg/dL) while having the additional patient benefits of increasing iron stores and decreasing the need for IV iron and ESAs, while maintaining hemoglobin levels." She also added that "If approved, the combined benefits of Zerenex would be of value for patients, health care professionals and the healthcare system."

Because of the added functionality of Zerenex, it appears probable that if the drug were approved, both patients and doctors would have an interest in using it. This usage would begin with patients on dialysis, but could be extended to pre-dialysis patients with CKD who suffer from anemia. In January of this year, the drug received Japanese approval to treat patients with all stages of CKD.

If Zerenex were to become approved for both dialysis and pre-dialysis CKD patients, and possibly the treatment of choice, the drug would likely become a blockbuster. Nonetheless, there is certainly the potential that it will not. Most theories against the drug are not based upon its efficacy and safety profile, but rather corporate profile. For example, Zerenex does have competition, and more may come, but Keryx is yet to have a partner for marketing the drug in the United States.

Currently, Sanofi's (NYSE:SNY) Renagel and Renvela are the dominant prescriptions within this market, with others taking small market share, not to mention generic options for longstanding treatments. Such claims discount the increased efficacy and ease of administration that Zerenex has, as well as the probable ease with which a partner, if not acquirer, would emerge after the FDA approves the medication.

Another cause of concern is that Keryx licensed Zerenex from Panion & BF Biotech, and does not own the drug outright. This type of arrangement is not out of the ordinary. Moreover, though this is not a partner for U.S. marketing and distribution of the drug, it is a global partner of sorts, who has a strong interest in promoting the drug's use.

What may the greatest concern to many long-term investors is that Keryx is a company with essentially one drug in its pipeline. This makes Keryx more of a binary situation than many investors desire out of a pharmaceutical investment. This could result in a sharp loss in valuation if the FDA denies the drug's application. On the flip side, though Keryx is a one-trick pony, Zerenex has a strong potential of getting approved, with that approval being expanded to a growing number of CKD patients, which is a group that is increasing over time.

Another reason to consider Keryx is that, within 2014, Seth Klarman's Baupost became a major shareholder in the company. Baupost reported acquiring a position in the company in the first quarter of this year, and subsequently filed that it acquired more KERX shares in April. Baupost's more recent accumulation brought its position to 9,151,600 shares and made it an inside due to Baupost's holding of roughly 10% of the company.

Baupost is known as a value investment fund, but unlike most value investors, the fund often takes large stakes in pharmaceutical companies. For example, Baupost owns roughly 35% of Idenix (NASDAQ:IDIX). In early June, IDIX shot up from the low 7s to the high 23s when it was announced that Merck (NYSE:MRK) would acquire the company for $24.50 per share in order to acquire its Hepatitis C medication, which it hopes will provide the company with a treatment that will be competitive with Gilead's (NASDAQ:GILD) blockbuster, Sovaldi.

Keryx has a reasonably large short interest, with about 19.7 million shares or over 20 percent of the company, last listed as short. This indicates many investors either do not expect Zerenex to get approval, or that its approval may be delayed. If the approval were to be delayed, and especially if the FDA required more information, it would be likely that Keryx would have to issue a secondary stock offering in order to fund operations.

Keryx has also accumulated patents relating to Zerenex. The company now has numerous patents (U.S. Patent Nos. 7,767,851; 8,093,423; 8,299,298; 8,338,642; 8,609,896; 8,754,257; and 8,754,258). If the drug is approved and the treatment becomes the standard of care, these patents will help provide a moat around the medication for over a decade, by protecting the drug's composition and method of use. These patents could make Keryx an acquisition target even if Zerenex does not become the standard of care, provided some other medication uses a similar technique.

The FDA's review of Zerenex has an assigned goal date of September 7, or about five weeks from now. At that time, there is likely to be a significant move in share valuation. While still a highly speculative equity, Keryx has tremendous potential and probable near term news from the FDA that will undeniably move the stock. Japan's approval of the drug earlier this year indicates a high probability of FDA approval. Similarly, last week's publication of the phase 3 study in the Journal of the American Society of Nephrology indicates there is a strong likelihood that the drug will receive approval and subsequent interest by nephrologists as a new medication onto which they may transition existing patients and start new patients.

Disclosure: The author is long KERX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.