ZS Pharma: An Undervalued Small Cap Play

| About: ZS Pharma, (ZSPH)


As ZS-9 continues to advance through the development pipeline the shareprice will increase.

ZS-9 has the potential to be a best in class treatment for Hyperkalamia.

With sales projections of over $1 billion, the company is substantially undervalued compared to its current marketcap.

Author UpdateNov. 8, 2015, 12:44 AM

On Friday, November 6th 2015, Astrazeneca announced the purchase of ZS Pharma for $2.7 billion, which comes out to $90 per share. 

Throughout the investment world there are a lot of stocks that present value to investors. However, one of the most compelling stocks on the market that I believe will succeed is ZS Pharmaceuticals (NASDAQ:ZSPH). The company is poised to continue its impressive pipeline growth and launch a drug into an untapped market. ZS Pharma has the potential to generate substantial value for shareholders.


With no drugs on the market, ZS Pharma is completely reliant on its pipeline to help generate value for shareholders. The company is currently investigating one drug, ZS-9. However, investors should note that upon success of ZS-9 and the development of a sales force, that ZS Pharma has indicated that it plans on in-licensing promising drug candidates. This will help to expand the pipeline over the longterm and should help to diversify the company's drug portfolio.


ZS-9 is going to be ZS Pharma's future. As the drug continues to advance through the requisite clinical trials, the share price for ZS Pharma should similarly continue to increase. The drug is in phase III development for the treatment of Hyperkalemia, regardless of the underlying cause. ZS-9 is the subject of multiple completed and ongoing phase III trials.

The first important question for investors before we get into the clinical trials, is what is hyperkalemia? Hyperkalemia is a condition in which the body has an abnormally high level of potassium in the bloodstream. While this may not sound dangerous, it can be very detrimental to patients and cause abnormal heartbeats. It has also been known to cause muscle dysfunction for patients.

ZS-9 has been the subject of rigorous phase III testing up to this point. The drug has been shown to be effective in helping to lower the amount of potassium in the bloodstream. In phase III testing, both the 5mg and 10mg dosages of the drug met the pre-specified efficacy endpoints. Furthermore, and this is critical the drug was shown to have an adverse event rate similar to placebo. This will be very important for doctors, should ZS-9 be able to keep this designation, as when a patient is afflicted with hyperkalemia, the last thing that a doctor is going to want to do would be to give the patient a drug that could potentially do more harm than good. The drug was proven effective in the acute phase, which was potassium reduction within the first 48 hours of treatment, and over a longer term of 12 days. 99% of the patients treated with ZS-9 were categorized as having normal potassium levels within 48 hours of treatment. The drug was also shown to start reducing potassium levels quickly, within hours of the administration of the first dose.

Both of these endpoints will be very important for doctors, as the immediate reduction of potassium levels will be important for emergency situations, but also the long term reduction of potassium levels will help to prevent future bouts of hyperkalemia. The treatment options currently available to doctors are not effective at helping to treat both, and as such having ZS-9 as an option would be a substantial improvement over the current standards of care.

The drug has been effective in previous clinical trials, so investors should also have confidence in the ability of the drug to execute in current clinical trials. ZS Pharma recently announced that it has completed patient enrollment for its final phase III trial, which is designed to confirm the results of the previous study over a longer timeframe. This will continue to provide ZS Pharma with a competitive advantage over currently available options as not only would doctors know that ZS-9 reduces potassium levels in the short run, but that it also helps to regulate potassium levels over a longer time period. The patients who are treated with ZS-9 will then be eligible for an extension of the study, which will evaluate ZS-9 over a time period of six months. The initial data readout (not including the extended period of the study) is expected to be completed in the late third quarter, or in the early fourth quarter of this year. This should help for ZS to be able to file a New Drug Application with the FDA, and a filing with the EMA sometime in the first half of 2015. That would put ZS Pharma, depending upon the designation of the NDA on track to receive approval either in late 2015 or in the first quarter of 2016. This would put the product on the market probably within the first half of 2016. Obviously it is too early to predict exact dates for FDA and EMA approval as we will need to know when ZS Pharma is going to file the application. Regardless, ZS Pharma should continue to hold an impressive advantage over current treatments.

ZS-9 has some key advantages over current treatments. In its clinical trial, the drug was shown to be able to bind to potassium selectively, while leaving uninterrupted the levels of other crucial electrolytes. This will be very important for both patients and doctors, as the other electrolytes, specifically magnesium, calcium and sodium are all important for normal physiological function. However, ZS-9 is not only just able to selectively target potassium but it also has been shown to have 10 times the potassium binding capability compared to the currently approved treatment of Sodium Polystyrene Solfonate. This allows for a quick onset of treatment for ZS-9 and also allows for a cleaner safety profile, as unlike SPS, ZS-9 is binding to the phosphate only.

When analyzing the development timeline for the drug, it will also be important to analyze the development timeline for any competitors. There is one rather large competitor to ZS-9 in the hyperkalemia space. Relypsa Inc (RYLP) is also developing a phosphate removal drug that is in phase III development. Relypsa is developing its drug Patiromer, and is using clinical trials that look very similar in their setup to ZS Pharma's.

In terms of a development timeline for Patiromer, it does appear as though Relypsa is slightly ahead. The company is planning on submitting a NDA to the FDA in the third quarter of this year. This should give Relypsa a slight advantage heading into the market, but the real question will be the effectiveness of Patiromer. If ZS Pharma is able to convince doctors that its drug is superior, then the advantage of Relypsa will be mitigated. It does appear, however, as though ZS-9 will have a broader market indication. In phase III testing, Patiromer was tested in patients with chronic kidney disease who were also being treated with RAAS inhibitor medications. It is not clear if the data will be sufficient for Relypsa to be able to gain approval for hyperkalemia, or if the FDA is going to force the company to narrowly tailor the label to patients with Chronic Kidney Disease. If the latter is the case, expect for ZS Pharma sales projections to rise, as it will limit the market for Patiromer.

While going first might seem like an advantage, ZS Pharma will have the benefit of seeing how Relypsa attempts to market the drug, and to see what kind of a sales force that they build up. Should Relypsa be successful in marketing Patiromer, ZS Pharma will know what they have to do to succeed. However, if Relypsa is unsuccessful and not hitting sales projections, ZS might be able to adjust its sales strategy to a more successful approach. Shares for ZS Pharma may fluctuate based on what Patiromer does. If for any reason Patiromer is rejected by the FDA, expect to see an increase in ZS Pharma shares.

Through having competition, ZS Pharma should also be able to increase its chances of obtaining FDA approval. With a filing expected later next year, it will have the advantage of waiting to see what its competitor is able to get in terms of labeling and FDA feedback, etc. This will allow for ZS Pharma to streamline its process in order to help minimize the risk of an FDA delay or a rejection. In terms of analyzing the approval process, the timeline that I mentioned above will still be in effect. ZS is expecting to have the trial results in either late third quarter of this year, or early fourth quarter. With this, ZS is likely to file an NDA in the first half of 2015. In terms of how the approval process is going to go it is important for investors to note that ZS is also conducting a longterm safety study. It is likely that the FDA will allow for ZS to include the results from this study without having to wait for the study to be completed, submitting the results as an update to the NDA. This will allow for quicker approval of ZS-9 and should help ZS to get some sort of language about the long-term use of ZS-9. It will be very important for the company to obtain language regarding the longterm use of ZS-9, as that is the main driver of revenue in hyperkalemia. The timeline would put ZS-9 on the market either at the end of 2015 or in the first half of 2016. I would expect a similar timeline for the EMA approval, and finding a partner to launch the drug in Europe. In regards to the process for Europe, there is a possibility that the European system will act faster than the FDA depending upon when ZS Pharma submits for FDA approval. I would expect a European launch at around the same time, if not before the US launch of ZS-9. Europe struggles with many of the same current treatments as the United States, and thus I expect for Europe to also approve ZS-9 without any problems.

Intellectual Property

A very important element of investing in pharmaceutical companies is the strength of the IP position surrounding the drug development process. ZS Pharma appears to have adequate patent protection to deter competitors from trying to make a generic of ZS-9. Amongst its other patents, ZS Pharma recently announced a notice of patent allowance. This means that ZS-9 is protected until 2032, barring other patent filings by ZS Pharma. This means that ZS Pharma has sufficient patent protection to deter its competitors and protect shareholder value for the long term.

Sales Estimates

Sales estimates for ZS-9 vary widely, and could be impacted by competition between Relypsa and ZS Pharma. One such estimate, has ZS-9 achieving $1.17 billion in sales. Sales will be impacted by two separate events. The first thing that we must look at in terms of sales potential would be the acute care setting (an emergency setting). Hyperkalemia is diagnosed in nearly 8% of the hospitalized patients in the United States. This is going to be a smaller market, as many times the hyperkalemia is caught will in advance of ever having an emergency situation. The big market opportunity for the drug will be in longterm use in order to maintain normal potassium levels. This will cause for repeat prescriptions for ZS-9, and this is why it is important for ZS Pharma to continue evaluating the longterm use of ZS-9.

When taking a look at the cost of achieving these sales, it should be rather low. ZS Pharma will build a specialty sales force in order to sell the product in the United States, which will likely be between 100-150 sales reps. This will allow for ZS Pharma to obtain a large amount of sales through a relatively low cost. The sales force will also be important to the longterm vision of the company, as it will allow for ZS Pharma to in-license drug candidates that its specialty sales force can market, allowing for additional revenue opportunities.

We should also note that ZS Pharma's competitor has a peak sales estimate of $1.4 billion. This tells me that both companies should be able to grab a substantial portion of the market.

Financial Position

ZS Pharma is in a solid financial position. ZS Pharma recently completed an initial public offering, leaving it with about $97 million in cash. This will be more than sufficient for the company to continue its phase III trials, and to begin to build up a specialty sales force in order to market ZS-9 in the United States. Investors should note that the company is planning on finding a marketing partner outside of the United States to market the product. This will provide ZS with additional revenue at no cost, and an upfront payment should help to further stave off the risk of dilution for investors. The company has not yet reported its first quarter of earnings as a public company, but that should give us more insight into the financial situation of the company.


As with any companies, ZS Pharma comes with its fair share of risks. The downside for ZS Pharma would be very large should the drug for some reason fail its ongoing phase III trials. I expect this risk to be rather low, but it would be a very large downside for investors and would cast doubt on the ability of ZS Pharma to obtain FDA approval for ZS-9. Another risk would be that the FDA decides to reject ZS Pharma's NDA application and ask for additional trials, which would of course throw off the approval timeline by years. Another risk that ZS Pharma is going to have to face is that it might be too late to the market. Relypsa is likely to make it to the market first, and this advantage of being first could lead to a larger uptake of patiromer than ZS-9. Finally, another risk that investors could see in ZS Pharma would be the risk of dilution. While this appears to be unlikely presently, it is likely that ZS Pharma will need to raise additional funds in order to see it all of the way through the FDA approval process and towards building up a sales force.


ZS Pharma appears to be on the right direction to success. It will continue to push towards FDA approval for ZS-9, and as the drug advances through its development timeline the company's price per share should continue to increase. ZS Pharma is well positioned to capitalize on the market opportunity for ZS-9 and should be able to generate substantial sales revenue from the product. With multiple upcoming catalysts, investors should be watching closely towards the end of the year for results, and long oriented investors should be set up very well for success. ZS Pharma is positioned to add substantial value for shareholders.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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