In early April, Keryx (KERX) announced that the Phase III trial for perifosine, a colorectal cancer drug, has not reached its goal of improving the chances of survival when compared with a placebo. The trial was conducted for multiple myeloma (a type of cancer affecting plasma cells), and demonstrated that a combination of Keryx's drug perifosine and chemotherapy did not stem the survival in patients with refractory advanced colorectal cancer in comparison with a placebo combined with chemotherapy. Keryx stock immediately lost around two thirds of its value and many analysts cut the target price by half, while downgrading recommendations to neutral. Perifosine is licensed by Keryx for the U.S., Canada and Mexico from the Canadian biotech company Aeterna Zentaris (AEZS), which also lost about 67% on the Toronto Stock Exchange.
I consider it is extremely unlikely that Keryx will spend more time and money on pursuing any further studies and, to all intents and purposes, perifosine has to be taken out of any investment and valuation equation. With 20/20 hindsight, it is clear that the market has been unduly optimistic about the approval for the trials and I consider that the stock had been bid up to unrealistic price levels and the inevitable correction had to take place. The question now is, where does Keryx go from here, and is it worth holding on to the investment at the sharply reduced valuation? In passing, I should note that perifosine should not be completely written off because it has possible applications in the treatment of multiple myeloma though, as I said, I consider it unrealistic to expect the company to persist with the study. The company has itself said that because of the failure, recruitment for the multiple myeloma study will be difficult.
In fact, biotech companies like Keryx present dual opportunities for investors. Naturally, the success of the perifosine trials would have provided investors with large potential rewards, but the failure provides an opportunity for further investment, specifically for investors who are still bullish about the company. I consider that the company is unlikely to fold up, because it still has $31 million in cash to pursue its other projects. However, as a measure of prudence, I would expect the company to raise more capital to bolster its cash position.
Keryx is only a two product company and both products are still in the pipeline. The other drug, Zerenex (ferric citrate) is intended for patients who are suffering from renal disease in the final stages.
Hyperphosphatemia is the condition in renal failure where patients cannot excrete phosphorous and the resulting buildup of phosphorus in the blood results in bone disease and tissue calcification in organs such as the heart and lungs. Late second stage trials are being conducted and the results are expected by the end of the year. Keryx is expected to apply for marketing approval in the United States in the first quarter of 2013 while its Japanese partners Japan Tobacco and Torii Pharmaceutical apply for approval in Japan at the same time. The drug is an oral medication that is based on iron and has the capability of transforming phosphorous into products that are not absorbed by the blood.
The target market for Zerenex is believed to be in the region of around $750 million in the United States and $1.5 billion globally. Obviously, this is much smaller than the potential market for perifosine could have been but I would regard Zerenex as a lower risk business opportunity. Zerenex now has to form the basis for any platform on which to value Keryx and the reduction in potential returns means that earlier valuations have necessarily to be revised sharply downwards. Keryx has now become a bet on a single pipeline product company with no assurances that trials will be successful or that necessary regulatory approvals will be forthcoming. At the current stock price, I believe that this stock is undervalued, and I would hold an existing investment in the expectation of a partial rebound.
Despite the slump in stock price, the impact of the failure of the trials on AEterna will be less significant. AEterna continues to have $46 million in the bank that is available for other projects. It has other anti-cancer drugs under development particularly AEZS 108 for ovarian and prostate cancer. AEterna has announced that it will consult its partners (which presumably include Keryx) before deciding on its future steps.
Pharmaceutical companies that compete with Keryx include large and well funded players with plenty of financial resources and multiple drugs being developed in the pipeline. For example, Baxter International (BAX) has a market capitalization well in excess of $30 billion and is an industry leader. Baxter is in the development of anti-cancer drugs as well as drugs to treat kidney diseases. I considered extremely unlikely that the travails of Keryx will have any impact on the Baxter stock price. Another major biotech company Teva (TEVA) has a market cap of close to $40 billion. The market leader in generic drugs, it may have profited from a genetic version of perifosine but the failure is not going to have an impact on the share price. The 800 pound gorilla of the biotech industry, Amgen (AMGN), competes more directly with Keryx for both anti-cancer and kidney drugs but it is far too large and successful to feel any ripples from the Keryx problem.
Another interesting company to look at is Shire Plc (SHPGY). The company provides drugs in the areas of human genetic therapies (NYSE:HGT), gastrointestinal (GI) diseases, and therapies for attention deficit hyperactivity disorders (NASDAQ:ADHD), as well as infectious diseases such as HIV and Hepatitis B. A positive outcome of the Keryx trials would have had a positive effect on the stock price, but I expect it to remain largely untouched by the failure. Shire has a market cap of approximately $19 billion, and it is far too financially sound and diversified in terms of product. Its investors are unlikely to be worried by the Keryx debacle.