Keryx Will Dive Lower Without Zerenex Approval

Keryx (KERX) shared some bad news with its shareholders recently, as its perifosine drug for colorectal cancer failed to meet the primary endpoint in a critical stage 3 trial. The drug did not increase survival time when combined with chemotherapy. The press release was remarkable for its lack of detail-left unsaid was whether the trial showed any positive trend.

The same drug is in a late stage trial for multiple myeloma, but it is possible that these will be terminated, given the negative result for colorectal cancer.

The market was swift and merciless in punishing Keryx. Its stock lost about two-thirds of its value, and trades now at about $1.43 per share.

Keryx had acquired the North American marketing rights for perifosine from Canadian biotech AEterna Zentaris (AEZS) whose shares were also pummeled.

Perifosine is an oral drug in that it targets Akt protein kinase, also known as protein kinase B. This enzyme is involved in signal transduction pathways that lead to cell growth, but is an inhibitor of apoptosis (programmed cell suicide). Akt was initially identified as an oncogene transduced by tumor viruses and has been implicated in the development of many different tumor types. In addition to colorectal cancer and multiple myeloma, the company has tested perifosine in preliminary trails against chronic lymphocytic leukemia, Hodgkin's lymphoma and various neural tumors, with some indications of efficacy.

Further tests of perifosine are now in limbo, as the company evaluates its options. The company still has about $31 million in cash, sufficient for its immediate needs.

Fortunately, Keryx has another drug in development, Zerenex for hyposphatemia. This is a condition of individuals with renal failure who cannot excrete enough phosphorus, with resulting calcification of tissues and bone disorders. CEO Ron Bentsur has indicated that Keryx would concentrate on Zerenex for the near future. In a bid to revive confidence in the stock, Bentsur bought 71,400 shares for his own account at $1.38 (Forbes covered Bentsur's purchase as an interesting insider buy, without bothering to mention the previous sell-off).

Roth Capital has calculated a price target of $4 for Keryx, based solely on revenues from Zerenex. That is more than a double its current lowly price level. So, is now the time for risk-taking investors to load up? Not according to Roth analyst Joseph Pantagnis, who has lowered his rating from buy to neutral in the wake of the perifosine news.

Relative to perifosine, Zerenex is a low tech drug with a market restricted to dialysis patients, of which there are currently about 500,000 in the U.S. Zerenex is ferric citrate. It combats hyperphosphatemia by binding phosphate in the gastrointestinal tract, preventing its absorption. Zerenex would face competition from aluminum and calcium binding agents already in the marketplace. There is some worry about the toxicity of aluminum taken long term, whereas calcium agents may further complicate calcification issues in the patients. Shire Pharmaceuticals has an approved drug called Fosrenal, which is a non-calcium, non-aluminum phosphate binder composed of lanthanum carbonate. This is not a perfect solution either as patients sometimes suffer nausea, vomiting and constipation. A rare but extreme side effect is bowel blockage, which may require surgery to repair.

So, there is a clear market opportunity. Short term trials carried out by Keryx showed statistically significant evidence of efficacy. A long term Phase II trial revealed no "serious adverse events" in a year of treatment. Long term Phase III trials are underway.

At its current reduced price, Keryx has a market cap of about $100 million and no immediate prospect of income. There are a number of risks to the investor in Keryx shares. Zerenex may not be approved, leaving the company without a means to generate income. The approval of Zerenex might be so delayed that the company runs out of money first, so that the company would be forced into a secondary offering, diluting equity at a time when the stock price is already depressed. Even if the drug is approved, there is no guarantee that it will achieve a significant market share, considering that Keryx has no experience at marketing. So, investing in this stock is for risk-tolerant investors only. Catalysts for a pop in price would be a positive result in Zerenex trials, which are expected to be unblinded late this year, or an FDA approval of the drug. The latter would not occur until 2013 at the earliest.

Keryx's partner in developing perifosine, AEterna Zentaris has a large pipeline of drugs in development, and one approved, Cetrotide, which is used primarily in-vitro fertilization treatment. Motley Fool's Sean Williams has reiterated his bullish call on the stock even after the failed perifosine trial, although fellow Fools Rich Duprey and Brian Orelli disagree with him. Williams cites clinical trials which could result in 14 different treatments. On the other hand, it seems unlikely that Aeterna can carry out its ambitious programs without additional cash. With its stock price already below a buck, a secondary offering is problematic.

Other than AEterna, other stocks in the same orbit as Keryx include Allos Therapeutics (ALTH) and New Link Genetics (NLNK), each with a market cap just shy of $200 million. Both are developing cancer drugs, and neither has positive income. Allos has a drug that has been FDA approved--Folotyn-- to treat refractory peripheral T-cell lymphoma. Folotyn had sales of $50 million last year. Allos is in the process of being acquired by Spectrum Pharmaceuticals. Drug hungry pharmaceutical companies may be taking a look at Keryx or Aeterna, as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.