FDA Approval Practically A Done Deal For Keryx And AEterna Zentaris

| About: AEterna Zentaris, (AEZS)
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The market has not realized the potential for AEterna Zentaris (NASDAQ:AEZS) and Keryx (NASDAQ:KERX). Phase 3 clinical information is expected within two weeks on their leading pipeline drug, Perifosine. As will be presented in this article, we strongly believe that the data is positive and will result in significant short-term upsides for both stocks.

Even in the highly unlikely case that the data appears negative, Oppenheimer's research report indicates that KERX's Zenerex is valued alone at $3.10 per share which supports KERX's stock price, even without Perifosine. Thus, Perifosine's results offer significant upside with limited downside and KERX's stock could easily double in the next two weeks. Oppenheimer has an $8 target on KERX. Further, KERX's options are bullish with the June $7 calls trading near $0.75 per contract, thereby confirming Oppenheimer's target expectation that KERX will exceed $8 per share within the next several months.

The original modeling employed by KERX and AEZS was based upon a 6.5 month median Overall Survival (OS) for the CAP arm consisting of Xeloda plus Placebo and a two month advantage in the median OS for the PCAP arm (Perifosine plus Xeloda or Capecitabine). The 6.5 month OS projected for the CAP arm is actually greater than the median OS survivals of 5.3 to 5.9 months reported in the literature. In fact, the actual deaths in the CAP arm would have been greater than if the 6.5 month OS was actually applicable. That is, a life expectancy shorter than 6.5 months would have meant more relatively early deaths. Keeping in mind that the CAP arm consisted of patients who had failed previous therapies, a lower OS than 6.5 months seems reasonable.

Despite this probable bias toward more deaths occurring at early points in time in the CAP arm than originally projected, the 163 deaths as of August 3, 2011, were approximately 10% less than the management projected numbers of 180 - 185 deaths. As a result, management revised its projections for the timing of the 360 events in Q4 2011 to sometime in Q1 2012. The evidence that PCAP was working was confirmed by the Yakult Honsha initiation on January 3, 2012, of P1 studies in Japan.

Even allowing for approximately 10% to 20% of the CAP arm to still be alive today, the difference in numbers from the 360 event that must be filled in large part by deaths in the PCAP arm for the 360 event to occur is significant. The difference is so marked, it is reasonable to project the 360 event will confirm the PCAP advantage to be longer and more statistically significant than the original two month difference set in the XPect study. Interestingly, the price per share has not reflected this opinion.

These events and others confirm that initial modeling was excessively conservative when it employed a two-month survival for the PCAP arm. Now with the recent announcement by Ron Bentsur, CEO of KERX, that the 360 event is imminent and should occur in March 2012, it is highly likely that the effectiveness of PCAP has been proven although the final results have not yet been announced.

We are extremely confident in management's repeated suggestion that PCAP will be confirmed as a NDA before the end of 2012. We believe that PCAP will significantly exceed the results of Onyx's (NASDAQ:ONXX) regorafenib which only offered an increase in OS of 1.4 months. Thus, PCAP will be the most effective treatment of its kind.

As per the AEZS fact sheet, if a NDA is approved for PCAP, significant milestone payments and later royalties may be expected from its partners Handok in South Korea, KERX in North America, Hikma in MENA, and Yakult Honsha from Japan, which paid AEZS $8 million for exclusive rights on Perifosine. AEZS stands to receive an additional $62.5 million from Yakult if certain pre-established milestones are met. Meanwhile, AEZS-108, 130, and other agents in the AEZS pipeline are on the sidelines, awaiting further developments. A takeover bid by Roche (OTCQX:RHHBY) and/or an announcement that a partner has been chosen for European marketing of PCAP remain distinct possibilities. Roche is the logical suitor since PCAP patent control allows extension of its Xeloda franchise, albeit indirectly. Potential other suitors that may buy AEZS and/or KERX are large pharmaceutical companies with an interest in oncology such as Celgene (NASDAQ:CELG) and Gilead Sciences (NASDAQ:GILD).

Dr. Williams, one of our biotech consultants, has added 500,000 shares to his position in KERX this month as he was encouraged by the delay in the 360 event and believes KERX will trade upwards of $10 this year. Dr. Williams also owns 1.2 million shares of AEZS. We value his opinion immensely and his track record is impeccable. Most notably, he invested in Dendreon (NASDAQ:DNDN) at under $4 a share in 2006 when it was out of favor with the Street and sold it at $50 in 2010. Dr. Wurlitzer, a well-respected surgical oncologist and former surgical instructor at a major university, now owns approximately one million shares of AEZS as he firmly believes in the success of Perifosine.

With the imminently upcoming news of Perifosine's efficacy, it is important to note that almost 19% of KERX's float is held short and both AEZS and KERX are trading at depressed levels. Based upon on the foregoing, it is our opinion that the near-term future is very bright for AEZS and KERX and both stocks offer an amazing risk/reward trade-off.

Disclosure: I am long KERX, AEZS, DNDN.