A Fresh Look At KERX; High Odds For Zerenex Phase III Success
Keryx Biopharmaceuticals (NASDAQ:KERX) announced disappointing news earlier this year for its cancer compound perifosine, and the stock remains in the penalty box. However, the story is now shifting to the company’s kidney disease treatment, Zerenex, which is around the corner from significant late-stage clinical milestones. As a result, investors have a chance to invest in the Zerenex opportunity at a discounted valuation, and trading activity is expected to heat up soon.
Zerenex is a ferric iron-based compound (ferric citrate) taken orally to bind phosphate in the gastrointestinal tract. Patients with chronic kidney disease (CKD) typically have elevated serum phosphate, given that their compromised kidneys are unable to properly remove excess phosphates that come from the foods they consume. Elevated phosphate can cause significant health problems in CKD patients. Zerenex is undergoing Phase III testing for hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal disease (ESRD), and results are expected by year-end. Importantly, key evidence from clinical trials, that we will review later, indicate that the company’s Phase III trial has a high probability of success, and Keryx expects to file for both U.S. and European approval of Zerenex if the current trial meets its primary endpoint (control of serum phosphate levels). Beyond the ESRD patient population (which are CKD patients on dialysis), Keryx is alsopreparing to test the drug in pre-dialysis CKD patients, significantly broadening the potential market opportunity. Analysts estimate approximately $300 million for Zerenex peak sales in the ESRD indication, and if the pre-dialysis indication is successfully developed, annual sales for the drug could peak above the half billion dollar mark. WhileKERX shares are still somewhat hung over from the bad perifosine news, near-term Phase III results from multiple trials and the potential for FDA and EU regulatory filings for Zerenex in early 2013 suggest that the momentum in KERX could begin to build again soon.
High Odds For Zerenex Clinical and Regulatory Success. In addition to strong Phase II clinical results for Zerenex, two Phase III trials have also reported out and met their primary endpoints, supporting a new drug application. These are 1) the company’s own short-term trial in ESRD patients, which reported out in late 2010; and 2) KERX’s Japanese partner, JT Torii’s (a subsidiary of Japan Tobacco) short-term trial in ESRD patients, which reported out in April of this year. The ability to lower serum phosphate levels as demonstrated in the successful Phase III trial run by the company is shown below, and the results are nothing short of spectacular. Notably, the dose-response demonstrated by the results (ie consistently better efficacy with higher doses) is very encouraging. Additionally, the study showed that Zerenex managed metabolic acidosis well, a shortfall of existing treatment options.
The short-term (12-week) trial conducted by JT Torii also met its primary efficacy endpoint, with a statistically significant reduction in serum phosphate from baseline levels. Importantly, Zerenex also demonstrated non-inferiority to leading phosphate binder, Renagel (the active control in the trial), and the drug candidate showed excellent safety and tolerability in the study. In addition to these study results, an ongoing long-term Phase III ESRD trial being conducted by KERX has had several Data Safety Monitoring Committee (DSMC) reviews, and we view the DSMC’s multiple recommendations for the trial to continue as signs that the outcome of the study has a high probability of success. Lastly, we should point out that the FDA has agreed to a Special Protocol Assessment (SPA) for Zerenex’s Phase III ESRD trial in the U.S. This means that the FDA is comfortable with the trial design, and that if the study’s endpoints are met, the chance for regulatory approval is very high.
Multiple Near-Term Catalysts To Lift KERX Shares. Partner JT Torii is expected to complete three more Phase III trials by the end of this year, in preparation for Japanese approval. These include a long-term ESRD trial (like KERX’s trial), a trial in CKD patients on peritoneal dialysis, and a trial in pre-dialysis CKD patients (failing kidneys but not on dialysis treatment yet). In addition, KERX’s long-term Phase III ESRD trial is also expected to report out later this quarter. These 4 Phase III trials mean that 4Q promises a lot of action for the stock, and if positive, significant shareholder value can be created. If theKERX-run Phase III study meets its endpoint, the company plans to file for both U.S. and EU approval in early 2013, and JT Torii is also expected to apply for Japanese approval in 1Q 2013, if its studies are positive. The filing in Japan will trigger a high single-digit million dollar milestone to KERX, and Japanese approval, roughly one year later, will trigger a low double-digit million dollar milestone payment. Terms of the JT Torii deal call for remaining sales-based milestones of over $50 million, and KERX is also entitled to royalties on Zerenex sales in Japan (range escalating from low double-digit to mid-teens percentage on sales). We note that the pre-dialysis CKD study being run by JT Torii could be key, as it will indicate to investors whether KERX will be in good position to take advantage of the pre-dialysis market in its territories. KERX is currently planning to start its Phase III pre-dialysis CKD trial by year end.
After Phase III Results, Competitive Positioning of Zerenex Will Be Key. The global market for phosphate binding therapies continues to grow off of its $1.5 billion annual sales base, driven by a rising number of dialysis patients particularly in emerging markets. The three main phosphate binders on the market are; 1) polymer-based Renagel/Renvela by Genzyme (NYSE:SNY), the market leader with ~$800 million in annual sales, 2) lanthanum-based Fosrenol, which has roughly $325 million a year in sales, and 3) calcium-based PhosLo, which is off patent. Many patients are started on a generic version of PhosLo because it is cheap, however, the risk of hypercalcemia over time usually causes patients to be switched to Renagel or Renvela (improved version of Renagel). Fosrenol, made by Shire plc (NASDAQ:SHPG), has a good share of the market, but the potential build-up of lanthanum also limits long-term use. Notably, about 25% of patients on phosphate binders switch brands each year yielding nice potential demand for a new entrant into the segment.
Leading Dialysis Provider Fresenius Estimates 3.8M Patients On Dialysis By 2020
A major issue for the phosphate binder treatment segment is that generic versions of Renagel and Renvela are expected to come to market toward the end of 2014. As a result, Zerenex will need to be significantly differentiated, and the good news is that its clinical profile thus far suggests it will be. Clincal studies have shown that Zerenex can substantially reduce the need for IV iron and erythropoietin stimulating agents (ESAs), which are commonly administered to dialysis patients to combat anemia. These agents are very expensive – annual costs per patient of about $11,000 – therefore, better control of anemia with Zerenex plus the opportunity to save significant treatment dollars by reducing the use of ESAs and IV iron could make this potential new treatment tops in the category. This beneficial cost proposition will be critical in the U.S. where reimbursement for dialysis patients is done using a “bundle” system, essentially a fixed dollar amount reimbursed per patient, incentivizing dialysis treatment providers to shoot for the lowest overall treatment costs possible. We believe this aspect of the story is not well understood, and the company’s Phase III ESRD trial is expected to highlight the IV iron and ESA-sparing potential of Zerenex, when the trial reports out later this year. Note that the “bundle” system is not used outside of the U.S. and the Renagel/Renvela line is not facing imminent generic competition in the EU or Japan, two of the largest markets for phosphate binders. Assuming the Phase III trials meet their endpoints, we believe shares ofKERX will continue to increase in value as the market learns more about the value proposition of Zerenex in both the U.S. and non-U.S. territories. Other trials designed to differentiate Zerenex in the marketplace, such as safety/tolerability studies, studies to support earlier use for iron supplementation, and one to demonstrate the lower pill burden of Zerenex vs. Renagel/Renvela, are ongoing.
Capitalized To Get To Value-Creating Events. Keryx had cash and equivalents of $27.1 million at the end of June, and management stated that the company has enough resources to fund its operations well-beyond the filing of a new drug application (NDA) for Zerenex. KERX is running the business tightly, with guidance for cash burn of approximately $4 million per quarter through the end of this year. R&D expenses have been significantly reduced since the company returned perifosine back to partner Aeterna Zentaris (NASDAQ:AEZS), which will incur all future perifosine expenses. Notably, if perifosine succeeds in the ongoing multiple myeloma study, investors benefit, as KERX is entitled to royalties on sales of the drug in the U.S., Mexico, and Canada – a free option in the stock. Importantly, cash guidance does not include milestone payments that could come in from the JT Torii deal, as mentioned above. With no need to raise capital before the Phase III trials report out, investors get a clear shot at the story without the fear of dilution or debt.
Positive Phase III Results Offer Significant Upside Potential. To be sure, KERXis a binary stock, in that poor Phase III results would likely lead to significant downside for the shares. However, positive Phase III trial results could result in the stock doubling on realization that KERX has a real commercial asset, and that the company could be an acquisition target. The average price target on KERX by Wall Street analysts is $4.25 per share, but we note that many analysts are not factoring in the pre-dialysis CKD opportunity. Further, positive clinical trial results later this year, if achieved, should lead to lower discount rates, hence price targets are likely to go up under this scenario. Given strong evidence that upcoming Phase III results should be positive, we believe speculating on KERX is a good bet. Company management agrees, with significant open market buying of KERX shares by the CEO and directors after the stock tanked on the perifosine news in early April. We find that siding with the people that know the story best can be a great strategy for making money.