Keryx held a conference call Monday morning after announcing Phase III results for Zerenex, the company’s primary value driver. Impressively, the phosphate binder met all of the primary and secondary endpoints in the trial, including the ability to spare intravenous (IV) iron and ESA’s (erythropoietin stimulating agents), which are widely used in the treatment of dialysis and are very expensive. Hence, bottom line, Zerenex has proven that it can improve patient care when it comes to treating end stage renal disease (ESRD, or patients on dialysis), while significantly lowering the burdensome treatment cost. As a result, dialysis providers, particularly the larger organizations like Fresenius (NYSE: FMS) and Davita (NYSE: DVA) will be extremely compelled to incorporate Zerenex into their treatment regimens for these reasons, and in fact could look to own Zerenex simply by acquiring KERX. Major pharmaceutical companies may also line up to acquire KERX given the potential opportunity for this orally administered drug to be used in treating dialysis and ultimately chronic kidney disease (CKD, or pre-dialysis) as a replacement for oral iron, which is a huge opportunity. In our prior report, we noted that if Zerenex was to achieve all of the anemia-focused endpoints in the Phase III trial, in addition to strong phosphate-binding results, that the stock could trade into the double digit range. Given the strength of the data released by the company on Monday, we would not be surprised to see the stock get there soon. On the conference call, all analysts shared the same enthusiasm as we have about the results; watch for significantly positive Wall Street research reports and price targets going substantially higher for KERX. Despite the early morning run in the stock, KERK still has a lot of room to climb, and investors can buy shares with the Phase III data risk behind them.
Zerenex could become leading phosphate binding therapy in a $1.5B market. The key take-away from this morning’s results is that the market for phosphate binders is large and that the Phase III data for Zerenex is exceptional. The market leading phosphate binder is Sanofi Aventis’ (NYSE:SNY) Renagel/Renvela, which has annual sales of approximately $800M. Two other therapies bring the worldwide market up to $1.5 annually, but none of the 3 currently available agents offer the benefits of Zerenex, such as no heavy metal toxicity, a low pill burden, improvements in iron absorption (ferritin and TSAT levels), and most importantly, the ability to substantially lower IV iron and ESA use. Based on the Phase III data just released, Zerenex was compared head-to-head with Renagel/Renvela and PhosLo (as well as a combination of both), and showed non-inferiority on phosphate-binding activity, and consistent superiority on improving ferritin and TSAT levels. These head-to-head results are nothing short of stellar, and will play well with treating physicians and dialysis centers that choose which products to use for their ESRD patients. With regard to Zerenex’s “sparing” effects, the drug enabled doctors to reduce ESA use by an impressive 27% and lower IV iron use by a whopping 52%, enabling the healthcare system to save ~$750M in the U.S. alone (see the press release). In addition to the savings on direct drug costs, nursing time is reduced with Zerenex (fewer IV iron and ESA injections), infection risk is lowered (fewer injections), and also the significant side effect risk with IV iron use (anaphylaxis) can also be avoided. Zerenex looks like the hands down winner in the $1.5B and growing phosphate binder market (dialysis alone), and with ~80% of dialysis patients receiving IV iron, penetration into the market should be quick given that IV iron patients will be the first target segment.
CKD market potential is 3-4x the size of ESRD. As we wrote last week, Zerenex has potential to penetrate the pre-dialysis market (CKD patients), which across all geographies, is about 3-4x the size of the dialysis treatment market. This suggests blockbuster potential for the drug if in fact a CKD indication can be added to the label over time. We believe that the company’s Japanese partner, JT Tori, has filed for the CKD indication in Japan, which already is a large opportunity for KERX. Assuming that the company can also produce a favorable result in CKD patients in the U.S. (trial initiated in November 2012), KERX could be sitting on a drug with blockbuster potential. Importantly, KERX still owns worldwide rights, except in Japan. Based on the Phase III ESRD results, most will agree that Zerenex should have the same benefits for CKD patients, hence potential partners or acquirers of KERX are likely to pay up for the prospects of the drug in this large opportunity. Note that what we are talking about is a replacement for oral iron, which does not adequately control anemia in CKD patients, and has other significant side effects. The CKD market potential is certainly a major opportunity that is currently not being factored into the valuation of KERX shares.
Cash sufficient to explore Zenerex “optionality.” KERX’s balance sheet is positioned well, with an estimated $24 million in cash currently (year-end 2012 cash balance estimated at $17M + $7M payment expected soon from JT Tori for the Japanese NDA filing). With more than 1 year in cash (estimated $4-$5M cash burn per quarter), and most importantly, the very strong Phase III results, KERX is in a very solid position to negotiate partnerships or an outright sale of the company. Instead of diluting shares in the company right away, we believe that management could choose to explore different strategic alternatives for Zerenex and the company before raising any new equity capital. On its conference call discussing the Phase III results, Keryx’s CEO, Ron Bentsur, noted that the Phase III results for Zerenex create significant “optionality” for the company, and that could include non-dilutive means for increasing cash, such as partnerships in the U.S., EU, or other global territories.
U.S. and EU regulatory filings anticipated in 2Q. According to KERX, full efficacy and safety data from the Phase III study are expected to be presented at a future medical conference, which should raise the visibility of Zerenex and its key benefits in the dialysis community. Dr. Julia Lewis, Study Chair of the Zerenex Phase III program and Professor of Nephrology, Vanderbilt University School of Medicine commented this morning on the results:
"The data from this study confirm that Zerenex is a safe and effective phosphate binder with the added benefit of improving patients' iron levels while utilizing significantly less IV iron and ESAs. There is a clear need for viable alternatives to the marketed phosphate binders, and Zerenex can play a major role by not only providing adequate phosphate binding, but also providing additional benefits."
Now that the long-term Phase III data have been released, and in conjunction with the company’s prior favorable short-term Phase III results announced last year, KERX is preparing to file a new drug application (NDA) in the U.S. and a regulatory application in the EU (an MAA) in 2Q 2013. Importantly, the long-term Phase III trial met pre-specified criteria set by the EU (12-week non-inferiority portion of the trial -- head-to-head efficacy data), making approval in both the U.S. and EU very high probability events. As a result, KERX now has a real differentiated drug with an extremely high probability of success that addresses a huge market, and the company is now in a very strong position to negotiate with potential partners or acquirers. Expect shares of KERX to continue to climb into the high-single digit range or more given the very favorable long-term Phase III results, the opportunity for U.S., EU, and Japanese approvals in about a year, and potential for major drug or dialysis company partnerships or a take-out.
In connection with KERX, PropThink has taken a long position.