Here’s Why Keryx and Amarin are nothing alike. Let’s digress for a moment from the high velocity trading on KERX and explore why NCE has become so important to Amarin, then compare that to the KERX story. Amarin’s Vascepa is expected to be a multibillion dollar compound that will be marketed to the broad physician and patient audience (primary care). Properly marketing a primary care drug, like Vascepa, takes hundreds of millions of dollars per year in sales and marketing expenses to support the product. As a result, AMRN shares are currently priced to reflect the significant doubt that it can successfully launch and grow Vascepa to profitability, let alone to the drug’s full potential. So for AMRN, it’s “take-out or bust”, and because management has told the market that NCE for Vascepa is critical for doing a deal, the stock is dead money, at least until NCE is granted or AMRN’s management and Board recognize that they are going to have to discount the company to get a deal done. Let’s remember that an acquisition of AMRN will be a multi-billion dollar transaction, and the acquirer still has to deal with a huge marketing effort, manufacturing challenges, and most importantly, a large cardiovascular outcomes study, which if it fails, will be the end of Vascepa. Yes, AMRN is a high cost proposition with risks well beyond the NCE issue. In fact, if NCE was the only thing standing in the way of an AMRN buyout, the company could be sold at a lower price with a contingent value right (CVR), in which there would be an additional payout to AMRN shareholders if NCE status was granted in the future.
So how is KERX’s Zerenex different from AMRN’s Vascepa? For starters, KERX has two weapons against early generic competition: potential for both NCE designation and patent-term extension (PTE) for the ‘706 patent. While many, including some bullish analysts on KERX, have chosen to focus on the company’s ability to obtain NCE status for Zerenex, we continue to be more focused on the high likelihood of the company getting PTE (see prior article); this would extend U.S. exclusivity protection out to 2022. Given that the ‘706 patent is solid, includes composition of matter claims, and if extended, would protect Zerenex from generic competition for 3 more years than NCE designation, it’s important for investors to know that NCE status is not a must-have for a potential acquirer to buy KERX. And unlike AMRN’s Vascepa, Zerenex will be sold to nephrologists and dialysis centers, a much more concentrated customer base, hence KERX will not be in AMRN’s unrealistic position with regards to having to market a drug to the primary care physician segment. In addition, we believe that KERX’s management is much more realistic about selling the company vs. AMRN’s 3-point strategy to either market Vascepa on its own, sell the drug with a partner, or sell the company outright. KERX management will probably be more realistic about price as well when compared to AMRN’s management and VC-led Board. And lastly, Zerenex’s clinical data was superb, and this drug will not be the subject of a very large outcomes trial that could derail the long-term prospects, like Vascepa. The big risk/reward for Zerenex will be a potential indication in the broad CKD (chronic kidney disease) population, and management may have to decide how much value it will have to leave on the table to get a deal done. Most importantly, a CKD indication is all upside to the story at the stock’s current level. Perhaps a CVR can apply to this situation, and KERX may pull it off.
Really? Zerenex Phase III results not robust? Let’s now take a look at the case being made by another author that doubts the robustness of the Phase III Zerenex results reported by Keryx. The good news is that the stock has now factored in some doubt on the Phase III data, meaning that the full release of data (expected at a medical conference this spring) is a major future catalyst for KERX shares. That assumes, of course, that the company is not acquired first by a strategic investor that is reviewing the data under confidentiality. The author of the article reverenced above makes the following five points, which we will briefly refute.
Point 1: “Many details about dosage and adverse effects have yet to be published”
PropThink Counterpoint: Top-line results never include full details in a press release, as medical conferences want fresh data when the company presents to their healthcare professionals. The Keryx “top-line” Phase III results press release actually includes significant safety and tolerability information, and dosing in the study was variable by design per each patient’s need for phosphate lowering. We do not expect remarkable dosing results for Zerenex in this trial given the multiple Phase III and Phase II studies previously conducted and published.
Point 2: For the 52-week safety portion of the trial, we do not know how Zerenex performed vs. the other two therapies.
PropThink Counterpoint: All patients in the trial had their medicines adjusted (titrated) such that phosphate levels were reduced to ~5.5mg/dL (a typical clinical goal). Therefore, it is assumed that all of the therapies in the trial reduced serum phosphate in a similar manner during the 52-week period. This is confirmed by the results announced from the trial (required by European regulators) in which Zerenex achieved “non-inferiority vs. Renvela at week 12 of the safety portion of the study.” Importantly, the press release does mention that hemoglobin levels in the Zerenex arm were better managed (statistically significant) than the comparator drugs in the 52-week portion of the trial, a very impressive result overlooked by the writer.
Point 3: Iron was not given to placebo patients, while treated patients got the benefit of Zerenex, which contains iron.
PropThink Counterpoint: While oral iron was not allowed in the trial (rarely used in dialysis patients anyway), IV iron was, and patients received IV iron in both groups when serum ferritin and TSAT were at or below 1000ng/mL and 30% respectively. These are typical treatment thresholds used in practice by dialysis centers, and this is why the FDA agreed with the trial design. Importantly, 51.6% less IV iron was used for patients on Zerenex vs. placebo to keep iron levels above these common thresholds. This study was specifically designed to see just how much iron was required to maintain these levels.
Point 4: “What the Phase III results from the Keryx study show is that although the ferric salt is normally absorbed poorly here the mega doses push the levels absorbed to significant levels.”
PropThink Counterpoint: Yes, Zerenex has shown to produce significant absorption of iron, because of the company’s unique formulation. Megadoses of other iron formulations have been given to patients before, and iron absorption similar to Zerenex has never been achieved. This is actually a key reason to own KERX, and demonstrates the company’s unique patent-protected formulation.
Point 5: “A maker of a product available "over the counter" could also produce [a ferric citrate product] to be available only through prescription, according existing to rules.”
PropThink Counterpoint: We think the author means a generic but is forgetting about patents on methods of use, manufacturing, and other formulation properties.
Let’s remember that the FDA granted the company a special protocol assessment (SPA), and given the very impressive results, Zerenex is heading for approval. Knocks on the design of this trial are simply ridiculous.
Valuation note: KERX trades below the annual cost savings it will create. When one thinks about the value of a drug product, understanding the macroeconomics of what alternative treatments cost, as well as the costs of a patient’s poor quality of life or lack of productivity, are typically considered. In the case of Zerenex, Keryx’s drug is expected to directly save a substantial amount of money in the dialysis setting given its ability to spare IV iron and erythropoetin stimulating agent (ESA) use, on top of the drug’s phosphate binding benefits. With a demonstrated ability to reduce IV iron use by ~52% and ESA treatments by ~27%, $560 million and $2.7 billion markets in the U.S., respectively, the savings to the U.S. healthcare system alone is estimated at $1.02 billion annually. With a market cap of less-than $500 million, we note that KERX trades substantially below the long-term dollar benefit that Zerenex will create for the healthcare system in the U.S. and abroad. An interesting calculation and food for thought with regard to this controversial stock and its true value. Remember, PropThink already returned 200%+ on KERX our to long-term readers and subscribers, but we reiterate our interest at these depressed levels.