KERX continues to prepare for Zerenex NDA. Last week we had a chance to speak with Keryx management and ask about the delay in the Zerenex Phase III clinical trial results. Management noted that the delay has been little more than a misjudgment on the overall timing to finalize patient information from the trial, and that they themselves are still awaiting the results. In the interim, Keryx continues to move forward with the assembly of Zerenex’s New Drug Application (NDA). The company is working on all of the modules of the drug application, including the CMC (Chemistry Manufacturing and Controls) section; preclinical data; toxicology studies; and the integrated safety and efficacy database, which is robust based on previous trials and awaits the Phase III results from the ESRD (End Stage Renal Disease) trial. Moving the NDA forward is a positive sign, and assuming that the Phase III data are favorable, the company should be in a position to file an NDA for Zerenex in the U.S. shortly thereafter.
Japanese opportunity for Zerenex may be larger than initially thought; U.S. opportunity could be pure upside. JT Tori, Keryx’s Japanese partner for Zerenex, filed a New Drug Application for the drug in Japan on January 7th, and while full details of the application were not disclosed, we now assume that JT Tori may have filed for both ESRD and Chronic Kidney Disease (pre-dialysis patients). Our new assumption is based on reviewing the set of prior studies run by JT Tori, including a Phase III trial in patients with CKD (see here). We previously wrote that the Japanese opportunity for Zerenex could be worth $1 per share to Keryx, but our estimate may be too conservative as it is based only on the ESRD (dialysis) indication. The market for phosphate binders in Japan is estimated at $335M annually, however, this is only in the ESRD patient population. We assume that Zerenex should take at least 35% of the ESRD treatment market, or $117M in annual sales, given the drug’s strong phosphate binding effects and likely anemia benefits. JT Tori is obligated to pay royalties to Keryx in the low double digits (we assume an average of 13%), suggesting that revenues to Keryx could reach approximately $15M annually. Valuing the royalties at a 4x or 5x multiple of sales, and with 72M KERX shares outstanding, the Japanese commercialization of Zerenex in ESRD is thus worth approximately $1 per share to KERX. Considering that the pre-dialysis (CKD) segment is estimated to be 3 to 4 times larger than the ESRD segment as in other countries, potential Zerenex sales, and subsequent revenues to KERX, could be 3x to 4x higher than our initial assumptions. As a result, KERX at ~$3.00 per share may be fairly valued on the Japanese opportunity alone, suggesting that the U.S. opportunity offers significant upside to the stock.
Delay for phosphate binder inclusion into the Medicare dialysis “Bundle” will benefit Zerenex’s market debut. When the company put out this press release, KERX shares didn’t react much, as Zerenex’s Phase III data were not yet released, which clearly takes precedent over any potentially beneficial news for the drug’s market opportunity. However, if the company releases positive Phase III results this week for the drug, investors are likely to start factoring in the benefit of Medicare’s delay in including phosphate binders as part of the “Bundle.” Because phosphate binders will continue to be reimbursed outside of the dialysis bundle for an additional two years (pushed out from 2014 to 2016), dialysis providers will not be as concerned about price, and therefore, Zerenex can be adopted primarily based on its differentiated and superior clinical benefits. While KERX expects to price Zerenex competitively to gain a rapid foothold in this large market, the lack of interference from bundle constraints removes an important barrier that may have impacted the drug’s initial launch ramp. Zerenex is anticipated to be reimbursed under Medicare Part D once approved, and physicians will have two additional years (before dealing with bundle issues) to become familiar with the drug and its benefits relative to competing phosphate binders. We believe this increases the value of Zerenex’s U.S. opportunity, and any potential strategic buyers of the company will see the benefit of the delayed bundle effect. Nevertheless, for KERX shares to take advantage of this news, Phase III data need to be favorable. Hence, this is another reason why the stock may rip higher on positive results from the anticipated Phase III trial.
Shares of KERX have sat relatively quiet in the $3.00 range since late last year when Phase III data for Zerenex was set to be released. Results are now expected imminently, and positive phosphate binding data should send the stock up to $5.00 or more, while favorable anemia benefits in ESRD patients on top of strong phosphate binding data could send KERX even higher. On the downside, if the trial data for the U.S. are not robust, we believe the revenue potential for Zerenex in Japan may be able to support the stock at or near current levels as investors better understand this opportunity. Overall, we like the long bet on KERX heading into the Phase III results, and playing the stock with options can limit one’s risk on this binary event.