Will Kidney Disease Drug Success Push This Stock Higher?

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Keryx (NASDAQ: KERX) announced that its Japanese partner, Japan Tobacco, has filed its New Drug Application (NDA) with the Japanese Ministry of Health, Labour and Welfare for marketing approval of Zerenex in Japan. Zerenex is used to treat hyperphosphatemia in patients with chronic kidney disease (CKD).

Efficacy and safety data from several successfully completed Phase 3 studies in CKD patients with hyperphosphatemia in Japan has provided ample support for the filing. Keryx will receive a non-refundable payment of $7 million for the achievement of the NDA filing milestone under the license agreement. Ron Bentsur, Chief Executive Officer of Keryx, said that the company eagerly awaits top-line results from its U.S. long-term Phase 3 study in dialysis patients, and U.S. NDA and European MAA filings will follow suit.

Completed Studies

Zerenex has completed a long-term Phase 3 study as a treatment for end-stage renal disease patients with hyperphosphatemia on dialysis. The top-line data from this Phase 3 study is expected soon. Zerenex is also being evaluated in a Phase 2 study in managing serum phosphorus and iron deficiency in anemic patients with Stage 3 to 5 CKD not on dialysis. Keryx retains a worldwide exclusive license to Zerenex from Panion & BF Biotech and has sublicensed the development of ferric citrate in Japan to JT and Torii. JT and Torii will pay Keryx up to $100 million in up-front license fees and payments upon the achievement of specified milestones, of which $35 million has been received by Keryx to date. Upon commercialization, JT and Torii will make royalty payments to Keryx on net sales of the drug in Japan. JT and Torii are responsible for all development and commercialization costs in Japan.

Zerenex & Market Opportunity

Zerenex is a ferric iron-based compound taken orally to bind phosphate in the gastrointestinal tract. Patients with chronic kidney disease (CKD) normally have elevated levels of serum phosphate, because their disease affected kidneys are unable to efficiently remove excess phosphates that come from foods consumed. Elevated phosphate can cause significant health problems in CKD patients. Zerenex is undergoing Phase 3 testing for hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal disease (ESRD), which are CKD patients on dialysis.

Evidence from clinical trials suggests that the company's Phase 3 trial has a high probability of success beyond the ESRD patient population. Keryx is also preparing to test the drug in pre-dialysis CKD patients, which could significantly expand the potential market opportunity. Analysts estimate that peak sales for the ESRD market will be around $300 million yearly and could be more than $500 million if the pre-dialysis treatment is successfully developed. The global market for phosphate binding therapies is growing from a base of $1.5 billion in sales annually, driven by the growing number of dialysis patients in emerging markets.

Cash Position

At the end of the third quarter of 2012, Keryx had cash and cash equivalents of $20.2 million, compared to $39.5 million on Dec. 31, 2011. Keryx says this will be sufficient to take Zerenex through its major regulatory milestones. In addition to the single-digit million dollar milestone payment due from Japanese partner JT Torii,  another low double-digit million dollar milestone will be payable when Zerenex receives Japanese approval. The company is unlikely to run out of cash, which can be a genuine risk with many early-stage biotech companies. The biggest risk is, of course, disappointing results from the Phase 3 trial, which would have a negative impact on the share price, but on the basis of evidence disclosed so far, this does not seem likely.

The Competition

The main phosphate binder on the market is polymer-based Renagel/Renvela by Genzyme, a division of Sanofi (NYSE: SNY), which is the market leader with approximately $800 million in annual sales. Second is lanthanum-based Fosrenol, which has roughly $325 million a year in sales and is made by Shire (NASDAQ: SHPG), but the potential build-up of lanthanum limits its suitability for long-term use. Next is calcium-based PhosLo, which is off patent. Many patients stock up on a generic version of PhosLo because of its affordability, but the risk of hypercalcemia over time usually causes patients to shift to Renagel or Renvela (improved version of Renagel). Around a quarter of patients on phosphate binders switch brands each year and provide opportunities for a new product in the segment. The challenge for Zerenex is to provide sufficient differentiation for its product over the competition and demonstrate that it is more cost effective.

Summary

Dawson James Securities has reiterated its "market outperform" rating and $4.00 price target on Keryx. Keryx is currently trading around $2.81. I see an upside of at least 25% without any strong possibilities of a reduction in the current price. Investors looking for exposure to the biotech sector should consider Keryx.


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