Baxter International announced on Tuesday that it has agreed to buy Swedish based Gambro for roughly $4.0 billion, or 26.5 billion SEK in cash.
The deal fits within Baxter's strategy of saving and sustaining human lives. The transaction creates a complementary dialysis portfolio of chronic and acute kidney diseases. The deal allows Baxter to capitalize on attractive global dialysis fundamentals. The global dialysis market grows at a compounded annual growth rate of 5-6%.
Gambro employs 7,500 workers in 13 production facilities across 9 countries.
For Baxter to continue being dominant in Europe they will have make a deal with Kerx for the European rights.
What to look for from the Phase III trials in terms of potential anemia benefits.
Key parameters for evaluating Zerenex's potential benefits in anemia are: iron saturation (TSAT and ferritin levels), hemoglobin levels, IV iron use, and ESA use. Of these parameters, we note that Zerenex likely needs to demonstrate that it can improve iron saturation levels (TSAT and ferritin levels) to get doctors to consider the phosphate binder's anemia benefits in practice. Baseline levels for dialysis patients are around 30% and 500ng/mL for TSAT and ferritin, respectively, and should improve by a minimum of 5%-10% to be considered clinically meaningful according to leading nephrologists. After clinically meaningful iron saturation is demonstrated, any one of the other parameters changing in a favorable manner would confirm the anemia benefits of Zerenex. While an improvement in hemoglobin (Hb) levels by 5% or more would be very impressive to physicians, we note that major dialysis providers like Fresenius (FMS) and DaVita (DVA) would love to see at least a 6-10% decline in either IV iron use and/or ESA use so they can reduce the costs of using these expensive anemia treatments in their centers. With the IV iron and ESA markets tracking at ~$560 million and ~$2 billion annually in the U.S., respectively, according to Nephrology News, one can see how 6%-10% reductions in the use of these treatments would be important in lowering the overall cost of care for U.S. dialysis patients. Based on our research, favorable iron saturation results and rising Hb levels in the Phase III trials for Zerenex-treated patients would be very positive news for KERX shares. The ability to lower IV iron and/or ESA use would be upside.
Potential anemia benefits for Zerenex could result in $250M or more in peak annual sales.
Should we see results that demonstrate favorable anemia benefits with Zerenex, KERX shares could trade to nearly $14 per share. We arrive at this estimate by the sales assumptions below, and note upside if Zerenex can demonstrate at least a 6-7% reduction in ESA use, and at least a 10% reduction in IV iron use, in which the product should take a minimum 35% market share. Note that the Zerenex pricing estimate is slightly higher in the table below vs. pricing for Zerenex's phosphate binding benefits alone (above).
Zerenex Sales Estimates With Anemia Benefits
We apply a 4x multiple to the Zerenex peak sales estimates above to arrive at a valuation of just under $1 billion ($248M x 4 = $991.5M), or $13.77 per share. Note that our assumption is for peak sales with the low end of anemia benefits. If Zerenex substantially reduces IV iron and/or ESA use in the long-term Phase III studies, peak sales estimates are likely to go even higher. Recall that annual sales for market leader Renagel are currently ~$800M worldwide. We use a 4x multiple on peak sales with the anemia benefit instead of the 3x that we used for the phosphate-only sales because the anemia benefits, if demonstrated, could result in new intellectual property that would protect the franchise for a longer period of time.
If Phase III results are positive in pre-dialysis patients (CKD), Zerenex sales could be 4x higher than in dialysis.
KERX recently initiated a Phase II trial evaluating Zerenex in CKD patients that are not yet on dialysis. Importantly, the number of U.S. patients seeking treatment in this segment that are anemic is estimated at 1.6 million, according to IV iron manufacturer, AMAG Pharmaceuticals (AMAG). This means that the CKD opportunity for Zerenex is roughly 4x larger than the dialysis market. Patients in this setting typically take oral iron supplements to combat anemia, however, CKD patients are known to have trouble absorbing iron through the intestine in addition to experiencing gastrointestinal side effects commonly associated with oral iron therapy. In fact, studies have shown that only 31% of CKD patients are able to achieve target Hb levels ( 11g/dL) when taking oral iron. IV iron is used in the CKD pre-dialysis setting, however, the percentage of patients receiving intravenous iron is low due to the need for IV administration at an infusion center, the high cost of therapy, and serious potential safety issues with IV iron treatment. Based on a study conducted by Avani D. Joshi et al., use of IV iron is as low as 8% in CKD patients. As a result, if Zerenex shows positive results in CKD pre-dialysis patients, another major market opportunity opens up for the product.
Pre-dialysis results anticipated before year-end.
While the company's CKD trial has just begun, Japanese partner JT Torii will report out results from its pre-dialysis CKD study later this year. These results and results from KERX's long-term dialysis studies, if positive, could instill confidence that Zerenex has a high probability for accessing the large and lucrative pre-dialysis CKD setting. Not only will shares of KERX begin to reflect the economics of a potential CKD indication if the data are positive, but also, investors are likely to speculate that a new range of potential suitors could pursue an acquisition of the company. Companies that I believe are most likely to consider buying KERX on positive phosphate binding results include Amgen (AMGN), Takeda (TKPHF.PK), Fresenius , Davita , AMAG, and Affymax (AFFY), however, with positive CKD results, many of the major pharmaceutical companies could take a look at KERX as well. As a result, under several scenarios, a take-out thesis could emerge for KERX, which could cause the shares to trade at levels beyond the valuation ranges calculated above.
Overall, I believe KERX has a very favorable risk-reward profile, and given the upcoming catalysts for significant Phase III trial results, now is the time to decide whether this one is going to be under your Christmas tree.