KERX: Striking While the "Iron's" Hot; Target Upped to $15
Keryx announced that the long term safety and efficacy Phase III study
with Zerenex met its primary and key secondary endpoints. We believe the
true differentiated data come from the secondary endpoints of iron sparing,
showing significant reductions of i.v. iron and ESA usage. We project Zerenex
will reach the market in 2014, reiterate our Buy rating and are raising our price
target from $7 to $15.
Event - On to the FDA
The long term Phase III for Zerenex (under SPA) met its primary and
key secondary endpoints. Keryx has indicated that they now intend to
submit regulatory filings to the FDA and EMA in 2Q13. We believe the key
differentiating data comes from the iron sparing benefits which Zerenex has
shown. Specifically, Zerenex produced statistically significant increases in
Ferritin, TSAT and hemoglobin levels. From a clinical standpoint this led to
statistically significant reductions in i.v. iron usage (51.6% decrease) and ESA
usage (27.1% decrease). These reductions in i.v. iron and ESA translate to
~$750 million in potential savings (drug costs alone) and does not take into
consideration the personnel costs of administering these drugs. Therefore we
believe the pharmacoeconomic benefits of this oral agent are clear should
Zerenex be approved.
Zerenex now has a meaningful opportunity to become the first phosphate
binder to also have clinical meaningful properties to manage anemia
associated with dialysis patients. We believe the Zerenex story has been
significantly derisked for Keryx and investors alike. With anticipated cost
pressures in 2016 on bundling phosphate binders with dialysis costs, the
differentiated profile of Zerenex has the potential to be excluded from these
pricing pressures, especially with the data supporting its ability to reduce i.v.
delivered drugs. A key question in our minds now is what is the next commercial
step for Zerenex. With Phase III data under SPA in hand and regulatory filings
on the short term horizon, we believe this drug is an attractive asset to potential
We reiterate our Buy rating and are raising our price target from $7 to $15.
We believe that Keryx is now well positioned with Zerenex (under SPA) to
garner both U.S. and E.U. approval in 2014. We believe that Keryx now has
the ammunition to drive either a partnership or even an ultimate takeout of the
company based on Zerenex' differentiated profile.
Long term Zerenex Phase III data dazzle, hit all key endpoints
Conference call highlights:
Participating on the call was Dr. Julia Lewis, Professor of Medicine, Department of Nephrology, Vanderbilt University School of Medicine who acted as the Study chair for the Zerenex Phase III program.
• Zerenex has the potential to be the first phosphate binder to move into the anemia management arena in
• An additional primary endpoint was met based on the Scientific Advice obtained from the EMA, which was
Zerenex showing non-inferiority to Renvela at week 12 for phosphate level reduction.
• Dr. Lewis indicated that the Ferritin/TSAT levels increase quickly following the start of Zerenex use and
quickly peak and plateau in the 4-5 month range, which she interprets as the body’s natural iron absorption
• The reductions in i.v. iron and ESA use seen in this study could represent ~$750 million in savings in the
U.S. alone, which talks to our earlier discussions regarding Zerenex’ potential pharmacoeconomic benefits.
Dr. Lewis indicated that these monetary savings only account for the costs of the drugs and not the personnel costs which are also significant. Nurses spending less time with intravenous procedures could
increase the quality of their care in other areas.
• The dropout rate on the study was discussed and was generally in line with other studies with other
phosphate binders and potentially better. The overall dropout rate on the Zerenex arm was 34% (primarily
due to initial GI side effects) and was 25% on the control arm. Recall that the dropout rate on the Renagel
Phase III study was 39% and 63% for Fosrenol. Serious adverse events were 34% on the Zerenex arm and
43% on the active control arm. No clinically meaningful differences were seen in serum calcium or liver
• Dr. Lewis shared here positive surprise with the extent of the iron sparing benefit conferred by Zerenex. ~70-80% of dialysis patients receive i.v. iron and potentially moving to an oral form has distinct advantages
including: 1) when i.v. drugs are introduced, there is an increased risk for infection, 2) i.v. iron has high
allergenicity, 3) giving an oral form of iron allows the body to absorb it as needed, compared to blasting the
patient with the i.v. form which can be not be as regulated by the body.
• Many investors have been looking toward potential pricing pressures on Zerenex and other phosphate
binders in the future based on the pending legislation in 2016 where dialysis drugs will be bundled together
and feel significant pricing pressures. Management believes that these pricing pressures will be focused
mainly on i.v. drugs and that Zerenex’ oral and iron sparing benefits could make its commercial profile
attractive from a cost perspective.
• Regarding the JT Torii partnership in Japan, recall that JT filed for Zerenex approval several weeks ago.
Keryx still has ~$65 million in milestone payments due to them (regulatory and sales based) as well as
royalties based on sales in Japan (low double digits escalating to mid-teens based on sales milestones).
• Patent protection. Zerenex has several families of issued and pending patents including composition of
matter and methods of use. The core patents expire in 2023 with additional patents anticipated to provide
protection to the 2028-2029 timeframe. Additionally, management has indicated that they will file additional
patents now based on the differentiated iron sparing data.
Our valuation of Keryx is based on our probability-weighted clinical net present value (NPV) valuation model. We believe this method is appropriate in capturing the value of the clinical stage pipeline. It allows for the flexing of assumptions based on key factors such as chance of success, peak sales estimates, and year of commercial launch. Our valuation of Keryx is based solely on the Zerenex opportunity split into the three primary geographies where we project approval for the drug; U.S., E.U. and Japan. A level of conservatism in our valuation model comes from our assigned multiple and discount rate for which we apply the historical values for large pharma (17.0x P/E and 15% discount rate) rather than the sometimes inflated non-profitable biotech multiples in the 30-40x range. We have made the following changes to our clinical NPV valuation as well as believe our assumptions remain conservative based on the following:
• Adjust base year to 2013
• Our projected chance of success for Zerenex has been increased from 55% to 80% in the U.S. and E.U. and 90% in Japan. We leave additional upside to our chance of success projection based on remaining
underlying regulatory risk both pre and post filing for approval.
• We believe our projections remain conservative based on our peak sales projections, which we are leaving
unchanged. These peak sales projections represent, in our belief, the “base case” scenario for Zerenex not
taking into account the demonstrated differentiation with regard to iron and ESA sparing benefits.
• While Keryx has indicated that they will look at multiple potential options in commercializing Zerenex (which we read as ranging from going it alone in certain territories to partnerships, to outright takeout of the
company) we currently model the company as maintaining rights in the U.S., partnering the E.U. (projected
30% royalty rate, which is added to the existing partnership with JT Torii (projected 12% average royalty).
Keryx Clinical NPV Valuation Model
Source: ROTH Capital partners estimates
Drug name Indication Status Launch Success
(US$m) Economics Profitability NPV (US$)
Zerenex - U.S. Hyperphosphatemia Phase III 2014 80% 350 100% 25% 7.05