Does Keryx's Silver Lining Have a Cloud?

First of all, congratulations to investors of Keryx Biopharmaceuticals (NASDAQ: KERX  )  who successfully played the company's latest binary event. Chances are good that most shareholders have at least doubled their original investment. Of course, if you opened this article you are well aware of that. What investors really want to know is whether the ride will continue.

If Keryx navigates its way to the market successfully, then this could be just the beginning of exciting news events. However, investors should know that there are several ways for this story to end badly.

Results green light the future
The company recently announced that ferric citrate -- an iron-based small molecule that binds phosphate in the bloodstream -- nailed its primary endpoint and all key secondary endpoints. After evaluating 441 patients with end-stage renal disease on dialysis, it was determined that Zerenex was more effective than the placebo (4.9 mg/dL to 7.2 mg/dL) in maintaining baseline phosphorus levels.

Meeting the primary endpoint is always a good first step toward approval, but in Keryx's case crushing the secondary endpoints was crucial for its future. Why? Zerenex is the lone ranger of the company's pipeline and will face generic competition upon reaching the market. Other phosphate binders -- such as Sanofi's (NYSE: SNY  ) Renvela and Fresenius' (NYSE: FMS  ) Phoslo -- can require intravenous iron supplements to keep blood iron levels at acceptable levels.

The good news for Keryx is that Zerenex crushed its two competitors head-to-head in improving iron storage. The drug candidate was shown to increase iron storage by 50.8% over baseline at the 52-week watermark, while the active control group took either Renvela or Phoslo and saw a negligible increase of just 1.5%.  

A biting past
Keryx went cliff diving after a horrendous showing in an earlier phase 3 trial evaluating perifosine for colorectal cancer in conjunction with Aeterna Zentaris. Despite being left for dead, the recent pop on surprising Zerenex results demonstrates that Keryx will not become a zombie biotech, leaching equity from unknowing investors for years on end with little to show. Nonetheless, the company's big bet on perifosine drained valuable resources that could have otherwise been used for advancing Zerenex. The balance sheet displayed an abysmal $20.25 million in cash as of the most recent quarter, which is clearly not enough to advance Zerenex to market or further in its current phase 2 trial for patients with anemic chronic kidney disease.  

Post-results outlook
Too many investors think that announcing successful results is the end of the game, but in order to succeed long-term the company will need to do several things. First, it needs to raise capital. Check. The company announced Tuesday that it will sell $55 million worth of shares to fund pre-launch activities. A partnership with a more experienced (and financially strong) pharmaceutical company could be a more favorable financing option for Keryx shareholders, but time will tell if the current financing will be enough. Remember, Zerenex may not hit the market for another year, and the phase 2 trial will need money to stave off delays.

Second, while it looks like Zerenex will have no problem getting a nod from the FDA, Keryx has no experience marketing or manufacturing a drug -- both critical components to a successful market leading drug. Marketing expenses can balloon quickly, and there is no guarantee that it will pay off at all. Doctors may be inclined to give their patients a cheaper generic drug, such as the generic version of Renvela from Impax Laboratories (NASDAQ: IPXL  ) , before determining if Zerenex is a better option. Of course, the recent results may erase those doubts.

As for manufacturing, Keryx will likely follow suit of other small-cap pharmaceutical companies and contract a third-party drug manufacturer. This was certainly implied in the most recent press release in which the company announced it would raise capital to "increase inventory" prior to launch.

And although it is still some time away, investors will be looking at pricing for Zerenex. Unless doctors come knocking down the door to take ferric citrate off the company's hands, CEO Ron Bentsur will need to find a Goldilocks price -- Zerenex needs to be cheap enough to compete with generics, but at just the right premium to maximize revenue. Once again, the results for key secondary endpoints seem to point to favorable pricing for Keryx and investors.

Foolish bottom line
Investors will likely be able to enjoy the ride with few bumps should Keryx successfully navigate its way to the market. Unfortunately, every potential misstep will be magnified given the fact that Zerenex is the only drug in the company's pipeline. What's more, should muted enthusiasm greet Zerenex's market launch -- something all too common with drug debuts -- the share price could be sent tumbling. The overwhelming results in the drug's favor do bode well for Keryx and its future, but don't tune out the cautiously optimistic voice just yet.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2013, at 4:18 PM, Kleeno65 wrote:

    You failed to mention that the cost of the pending generics is significant, where Zerenex can be produced competitively. Also, by reducing intake of EPO and or Iron related drugs, can equate to a savings of $750 million, which would offset any savings when the other agents go generic. This is also not taking into account the money saved in nursing costs, and time, which is required to deliver the EPO or Iron when dialysis patients levels become low. I suggest anyone who has interest in the Keryx story to listen to this past Monday's Conference call releasing the Phase III data on Zerenex.

  • Report this Comment On January 30, 2013, at 4:19 PM, Kleeno65 wrote:

    I should state, the "MANUFACTURING" cost of the pending generics is significant.

  • Report this Comment On January 30, 2013, at 8:20 PM, stepstocks wrote:

    I think you forgot to mention the milestone payments from JT Tori (which would equal $65,000,000 upon Japan approval) and royalties on sales in Japan.

  • Report this Comment On January 30, 2013, at 9:58 PM, TMFBlacknGold wrote:

    @stepstocks

    You're right, I totally left out JT and Torii in Japan. The total milestones could total up to $100 million, but most of that will come after commercialization. So while it will boost the company's cash it will not help immediately (thus the need to raise cash Tuesday).

    Thanks for pointing that out. The original announcement:

    http://investors.keryx.com/phoenix.zhtml?c=122201&p=irol...

    --Maxxwell

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