(By Mani) Investors are undervaluing the potential of Zerenex, which has led to the 35 percent drop in the shares of Keryx Biopharmaceuticals Inc. (NASDAQ:KERX) year-to-date. The market is concerned with pricing pressures to Zerenex' from Sanofi Aventis' generic Renagel and bundled reimbursement anticipated in 2014.
However, the stock has an attractive risk/reward profile over the next 12-18 months. In addition, the clinical risk associated with Zerenex is relatively low, and once the Phase III is completed (around year-end), investors may revisit the commercial potential of Zerenex.
Zerenex, which is being studied for the treatment of hyperphosphatemia (elevated phosphate levels) in patients with renal failure, is being conducted pursuant to a Special Protocol Assessment (SPA) agreement with the FDA. Zerenex, if approved, is expected to generate in excess of $300 million annual sales in the US, and about $90 million a year in royalties from Japanese sales by partner JT Torii.
"We believe that the Phase III Zerenex program carries relatively low clinical development risk due to the validated underlying mechanism of action and existing data. NDA/MAA filing anticipated in 1Q13," Oppenheimer analyst Boris Peaker wrote in a note to clients.
Zerenex's reduced pill burden is a significant competitive advantage with iron delivery as an upside to the product profile. Zerenex may be launched into the market below Renagel's pricing, allowing it to capture significant market share based on pricing and its attractive product profile.
"We looked closely at the potential generic pricing pressure using data from government agencies as well as market analysis, and we believe that our pricing assumption of $2,500/ptn yr is justifiable," said Peaker, who has an "outperform" rating on Keryx shares adding that $2,500/ptn is approximately a 50 percent discount to current Renagel/Renvela pricing.
Commercially, Zerenex has a potential timing advantage to Renagel/Renvela since it is likely to enter the market prior to a generic Renagel/Renvela. As such, it can be priced at a significant discount to Renagel and potentially leverage the favorable pricing to gain market share.
Peaker anticipates Zerenex to show an increase in iron parameters and an associated reduction in EPO dosing, and patients treated with Zerenex saw a statistically significant increase in serum bicarbonate in the Phase II study. This may help to address metabolic acidosis, which is an adverse event in many dialysis patients due to the inability of the kidneys to remove sufficient acid from the body, leading to low blood phosphate.
"While it is not clear at this time how these attributes may affect Zerenex's market share, we believe that if this profile is further confirmed in the ongoing Phase III study, Zerenex may capture more than the 15% peak market share in our base-case model," Peaker added.
Meanwhile, Keryx's cash balance of $31 million at the end of the first quarter of 2012 is adequate to complete the development of Zerenex, and additional financing is not required until the drug is approved.