KERX is a $1.3b biotech company with one product, Auryxia (ferric citrate), approved in Q3 2014. Because of its slow launch, the stock price remained subdued at around $12-$13. Now KERX looks more like a long term short.
- Baupost has about 19% of KERX. He wasn’t all successful at biotech (check AVEO), so don’t take his underwriting as Midas.
- Business wise, their drug only offers incremental improvement, and is facing a potential generic competitor; what’s even more devastating is that the claimed edge may not exist.
- Their product may be a negative NPV product, maximum PT $18.
1. To elaborate on the second point:
KERX is directly competing with Sanofi’s Renvela, current market leader with 2014 global sales €684m. The sales number dropped -13.6% comparing to 2013, partly due to generic competition.
The whole selling point is that Auryxia is not only Renvela, i.e., reducing serum phosphate level in End Stage Rena Disease (ESRD) patients, but also provides iron supplements as most dialysis patients are anemic. The dual benefits would cut costs for care providers and insurers as obviously less iron supplement drugs are needed.
a. First of all, if generic renvela comes to market, there is limited chance for Auryxia. In below table ESA is one of the most common drugs used to treat anemia. Currently Amgen’s Epogen is leader.
|Patient Groups Approved||Cost Estimates|
|Renvela + ESA (current standards)||Chronic kidney disease (CKD) on dialysis||$12k + $6k|
|Auryxia + less ESA||Same as 1; is working on Phase 3 trial to expand label to non-dialysis patients;||$12k + $2k~$4k|
|Generic Renvela + ESA||Same as 1;||<$2.4k + $6k.|
Remember generics will be 80% cheaper. Currently a generic version is not widely available but Impax has started shipping small quantity under Sanofi settlement since 2014 and is looking forward an FDA approval. I am not very sure why FDA hasn’t approved generic Renvela, but I’m optimistic that it will eventually crawl its way into the market. Then Auryxia is at serious risk being excluded in all major formulary.
b. The management has reiterated Auryxia is beneficial for hospitals and dialysis centers (DCs) as it may save up to $7,000 per patient and reduces injection of ESA. But the reality is that DCs have no control over what nephrologists prescribe. It is clearly seen in that Velphoro, developed by Fresenius, controls less than 10% of market. If the market is like what KERX imagined, Fresenius could ask all their centers use Velphoro, that is almost 40% of market. But that didn’t happen. And it is exactly why KERX has hired a large group of salesperson to cold call and pitch nephrologists.
For nephrologists, there is not a lot of incentive for them to change to a new treatment plan. They may have years of experiences prescribing Renvela. If the drug is not like a new cancer life saver, but only marginal improvement, I don’t see them change their practice. And remember, oral phosphate binders are included in medicare, they don’t have to think about cost-saving.
2. Model and assumptions (very very bullish case)
a. It is market belief that Auryxia doesn’t’ have a strong patent protection. Current designation of New Product Entity has only 3 years of exclusivity, which should end in 2017. I give a very optimistic scenario of exclusivity until 2022.
b. Success in label expansion and Europe launch (very likely).
c. Peak sale from ESRD patients is $900m in 2022. If we compare to ~$800m 2014 global sales of Renvela, it is essentially all Renvela market and grows at 5% CAGR. And there is another $570m from NDD-CKD patients after label expansion.
d. NPV of net income up to 2022 is $727m using 10% discount rate. The interpretation is if we invest $1.4b to buy out the firm now, we only receive $727m in lifetime of the drug. And because the company doesn’t have a R&D platform, they have to acquire other drugs and take them to clinical trial, it dampens the value of the company. If we assume terminal growth of 1%, price target will be $18, and terminal value consists of 65% of the price.
Now the challenge for Keryx management is that:
a. Prescribe as many as possible, no matter through voucher or promotion or sample test;
b. Before generics controls the market, charge a little less than Renvela to provide the incentive and take as many cash home as possible.
c. Make progress on the clinical trials for label expansion, do secondary offering before capital market lose patience.