Reflect on yesterday’s KERX – Baupost deal

As a long term bear, I’m actually quite curious about the future of Keryx (NASDAQ:KERX) and what Seth Klarman’s view of the company.

On 10/15/2015, Keryx announced a cash infusion from its largest shareholder, Seth Klarman’s Baupost for a $125M convertible senior notes due 2020. The transaction will increase the company’s cash position to ~$225M. In exchange, Baupost will have a board seat and oversea a cost reduction plan to reduce operating expenses by ~$25M in 2016.

As of June 30, 2015, the company had cash of $131M, and run rate of operating loss $27M. Without the cash infusion, the company will go to bankruptcy in less than 1 year if the sales of Auryxia doesn’t improve.

What does the deal mean to Baupost?
Baupost owns 25,791,678 shares (source: Yahoo finance), that is $103M. If they don’t do anything, the shares will go to zero in a matter of time. Now they invest $125M in convertible notes (convertible at their discretion for $3.74 per share), $100M in common stocks. If the shares double, they get $225M ; if the shares drop 50%, they lose $50M; if company go bankrupt, they lose $100M. The cash help the company to stay in the game, and provides a nicer risk/reward for Baupost than you. And now they have the time to even seek acquirer (Valeant for example) if Auryxia secures a broader approval from EU and US regulator.

What does the deal mean to the company?
It increased their chance of success. Now they must cut expenses, lay off, and re-focus on selling. There are inherent reasons why Rx, patients and nephrologists don’t like the drug. But there is some opportunity if they secure the non-dialysis-dependent (NDD) market. And maybe they even can do more with the money, like buying another drug IP, etc.

What does the deal mean to common shareholder?
I think until we hear further disappointing sales news, the price will not drop a lot, think now the company trades at $400m market cap, and $225m of it is cash. Not good for short sellers. But bulls should think about dilution of 25~30% when Baupost decides to convert.

What do i think of the prospect of Auryxia?
…Nah…I don’t think it is exciting drug and I won’t buy it if I own a pharmaceutical company.

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Nivalis Therapeutics (NASDAQ:NVLS) and why Deerfield Management is betting big on it

A recent IPO caught my eyes as Deerfield Management has about 24% of the company. As far as I know, Deerfield is fundamental-driven, scientific and successful. There must be something. So I took a deeper look.

Nivalis Therapeutic Inc., (NASDAQ:NVLS) is a small development stage biotech company targeting cystic fibrosis, IPO priced at $14, and underwriter subscription helped them take home $88 million. The leading drug candidate N91115 is currently in phase 1b. The company said it will use $12 million to complete a phase 2 trial and $35 million for an anticipated phase 3 trial. From the time Deerfield took positions in the board, it seems they helped the company design the strategy and redirect research focus to current leading drug.

The drug N91115 piggybacks on soon-to-be approved treatments from Vertex Pharmaceuticals (NASDAQ:VRTX) to enhance effectiveness and outcomes. Basically, the success of NVLS hinges on three things:
a).Successful commercialization of Vertex’s Orkambi;
b).Proof of clinical benefits in N91115;
c).Vertex’s willingness to acquire them.

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KERX: reasons to avoid – part 1

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.

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