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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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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