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Keryx Biopharmaceuticals: A Highly Asymmetric Bet For The Long-Term Investor

Summary

Keryx is facing what is likely a solvable, short-term problem in manufacturing ferric citrate.

"Bear Case" peak sales potential for Auryxia provides a valuation floor near the current market valuation.

Indication expansion to Iron Deficiency Anemia based on solid Phase 3 data is being heavily discounted.

Thesis Summary

Keryx Biopharmaceuticals is a single asset biopharma company that markets Auryxia (ferric citrate) for hyperphosphatemia in patients with chronic kidney disease (CKD) on dialysis, and is additionally seeking FDA approval via sNDA for an indication expansion to treat iron deficiency anemia in non-dialysis dependent chronic kidney disease patients (IDA in NDD-CKD), based on Phase 3 trial results released 4 months ago. Thus, the company has one marketed asset with a major indication expansion soon to come, but the market is discounting the sales prospects of these assets and pricing in a worst-case scenario due to the temporary problem of a drug supply freeze due to a manufacturing issue at its sole contract manufacturing organization. Auryxia's uptake had previously disappointed investors, as the thesis that a combination phosphate binder and iron treatment would lead to rapid adoption by nephrologists did not pan out.

The stock currently trades at ~$4.75/share, with a current market cap of ~$510MM, and the company has ~$30MM in net cash ($155MM in total cash, offset by a $125MM convertible note due 2020), resulting in an enterprise value of ~$480MM. What is a long-term investor getting for $480MM, in terms of downside risks and upside potential?

A reasonable multiple for biotech valuation is 4x expected peak sales 4-6 years out, for a drug that has not yet reached full market uptake. This implies that KERX is being valued by the market solely on the expectation of ~$120MM in 2020/2021E peak sales for Auryxia at a 4x multiple. I believe this is a very reasonable peak sales hurdle for Auryxia to meet as a phosphate binder in CKD, and ascribes no value to the indication expansion to IDA in NDD-CKD patients, whose FDA application will be supported by strong Phase 3 data from earlier this year and if approved would make ferric citrate the only iron tablet approved to treat IDA in NDD-CKD patients, a greenfield market space where intravenous iron infusions are the only other efficacious option and have major safety/convenience concerns.

Assuming the temporary manufacturing problem can indeed be fixed by the end of 2016, I calculate a fair value of $12/share and a potential future upside value of $35/share. On the downside, I calculate a value of $3.30/share if the worst case scenarios come to fruition (manufacturing issues continue past 4Q16 and expansion to IDA rejected). Given this range of reasonable outcomes over a long-term investment horizon, I believe the bet is asymmetric and highly skewed towards the upside.

Valuation of Assets

Below, I value the core company assets (1 marketed, 1 seeking sNDA approval, 1 royalty stream):

  1. Auryxia (ferric citrate): There is significant upside if Auryxia peak sales for hyperphosphatemia in patients with chronic kidney disease on dialysis are greater than $120MM. Auryxia achieved 1% market penetration (of a $1B market) in 2015, its first full year on the market, and was on track to achieve 3% penetration in 2016, only its second year. Is it reasonable for Auryxia to do $120M in peak sales (~12% market share)? I think so. Generics have hit the phosphate binder market hard and Renagel (once a $1B/year drug) is losing share. However, Auryxia has the benefit or requiring less intravenous iron infusions as a result of its iron compound platform, and while adoption may have been slow in the short term, in the long term, this should result in savings for dialysis centers as oral bundled payments kick in. Given the company was on track to do $30MM/year in its second full year on the market, I think a $120MM/year sales hurdle is very much achievable, particularly given the YoY growth it was on track to achieve prior to the manufacturing fiasco ($10MM in 2015, $30MM in 2016E if supply were not disrupted). However, doing over $120MM in peak sales is a major uncertainty. Anything in excess (perhaps capturing 25% share) would be a pleasant surprise, which could...


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