July 01, 2014 - 2:33pm EST by
2014 2015
Price: 16.05 EPS -$0.73 $0.32
Shares Out. (in M): 92 P/E -22.0x 50.6x
Market Cap (in $M): 1,467 P/FCF 0.0x 0.0x
Net Debt (in $M): -107 EBIT 0 0
TEV ($): 1,360 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Pharmaceuticals
  • FDA approval
  • Generics
  • Product concentration
  • Competitive Threats


4 simple points to the short thesis
1. The Street is very focused on KERX’s pharmacoeconomic thesis, which is that using Zerenex (KERX’s phosphate binder (PB) drug) will save dialysis centers (DC) money by allowing DCs to use less IV Fe/ESAs.  While it is extremely well known that the oral dialysis bundle begins in 2024, the Street over-estimates the impact of the pharmacoeconomic thesis as a driver for Zerenex sales pre-bundle (i.e. pre-2024), because
Pre-bundle, PBs (incld Zerenex) will be predominantly prescribed by doctors, not DCs, and doctors have 0 financial incentives to prescribe Zerenex
Further, DCs have 0 means to force doctors to prescribe Zerenex
Thus, adoption will be based solely on the clinical profile of the drug pre-bundle
Per physician interviews (n=5), Zerenex is only an “incremental improvement” versus current PBs
Given that doctors view Zerenex’s clinical profile as incremental, I expect the Zerenex launch will likely be much slower than Street consensus, because the Street still incorporates the pharmacoeconomic thesis as a major driver of sales
2.  Doctors/patients are price-sensitive with respect to PBs.  Generic versions of Renagel/Renvela (Sanofi), the current market leader in branded PBs, can further depress KERX share price given KERX management has set expectations that generics will likely not be coming to market even after its patent expiry in Sept 2014
3.  Inexperienced management with some red flags
4.  Downside protection: likelihood of getting caught with a big upward share price movement from M&A is limited given that management’s body language is relatively easy to read
KERX’s future depends solely on the success/failure of Zerenex
They do not have any other real pipeline drugs at this time
Zerenex (ferric citrate)
Ferric citrate is an oral, ferric iron-based PB that soaks up phosphate in the GI tract
Dual clinical effects:
1. Decreases phosphate levels
2. Increases iron levels à decreasing anemia
Average daily swallowed pill burden: 7-8 (like PhosLo)
Focused on 2 indications in the US
Hyperphosphatemia in dialysis patients
Competed a Ph3 study under SPA in dialysis patients
Successfully hit all endpoints in statistically significant manner
General consensus that clinical data is robust and likely will be approved (I agree)
Iron-deficient anemia in pre-dialysis patients
Ph3 study to begin in 3Q14
Focused on only hyperphosphatemia in Japan & EU (both dialysis and pre-dialysis)
Japan (launching May 2014)
Zerenex called “Riona” in Japan
Partnered with JT/Torii
EU (approval decision likely mid 2015)
MAA submitted

Crowded competitive PB landscape

PhosLo: usually the 1st line PB given because it’s a) cheap/generic b) very safe/effective
Originally approved and used in the early 1990s
Average daily swallowed pill burden: 7-8
PhosLo generics available
Renagel/Renvela: branded market leader given it’s just as effective as PhosLo w/ better AE profile
Renagel originally launched ~ 8 years later (approved 1998) by Geltex
Differentiated from PhosLo by decrease hypercalcemia side effects (despite higher pill burden)
Renvela launched 2008 (decreased metabolic acidosis adverse effects vs Renagel)
Average daily swallowed pill burden: 9-10
Branded PB market leader (~50-65% TRxes of all PBs per KERX)
Genzyme acq. Geltex in 2000; Genzyme subsequently acq. by Sanofi in 2011
2013 sales: $966m (15 yrs into its launch)
Patent expires Sept 2014
Fosrenol: disappointing sales: lower pill burden did not drive sales as originally expected
Launched ~7 years later (approved 2005) by Shire
Differentiated from PhosLo & Renagel/Renvela by lower pill burden (despite potential lanthanum accumulation toxicity and being chewable)
Average daily chewed pill burden: 3-4
Very low sales: $183m (2013)

Zerenex only incrementally better

Dialysis patients lose blood during each dialysis procedure
IV Fe and ESAs are given to combat anemia/blood loss
IV iron and ESAs are expensive
In high doses, IV iron and ESAs have other potential toxicities to patients
Given Zerenex’s iron-repleting properties (in addition to its phosphate lowering properties): patients will use less IV iron (52% less vs other PBs per Ph3 study) and ESA (24% less vs other PBs) at their dialysis sessions
For DCs only, decrease IV iron and ESA use equals cost savings (increased margins)
However, for nephrologists, Zerenex’s iron-repleting properties are incremental (per doctor survey)
Oral bundle basics
The oral bundle* means that oral dialysis-related medications (such as PBs) will be added to the Medicare dialysis payment bundle, which is simply a set payment that Medicare pays per patient per dialysis treatment
Currently, medications that are injectable (including injectable medications with an equivalent oral form) are already included in the payment bundle that dialysis providers receive from Medicare
Currently, oral dialysis-related drugs (such as PBs) are paid separately by Medicare Part D
However, once the oral bundle is instituted, oral dialysis drugs will be included in the payment bundle and no longer paid for separately by Part D
Oral bundle originally scheduled to be active in 2014
In December 2013, legislation was passed to delay their inclusion until 2016
In March 2014, the government further delayed including PBs and other dialysis oral-only drugs in the dialysis payment bundle until 2024
DCs have a big incentive to decrease costs given capped payment by Medicare**
Recall: Zerenex decreases use of expensive IV iron and ESAs, which are therapies used in dialysis patients to increase their blood levels (combat anemia)
The pharmacoeconomic thesis: using Zerenex will allow DCs to save money (increase margins)
In 2024 (in oral bundle), DCs will have a greater role in the prescribing and dispensing PBs
Prior to 2024 (pre-oral bundle), nephrologists caring for dialysis pts, not DCs, will prescribe PBs
Important: prior to the 2024 (oral bundle), PBs will be written by nephrologists that take care of dialysis patients, not DCs
The vast majority of these nephrologists have no relationships to DCs and prescribe PBs as they see fit when these nephrologists see dialysis patients in their clinic (not in DCs)
Pre-oral bundle, DCs have no “forcing mechanisms” to coerce nephrologists into prescribing specific PBs
Only ~20% (per KERX) nephrologists have a financial relationship or joint venture with DCs, i.e. care about saving costs associated with DCs
Yet Street solely focused on pharmacoeconomic thesis

Street’s focus on DCs’ financial incentives is largely irrelevant in the pre-bundle setting

But Street is still focused on the DCs’ financial incentives (the pharmacoeconomic thesis) as the driver of Zerenex’s use
The Street misses the disconnect between DC’s financial incentives for using Zerenex, which saves DCs money, and how Zerenex will actually be prescribed in the pre-oral bundle setting
Again, Zerenex (pre-oral bundle) will be predominantly prescribed by doctors that have 0 financial incentives to prescribe Zerenex (unlike DCs, which do have financial incentives to prescribe Zerenex)
And DCs have 0 means to force doctors to prescribe Zerenex

So what will Zerenex’s launch look like?

Renagel/Renvela is a good comparable for Zerenex’s drug launch for multiple reasons

The decrease use of IV Fe/ESA (i.e. the clinical components that leads to the cost savings that affect only the DCs) is only an incremental improvement to nephrologists
“Incremental improvement” is the consensus from nephrologists (n=5) I diligenced
Renagel/Renvela is a very good comparable drug launch because
1.  Both Renagel/Renvela & Zerenex are in the same drug class and used by the same doctors
2.  Both Renagel/Renvela and Zerenex were both incremental improvements to prior PBs
At its launch, Renagel/Renvela had lower incidences of hypercalcemia (vs PhosLo) despite higher daily pill burden
At its launch in late 2014, Zerenex decreases use of IV iron/ESAs, which is seen as “incremental” and not a “big deal” by docs
3. In drugs with incremental improvements, marketing and sales reps are critical
Renagel had ~40-50 sales rep early in its launch
Zerenex is also planning on ~50 sales rep at its launch post-FDA approval in late Sept
4. Greg Madison, KERX’s chief commercial officer, previously helped launch Renvela
Greg appears to be following the Renagel/Renvela commercial playbook
Using similar number of sales reps for Zerenex as for Renagel launch
Pricing Zerenex similarly to Renagel/Renvela

If Zerenex’s sales reflect Renagel/Renvela launch, sales will be materially lower than Street

Other headwinds to Zerenex’s sales

Street also chooses to de-emphasize the difficult competitive landscape
Crowded: many branded, generic, and OTC competitors
4 branded PBs: PhosLo, Renagel/Renvela, Fosrenol, Velphoro
Generics: PhosLo
OTC: Tums (works but not extremely efficacious)
Commoditized: doctors and patients are price sensitive
Clinical profile (safety, efficacy) differences between PBs are not large
Thus, price is a large differentiator
PBs are further characterized by low compliance
Due to high daily pill burden
Prevention of a chronic disease (no acute symptoms)
General treatment protocol: doctors typically start with the cheapest drug first
1st line: generic PhosLo (unless patient is overtly hypercalcemic)
2nd line: Renagel/Renvela
3rd line: Fosrenol or Velphoro
Diligence from doctors show that Zerenex is likely a 3rd line or later agent
A premium-priced drug with incremental improvements launching within a crowded and commoditized (i.e. price sensitive) environment makes blockbuster potential even more highly unlikely


Given the importance of price, generic Renagel/Renvela will slow Zerenex sales/adoption

KERX management has consistently set the expectation with the Street that generic versions of Renagel/Renvela, the current market leaders in the branded PBs, are extremely difficult to make
The strongest patent for Renagel/Renvela (5667775, use patent) expires Sept 16, 2014
Generic/spec pharma players (IPXL, ENDP, ACT, and Lupin) have all filed ANDAs
Given KERX/Street expectations of no generics, a generic entry may cause a material downside move

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Start foothold position now: structurally favorable risk/reward
Given the consensus view that Zerenex will be approved by the FDA (PDUFA date 9/7/14) based on the robust clinical data from its Ph3 studies, KERX will move up but likely not a lot (given the consensus expectation of approval)
However, if the PDUFA date gets delayed again (e.g. recently delayed in May 2015 for CMC issues related to drug-drug interactions and non-plant related manufacturing issues) or if any other issues arise, this will move the stock down materially
Build bulk of position after the FDA approval (esp if share price moves materially higher)
The thesis is that the Zerenex sales will disappoint, thus it is important to add to the position post-FDA approval, especially if the share prices moves higher post-approval
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