This Ingenious Company Will Soar, Despite "Analyst" Claim

When it comes to the bioscience sector, the amount of misinformation some so-called "analysts" spread around the blogosphere on any given day is nothing less than breathtaking.

And frankly, I'm not sure whether most of the nonsense comes from ignorance - they just don't understand the science, the regulatory gauntlet, or the doctors who will be prescribing new products.

Or worse - trying to manipulate the market to help out friends holding positions in the stocks they "analyze."

But their misinformation can have a very real market impact, and that's why it's so important to point out when it's wrong...

An analyst - really a blogger - recently produced research that did just that, and I want to illustrate just how critical true knowledge of the biosciences industry is to finding the profit opportunities...

Faulty "Analysis" Triggered a 10% Sell-Off

Case in point: Keryx Biopharmaceuticals (Nasdaq: KERX) is a small biotech (market cap: $1.29B) with an experimental drug, Zerenex, that treats elevated phosphate levels and iron deficiency anemia in patients on dialysis for advanced chronic kidney disease (CKD).

Last week, Keryx announced a public offering of 6.9 million shares of common stock at $14.40 per share. Dilution, of course, would cause a temporary drop in the price, but that wasn't enough from some blogger analysts. In particular, Steven Breazzano decided to pile on in a Seeking Alpha article titled, "Keryx Biopharmaceuticals: Grim Realities of the Dialysis Market Will Result in Commercial Failure."

It was a hatchet job from start to finish and helped pushed the market down by 10.3% at one point on Wednesday (Jan. 22, 2014) from the prior day's close.

Fortunately, even with the price drop, my subscribers were still enjoying a 51% return on the stock - because whatever the bloggers had to say, Keryx is a great company with a great product.

The only "grim reality" in the article was the number of ways in which it did an end run around the truth. Let's take a closer look...

The Analyst Got This Critical Assumption Wrong

Breazzano leaps out of the gate somewhat panicked over the following quote from a recent Keryx press release regarding a new public stock offering: "Keryx intends to use the net proceeds from the sale of its common stock to fund pre-launch/launch inventory build-up and pre-commercial/commercial activities related to Zerenex, the ongoing development of Zerenex in pre-dialysis, and other general corporate purposes." From this, he concludes there are no strategic partners interested in marketing Zerenex in the U.S.

It's a huge assumption, based on zero evidence - like those guys who see Bigfoot everywhere there's a local forest and running water.

The company has a fiduciary responsibility to its stockholders to prepare for its product launch, with or without a strategic partner. The quote reveals nothing about whether other, larger firms are sniffing around for a deal. But more to the point, company president Ron Bentsur has been clear in past statements that the company sees the tightly focused market in CKD patients on dialysis as presenting a unique opportunity for a small firm like Keryx to carry out its own marketing - and reap the financial benefits thereof.

The article goes on to say that the current-standard-of-care drugs, Renvela (Sanofi/Genzyme), Fosrenol (Shire), and PhosLo (Fresenius), will all soon have equivalent generics that will take a large bite out of the market, and that in any case, Zerenex is only marginally better than these drugs in terms of its clinical significance and therefore won't be attractive to prescribing physicians.

Baloney. Zerenex is completely unique in that it not only binds phosphate like the drugs mentioned above, but it also manages iron levels in the blood to control anemia, and it takes on another common problem of CKD patients, low hemoglobin, by boosting red cell production. Currently, the only way to manage anemia in these patients is by sending them to a clinic for an expensive injectable drug called Epogen or intravenous infusions of iron, either of which frequently cause iron overload resulting in serious heart problems. Zerenex triggers the body to reabsorb excess iron naturally, so blood levels never get out of hand. Injectable drugs also increase a patient's risk of infection. Note that Zerenex is dosed once a day by mouth, and there are no other FDA-approved oral drugs that increase blood iron levels. In the clinical trials, it reduced the need for injected iron or dispensed with it altogether. Down go the risks, and down goes the price tag!

Given that Zerenex has three clinical actions that it does well, improving patient outcomes and lowering treatment cost, I believe it's a game changer.

The Company's Science Will Provide Patent (and Profit) Protection

Breazano then makes the case that a new entrant to the market, Velphoro (Fresnius/Galenica), has a competitive advantage over Zerenex in that Fresnius, a partner in its sales, is also a dialysis provider and will preferentially use the drug. He asks, "Given that Fresenius receives profits on the sales of Velphoro, which phosphate binder will be used in their dialysis clinics?"

The answer, of course, is they will use whatever the patients' nephrologists (kidney doctors) prescribe (since phosphate binders are not currently included in treatment bundles). So which will they prescribe? Zerenex has been notably successful in controlling phosphate levels in the longer term. By contrast, in a six-month study, Velphoro was unable to normalize patients' phosphate levels to an acceptable level of < 5.5 and, of course, did nothing to improve iron levels or hemoglobin. So which drug do you believe will earn the trust of prescribing physicians?

The article also dredges up old arguments about Keryx's intellectual property protection first with regard to the possibility of its earning NCE (new chemical entity) status for Zerenex from the FDA, and then to the defensibility of its patents. First of all, there's no reason to assume an NCE, which provides five years' market exclusivity, won't be granted.

If you'll forgive just a moment of science, underlying Breazzano's argument is the presumption that ferric citrate, the active ingredient in Zerenex, is a "salt" of ferric ammonium citrate (FAC), a chemical first used in a drug many years ago. But you can't combine ferric citrate and ammonia to make FAC; you can't mix the compounds together to make another salt; their chemical structures are different; you don't use ferric citrate to make FAC; the compounds behave differently; and with ferric citrate, both the ferric and acid components may exert individual effects on the patient, so the two individual chemicals working in tandem may be the active ingredients in Zerenex, not ferric citrate as a single entity. All of which argues in favor of NCE status.

Okay, science lesson over.

Let's Look at the Money

As for the patent protection, I won't go into the details here, as they're lengthy and complex, but I will say I've read the opinions of a considerable number of patent experts regarding this case, and they generally agree that the Keryx's patent portfolio is very strong and defensible, particularly with regard to surface area and dissolution rates, and will provide protection until at least 2024, with a likelihood of patent extensions after that.

Finally, Keryx is now doing studies on the use of Zerenex in stage 3-5 CKD non-dialysis patients, which would considerably widen its target market. Mind you, there are currently 2.5 million people worldwide on dialysis, and that number will increase to 4 million by 2020, mostly in the U.S., Japan, and Europe. About 90% of dialysis patients will eventually need treatment for hyperphosphatemia and anemia, so the market is already big and growing. The number of stage 3-5 non-dialysis CKD patients in the U.S. alone is about 16 million, and 1.5 million are already known to suffer from full-blown anemia. The number that will go on to develop anemia is probably much higher.

The Seeking Alpha article argues that Keryx will need outcomes data to impress the FDA with regard to phosphate binders in CKD. This, in fact, misstates the case. The FDA does not recognize phosphate binding as an approvable endpoint for CKD. It does, however, accept maintenance or improvement in hemoglobin in the treatment of anemia, and that is the path Keryx has already committed to following in its successful phase 2 trial for this indication. (Here, the author makes the nebulous argument that it will take a while to do the necessary trial studies for non-dialysis patients, and by the time they're done, Zerenex will have already failed in its initial market.) So the article misses the point.

Fortunately, Keryx quickly recovered from the slide, even in the midst of a generally bearish market over the past few days. As I write this on Tuesday, my subscribers saw their return on KERX go all the way up to 71.8%. In this case, investors have been smart enough to recognize excellent value when they see it. Over the next one to two years, I expect KERX to triple or even quadruple in value.

That's not always the case. I watched as one well-known blogger on The Street sabotaged Antares Pharma (Nasdaq: ATRS) right after FDA approval for a new rheumatoid arthritis delivery system a few months ago, and it's taken a long time for ATRS to finally recover. A similar thing happened to Sangamo Biosciences (Nasdaq: SGMO), which stopped my subscribers out of the stock. I advised them to buy right back into it, and we currently just exited with a 73.4% return on it.

So beware the bloggers as "analysts." Just because someone has a byline and a little space online, doesn't mean they have a deep understanding of their subject.

With over 30 years' experience writing about the latest developments in health, medicine, and related technologies, Ernie Tremblay has gained "insider" access to the world's top doctors, professors, and researchers. He's worked with Nobel-caliber doctors such as Yale's Karel Liem, Columbia's George Gaylord Simpson, and Harvard's William S. Beck, to name a few.

Ernie's edited hundreds of books on science, microbiology, and groundbreaking medical therapies for top publishers like Harper Collins, Penguin Putnam, and Prentice Hall. He's also co-authored and ghostwritten numerous books on everything from Alzheimer's to rheumatology.

Best of all, he's developed knowledge of the inner workings of the FDA drug approval process and knows precisely when a drug or technology is about to "pop" and its company's stock rocket upward in price. So stay tuned; you'll be hearing from Ernie a lot more now...

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