Monday, April 2, 2012

Keryx Biopharmaceuticals (KERX) - Trial Results Crush Stock; But is it Priced to Fair Value?

KERX is trading $1.72, down 65.6% with IV30™ down 34.2%. The LIVEVOL® Pro Summary is below.


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Keryx Biopharmaceuticals, Inc. (Keryx) is a biopharmaceutical company focused on the acquisition, development and commercialization of pharmaceutical products for the treatment of cancer and renal disease.

This is a bio-tech with trial news that was, in all fairness, devastating. Let's start with teh news:

(Reuters) - Keryx Biopharmaceuticals Inc (NAQ:KERX - News) and Aeterna Zentaris (TOR:AEZ.TO - News) (NMQ:AEZS - News) said their experimental drug for colorectal cancer did not meet the main goal of prolonging survival in a late-stage trial.


The 468-patient trial showed that the companies' drug, KRX-0401 (perifosine), failed to improve overall survival in patients with refractory advanced colorectal cancer when compared with the control arm.

The drug is also being tested in patients with multiple myeloma.

With a negative outcome from the late-stage colorectal study, we believe recruitment into the multiple myeloma study could become increasingly difficult, the company said in a conference call.

"We will evaluate whether our Phase 3 study of Perifosine in relapsed/refractory multiple myeloma will continue as planned," Keryx's Chief Executive Ron Bentsur said in a statement.

Keryx holds the North American rights to the experimental cancer drug KRX-0401 (perifosine), through a licensing deal with Canadian biotech company Aeterna Zentaris.


Keryx will now focus its efforts on its drug Zerenex, for treatment of hyperphosphatemia in patients with renal disease on dialysis.

Zerenex is currently undergoing a second late stage trial, and topline data from this trial is expected by the year-end.

The drug could target a market of $1.5 billion worldwide and $700 to $750 million in the United States, Ladenburg Thalmann analyst Matthew Kaplan told Reuters.

Source: Reuters via Yahoo!Finance Keryx, Aeterna cancer drug fails trial, shares tank, reporting by Balaji Sridharan in Bangalore; Editing by Joyjeet Das.

Devastating news for the drug, and for all of the potential patients involved. As we go through the pieces that are left, keep in mind the end of that article -- the potential for drug Zerenex and it's hypothetical ~$1 billion market.

Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see how the stock rose quite abruptly into this news release (results). On 2-22-2012, the stock closed at $3.04. Friday the stock closed at $4.98 -- so that's 39% in less than a month on expectations. You'll note there was an earnings result in that time frame. That earnings report was received well, but basically all it really disclosed was that the trial results would be delayed a bit. Then the speculation began... Here's a news snippet from 3-5-2012, the day the stock exploded.

Shares of Canada's AEterna Zentaris (US:aezs) and partner Keryx Biopharmaceuticals (US:kerx) soared Monday in the wake of an opinion piece on the company that appeared on the investor site Seeking Alpha on Friday. The piece, which was written by a fund manager, said that upcoming Phase III data for the company's cancer-fighting agent Perifosine should be positive, which in turn should drive shares higher.

Source: MarketWatch via Yahoo! Finance -- AEterna, Keryx soar on study speculation, written by Val Brickates Kennedy.

Unfortunately, the spec turned out to be wrong...

Looking to the vol, it's interesting to see how the implied stayed relatively tame as the stock was going up, even through the earnings and speculation time frame. Of course, today, with the ultimate news out, vol has collapsed.

Let's turn to the Skew Tab.

I've included all six expiries going all the way out to Jan 2014. There's a nice monotonic vol relationship across expiries, namely, higher vol to shorter expirations. There's an upside tilt to the OTM calls for all of the months other than the Jan 2014 LEAPS.

Finally, let's turn to the Options Tab, and examine what this firm looks like as a going concern.

We can see 141.74%, 123.15%, 115.92%, 108.98%, 103.05% and 100.61%, respectively for Apr, May. Jun, Sep, Jan '13 and Jan '14.

So, now what?... Fair question and obviously I have no idea. The current $1.72 valuation, assuming it's somewhere near equilibrium until the next valuation moving news, event represents a few things:

1. The expected value stemming from the potential that another "re-test" has different results.
2. The expected value of his same drug treating the other ailment (multiple myeloma).
3. The expected value of the drug Zerenex (that potential market was discussed in the first news article near the end).
4. The expected value of any "new" drugs, etc.

With $1.72 to apportion and the news today, it's pretty clear that the vast majority of this firm's potential as a going concern now surrounds items #2 and #3. The CEO was quite upfront about the issue surrounding even completing a trial for item #2, not to speak of the likelihood of positive results.

Now the real question, is KERX fairly valued?  If we assign probabilities and expected payouts of the above four items, hypothetically we could assign our own valuation to KERX.  Just messin' with some numbers, if we assign 0% chance of success for #1, #2 and #4, and assign a 10% chance of full success in #3, that would result in ~$100 million a year for the firm (I have no idea what the split of that revenue would be).  I got the $100 million number as 10% (chance of success) of a $1 billion market.  Right now, KERX is valued at $128 million which would be a 1:1 annual sales:valuation ratio.

NB: This was just a silly back of the envelope calculation -- not intended in any way to be representative of actual real world results.

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