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Keryx: Lessons From a Drug Failure

Tickers in this article: AEZS SNY KERX

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NEW YORK ( TheStreet) -- Observations and lessons from the blowups in Keryx Pharmaceuticals (KERX) (down 65% to $1.75 per share) and Aeterna Zentaris (AEZS) (down 65% to 74 cents per share) due to the failure of the colon cancer drug perifosine :

1. Let's look ahead before we look back. With perifosine essentially dead, Keryx must fall back on its second pipeline drug, the phosphate binder Zerenex. Unfortunately, Zerenex has very little value.

Keryx is developing Zerenex as a treatment for treat kidney disease patients with excess phosphate in their blood. A phase III study is underway with results expected before the end of the year. Unlike perifosine, there is a good chance that Zerenex works, based on previous studies.

Unfortunately, Zerenex is likely coming to market in late 2013 or early 2014 at the same time as generic phosphate binders. Both Sanofi's(SNY) Renagel/Renvela (the market leader with $537 million in sales) and Shire's(SHPGY) Fosrenol ($167 million in sales) will be largely replaced by cheap generic versions just as Zerenex tries to compete.

Going up against generics is tough enough, but Keryx faces an even more impossible challenge with Zerenex because dialysis providers (the primary users of phosphate binders) only receive a single, fixed or "bundled" fee from Medicare that covers all ancillary products involved in providing dialysis to patients. Under a bundled reimbursement system, dialysis providers can only increase their profits by reducing costs. One way to reduce costs, obviously, is to spend less on phosphate binders. The likelihood that dialysis providers will eschew cheap, generic phosphate binders in favor od a premium-prived product like Zerenex is low to nil.

You're going to hear a lot of Keryx bulls in the next few days extolling the virtues of Zerenex. Don't buy into the spin.

2. The "Feuerstein-Ratain Rule" worked.

For those unfamiliar, University of Chicago oncologist and professor Dr. Mark Ratain and I correctly predicted perifosine's failure last October based on a theory we developed which directly correlates the market value of a company developing cancer drugs with the outcome of phase III studies.

I won't rehash all the details of our "rule" here, but essentially, after examining 59 phase III clinical trials of cancer drugs going back 10 years, we found companies with micro-cap market valuations (i.e market caps less than $300 million) had no chance of producing positive phase III study results .

By contrast, almost 80% of cancer drug companies with market values greater than $1 billion conducted positive phase III studies. Ratain and I looked at market values of cancer drug companies four months prior to the release of phase III results. Our findings were published in the Journal of the National Cancer Institute .

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