KERX Perifosine Analysis
The company Keryx Biopharmaceuticals (NASDAQ: KERX) has attracted two types of investors: those who hate KERX and those who love it. Their lead drug candidate, perifosine, is currently in Phase III trials for colorectal cancer - and results are expected within weeks. I bought a total of 981 shares during 2010 and early 2011. I have had plenty of opportunities to sell for a profit, but did not pounce. Now that I am entering my fourth year as an investor I feel much more confident in my ability to assess companies and put my money in profitable places. Like many of its followers I once thought KERX was going to be successful. Unfortunately, there are several big reasons to believe the trial will not reach its primary endpoint. I am considering selling all of my shares for a slight loss in order to hedge my bets against a possible failure. I would much rather almost breakeven than hang on for an against-the-odds gamble and lose big.
The "Feuerstein-Ratain Rule"
TheStreet journalist Adam Feurestein and University of Chicago Medical Center Dr. Ratain, an "expert in the use of investigational agents to treat advanced solid tumors", conducted a study for JNCI relating Phase III cancer trial success to a company's market cap. The study looked at 59 Phase III trials over the past 10 years and came to a rather concrete conclusion. Companies with a market cap of under $300 million several months before the release of trial results were 0 for 21, whereas companies with a market cap exceeding $1 billion were a respectable 21 for 27. Now, the previous 21 failed trials are independent of the perifosine trial outcome. However, that was also true for trial number 21, and 20, and 19, and...
Phase II Trial Folly
At face value the Phase II trial results for perifosine + capecitabine (PCAP) were pretty remarkable. However, anyone who has ever taken a statistics class could probably guess that results from only 38 total patients (35 of which were evaluable) would not be enough to prove statistical significane for a double-blind study. The range for overall survival (OS) of 20 patients given PCAP was 10.8 - 25.7 months (average of 18) compared to 5.3 - 16.9 months (average of 11) for the 15 evaluable patients given only CAP. Those numbers will certainly change for the 360 patients that will be included in the Phase III trial. Consider the following scenarios: OS for PCAP drops from 18 to 17 months and OS for CAP rises to 12 months. The improvement drops from 63.63% (18/11) to 41.67% (17/12). It gets considerably worse for the 16 to 13 scenario at 23.07%. That doesn't exactly sound like blockbuster potential.
Furthermore, how likely is it that the FDA will approve a less-than-stellar drug with two competitors already having been approved? Johnson & Johnson's (NYSE: JNJ) Zytiga and Spectrum Pharmaceuticals' (NASDAQ: SPPI) Fusilev were both approved in May 2011.
Although the only two patients who were deemed unevaluable due to toxicity were in the CAP group (11 % of the total mind you), the CAP dose was increased from 825 mg to 1,000 mg for the Phase III trial. That means the CAP+placebo and PCAP groups will both contain more CAP. Will the toxicity data be different? If so, how different?
Let's say the trial is a success. It is a good time to cash in. Keryx now has a drug with viable competitors that are briskly heading to the market. Keryx is devoid of a sales force, acquisition, and Big Pharma partner. It will take a major amount of money to successfully market and sell perifosine. Let's not forget that KERX quietly shelved a $100 million offering a few months after announcing Phase II results. A possible backup plan? A possible share dilution should there be a positive trial and no partnership? I am personally irked by Keryx CEO Ron Benstur's comments that "selling the company was a top priority". I know business is about profit, but it doesn't seem like one of the CEO's top priorities should be selling his company before meaningful Phase III trial results have been announced.
Of course, once I make the decision to sell, trial results will blow expectations out of the water and I will be sitting on the outside shaking my fists. That's investing. Am I right to play it safe? I think so. We will see before 1Q12 is in the books.