Keryx Biopharmaceuticals:Trial Results Crush Stock; But Is It Priced To Fair Value?

Keryx Biopharmaceuticals, Inc.  (KERX) 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 the 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 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.

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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.

Written By: Ophir Gottlieb