Beginning May 24th, the FDA will have a marathon of decisions to make, with 8 drugs under review through the rest of the month. Last week we dissected Novo Nordisk A/S (ADR)(NYSE:NVO) and Sanofi’s (NYSE:SNY) new diabetes drug combos. This week we will begin with AstraZeneca, and as the week progresses, we’ll release analyses of other companies and their drugs under review, so stay tuned.
On May 26th, the FDA will issue its final decision on AstraZeneca PLC (ADR) (NYSE:AZN) drug ZS-9 for hyperkalemia, a condition that is caused by too much potassium in blood serum. This is going to be a pretty big deal for AstraZeneca because peak sales for this drug are estimated at $1 billion a year, making it a potential blockbuster. AstraZeneca shares have been in steady decline for two years, down 30% from May 2014 highs, and the firm really needs a shot in the arm to prove to its shareholders that it is still capable of growth. That’s why this FDA decision will probably affect the share price more than you’d normally see a large cap $70 billion Big Pharma company be affected by decisions like this. Not as much as a small development stage biotech, but pretty significantly for a big company.
ZS-9 was acquired by AstraZeneca from ZS Pharma for $2.7 billion back in November. If they’re right about the potential sales numbers of $1 billion a year at peak, then it was a good deal, but as we’ll see this estimation is far from assured. ZS-9 is designed to treat hyperkalemia, which occurs when the kidneys are compromised and can no longer filter excess potassium out of the blood. Most potassium in the body, about 98% of it in fact, is located inside cells and only very little circulates outside in the bloodstream itself.
The name hyperkalemia comes from the word kalium, which is the original latin name for potassium, and the reason that the element is abbreviated with the symbol K. It usually occurs in people with chronic kidney disease (CKD), but it can occur for short periods of time in people who eat too much potassium chloride as a salt substitute, or other forms of potassium, or take way too much aspirin at a time. The most common treatment for the condition is to stimulate urine production, for example to drink lots of water and hopefully the kidneys will excrete some of the excess. If that doesn’t help, patients usually go on dialysis, which obviously has major disadvantages.
Potassium is an ion responsible for much of the electrical activity that goes on in the body. The electric differential between the inside of cells where most of the positively charged potassium stays and outside cells where potassium should be very low, is responsible for muscle movement, including the heartbeat. Minor hyperkalemia leads to malaise and muscle weakness. Acute hyperkalemia can lead to paralysis and cardiac arrest as the heart can no longer keep its rhythm due to disturbed electrical signals between cardiac cells and the blood. Acute hyperkalemia then is a medical emergency, but since the condition progresses slowly as the kidneys decline, it is usually caught before that if we’re not talking about a medical overdose that causes a sudden change in serum potassium levels.
ZS-9 works by mimicking the shape of the pathways that vacuum potassium naturally into cells. Each cell has tiny and specifically shaped holes in the cell membrane that let different ions in and out of the cell. Since each ion has a particular shape and charge, each channel is designed to transport one kind of ion. There are potassium channels, sodium channels, magnesium channels and others, each shaped differently.
Though nobody knows exactly how ZS-9 works since the mechanism of action has not yet been proven, it is theorized that it takes the same shape as natural potassium channels in the cell membrane. Released in crystallized form in the blood as an insoluble zirconium silicate, ZS-9 catches specifically potassium ions in the blood and locks them away inside the crystalline structure. Once ZS-9 is saturated with potassium, it is then eliminated by defecation through the digestive system, with no need for the kidneys to do anything extra. Since ZS-9 is insoluble, it cannot itself be taken up and into cells, which means it is eliminated quickly from the body.
A Phase 2 trial study already completed compared ZS-9 with placebo and showed significant reduction in potassium levels within 48 hours of treatment. Patients had stage 3 CKD and minor hyperkalemia. The Phase 3 trial, which is what the FDA will be looking at, took place in two stages and was also placebo-controlled. The trial tested 753 patients with hyperkalemia who received infusions of ZS-9 three times a day for two days. After two days, stage 2 began with patients who had achieved normokalemia, or normal potassium levels, and were given either a maintenance dose of ZS-9 or placebo, which had the effect of testing whether the drug could not only lower potassium levels initially, but keep them lower for a longer period of time, and what the side effects would be on the maintenance schedule. The latter part of the trial is crucial because if ZS-9 was found to keep lowering potassium levels too far, that can lead to death – not a good result for a trial like this, to be sure.
After 48 hours, serum potassium decreased from 5.3 mmol/L to 4.9 in the second lowest dose tested of 2.5g. Hyperkalemia is defined as any level above 5, so even in the low dose of 2.5g, the condition was resolved. 4.8 was achieved in the next highest dose of 5g, and 4.6 for 10g. The 1.25g dose did show a decrease, but not enough to resolve the condition, and it was the same as placebo. The 5g and 10g group maintained stable potassium levels during the maintenance phase. Those who got placebo during the maintenance phase had their levels rise above the 5 mmol/L threshold, showing that ZS-9 can in fact maintain stable potassium levels in the blood and that stopping treatment means that hyperkalemia returns. The adverse event rate was similar in the placebo arm and the ZS-9 arm in both the initial and maintenance phases. Diarrhea was the most common side effect, which should be expected given that ZS-9 is eliminated by defecation rather than urine excretion through the kidneys. This, in fact, is the entire point.
Sounds encouraging yes, but there is a potentially serious problem with the study. That is, it was not designed to detect serious adverse events. These include vital signs, electrocardiograms (EKGs) that can show evidence of disturbed potassium levels, or very low magnesium levels. There are analyses of these data, but they are descriptive only rather than conclusive. The FDA’s decision on ZS-9 will not come down to the efficacy results, which are definitely positive. It will come down to safety issues, because when you’re dealing with serum potassium, you’re talking life and death. If something goes wrong and potassium levels get too low, a patient can quickly die.
Market and Reaction
According to researcher Larry Smith, the hyperkalemia market in the US is in the tens of billions of dollars. AstraZeneca’s estimate of $1 billion annual peak sales for ZS-9 are therefore conservative. The reason for the conservative estimate given the market size is the tribulations for competitor Veltassa from Relypsa Inc. (NASDAQ:RLYP) which also leaches potassium out of the blood and exchanges it with calcium, with elimination through feces. Veltassa got smacked with a warning label over a relatively minor issue that it should not be used in emergency hyperkalemia situations because it takes hours to take effect. There was also a black box warning to separate dosage from other medications by 6 hours. Shares of Relypsa did not react well to that, and there has not been much improvement since. What should have been a great day for Relypsa turned out to be a dud.
The same is true of ZS-9, since it does not work instantly or within minutes, and it could therefore be slapped with the same black box label, not to mention the fact that the FDA could issue a Complete Response Letter demanding more long term safety studies. It might not, but it is a strong possibility.
Veltassa sold $600,000 last quarter (see page 19 at link), its first full quarter post approval, a far cry from the $1 billion a year forecast by AstraZeneca or anything near it. AstraZeneca of course is in a different league when it comes to marketing since it is more than 100x the size of Relypsa, but the chances of it getting smacked down with a black box warning or even a return to another phase 3 are too high to ignore.
The reaction on such news would be markedly negative. Investors already have the experience of Relypsa’s Veltassa and a black box warning over such a trivially obvious issue like “do not use in an emergency situation” will probably inspire a similar reaction for AstraZeneca, and even worse if it gets a “go back to the clinic” CRL.
We already know that the phase 3 trial on which AstraZeneca’s submission was based was not designed to detect serious adverse events relating to potassium levels. The chances of the FDA approving but not wholeheartedly are high. Add to that the fact that that very question was pretty much skirted during AstraZeneca’s last shareholder conference call and it seems that the company fears this as well.
Valuation and Trading Strategy
There are no immediate financial dangers with AstraZeneca as a firmly established company. It has significant debt, but it’s not too heavy relative to its market cap. In terms of trading strategy for this event next week, our guess is that ZS-9 will be approved, but not with a clean slate. We will hear something similar to Veltassa about a black box warning for the same obvious reasons not to use the drug in emergency hyperkalemia situations. That is the most likely scenario. Less likely is a full blown approval on one end, and a CRL “go back to the clinic for more safety data” on the other. So chances, while not exactly 66% negative, are weighted towards a negative outcome in regards to immediate share price action.
That said, the best move with AstraZeneca now is probably to wait until the announcement, and buy the dip. The emergency issue is really nothing, but will be overreacted to by traders. AZN has been trending down for a while and its dividend yield is close to 7% already, one of the highest in all of biotech. Another dip down in response to any negative or mediocre news with ZS-9 will bring that yield even higher and a quick bounce back is likely at least to current levels.
Alternatively, a small position can be taken now in case news is fully positive, and then added to on any negative news. Either way you’ll get a decent dividend if you hold it long term, and eventually the drug will be approved if not now and AstraZeneca will make money off of it. The question is just how much, and it is too early to tell that just yet.
By: Rafi Farber and Samuel Rae