Company: Akebia Therapeutics, Inc.
Symbol: AKBA
Date of analysis: 4/25/19
Price at analysis date: $6.45
PT: $19.46

AKBA: 1-Year Chart, May 2018 – April 2019

Source: Seeking Alpha

INVESTMENT THESIS:

Commercialized drug Auryxia (approved in the US for hyperphosphatemia in adults with dialysis-dependent chronic kidney disease (DD-CKD) and iron deficiency anemia (IDA) in adults with non-dialysis-dependent (NDD) CKD) has blockbuster potential, but after several years on the market, annual sales are only about $100M. However, they have another potential blockbuster candidate, vadadustat, which is in several phase-3 trials around the globe. The hope is that it can become the standard of care in the $6B+ market for anemia due to CKD in adults with DD-CKD and NDD-CKD. Our valuation for vadadustat alone justifies a position in AKBA.

LIQUIDITY POSITION: Good

As of 4Q18, AKBA had cash of $322M. Additionally, AKBA is eligible to receive over $150M in development and regulatory milestones from its collaboration partners. As per the 4Q18 earnings call, management says that the cash runway should extend into 3Q20, so the risk of dilution seems fairly low.

COMMERCIAL PROSPECTS: Very Good

Auryxia (ferric citrate)

Value: not included in valuation

Auryxia has been on the market in the US since late 2014 for hyperphosphatemia in adults with dialysis-dependent (DD) CKD. In early 2018, it also began selling for a second indication: iron deficiency anemia (IDA) in adults with non-dialysis-dependent (NDD) CKD. Auryxia is also marketed in Japan under the trade name Riona for the improvement of hyperphosphatemia in patients with CKD (both DD and NDD). Lastly, it was approved in the EU in 2015 for the control of hyperphosphatemia in adult patients with CKD under the trade name Fexeric (it is not marketed yet in the EU, as the company continues to explore third party commercialization opportunities).

Expectations for Auryxia were very high, with some analysts projecting peak sales of $1B+ in just the US alone. However, almost 5 full years after launch, the annual run-rate remains at a paltry $100M, with AKBA’s management unwilling to give any type of sales guidance as of 4Q18 (until they become more familiar with the normalized growth rate). Licensing revenue from Japan also remains at less than $2M per quarter, and the inability/unwillingness of KERX’s past management to sign a commercialization partner in the EU several years after approval does not instill much confidence.

While we acknowledge the possibility of Auryxia being able to differentiate itself in the newer IDA indication, the sales results thus far are such that we have chosen to exclude Auryxia from our valuation.    

Vadadustat (hypoxia-inducible factor prolyl hydroxylase inhibitor) (HIF-PHI)

Value: $2.3B

AKBA: Drug Development Pipeline

Source: AKBA website

Vadadustat is currently in various phase-3 trials for anemia due to CKD in adults with DD-CKD and NDD-CKD. AKBA has multiple licensing deals in place around the globe for vadadustat that have already generated over $200M in upfront payments. Additionally, these licensing deals provide for significant assistance in completing the various phase-3 trials being run: over $1B in potential regulatory and commercial milestones, and very generous double-digit royalties on net sales—all of which validate the blockbuster potential of vadadustat.

The reason AKBA’s collaborators were so interested in becoming partners is because vadadustat has the potential to set a new oral standard of care for this indication. Anemia due to CKD is currently treated by injectable recombinant human erythropoiesis-stimulating agents (ESAs) such as Epogen (epoetin alfa) and Aranesp (darbepoetin alfa), or blood transfusion. Global sales of injectable ESAs in 2018 were about $6.1B. Though this figure covers all uses, the vast majority of sales were for the treatment of anemia due to CKD.

Injectable ESAs can be very effective in raising hemoglobin levels. However, in addition to requiring a subcutaneous or intravenous injection, they can cause serious side effects such as thrombosis, stroke, myocardial infarction and death. These safety concerns became evident starting around 2006, and have subsequently led to a major reduction in the utilization of injectable ESAs. For example, from 2009 to 2013, it is estimated that the collective injectable ESA treatment rate in NDD-CKD patients in the US decreased by approximately half. Because of this, anemia is either not treated or inadequately treated in the majority of NDD-CKD patients, leaving a high unmet need for a new treatment paradigm (pg. 9, 2018 10-K).

When AKBA announced their expanded licensing deal with Otsuka in the EU, China, and other territories, they valued the addressable market at $3.5B. For our valuation, we therefore assume an addressable market size of $3.5B in both the US and the International territories covered by the Otsuka agreement. We think this is reasonable given that global sales of ESAs in 2018 were $6.1B, and considering the fact that many patients with anemia due to CKD go untreated because of the harmful side effects.

Below you can see our peak sales estimates for just the Otsuka US and International territories, as well as our valuation for vadadustat. Our calculation involves the following assumptions:

• Addressable Otsuka US and International market size $3.5B (in each territory)
• 50% gross-to-net reduction (2019 guidance for Auryxia gross-to-net reduction)
• 20% International royalty rate to AKBA on net sales
• 97% gross margin
• $250M in commercialization costs
• 21% tax rate
• Target P/E of 5
• No impact from potentially dilutive securities (given the outstanding share count of 117M, the impact will not be too material)

To be conservative, we have only included the potential commercial milestones from Otsuka, even though AKBA could also receive up to $175M from MTPC (for Japan and other Asian countries) and $25M from Vifor (for sales to select dialysis clinics and third-party dialysis organizations in the US). Also, our choice of $250M in commercialization costs for the US territory might seem a bit high, but we prefer to err on the side of caution. We feel confident saying that AKBA’s share of vadadustat is worth somewhere around $2.3B, which equates to a PT of $19.46/share, representing 202% upside.

AKBA: Vadadustat US And International Peak Sales Estimates In Otsuka Territories ($M)

© 2019 Elle Investments. All rights reserved.

AKBA: Vadadustat Valuation Based On Sales, Licensing Revenue, and Commercial Milestones from Otsuka US And International Territories ($M)

© 2019 Elle Investments. All rights reserved.

CONCLUSION:

AKBA has continued to drift since the merger with KERX was announced in mid-2018. We see this as a buying opportunity. While sluggish sales of Auryxia do not currently offer very much to be hopeful for (and are partially responsible for the downward drift), the value of vadadustat alone is compelling. The solid cash position, along with the potential for vadadustat to disrupt the $6B+ market for anemia due to CKD, makes AKBA a strong buy. Our PT is $19.46/share, offering 202% upside.

GLOSSARY:
CKD: chronic kidney disease
DD: dialysis-dependent
ESA: erythropoiesis-stimulating agent
IDA: iron deficiency anemia
NDD: non-dialysis-dependent
QOQ: quarter-over-quarter