Keryx CEO vs. a Short-Seller: Zerenex Patent Debate

NEW YORK ( TheStreet) -- For the last six weeks or so, Keryx Pharmaceuticals ( KERX) has been weighed down by concerns that its promising phosphate binder Zerenex suffers from weak intellectual property protection and may be ineligible for full market exclusivity. Keryx CEO Ron Bentsur has used presentation slots at various investor conferences to rebut these concerns, but the company's stock price hasn't fully recovered.

On Tuesday, Bentsur devoted a big chunk of time on Keryx's quarterly conference call to a point-by-point explanation of Zerenex's intellectual property position, which he believes is strong today, getting stronger tomorrow, and will not adversely affect the drug's commercial potential at all. Keryx shares closed Tuesday down 3% to $7.13.

Not everyone agrees with Bentsur. Listening to Tuesday's call was an institutional investor who is shorting Keryx shares because he believes Zerenex's patent protection is weak. He also believes previous FDA approvals of drugs with identical active ingredients as Zerenex will block Keryx's attempt at gaining key patent extensions or New Chemical Entity (NCE) status. Without strong patents and five-plus years of U.S. market exclusivity, Keryx won't be able to land a marketing partner for Zerenex, the Keryx short-seller says. Without a marketing partner, Keryx will be forced to sell Zerenex on its own -- a task the company will not do successfully. Keryx is very much the Amarin ( AMRN) story repeating itself, this investor believes.

What follows is a virtual "debate" between Bentsur and the aforementioned investor shorting Keryx. His fund's rules do not allow him to be identified by name in the media, so he'll be referred to as "Keryx short-seller."

Bentsur's quotes regarding Zerenex's patents and market exclusivity potential are pulled directly from Tuesday's conference call. Responses to Bentsur's remarks made by the Keryx short-seller were provided to me via email.

Bentsur: I would now like to discuss the IP protection for Zerenex, as this has been the subject of much dialog recently. Let me begin by saying that we strongly believe that Zerenex is well protected in the U.S. market until at least 2024.

Keryx short-seller: This assumes the granting of patent term extension, which we will see is not a given. Keryx does not have a real composition of matter patent for Zerenex. They do have a method of use patent ('706) covering the use of ferric citrate in dialysis that expires in 2017, plus several manufacturing patents that expire in 2023 and 2024. In order for Zerenex to be commercially viable, Keryx must convince the U.S. patent office to extend the life of the '706 patent for another five years. This is the "patent term extension" (PTE) that is much debated. Absent PTE, Zerenex's exclusivity may be short lived because generic companies could work around the remaining Zerenex manufacturing patents.

Bentsur: We believe that with our key API or drug substance, surface area and intrinsic dissolution patents which expire in 2024, it will not be possible for a generic to make a commercially viable ferric citrate without infringing on these patents. Simply put, in order to have a commercially viable ferric citrate, one has to have drug substance or API which is concentrated enough, otherwise, one would need large amounts of API and that would make any formulation extremely cumbersome. For example, this would translate into a very large number of pills, very large pills or a combination of both to get any meaningful or comparable therapeutic activity and in either case that would not be commercially viable...

Our ferric citrate API or drug substance is unlike any other, it has considerably higher intrinsic dissolution and surface area, which are critical for the drug product activity as compared to the OTC versions, as well as much higher purity levels. We believe that only with those characteristics can one potentially develop a tablet that will have a commercially viable amount of ferric iron in it.

Keryx short-seller: All of this talk about proprietary API for a molecule that has been known for a hundred years is a smoke screen distracting from the fact that Keryx is not going to get NCE or patent term extension, leaving Keryx with a dubious manufacturing barrier to entry. Ferric citrate is not a biologic. The idea of erecting a manufacturing barrier to entry is silly. Keryx's argument in essence is "if we fail to get NCE or patent term extension, we will be able to administer six tablets per dose while our competitor requires seven."

Bentsur: As many of you know, New Chemical Entity, or NCE for short, is based on active moiety and is determined by the FDA. Patent Term Extension, or PTE for short, is based on active ingredient and is determined by the PTO or the Patent Office. Both determinations will be made post-approval... I cannot go into all the details on this call and we do not plan on disclosing everything for competitive and strategic reasons, but there are several things that are very important in thinking about NCE and PTE.

Keryx short-seller: Keryx has a method of use patent on Zerenex that will expire in 2017. That does not leave much room for market exclusivity. Keryx has stated that they anticipate PTE may allow extension of this patent by five years. Among the six criteria for determining eligibility for PTE is a stipulation that the "applicant must show that the product either represents the first permitted commercial marketing or use of the product...". Ferric citrate is available for sale at various health food stores. In other words, Zerenex is not the first commercial sale of ferric citrate, and therefore fails to satisfy PTE requirements.

Avanir Pharmaceuticals' ( AVNR) Neudexta is a recent example of a rejection of PTE by the patent office. Neudexta is a combination product of dextromethorphan and quinidine. U.S. patent officials found PTE to be unwarranted because both ingredients had previously been sold commercially. Importantly, dextromethorphan, like ferric citrate, was sold over the counter prior to Neudexta's approval. Avanair subsequently appealed this case without success.

Bentsur: An interesting data point for people to think about is Ferrlecit, an IV iron ferric gluconate compound that was able to obtain NCE, when there were two ferric dextran IG iron formulations that were approved prior to Ferrlecit's approval. Why would the FDA grant Ferrlecit an NCE, if the active moiety is ferric just like the prior ferric IV iron drugs. The answer we believe is that the sponsor was able to prove to the FDA from an inorganic chemistry perspective that Ferrlecit's physiochemical properties, mainly its high molecular weight complex structure, were critical for its improved activity as an IV iron formulation compared to the other IV iron compounds. We don't believe it will be difficult to prove that Zerenex represents a different complex compared to any OTC ferric citrate or any other ferric-based compounds.

Keryx short-seller: Ferrlecit's approval and NCE status designation occurred before the FDA convened an in-house working group in 2000 to address issues about the granting of market exclusivity for metal-based drugs with equivalent active ingredients. The result of this FDA working group was a more restrictive policy on the granting of NCE status. For example, Venofer, another IV iron, came up for review after the FDA's implemented changes recommended by the metals working group. FDA approved Venofer but did not grant NCE market exclusivity. FDA concluded that Venofer's active ingredient, ferric iron, had already been approved in several other drugs. Bentsur is not telling the complete story when he mentions Ferrlecit's NCE designation but omits Venofer NCE rejection. The latter is far more relevant to Zerenex.

Bentsur: With that perspective in mind, let me also discuss ferric ammonium citrate that has been mentioned as a potential impediment for Zerenex obtaining patent term extension. Ferric ammonium citrate is altogether a different salt and complex molecule with a different USB classification. Clearly, these are also different complexes and that would be very easy to prove in vitro if necessary, but the difference is so clear even organically, ferric ammonium citrate has two ph ket irons and one n iron compared to Zerenex which has one ket iron and one n iron. Secondly, it's activity as a phosphate binder has never been clinically proven and arguably it would have a very different activity profile. For example, it is likely to cause complications such as metabolic acidosis due to the ammonium component. Third, for the ferric ammonium citrate USB monographs. One of the impurity test for making ferric ammonium citrate is the absence of ferric citrate, meaning you cannot have ferric citrate in the ferric ammonium citrate salt. It is considered an impurity when making ferric ammonium citrate. Also, the fairly recent PhotoCure precedent whereby a methyl ester of an approved salt received patent from extension is reassuring. In particular, given the fact that we don't believe that ferric ammonium citrate and ferric citrate are the same salt or salt of one another and even if they were derivatives of one another, the PhotoCure precedent is very favorable. Bottom line, we strongly believe that ferric ammonium citrate will not be an impediment to patent from extension.

Keryx short-seller: I don't think the approval ferric ammonium citrate is relevant to the NCE argument. There is more than enough precedent established by the metal complex working group to eliminate NCE from consideration. The Photocure decision is relevant because it was subsequently appealed and the Federal Circuit court ruled that "product" equals the "active moiety." In fact, current FDA guidance now specifically states that altering an active moiety by changing its ester or salt does not constitute a new active moiety.

Bentsur: Next, we have also heard about the possibility that older ferric citrate filings could impede on our ability to obtain Patent Term Extension. First, we don't know whether any of these older filings physically exist or whether they were actually 505(b) filings, meaning NDAs, or rather just nutraceutical filings. Even if they do exist and one or more of them were actually 505(b) filings, such filings occurred prior to the 1962 Kefauver Harris Act, which required efficacy studies of drugs from that point forward in order to be approved. All older filings received an eight-year grace period to conduct efficacy studies or appeal their case in order to remain on the market. The cutoff date for the Kefauver Harris Act grace period was July of 1970, and in fact, all four older ferric citrate filings show up as being pulled from the market on that date, meaning, none of them made the cut as an approved drug and no ferric citrate approval appears after that date. Incidentally, two ferric ammonium filings do appear after the July 1970 cutoff date, meaning ferric ammonium approvals deemed have been approved subsequent to the Kefauver Harris Act.

Keryx short-seller: There is no such thing as a nutraceutical filing. I don't think these very old ferric ammonium citrate filings are relevant because iron citrate itself was approved by the FDA in 1973! Though forty years have passed, the active ingredient remains the same -- iron. If you don't believe me about the tenuous thread upon which Zerenex's exclusivity hangs, look at Keryx's own 2011 10-K filing, which includes a statement that perifosine (in clinical development at that time) would qualify for NCE. Notably absent is a similar statement regarding NCE status for Zerenex.

Bentsur: So while we're very much engaged in dialogue with prospective partners, and there does seem to be significant interest, we were not at all apprehensive about launching the drug on our own, if the timing and or economics of the business development discussions do not coincide with our goals or expectations.

Keryx short-seller: While Big Pharma has done its share of ill-advised partnerships and acquisitions, one thing Big Pharma almost always does well is due diligence on intellectual property and market exclusivity. In this regard, I agree with Ron's comment above. Keryx will be launching Zerenex on its own. His warning Tuesday to that effect will be prove to be prescient in the days and months ahead.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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