Keryx Biopharma (NASDAQ:KERX) Product Development Update

The following is a guest post from IR GRO:

Keryx Biopharmaceuticals, Inc. (NASDAQ:KERX) is an emerging biopharma company that has a pair of lead compounds in late stage development: Perifosine for the treatment of cancer and Zerenex for patients suffering from renal disease.

Last December, Keryx announced the initiation of a Phase 3 pivotal study of Perifosine (KRX-0401), the Company's PI3K/Akt pathway inhibitor (a cell signaling pathway that disrupts the normal cell cycle / programmed cell death and leads to chemotherapy drug resistance in some cancer cells), in multiple myeloma patients under a Special Protocol Assessment (SPA) with the FDA with Fast Track designations for this indication.

Perifosine is in-licensed by Keryx from Aeterna Zentaris. Keryx expects a patient recruitment period of approximately 16-18 months and expects to report data from this study during 2H11. In addition, a refractory metastatic colorectal cancer (mCRC) study under SPA is expected to begin 2Q10 with projected completion 2H11.

During the first week of 2010, Keryx announced that it has reached agreement with the FDA regarding a SPA for the design of a Phase 3 clinical program for Zerenex (ferric citrate), which is the Company's iron-based phosphate binder for the treatment of elevated serum phosphorous levels (hyperphosphatemia occurs in the majority of dialysis patients, resulting in serious medical complications such as blood vessel calcification and skeletal deformities since phosphate is a major component of bone along with calcium) in patients with end-stage renal disease (ESRD) that are on dialysis.

Zerenex works by forming iron-phosphate complexes in the gut that are not absorbed since patients with ESRD are prone to electrolyte disorders such as elevated phosphorus due to the absence of normal kidney function. In accordance with the Company's SPA agreement with the FDA, the Phase 3 clinical program for Zerenex will consist of two clinical studies, including (1) a short-term efficacy study that is expected to commence by the end of 1Q10 with date expected during 2H10; and (2) a long-term safety and efficacy study that is expected to begin mid-2010 with data expected and a NDA filing expected during 1H12.

Keryx has retained all key commercial rights for its two lead compounds and has the resources to complete Phase 3 development for both of its lead compounds, which provides more leverage in partnership discussions. The estimated cash burn rate for 2010 is $1.3 million per month or approximately $4 million per quarter and $16 million for the entire year.

This is a sponsored post placed by IR GRO on behalf of ProActive Capital. Please visit the ProActive News Room for more details on Keryx.

Avoiding Stock Market Scams

We have discussed a couple of companies on this site that don't trade on the major exchanges (e.g. the NYSE, the Nasdaq etc). Though it has been mentioned that over-the-counter stocks do not offer investors the same protections as do stocks trading on the exchanges, the details were not explored. However, there are some "smell tests" investors may wish to apply to such apparent opportunities.

Consider NewMarket Technology (NWMT), a company that provides a range of technology-based services. The company has total assets of $53 million, and has net current assets of $12 million. However, the company trades for just a couple of hundred thousand dollars! For a company with $100 million in sales, how can this be?

It is possible that the company is not a scam at all, but just a victim of poor management. The company has issued several rounds of preferred shares, which are convertible to common stock. The conversion rates are extremely dilutive, resulting in the issuance of millions of shares that flood the market with this company's stock. Investors who believe this company to be legit should beware of further stock issuances, as convertible preferred stock remains outstanding.

But upon further investigation, there may be more to this story than the idea that this is simply an undervalued stock undergoing a flurry of dilution. While the company claims to have "over 600 employees" and its "target markets are located domestically in all 50 states", it is very difficult to pinpoint from where the company runs its operations. It's impossible to reach anyone by phone at the company's headquarters, as calls to the company's two provided numbers repeatedly went unanswered! E-mail and phone requests to the company's investor relation's department were also ignored.

Public companies are required to have independent auditors, which provide some form of comfort to investors. But this company has gone through several auditors in the past few years, each of which appears to have little in the way of name recognition but much in the way of legal issues. The auditor of the company's 2008 financial statements is now barred from practice, as per these findings of the SEC. The newest auditor is a two-person, husband and wife tandem who appear to operate out of their own home, for this a $100 million, international company!

But while it may be impossible to speak with any of the company's employees, the company doesn't hesitate to publish schools of positive press releases to pump the company's stock, including this laughable video, put together by a really professional outfit:

It's important that it be re-iterated that it's not clear that NewMarket is a scam. But it's never clear whether a company is acting fraudulently. Investors in companies that trade over-the-counter must take special steps to ensure the investment is legitimate, since the added layer of protection added by the major exchanges is absent. Since the #1 principle of value investing is "Never Lose Money", companies that don't pass these basic tests should be discarded.

Disclosure: None

Mirant Corporation

Mirant (MIR) produces and sells electricity in specific markets within the US. It trades at its lowest price in several years, and currently has a P/E of just 3 and a P/B of just .35! It has almost as much cash as it does debt, despite operating in an industry where higher debt loads are considered safe.

As demand for power has dropped as a result of the recession and environmental conservation efforts, prices in the future are expected to be lower than they have been in the recent past, leading to profit projections considerably lower than current profits. Electricity prices are volatile, however, which can allow investors to take advantage of short-term pessimism. Furthermore, Mirant operates in an industry with high barriers to entry, as high regulations and high upfront capital requirements discourage potential new entrants.

But while Mirant is superficially appealing based on traditional value metrics, it is substantially more complex than most of the companies discussed on this site. Not only is it several times larger than most of the companies we look at, but it also operates in several business lines, requiring the investor to understand a myriad of issues. The company uses over-the-counter and commodities market derivatives to manage its production capacity and its supply requirements, both to hedge its revenues and costs, as well as for proprietary trading.

Furthermore, as a producer of dirty energy (fuel and coal based) the company is subject to numerous regulations from all branches of government, from the federal to the state to the local level. Some of these regulations require plant shutdowns (for plants that are not up-to-date technologically), while others can, and have, required billions of dollars in capital expenditures. The market cap of this company is only $1.5 billion, so the nature and timing of any future regulations can have a significant effect on the stock's valuation.

While Mirant may very well generate excellent returns for stockholders at its current price, it's important that the value investor recognize the importance of investing within his circle of competence with an investment like this. An investor that doesn't fully understand the risks to a company such as Mirant (and there are several including environmental, regulatory and financial) can receive unwelcome surprises that destroy his principal, thus violating the first rule of value investing. Indeed, the company went bankrupt just 7 years ago, catching a different group of shareholders off guard (albeit with a much higher debt burden than it currently carries).

*Note: A few hours ago, the company announced that it would merge with RRI Energy in an all-stock deal, making this stock's value somewhat more difficult to estimate, since an understanding of both companies is now required.

Disclosure: None

Freakonomics: Chapter 3

Charlie Munger says the most important rule in management is "Get the incentives right". Munger argues that the power of incentives is constantly underestimated. In Freakonomics, Steven Levitt shows us how pervasive incentives are in society, and what we can learn from that. Value investors who can grasp the power of incentives put themselves in a position to understand which companies are utilizing the full potential of their managements.

John Kenneth Galbraith coined the term "conventional wisdom", calling it a convenient and comfortable point of view that is often false. Indeed, Levitt argues, much of what we accept to be true really isn't, and only by asking the right questions can we know this.

Levitt believes sloppy or self-interested thinking leads to common beliefs that are actually untrue. Individuals with vested interests will often permeate untruths in the hope of effecting change. Levitt cites examples where advocates for the homeless and women's rights have been known to inflate their numbers to make their causes more significant.

Ideally, we would count on the media to scrutinize the info before it is brought to air, but Levitt argues that the media is a willing participant. They too rely on the self-interested to fill papers with jarring pieces of wisdom that few are going to question. A little creative lying can draw attention and money, for both the expert supplying the data and the media enterprise that helps spread the message. Working together, journalists and experts create much of what comes to be known as conventional wisdom, argues Levitt.

Every day, experts and journalists fill the business news with an explanation for what happened in the market, but are their explanations true, or just taken as such?

Freakonomics: Chapter 2

Charlie Munger says the most important rule in management is "Get the incentives right". Munger argues that the power of incentives is constantly underestimated. In Freakonomics, Steven Levitt shows us how pervasive incentives are in society, and what we can learn from that. Value investors who can grasp the power of incentives put themselves in a position to understand which companies are utilizing the full potential of their managements.

Even if incentives exist for a particular action, information assymmetries can cause destructive outcomes. Levitt discusses various corporate scandals, and how they were caused by certain groups possessing information that other groups did not have: research analysts Henry Blodget and Jack Grubman wrote positive research reports about stocks they knew to be junk; Frank Quattrone covered up investigations into his company, Credit Suisse; Sam Waksal and Martha Stewart dumped shares of ImClone on inside information; managements have fabricated billions of dollars in revenues.

All of these situations exist because one group has information that other groups don't have. They seek to profit not by normal means, but by exploiting this information differential. They do this by either promoting false information, or hiding true information.

Most types of crimes leave visible victims, such that even if the perpetrators aren't caught, it is known that a crime has been committed. Such is not the case with respect to crimes of information, which can go completely undetected.

You are more likely to listen to the advice of an expert. But because of information assymmetries, the expert may be acting in his own interest. The weapon of choice for such experts is often fear. "If you don't agree to this surgery", or "without this safer car", or "by not accepting this offer for your house", "the consequences may be dire".

The internet is a useful tool in reducing information assymmetries, but they will always exist to some extent. Readers may wish to follow the advice of Charlie Munger: "Fear advice that, if implemented, is good for the advisor. Learn the basic elements of your advisor's trade, and double-check/disbelieve much of what you're told."

Karsan Value Funds: 2010 Q1 Results

Karsan Value Funds (KVF) is a value-oriented fund, as described here. Due to securities regulations, the fund is not open to the public at this time. Should that change in the future, there will be an announcement on this site.

This report will read eerily similar to that of the last quarter, since many of last quarter's trends continued into the first quarter of 2010. For the first quarter ended March 31st, 2010, KVF earned 33 cents per share, bringing the value of each share to $11.73. The markets had another strong quarter, with most indexes up in the low to mid single digits. As such, most funds will have made money in this period. However, the true test of whether this (or any other) fund is adding value will take place over a period of several years and through both bull and bear markets.

Once again, weakness in the US dollar (relative to the Canadian dollar, the fund's reporting currency) hurt results. Had the exchange rate ended the quarter at the same position at which it started the quarter, earnings this quarter would have been almost 20 cents per share higher. Currency volatility is likely to continue to have a significant bearing on quarterly results, but over the long-term it is not expected to be a material factor. With the currency rates where they are presently, however, owners of Canadian dollars who have a long-term perspective are offered opportunities to buy securities around the world at what appears to be a favourable rate.

As the market rose over the quarter, some stocks were divested following their exceptional price run-ups. These stocks include Key Tronic, Chromcraft Revington, Hardinge, and LCA Vision (further details are available where linked). Despite these divestments, KVF continues to own a great many stocks that are deemed to be undervalued.

At the same time, as downside risks in the market have risen (thanks to the market's continued rise), KVF is also capitalized to seize any opportunities the market may offer through both temporary or prolonged pullbacks.

KVF's income statement and balance sheet are included below. Note that securities are marked to market value, and amounts are in $CAD:

Curious About The Useless

In previous posts, we've discussed how forecasts are rarely accurate, and are better at telling us what has happened rather than what is going to happen. So why then do we continue to "consume" forecasts, growing a market for those who continually churn out mountains of useless forecasts?

James Montier, author of Behavioural Finance: Insights Into Irrational Minds And Markets, argues that a fear of uncertainty is largely responsible for our use of forecasts even when we know they aren't accurate. When we are uncertain, we are willing to latch onto even irrelevant data in order to attempt to quell that uncertainty. Montier refers to this as "anchoring", and uses the following example to illustrate how it affects us:

A question he asks professional fund managers is to write down the last four digits of their phone numbers, and then estimate how many doctors live in their capital city. Those with the last four digits above 7000 report on average 6762 doctors, while those whose last four digits are under 2000 arrive at an average estimate of 2270 doctors. Incredibly, the phone numbers of fund managers play a role in helping them answer a completely unrelated question!

This study is by no means unique. In this paper, Tversky and Kahneman asked subjects what percentage of African nations are part of the United Nations. Before they could answer, however, the authors had the subjects spin a rigged wheel of numbers that would land on either 10 or 65. As readers may by now predict, the answers of subjects were strongly influenced by the random number that came up on the wheel.

Montier strongly believes that we should ignore forecasts, and instead use value-based strategies based on trailing earnings or PE's. Furthermore, he argues that analysts should stick to analyzing, not forecasting. However, since this would require a radical re-think of the investment process, he doesn't see this as likely.