Akebia shares soar on rich partnership with Otsuka; risky but rational gamble?

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The News:

Akebia Therapeutics Inc. (Nasdaq:AKBA) led advancing issues last week, soaring $4.08, or 45% for the 5-day stretch, to $13.18. The big move came after the Cambridge, MA-based company wrapped up an expanded deal with Tokyo-based Otsuka Pharmaceutical on its midstage anemia drug.

@akebiatx expands deal with @OtsukaUS on midstage #anemia drug Click To Tweet

Otsuka already had licensing rights to Akebia’s vadadustat in the US thanks to a $125-million deal (plus additional future payments) between the two companies in December. Otsuka now has rights to vadadustat in Europe, China, Russia, Canada, Australia, and the Middle East.

The med is an oral drug that can boost red blood cell counts in patients with chronic kidney disease, and if its trials are successful, it could compete against Amgen Inc.’s Epogen in a multibillion-dollar market. Including milestones, Akebia could receive more than $1 billion from Otsuka.

Steve’s Take:

If I didn’t know better I’d say these two partners see a road, winding all over the world, beckoning with large-denomination dollar signs. Although some things still need to fall into place, they could be right.

Clearly, these drugmakers think vadadustat’s got a very good chance at getting across the regulatory finish line, and because both of these companies have a big sales presence in their respective markets, there’s reason to think that vadadustat could get out of the blocks quickly, well ahead of any competition.

First, however, Phase 3 studies have to confirm vadadustat’s efficacy and safety, and there’s no guarantee of that happening. Therefore, while there’s unquestionably a big market opportunity for Akebia, this remains a risky bet.

Akebia Therapeutics currently carries a Zacks Rank #3 (Hold).

In a nutshell, Akebia’s agreement with Otsuka involves the development and commercialization of vadadustat in the European market, China and elsewhere. Each company has designated global territories in which each has specified rights to sales of and profits from the medicine.

HC Wainwright said in a note that the European partnership, in particular, “provides strong economics, removing any funding concerns.” The agreement is the natural follow-on of a previous collaboration which called for the companies to share the costs of developing and commercializing vadadustat in the US as well the profits from potential future sales.

Upon closer examination, the latest agreement provides for Akebia receiving $208 million or more in committed capital from Otsuka, including $73 million on signing and $135 million or more of development funding, according to Bezinga. This payment is expected in the second quarter of 2017.

Akebia also stands to receive $657 million in milestone payments. Consequently, the transaction value is about $865 million. Otsuka will make double-digit royalty payments of up to 30% on the net sales of vadadustat in Otsuka’s territory, which includes Europe, Russia, China, Canada, Australia and the Middle East, but excludes Latin America and other previously licensed countries.

Bottom Line:

Akebia retains all final decision-making authority with respect to manufacturing and supply in the territory, the global Phase 2 development program and brand strategy and regulatory filing in the US and EU. That’s a huge point in its favor.

But perhaps most importantly, let’s not sell Akebia’s partner short. Outside of Japan, Otsuka traditionally flies under the world markets’ radar. Its shares have returned 22% the past year. It was founded in 1921, has nearly 31,000 employees, had sales of $11.94 billion and a market cap of $22.2 billion as of May 2016. Funding this endeavor all the way to the goal line isn’t an issue.

The companies estimate the renal anemia market at $3.5 billion. Another strong positive, if it proves real.

Wainwright analysts Ed Arce and Yasmeen Rahimi view the data readout of two separate Phase 2a dose-ranging studies in Japanese CKD patients by the year end as “a near-term catalyst.” Not wildly enthusiastic, but I’ll take that as a positive.

Furthermore, the analysts expect the initiation of Phase 2 hyporesponders study within the next couple of months, with the results expected in the first half of 2018. That means we won’t have to wait years to get a better fix on clinical progress (or lack thereof).

Wainright reaffirmed its Buy rating on shares of Akebia, raising its price target to $21–a whopping 62% premium to the company’s closing share price Friday (April 28, 2017).

Steve's Take: @akebiatx has all the earmarks of a rational gamble Click To Tweet

It’s definitely a risky name, but Akebia has all the earmarks of a rational gamble. Waiting seems short-sighted. It’s not for the risk-adverse portfolio.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.

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