Expert Financial Analysis and Reporting

Investment Thesis

The receipt of a CRL for ZS-9 delays its possible approval by perhaps one year or more which substantially enhances the first mover advantage of Veltassa. AZN comments on the CRL minimize the potential that the mechanism of action of ZS-9 (which exchanges sodium for potassium) is a safety concern, but I am not convinced. We’ll know in a year how the FDA feels about this.

I think that the hyperkalemia market has multi-billion potential in the US and also in Europe so that ZS-9 (if it is approved with a clean label) and Veltassa could each achieve billions of sales. This is not a zero sums game between the two products. There is some reasonable chance that Veltassa could have the market to itself. In any possible scenario, this CRL is a meaningful positive for Relypsa and I continue to recommend purchase.

The slow uptake of Veltassa continues to trouble investors. I think that this is a near term issue as managed care tries to restrict usage of Veltassa solely to maximize its profits and without regard to patient outcomes. This can’t last. I urge you to read what I have written on this subject later in this report.

ZS-9 Receives a Complete Response Letter

AstraZeneca announced on the morning of May 27, 2016 that ZS-9 had received a Complete Response Letter (CRL) from the FDA. AZN said that FDA cited three remaining manufacturing citations (nine have already been addressed and solved) arising from a pre-approval inspection of ZS Pharma's Texas manufacturing facility. AZN said the CRL did not request any new clinical data. AstraZeneca views the three remaining manufacturing citations, which relate to process and quality issues, as "non-systemic" and resolvable in a "timely manner".

The company plans to resubmit the ZS-9 NDA within three to six months under a Class II review, and I would expect a six month or more FDA period of review. If this is the case, the new PDUFA date could be in the February to May of 2017 timeframe. If the product is approved at that time it would likely be launched in the May to August period of 2017.

Some Further Thoughts

AZN did not mention anything in regard to whether the FDA considers the mechanism of action of ZS-9 to be an issue. Remember that the mechanism of action of ZS-9 exchanges sodium for potassium and this can cause an increase in sodium in the body. Many or most of the patients eligible for potassium lowering drugs have high blood pressure, congestive heart failure or chronic kidney disease and it is possible that ZS-9 could worsen their condition. It is widely accepted that these types of patients should restrict their sodium (salt) intake.

I can’t imagine that the FDA hasn’t put enormous emphasis on the sodium retention issue. However, the AZN statement omits any mention of this. If the FDA has no issue with sodium exchange, this outcome means that the introduction of ZS-9 has been delayed for a year. This is a very positive outcome for Relypsa as it will not have to contend with ZS-9 until the summer of 2017. I am not convinced that the FDA is as sanguine about this sodium exchange issue as AZN would have us believe, but let’s for the time being assume this is the case. This allows Relypsa to build even more on its first mover advantage. I think that the hyperkalemia market is so large that both products can potentially be blockbusters, but this event will certainly increase the potential market share of Veltassa.

I am not so sure that the AZN explanation is really what is going down. The FDA often uses a CRL response when it needs more time to review a product and that may be the case here. In the CRL, the FDA acknowledged receipt of recently submitted data which it has yet to review. I suspect this may relate to clinical experience with patients in the clinical trials which may reveal if there are any signals of adverse events related to sodium. There is an ongoing 12 month open label clinical trial in 1200 patients. I continue to think that there is still a strong chance that if ZS-9 is approved it will have a black box warning related to sodium retention or only be approved for acute use. This, of course would be dramatically positive for Relypsa.

Discussion of Slow Commercial Launch of Veltassa

Veltassa has had a slow commercial uptake since its December launch and this has led some investors to question the size of the market. I think that this slow launch is reflective of managed care putting hurdles in place for reimbursement to restrict usage of new drugs with the sole motivation of increasing their bottom line. This is a situation that legislators need to address. Let me illustrate this with the experience of Novartis’s new drug for congestive heart failure Entresto, which is struggling to gain traction.

Entresto is a significant advance in the treatment of congestive heart failure. Just one week ago new medical guidelines were issued by U.S. and European heart experts which gave the highest "class 1" recommendation to Entresto for use in patients with heart failure. The guidance in the U.S. market says that Entresto should replace two older types of drugs known as ACE inhibitors and ARBs in heart failure patients. In Europe, doctors are recommended to switch their patients to Entresto if they fit the profile of a 2014 clinical trial that proved Entresto was better ACE and ARD standard treatments.

Here we have the situation of a drug which medical experts clearly recommend that patients be switched from older, now generic products like ACE inhibitors and ARBs and yet managed care has tried to block this medical practice at every turn. Their motive is money as Entresto costs about $4,500 per year versus perhaps $200 or so for the generics.

Like Entresto, Veltassa also represents a major clinical advance as the first product to be approved for chronic control of hyperkalemia. I view this as potentially a multi-billion opportunity in both the US and Europe. Astra Zeneca apparently agrees as they paid $2.7 billion to acquire ZS-9. I think that managed care will be forced by medical guidelines to allow Entresto now and Veltassa later to be widely used. I think managed care is very vulnerable to the charge that they are withholding lifesaving drugs from patients in order to increase profits because this is exactly what they are doing. This is potentially more egregious than the Valeant situation.