Street Watchdog Starts Relypsa at Strong Buy

Price Target $65.00
Link to News Story
December 9, 2015
On Friday, a rumor broke that Merck (NYSE:MRK) is planning to make a formal non-binding offer to acquire Relypsa, Inc. (NASDAQ:RLYP) at an undisclosed price.  Relypsa, based in Redwood City, CA, is a biopharmaceutical company involved in the discovery, development, and commercialization of a pipeline of polymer-based medicines.  These non-absorbed polymeric medicines can be used to treat a wide range of gastrointestinal tract diseases, including hyperkalemia.  Hyperkalemia, or high potassium in the blood, can cause abnormal heart rhythm and even sudden death.  Hyperkalemia can occur when the kidneys fail to maintain the appropriate potassium level in the blood.
Last month, the FDA approved Relypsa’s orally administered Veltassa to treat hyperkalemia.  Veltassa works in patients with hyperkalemia by binding potassium in the gastrointestinal tract, thereby decreasing its absorption in the body.  Veltassa did get a boxed warning from the FDA because it binds to other orally administered drugs, which could decrease their absorption and thereby reduce their effects.  The FDA recommends taking Veltassa at least six hours apart from other orally administered medication.  Veltassa is expected to be commercially available in the US by the first week of January 2016.  It is the first new treatment for hyperkalemia in over 50 years.
Because of the FDA’s boxed warning, shares in Relypsa hit a 1-year low of $10.26 on October 22nd amidst heavy selling pressure on fears that the restrictive label could potentially limit demand.  However, Relypsa’s management did state that a survey of physicians indicated that 95%-98% of the addressable patient population take their current medications either once daily or twice daily, which would allow Veltassa to be dosed midday or at night.  In early 2016, the company is expected to release the results of a drug interaction study to determine if the dose separation period can be reduced from 6 hours to 3 hours.  Share prices have since recovered to early August’s trading ranges of the upper $20s to the low $30s.
Currently there are very limited options on the market to manage chronic hyperkalemia.  ZS Pharma, Inc. (NASDAQ:ZSPH) has a competing drug ZS-9, for which the company submitted an NDA to the FDA back in May.  The FDA has set May 26, 2016 as the Prescription Drug User Fee Act (PDUFA) date for a decision.  Even without an FDA approval, last month ZS Pharma received a $2.7 billion buyout offer from AstraZeneca (NYSE:AZN), after having been pursued by other suitors.  This buyout offer came despite the fact that ZS-9 may likely receive an FDA boxed label warning regarding use in patients with renal disease and heart failure.  Since its target population comprises patients with these two diseases, we believe Veltassa (which has no significant safety concerns) to be at least equal, if not superior, to ZS-9.
Friday, a source claiming to have direct knowledge of the situation disclosed that pharmaceutical giant Merck & Co., Inc. (NYSE:MRK) plans to make a non-binding offer to acquire Relypsa.  Additionally, three or four other companies may be evaluating Relypsa, including Sanofi SA (ADR) (NYSE:SNY).  In August, Relypsa entered into a two year detailing and distribution agreement with Sanofi.
With peak annual sales in the US and the European Union expected to top $1 billion, we believe a buyout offer exceeding $65 per share could be likely very soon.  As such, we have set a short-term price target of $65.00.
Disclosure:  We are long RLYP.  We do not have a financial relationship with the company.