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AKBA Akebia Therapeutics, Inc. - Initiation Note

Akebia Therapeutics, Inc.

BUY (AKBA, $9.67)

Vadadustat: a Differentiated Drug That Should Attract a Partner in Every Major Market and Deliver in Phase 3: Initiating BUY/$18 TP

January 26, 2017

Jonathan Aschoff, Ph.D.

212.417.8277

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We are initiating coverage of Akebia Therapeutics Inc. with a Buy rating and a 12-month target price of $18. Vadadustat is Akebia’s leading small molecule oral drug being developed for anemia secondary to chronic kidney disease (CKD), and we believe it has the potential to expand the market for anemia in non-dialysis CKD and replace ESAs as standard of care for anemia in dialysis CKD. Unlike ESAs, vadadustat stimulates endogenous production of erythropoietin and iron transfer proteins in a manner similar to when a person adapts to a higher altitude, thereby providing a more physiologic approach to treating anemia.

Vadadustat entered Phase 3 for anemia in non-dialysis CKD in late 2015, with filings for approval expected in 2019. In Phase 2b, vadadustat was successful in safely and predictably raising hemoglobin levels in non-dialysis CKD anemics. In dialysis CKD anemia, Phase 2 read out positive results in 3Q15, and Phase 3 started in that indication in 3Q16, with filings for approval expected in 2020.

Akebia will market vadadustat with partner Otsuka Pharmaceutical in the US, has signed Mitsubishi Tanabe Pharma Corp. (MTPC) as an Asian partner, and is seeking an EU partnership that we anticipate in the not too distant future. We base our valuation for Akebia exclusively on global revenue from vadadustat for anemia in both non-dialysis CKD and dialysis CKD. We project FDA approval and US launch for anemia in non-dialysis patients, the first indication of vadadustat, in 2020, followed by the approval and launch in dialysis patients in 2021. As with the prior two partnerships, an EU deal should serve as a similarly meaningful stock catalyst.

Vadadustat’s differentiated mechanism of action allows hemoglobin levels to increase predictably and sustainably in CKD patients. As a result, peak levels of erythropoietin induced by vadadustat stay within the physiologic range naturally experienced by a person ascending in altitude. Compared to injectable ESAs that supply recombinant versions of erythropoietin without a corresponding increase in iron availability, vadadustat provides a more physiologic approach to treating anemia related to CKD that maintains erythropoietin within a normal physiologic range and enhances natural iron mobilization. Moreover, vadadustat’s flexible oral dosing enables a gradual and controlled titration, and we believe it has some advantages over FibroGen’s (FGEN - $23.85) roxadustat.

Vadadustat could potentially expand the market for anemia in non-dialysis CKD and replace ESAs as standard of care for anemia in dialysis CKD. About 14% of US adults suffer from CKD, including more than 450,000 patients with end-stage CKD on dialysis, with anemia being a common complication. We believe non-dialysis CKD patients are not receiving adequate treatment for anemia, likely due to safety concerns and the relatively inconvenient injection route required for ESAs. Oral vadadustat, in our view, addresses this lack of adequate treatment and could therefore expand the anemia treatment market in non-dialysis CKD. While ESAs are commonly administered for dialysis CKD, vadadustat has the potential to replace ESAs as standard of care for anemia in that setting as well.

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