THCG GIZA INVESTMENT LETTER
JUNE 2000
No. 51

Keryx Readies for IPO, New Drug Trials

At a time when communications companies dominate Israel's investment landscape, Keryx is attempting to demonstrate that biotechnology firms can also garner investment attention. Keryx is also involved in communications, although of a different nature. Keryx applies data from the human genome to discover new drug candidates which target protein kinases. These enzymes are important to the way cells communicate via signal transduction. The company believes its 'KinAce' drug design system enables it to discover more candidates, in less time and with lower toxicity levels than its competitors.

In addition to its own work with protein kinases, Keryx has licensed KRX-101, which is being developed to treat diabetic nephropathy in Type II diabetes. In the short- to intermediate-term the company plans to begin clinical trials for KRX-101 while pursuing additional applications for the compound.

In May, Jerusalem-based Keryx filed for an initial public offering on Nasdaq in the US. Lead manager is Cruttenden Roth Inc. Concurrently, the company plans to list on the London Stock Exchange's Alternative Investment Market (AIM) and has engaged West LB Panmure Limited as international lead manager.

KRX-101
It is estimated that in the US, 10% to 20% of the nine million diabetics with Type II diabetes (characterized by the body's inability to make or properly use insulin) suffer from nephropathy. Diabetic nephropathy occurs when albumin and other proteins are lost through the urine as a result of diabetes-related damage to the kidney's capillary loops. Such kidney damage often leads to end-stage renal disease, which can be treated only by dialysis or kidney transplantation.

KRX-101 is used in Europe to treat vascular conditions. Keryx plans to enter clinical trials for KRX-101's use in treating nephropathy in Type II diabetics. Keryx believes that KRX-101, which helps maintain the capillary loop membranes in the kidney, can prevent or delay end-stage renal disease.

Needs to Pass FDA Hurdles
Keryx intends to submit an Investigational New Drug (IND) application to the US Food and Drug Administration this year. It hopes KRX-101 will be put on the FDA's fast track review since, to date, there is no FDA-approved treatment for nephropathy in Type II diabetics. However, it may not be smooth sailing for Keryx. The IND will propose that a reduction in the albumin excretion rate be the endpoint of its trials. The FDA has already rejected this endpoint as insufficient for granting approval. It remains to be seen whether the FDA will reverse itself of whether Keryx will be forced to enter into more comprehensive, time consuming and costly trials.

Keryx believes KRX-101 will be effective in the treatment of other conditions such as pre-eclampsia of pregnancy, diabetic retinopathy and thrombosis.

Rights from Alfa Wassermann
KRX-101 is licensed from Alfa Wassermann SpA under an agreement which grants Keryx exclusive rights for diabetic nephropathy, diabetic retinopathy and diabetic neuropathy in the US, Canada, Japan, Australia, New Zealand, South Africa and Israel. Keryx also has exclusive, worldwide ownership of any novel indications developed for KRX-101. The company has already filed two such patent applications.

Competing Drugs
The American Diabetes Association recommends ACE inhibitors, commonly prescribed for hypertension, to treat diabetic nephropathy. While ACE inhibitors alone are not as effective in combating nephropathy in Type II diabetics, preliminary clinical evidence shows that KRX-101, in synergy with ACE inhibitors, may reduce albumin loss further than ACE therapy alone. Exocell, Inc., a US drug company currently has a compound in Phase III clinical trials aimed at reducing nephropathy in Type II diabetes.

"KinAce" Approach to Identifying Drugs
Protein kinases can be considered cellular messengers, communicating via biochemical signals with cells in the human body to coordinate their growth and differentiation. Disease or other medical conditions may arise when protein kinases give an inappropriate signal. Keryx's KinAce approach uses proprietary algorithms to identify compounds that can inhibit or stimulate activity of the kinase by focusing on the sequence of specific portions of a protein kinase. Using this targeting approach, Keryx has, to date, discovered 13 lead drug compounds.

KRX-123 for Prostate Cancer
KRX-123 is Keryx's leading drug candidate for treating hormone-resistant prostate cancer, which is currently incurable. The market size is estimated at more than $450 million. In studies, mice injected with KRX-123 demonstrated survival rates of 75% to 100%, whereas control groups, receiving either chemotherapy or no treatment, had no survivors.

The company plans to apply to the Israel Ministry of Health to run clinical trials in accordance with FDA guidelines and intends to file an IND by year-end 2000. Keryx believes it can obtain fast track FDA review because of the fatal nature of the disease. There are several other KinAce drug candidates, all in earlier stages of development.

Marketing to be Entrusted to Partners
Because of the high cost of clinical trials and manufacturing and marketing new drugs, Keryx will seek alliances with established pharmaceutical and biotechnology firms. It will forego building a sales force of its own, assigning the marketing of future products to potential corporate partners. It will attempt to limit its expenditures as much as possible to the research and development of new compounds and technologies.

Protein kinases Receive Attention by Competitors
Several companies, including Pharmacia-Upjohn, Ariad Pharmaceuticals, Tulark, Inc., Ligand Pharmaceuticals, Inc. and ICOS Corporation, are active in signal transduction. Vertex Pharmaceuticals, Inc. and Novartis Pharma AG are jointly working to discover eight kinase inhibitors.

Operations to Date
Keryx was incorporated in Delaware in 1998. Operations began in November 1999 with the acquisition of assets and certain liabilities of Partec Ltd., Keryx's predecessor company. Operations were financed through private investment for which the company received gross proceeds of $11.6 million from stock issuances and $3.2 million through the contribution of notes by holders in Partec. As of March 31, Keryx had an accumulated deficit of $14 million, and in the March 2000 quarter, it incurred a loss of $1.8 million on no revenues. More losses are anticipated as the company intensifies its research and development efforts. Key balance sheet data as of March 31, 2000 ($000s):

Cash and equivalents....................6,551
Working capital........................... 6,469
Total assets................................ 7,607
Long-term obligations......................129
Total stockholders' equity..............7,073

Proceeds for Clinical Trials
Proceeds from the initial public offering are expected to fund clinical trials for KRX-101 and KRX-123, as well as expansion of the company's KinAce platform.

Principal Stockholders
Lindsay Rosenwald, M.D., an investment banker and venture capitalist, owns 42% of Keryx's shares. Rosenwald is chairman of Paramount Capital, Inc. and Paramount Capital Investments LLC. Keryx Chairman and CEO, Morris Laster, M.D., holds 11%.