(Updated - May 23, 2016 10:54 AM EDT)

Relypsa (NASDAQ: RLYP) is gaining sharply in early trading Monday following this morning's upgrade to Equal Weight at Morgan Stanley.

While not a bullish rating, shares of RLYP are surging as Morgan Stanley's Andrew Berens was the biggest bear on the Street.

In the upgrade report, Berens is moving away from the Sell rating ahead of the the May 26th outcome of the FDA decision on a competitor's drug, AstraZeneca's potassium binder, ZS-9.

Berens admits "currently, RLYP stock is not trading on the fundamentals, but predominantly on the outcome of this FDA action date and how it impacts investor perception about the likelihood of strategic optionality in the future – stimulated by AstraZeneca's 2015 acquisition of ZS Pharma for $2.7 billion."

The analyst think RLYP is fairly priced into the binary event and lists seven possible PDUFA outcomes:

Approval Scenarios (65%):

Scenario 1: In our first approval scenario, ZS-9 receives a clean label from the FDA, devoid of any restrictive language regarding edema, sodium, or drug-drug interactions and is approved for usage in both the acute and chronic settings. We believe this would be very advantageous vs. Relypsa's Veltassa, which contains a black box warning cautioning against drug-drug interactions and requiring a six hour separation before and after Veltassa and other oral medications. The Veltassa label also cautions against usage in the urgent setting, and it is unclear how the agency will address ZS-9's much faster onset of action in this regard. We believe RLYP shares would likely trade down ~50% to $7, based on the perceived commercial advantage for ZS-9. We assign this scenario a 15% probability.

Scenario 2: In our second approval scenario, ZS-9 is approved with minimal restriction (i.e., no black box or contraindication against broad usage), although the drug's sodium content and/or edema noted in the trials are highlighted as precautions. We believe this is the most likely scenario, modeling a 35% probability. The most likely example of a minimal restriction is wording cautioning against usage in patients who are extremely sensitive to sodium, similar to the precaution found on the kayexalate label. We believe this scenario would be advantageous vs. Veltassa, and that RLYP shares would likely trade down ~40% to ~$9.

Scenario 3: Our third approval scenario results in the inclusion of a black box warning on the ZS-9 label, potentially putting it on par with Veltassa. The black box may be related to edema, hypertension, or sodium loading. We view this scenario as unlikely, assigning a probability of 10%. Should this scenario emerge, we believe RLYP shares would react favorably, trading up ~70% to ~$25.

Scenario 4: Our final approval scenario involves the restriction of ZS-9 limiting the drug to acute usage and inclusive of a black box warning around sodium loading, edema and hypertension. We view this scenario as unlikely, modeling a 5% probability. We believe RLYP shares in this scenario would likely double, trading up to ~$30.

Non-Approval Scenarios (35%)

Scenario 1: Our first non-approval scenario, which we view as the second most-likely overall, involves a minor delay to the ZS-9 action date. The most likely cause of this short delay is due to an issue with manufacturing (CMC) or as a result of the FDA needing additional time to review long-term safety data submitted during the application review process. We still think the stock would react favorably in the immediate term, as it would give Relypsa a slightly longer runway without any competition. However, we would expect the fundamental concerns to rapidly impact RLYP shares, as the final ZS-9 label would be delayed, as would the perception of the likelihood of near-term strategic optionality.

Scenario 2: The second non-approval scenario includes a complete response letter (CRL) resulting in amoderate delay with an uncertain path forward. We view this scenario as relatively unlikely, modeling a 5% probability, and that shares of RLYP would likely react very positively, gaining ~115% to $30.

Scenario 3: The final non-approval scenario includes a complete response letter resulting in a long delay, likely requiring additional clinical data and/or a non-approvable status. We view this worst-case ZS-9 scenario as equally unlikely, modeling a 5% probability. We believe RLYP shares in this scenario would likely more than double to ~$35 (+150%).

Meanwhile, the firm sees strategic optionality as a wild card.

"We think RLYP shares are not trading on fundamentals currently, with the potential for strategic optionality a primary driver following AstraZeneca's 2015 acquisition of ZS Pharma," he commented. "Investors appear to be viewing the ZS-9 action date as a potential gate for optionality, just as Veltassa's action date was seen as a gate for the ZS acquisition. We have no knowledge of any potential transactions and management has not commented. However, if ZS-9 gets a more favorable label, we think it is plausible that talk about strategic optionality would decrease (50% probability), while if the label is on par or worse than the Veltassa label or the drug gets a complete response letter (25% collective probability) this may increase. Until investor interest about optionality subsides, RLYP is unlikely to trade on fundamentals."

Shares of RLYP are up 9.5% early to $16.38.