Expert Financial Analysis and Reporting

Par Pharmaceutical’s launched at risk a its generic version of Zegerid capsules, Santarus responded by launching its own authorized generic, restructured its sales force and ceased promotion of Zegerid prescription products.

The Zegerid patent litigation is still ongoing as SNTS filed an appeal to the US Court of Appeals for the Federal Circuit in late May in response to the US Delaware Court’s decision that the patent in question is invalid due to obviousness. Late July, SNTS filed their initial brief for the appeal. The appeal will be hear by a three judge panel with the decision based on a majority ruling. They expect the appellate decision in about 12-18 months from the filing date in May.

As for the GI products, SNTS plan to announce topline date from the US and EU budesonide MMX ph. 3 trials for ulcerative colitis is September 2010, and they are currently enrolling patients for their first Rifamycin SV MMX ph. 3 clinical trial for Traveler’s diarrhea at centers in Mexico and Guatemala.

Pipeline Update

Budesonide MMX for ulcerative colitis is comparing either 6 mg or 9 mg to placebo over an eight week period. Each study also includes a fourth arm to compare an active reference drug. In the US study, the reference drug is Asacol tablets, and in the EU stud, it is Entocort EC capsules. A total of 1024 patients were enrolled in the two studies. The primary endpoint of the ph. 3 clinical studies is the achievement of clinical remission by patients in each budesonide MMX group vs. the placebo group at eight weeks. The studies are not powered to show a statistical difference between budesonide MMX and the reference drugs.

1. The topline data is expected in Sept 2010 from the US and EU ph. 3 studies.
2. SNTS has completed patient enrollment in a 12 month extension study that was requested by the FDA to evaluate the safety and efficacy of daily budesonide MMX 6 mg vs. placebo and the maintenance of remission in ulcerative colitis patients.       The study is expected to complete in mid 2011.
3. Assuming positive clinical trial results from the ph. 3 studies, and the extended use study, SNTS plans to file NDA in 2H2011.

Rifamycin SV MMX for Traveler’s diarrhea ph. 3 trial has currently recruited about 25% of the patients for the first ph. 3 trial. Assuming a timey and successful completion of the first ph. 3 trial, the second ph. 3 trial will start in 2H2011. The FDA has deemed Rifamycin to be a new molecular entity and is requiring the company to conduct a separate safety study with at least 700 patients. The safety study will start later in the 3Q10.

Glumetza Sales Update:

In mid-June, 500 mg Glumetza was recalled and Depomed has informed SNTS that they expect to recommence shipping of 500 mg Glumetza by mid-August, however they still have not resolved the issue. The 1000 mg tablet was not impacted by the recall. The company expects to be profitable in 2010, assuming that Glumetza 500mg shipments resume by mid-August but the 500 mg is still not resolved by Depomed.

Financial

Revenue for the 1H2010 was $81.4 million and net income of $9.4 million. The 2010 revenue guidance is $125 to $130 million assuming Depomed resumes 500 mg by mid August as scheduled. The R&D expense for the year is expected to be up to $23 million which include the costs of ph. 3 Budesonide and Rifamycin trials. With these guidance, SNTS expects to achieve modest profitability in 4Q10.

With the restructuring of sales force in June the company will reduce their expenses by $40 million annually starting in 4Q2010. Substantially all of the restructuring is downsizing the sales force to 110 reps due to Zegerid going generic.

SNTS ended 2Q10 with $99.1 million in cash, an increase of $5.2 million from Dec 31, 2009.

Type of Contact

I attended the presentation and spoke before and spoke afterwards with Gerry Proehl, Debbie Crawford and Martha Hough.

Notes From Meeting

They continue to await the judge’s decision on whether the patents covering Zegerid are valid and enforceable. If they lose the case, the stock might go to $1 to $2 as investors will probably see the patent loss as a disaster. However, as I have pointed out in previous notes, this would be an enormous over-reaction. For the first two to three years of generic competition, only Par and Santarus would be marketing Zegerid and there would be little price competition and the companies would probably split the market 50/50. Santarus would cease marketing of the product and would not bear the associated costs so that from a profit standpoint this could be a wash for Santarus, not the unmitigated disaster that the Street would interpret it as.

Beyond Zegerid prescription product, there are a lot of positive things going on at the company. It has a very interesting, potential mini-blockbuster drug in budesonide MMX for ulcerative colitis. Results from the European phase III trial will be available in 1H, 2010. Also, Schering-Plough is about to launch the over the counter version of Zegerid, which I think will be a huge success.

If the company loses the patent case and the stock drops to $1 to $2 it would be a great buy. If they win the case, the stock could jump to $6 to $7. I think it would be a buy at that level. I couldn’t stand the uncertainty and sold the stock in my personal account. However, I think that the odds favor them winning the patent case.

Santarus has about $94 million of cash and should be profitable in 2010.