Expert Financial Analysis and Reporting

Investment Thesis

This report focuses on the ulcerative colitis market and particularly on budesonide MMX, an important new drug being developed by Santarus for this disease. It uses a novel drug delivery technology in combination with the now generic, non-systemic corticosteroid budesonide. Santarus currently markets three drugs. Its first marketed drug Zegerid has been impacted by a generic competitor; the second Glumetza, is dealing with a generic challenge; and intellectual property protection for its third drug Cycloset expires in 2014.

It is critically important for Santarus to quickly and successfully develop its pipeline and the most important drug in its pipeline is budesonide MMX, which could be introduced in early 2013. Management believes that it has potential to reach peak sales of $300 million and, if so, could make Santarus an interesting long term situation even in the face of the generic challenges to Zegerid, Glumetza and Cycloset. It has the potential to single handedly drive strong growth in the 2015 to 2020 period before taking into account other interesting drugs in development and the potential for in-licensing of additional drugs.

Two phase III trials have clearly demonstrated efficacy of budesonide to cause ulcerative colitis remissions over eight weeks of treatment. In these trials, there was also an indication that it is superior to Asacol, the largest selling drug in inflammatory bowel disease. The remaining hurdle for approval is success in a 12 months safety study that has been completed and is due to be reported at any time. Because budesonide has been used for many years to treat asthma and for the last few years to treat Chrohn’s disease, there is strong reason to hope that there will be no safety issues. Chances for approval seem excellent, but in dealing with an extremely risk adverse FDA, it isn’t over until it is over.

I am currently working on a comprehensive report on Santarus that will be published shortly. In this report, I have estimated sales for Santarus through 2017 based on three scenarios that are dependent on the outcome for the generic challenge to Glumetza. The best case scenario is one in which the Glumetza patents are upheld and last through 2020. The worst case is one in which a generic is launched at risk in mid-2012. The most likely case is one in which there is a settlement that allows a generic to come to market in early 2015. These are shown below to frame the importance of budesonide MMX to the company.

Disease Overview of Ulcerative Colitis

Inflammatory bowel disease (IBD) refers to autoimmune diseases caused by an immune reaction by the body’s immune system against the gastrointestinal tract. The two principal IBD disorders are ulcerative colitis and Chrohn’s disease which cause inflammation in the intestines. The intestines are made up of the small intestine, large intestine (colon) and rectum that form a long tube running from the stomach to the anus. The small intestine leading from the stomach is about 20 feet long and an inch in diameter and it absorbs most of the nutrients from food and drink. It empties into the large intestine that is about 5 feet long and 3 inches in diameter which reabsorbs the water from the remaining nutrient depleted waste, creating stool. This stool is then moved along into the rectum and defecated.

With inflammatory bowel disease, the intestinal walls become swollen and inflamed, causing ulcers and sores, which can cause discomfort and digestive problems. Ulcerative colitis only involves the large intestine and rectum. Ulcers form when inflammation kills cells lining the colon resulting in pus and bleeding. When the disease is active, the main symptom is constant diarrhea mixed with blood. Ulcerative colitis is an intermittent disease, with periods of exacerbated symptoms, and periods that are relatively symptom-free. Although the symptoms of ulcerative colitis can sometimes diminish on their own, the disease usually requires treatment to go into remission.

Crohn’s disease has similarities to ulcerative colitis although it can affect any part of the gastrointestinal tract from mouth to anus, causing a wide variety of symptoms. When Crohn’s disease attacks the small intestine, the body may not be able to absorb enough nutrients because of the chronic inflammation that results. It can sometimes make the inside of the small intestine so narrow that nothing can pass through resulting in bowel obstructions that must be treated in the hospital and sometimes requires surgery.

IBD occurs equally in men and women and is most frequently diagnosed in patients under the age of 30. The symptoms of ulcerative colitis and Chrohn’s disease are similar: (1) abdominal pain or cramping, (2) diarrhea multiple times per day, (3) bloody stools and (4) weight loss. Symptoms can come and go and patients can go into remission for months or years before flare-ups. Only about 5% to 10% of people with ulcerative colitis have symptoms all the time. Chrohn’s disease is more chronic.

Drug Treatment of Ulcerative Colitis

The goal of medical treatment of ulcerative colitis is to relieve symptoms and reduce or do away with inflammation. Drugs used depend on the severity of the disease. Milder cases can be treated with drugs that control symptoms such as diarrhea combined with changes in diet.

Aminosalicylates are the main anti-inflammatory drugs used to treat moderate ulcerative colitis. Two leading drugs of the aminosalicylate class (mesalamine and sulfasalazine) have been in medical use for over 30 years. In some cases they can treat flares and achieve remissions on their own, but if they cannot control the disease, corticosteroids may be added. Once symptoms are under control, the patient is tapered off corticosteroids because of the dangerous side effects that can arise with long term use of corticosteroids and aminosalicylates may or may not be continued to keep the disease in remission. Mesalamine is poorly-absorbed by the intestines so that it provides topical relief along the intestinal wall in which ulcerative colitis occurs. It is related to aspirin and NSAIDs like ibuprofen, but because it is poorly absorbed it is a topical drug.

Corticosteroids such as hydrocortisone and prednisone are used to control flares that don’t respond to milder treatments. They are very effective drugs, but their use is limited because long term use can result in onerous side effects including weight gain, excessive facial hair, mood swings, high blood pressure, type II diabetes, osteoporosis, bone fractures, cataracts, glaucoma and an increased susceptibility to infections. As a result, corticosteroids are used acutely to control the disease. The dose is tapered down after two to three months and then halted.

Mesalamine is available as two major brands, Asacol and Lialda. Asacol is dosed as two pills taken three times per day pills for treating the entirety of the large intestine and as enemas and suppositories to treat the lower part of the large intestine and the rectum. Lialda is a once a day product that uses the same delivery technology as budesonide MMX to deliver most of the drug to the large intestine and is more specific for ulcerative colitis than Asacol. Mesalamine can relieve signs and symptoms in more than 90 percent of people with moderate ulcerative colitis. Sulfasalazine (Azulfidine) is also effective, but it has a poorer side effect profile so that mesalamine is preferred.

Immunomodulator medicines, such as azathioprine or 6-mercaptopurine (6-MP), have long been used for cases that cannot be controlled with aminosalicylates alone. They reduce inflammation by targeting the dampening the activity of the immune system rather than treating inflammation. Immunomodulators may be used to avoid long-term use of steroids, but they often take three months or so to work so that steroids are given during this time to control the disease and then tapered off.

For patients failing aminosalicylates, physicians are increasingly turning to biologics such as the TNF α inhibitors Remicade (infliximab), Humira (adalimumab) or Enbrel (etanercept). They work quickly to bring on remission, especially for people who haven't responded well to corticosteroids and can sometimes prevent surgery. They work by neutralizing a protein produced by the immune system known as tumor necrosis factor (TNF α). Once started, they are generally continued as long-term therapy, although effectiveness may decrease over time.

Cyclosporine (Sandimmune) is a powerful immune suppressant reserved for people who don't respond well to other medications. In some cases, cyclosporine may be used to allow some healing prior to surgery. In others, it is used to control signs and symptoms until less toxic drugs start working. Cyclosporine begins working in one to two weeks. Because it has the potential for severe side effects, including kidney damage, seizures and fatal infections, it is seldom used chronically.

Budesonide MMX

Budesonide MMX is the corticosteroid budesonide used in a delivery system called MMX that was developed by Cosmo Technology and licensed to Santarus. The MMX technology is designed to transport the drug without releasing it through the large intestine and to then deliver budesonide throughout the entire large intestine. Budesonide is primarily absorbed topically and is also metabolized faster than other steroids, a combination which significantly reduces systemic side effects.

Budesonide has been on the market for many years for treating asthma in which topical absorption with limited systemic absorption is also critical. A budesonide formulation called Entocort has been successfully marketed by for use in Chrohn’s disease so that it is well known to the gastroenterology community. The MMX technology has also been used to successfully to deliver mesalamine to the large intestine in the product known as Lialda which is marketed by Shire; it is also well known to the gastroenterologists. The familiarity with the drug and its delivery system may help the uptake of the budesonide MMX.

Clinical Trial Data for Budesonide MMX

Santarus conducted one phase III clinical trial for budesonide MMX in the US and another in Europe. The US phase III trial had four arms: (1) 123 patients received 6 mg of budesonide MMX given once a day, (2) 121 patients received 9 mg of budesonide MMX given once a day, (3) 124 patients received two 400 mg tablets of Asacol in the morning, noon and evening and (4) 121 patients received placebo. The European trial was similar except that Entocort was the reference drug instead of Asacol. The primary end point for both trials was the percentage of patients achieving clinical remission versus placebo after 8 weeks of treatment. Clinical remission was measured by an ulcerative colitis disease activity index score. Specific measurements included rectal bleeding, stool frequency, mucosal appearance, and the physicians rating of disease activity. Each measurement was ranked on a 0 to 4 scale.

Results for the US and European trial were released in late 2010 and are summarized below.

From these results, it appears that efficacy should not be an issue. Key observations from this data are as follows:

1. The results showed that the 9 mg dose of budesonide was statistically significantly superior to placebo in both the US and European trials so that in both trials the 9 mg dose successfully achieved the proscribed endpoint. This will be the recommended dose if budesonide MMX is approved.
2. In the US study Asacol was not superior to placebo. Budesonide MMX 9 mg showed numerical superiority to Asacol on the primary end point, but the study was not sufficiently powered to show statistical significance.
3. In the European study, Entocort reached modest statistical significance, but it was at an order of magnitude lower than the 9 mg dose of budesonide. Even though Entocort is targeted to the small intestine for Chrohn’s disease, some part of the dose does reach the large intestine and is effective in ulcerative colitis; this was the reason that it was used as a reference drug.
4. Pooling results of the two trials results in an extremely good p-value of 0.0002 for the 9 mg dose of budesonide MMX.
5. The 6 mg dose was numerically better than placebo in both studies, but not to the point of statistical significance. In the pooled analysis for both trials its p value versus placebo was 0.0809 just barely missing the statistically significant threshold of 0.05.

As a requirement for approval, the FDA requested an additional 12-month extended use safety study. A total of 123 patients from the Phase III clinical studies in the U.S., India and Europe were enrolled in this double-blind, placebo-controlled study using a dose of 6 mg. The study was completed and topline results should be available at any time. The two phase III studies were done over eight weeks, but the product may be used for longer periods of time. A principal safety focus will be on levels of cortisol. In addition to safety data, there will also be some information on efficacy. There is some concern that the 9 mg dose is not being used in the safety study, since the 6 mg dose was not effective in the two phase III trials.

The NDA is expected to be filed later this year pending success in the safety trial. If approved by the FDA, the product could be launched in early 2013. Budesonide MMX is being developed under the 505 (b) 2 regulatory pathway which allows Santarus to reference all of the clinical and pre-clinical NDA file as complied by Astra-Zeneca. There is one patent still listed in the Orange Book but because budesonide formulations including Entocort have already gone generic, it is doubtful that Astra Zeneca, the holder of the patent would try to block approval of Budesonide MMX.

Market Potential for Budesonide MMX

The inflammatory bowel disease market is an attractive specialty market. The mainstays of therapy like mesalamine and corticosteroids have been in place for thirty years. Recently, the TNF α inhibitors been used extensively in more severe cases, but in the moderate disease part of the market, there has not been much innovation. The combination of a non-systemic corticosteroid like budesonide with a delivery system targeted to the large intestine has the potential to be a meaningful advance in treatment of moderate ulcerative colitis.

Santarus plans to position budesonide MMX broadly in the management of moderate ulcerative colitis as follows:

1. Primary induction therapy for newly diagnosed patients
2. Induction therapy in patients failing mesalamine
3. Adjunctive therapy in patients receiving azathioprine, 6-mercaptopurine or infliximab
4. Maintenance therapy in patients who received induction therapy with budesonide MMX
5. Microscopic colitis which is characterized by watery diarrhea due to autoimmune disease or drugs
6. Pouchitis which is inflammation of an artificial rectum created with anastomosis

It is difficult to determine the exact patient population in which budesonide MMX may be most used. I think that it is useful to look at the sales of other drugs used for inflammatory bowel disease to judge the potential for budesonide MMX. This is shown in the following table.

Recall that in its phase III trials there was an indication that budesonide MMX is better than Asacol, the leading mesalamine formulation. Budesonide MMX can potentially be used before, concomitant with or after mesalamine. Perhaps half of the sales of mesalamine occur in ulcerative colitis and represent $750 million of sales. The Entocort sales of $364 million are encouraging in that this is a budesonide formulation targeted at Chrohn’s disease. The Lialda sales of $361 million are also very encouraging as Lialda uses the same drug delivery system as budesonide. Lialda is taking very significant market share from Asacol.

Santarus has guided investors to peak sales of $300 million for budesonide MMX. This was based on looking at how Entocort (another budesonide based product) performed in the Chrohn’s market in relation to Asacol and the aminosalicylates and extrapolating this to the ulcerative colitis market. Entocort achieved peak sales of $360+ million in the Chrohn’s market which is comprised of 500,000 patients in comparison to the 700,000 in ulcerative colitis. Budesonide MMX will probably be priced at about $30+ per day for its which is in line with the Entocort price before it was genericized. Because gastroenterologists have used Entocort in Chrohn’s disease, it may be the case that they will more quickly take up use of budesonide MMX in ulcerative colitis since both are based on budesonide and differ only in their delivery mechanism. Similarly, the MMX delivery system is familiar to them because of Lialda.