Expert Financial Analysis and Reporting

Investors are evaluating the impact on the earnings of Santarus following the recent launch of a generic to its key product Zegerid. Of perhaps more importance they are also trying to gauge how much and when a pipeline of new in-licensed products can bolster sales and earnings.

Santarus: Building a New Company on a Zegerid’s Ashes

The remainder of this year and first half of 2011 will be muddled because of year over year comparisons to quarters in which Zegerid had not been hit by a generic competitor.

It will take investors awhile to come up with their own forecasts for the new products, but Santarus has given guidance on peak sales potential for each that are eye opening. In the immediate term, pivotal phase III trial results from one key new pipeline product, Budesonide MMX will be released any day. As a leading drug in the pipeline, success in these trials would bolster investors’ confidence in the company’s ability to execute on its new product strategy and failure would, of course, undermine confidence. This report is a broad overview of Santarus and does not purport to be a detailed analysis. However, there are a lot of exciting things going on and this is certainly a company to watch.

Santarus was dealt a crunching blow earlier this year when a judge ruled that patents covering its key product Zegerid were obvious and unenforceable. This allowed the introduction in June of a generic competitor. In 2009, Santarus had product sales of $143 million of which $119 million was attributable to Zegerid and $24 million to its other product Glumetza. Based on company statements at a recent investor conference, Zegerid sales appear to be running at an annual rate of about $45 million three months into the generic launch. The question investors are asking is whether Santarus can withstand this blow.

The company has taken aggressive action to right the ship, It reacted to the generic launch by downsizing its sales force to 110 reps, a level needed only to support Glumetza promotion and in doing so reduced expenses by $40 million on an annual basis. Also helping is that partner Proctor & Gamble has launched an OTC version of Zegerid and partner Glaxo is launching Zegerid in selected foreign markets in which the addressable market is about $2 billion. However, If Santarus is to recover and thrive it has to use the sales and marketing infrastructure and skills that it built with Zegerid to in-license new products to develop and market. These new in-licensed products are briefly described below:

New In-Licensed Drugs

Santarus has done an impressive job in building its product pipeline. These are discussed below.

Budesonide MMX: In December of 2008, US rights for Budesonide MMX were in-licensed from Cosmos; this product treats ulcerative colitis. It uses Cosmos’ proprietary drug delivery technology to more directly deliver the corticosteroid budesonide to the lining of intestine enhancing its efficacy and safety profile. Results from two pivotal phase III trials will be released any day. An extension study looking at safety will need to be completed before an NDA can be filed; this will complete in mid-2011. Assuming success with the phase III trials and the extension study, the drug could be launched in late 2012 or early 2013. Santarus estimates US peak sales potential of $150 to $250 million.

Cycloset (bromocriptine mesylate): On September 8, 2010, Santarus in-licensed Cycloset, a type II anti-diabetes agent, which complements Glumetza (sustained release form of metformin). It is likely that Cycloset’s place in the market will be as an add-on after metformin alone can no longer control type II diabetes. It is a perfect marketing complement to Glumetza. Cycloset will be launched in the US in November of 2010. Gerry Proehl, Santarus’ CEO, has stated that he believes that combined US peak sales of Cycloset and Glumetza could reach $300 to $400 million.

Rifamycin SV MMX: This product was also in-licensed from Cosmos in December 2008. It uses Cosmos’ drug delivery technology to target a broad spectrum antibiotic to the intestine. It is being developed to treat traveler’s diarrhea and could reach the US market in 2013. The company estimates that peak US sales could reach $150 million to $250 million.

Rhucin On September 13, 2010, Santarus announced the in-licensing of Rhucin from Pharming. This product is a C-1 inhibitor for the treatment of hereditary angioedema. Viro Pharma already markets a drug called Cinryze which works through this mechanism of action and CSI Behring is developing a C-1 inhibitor called Berinert. Both of these products are derived from plasma while Rhucin is a recombinant protein. Santarus believes that this will differentiate Rhucin’s efficacy and side effect profile making it the preferred drug in this category. Santarus sees peak US sales of $200 million. A BLA will be filed with the FDA in January of 2011. However, Santarus believes that the FDA will not act on approval until a trial with a low dose of Rhucin is completed. This could lead to a delay in approval and marketing might begin in 2013.

Anti-VLA 1 antibody: VLA is a type of integrin which are adhesive molecules that mediate interactions between cells and between cells and the extracellular matrix. They have an effect on the migration, retention and proliferation of activated T-cells at the sites of chronic inflammation. Animal studies of antibodies against VLA-1 have shown activity against rheumatoid arthritis, psoriasis, inflammatory bowel disease and psoriasis. A phase I trial will start in 1H, 2011. This project is totally out of character with the specialty pharma strategy of Santarus.

Great Management; Look at What They Did With Zegerid

Santarus is one of the best managed small companies that I have followed. It showed impressive skill in its marketing of Zegerid, a product for treating gastrointestinal reflux disease (GERD). This disease is treated extensively with a class of drugs called protein pump inhibitors (PPIs) such as Prilosec. A shortfall of PPIs is that they are quickly destroyed at the pH level that exists in the stomach. In order to get them into the lower gastrointestinal tract, the pills must be enteric coated which allows them to pass unharmed through the stomach. Santarus’ Zegerid solved this problem by combining the widely used and generic proton pump inhibitor omeprazole with baking soda. In the stomach, the baking soda altered the pH level so that omeprazole was not destroyed and could be absorbed in the stomach as well as the lower GI tract. Moreover, the baking soda had a synergistic effect on GERD through its action of lowering gastric pH.

Many investors were skeptical about this product. They felt that it couldn’t be differentiated form the plethora of protein pump inhibitors already in the market. In addition, Santarus was facing up against giant multinationals such as Prilosec’s marketer Astra-Zeneca that were spending huge sums of money and deployed armies of salesmen to promote their products. Santarus surprised almost everyone by carving out a tiny, but meaningful niche in the PPI market. It did this with skillful marketing and well planned studies that showed differentiable characteristics of Zegerid. It was able to grow sales from $634,000 in 2004 to $109 million in 2009. Profits generated from Zegerid supported expansion of the sales force and the building of an infrastructure to support a mid-sized specialty pharmaceutical company. This made Santarus an attractive partner for companies seeking a marketing partner. One of my most important observations gained in watching companies over the years is that products continually come and go, but the lasting strength of a company is its sales force, marketing skills and the infrastructure that supports it.

In 2008, Santarus was able to in-license a drug called Glumetza, a sustained release formulation of metformin, from Depomed. Metformin is the first line of therapy for type II diabetes and has no composition of matter patent. Depomed’s formulation addressed a major drawback if immediate release formulations that cause nausea and prevent titration of metformin to an effective dosage level. Santarus took out its Zegerid playbook and in a very crowded market for type II diabetes agents has built Glumetza into a serious product with end market sales of about $35-40 million by the end of 2009.

Investors always had unease about the strength of Zegerid’s patents. While it had several Orange Book listed patents, it did not have the all important composition of matter patent for omeprazole, which is a generic. Three years ago, the company received a paragraph IV challenge from Par Pharmaceuticals on its capsule formulation of Zegerid. My personal view was that there was probably a 51/49 chance that Santarus would prevail. The company was probably more confident. However, the judge hearing the patent challenge case ruled that the three issued patents were obvious and Par launched a generic version of Zegerid in June. The company is appealing the judge’s decision and if it were to win it would force Par’s generic off the market. In this event, Santarus has said that it will not go back to marketing Zegerid as aggressively as in the past.

In 2009, sales of Zegerid were $119 million with 90% of those sales coming from the capsule. In a presentation by the company at an investor conference, in response to an investor question, management indicated that sales of the capsule have declined about 80% from a peak run rate of around $105 million to roughly $20 million. It was also indicated that the authorized generic may have sales of around $15 million and the still unchallenged solution formulation has sales of around $10 million. All in, this indicates that the run rate of Zegerid has dropped from about $120 million to $45 million.