FDA Approval Boosts Santarus - Analyst Blog

Santarus Inc. (SNTS) recently received good news with the U.S. Food and Drug Administration (FDA) approving its over-the-counter (OTC) version of Zegerid for the treatment of frequent heartburn. Santarus shares gained more than 16% on the news.

The OTC version has been developed under the company’s agreement with Merck (MRK) whereby Merck gained exclusive rights for the development, manufacture and sale of OTC Zegerid products in the U.S. and Canada.

Zegerid is Santarus’ lead product which accounted for approximately 80% of total revenues in the third quarter of 2009. Santarus markets the Zegerid family of products, which are proprietary immediate-release formulations that combine omeprazole (Prilosec), a PPI, and one or more antacids. Zegerid is approved by the FDA for the treatment or reduction of the risk of a variety of upper gastrointestinal diseases and disorders. Zegerid is currently marketed as capsule and powder for oral suspension dosage forms.

The approval of the OTC version of Zegerid is a major positive for Santarus. Santarus will receive a $20 million milestone payment from Merck based on the approval. The company could also receive up to $37.5 million in sales milestone payments along with low double-digit royalty on net sales.

In addition to ensuring a steady source of revenue for Santarus in the form of milestone payments and royalties on sales, the launch of the OTC version in the $1.7 billion OTC market will also help increase awareness of the Zegerid brand of products.

Merck intends to launch OTC Zegerid in the first half of 2010. The drug will be sold by the Schering-Plough Health Care Products division, which was acquired by Merck in November as part of its acquisition of Schering-Plough.

We have an Outperform recommendation on Santarus. Flagship product, Zegerid, has captured a nice niche of the gastroesophageal reflux disease market, and the company has good upside potential with the product through its partnerships with GlaxoSmithKline (GSK), Merck, and Norgine. We are also impressed with management’s ability to in-license new products and expand its pipeline.