Yesterday, shares of San Diego specialty pharmaceutical company Santarus (SNTS) sank by 33% on news that a U.S. Federal Court for the District of Delaware has ruled that five patents covering the company’s Zegerid product are invalid due to obviousness.
Zegerid, the company’s flagship FDA approved product, is an immediate-release formulation that of omeprazole (Prilosec), a proton pump inhibitor (PPI), and one or more antacids for the treatment or reduction of the risk of a variety of upper gastrointestinal diseases and disorders, including gastroesophageal reflux disease (GERD). The product is currently on the market in a capsule (20mg and 40mg) and oral suspension (20mg) formulation. Generic drug manufacturer, Par Pharmaceuticals, has been seeking to bring a generic version of Zegerid to the market since 2007.
In mid-July 2009, the same U.S. Court of the District of Delaware ruled that Par’s proposed generic versions would infringe the five patents protecting Zegerid. Par appealed the ruling on claims of invalidity and inequitable conduct. A 30-month stay period on the capsule formulation expired in early February 2010.
The ruling yesterday effectively allows Par to launch a generic product of Zegerid after it received FDA approval of it abbreviated new drug application (ANDA). The news for Santarus is a clearly negative, as Zegerid accounted for 69% of the company’s total revenue in 2009.
All is not lost for Santarus, however. The company is looking to launch a newly approved tablet formulation of Zegerid with an improved pharmacokinetic, efficacy, and tolerability profile later this year. The company also possesses a phase III ready candidate in rifamycin SV MMX for traveler’s diarrhea. However, Santarus will still need to conduct two international multi-center, randomized, double-blind studies, each with roughly 300 patients, before it can file for approval.
At best, rifamycin SV MMX is still years from the market. Another pipeline candidate, budesonide MMX, designed for the treatment of mild-to-moderate ulcerative colitis, is also still a few years from the market.
Therefore, assuming Par receives FDA approval for a generic Zegerid in the near future, we believe that management at Santarus will beef up its efforts in selling the company’s other FDA approved prescription product, Glumetza, for the treatment of type 2 diabetes.
Glumetza is the market’s leading branded metformin product, with an estimated 31% total prescription share at the end of 2009. New prescription market share for Glumetza is even higher at 39%. Santarus believes it can deliver $50 million in Glumetza sales in 2010.
We have stated previously that we believe this guidance on Glumetza is conservative. If the company loses exclusivity on Zegerid before patients can be effectively transitioned over to the new tablet formulation, we believe management will refocus the sales force effort behind Glumetza even greater in 2010 than we previously forecasted.
This is clearly good news for Depomed (DEPO), the inventor of Glumetza. Depomed books all the revenues from Glumetza sales and pays 80% of the gross margin on the product to Santarus.
We note that the economics on Glumetza improve from the current 20/80 split for Depomed to 25/75 in the fourth quarter of 2010. Depomed management believes that Glumetza will contribute between $8 and $10 million in profits this year. Our financial model for Depomed forecasts this number to be $9.6 million.
However, we will be keeping a close eye on the promotional efforts and happenings at Santarus throughout the year, because even our bullish forecast could now prove conservative based on yesterday’s seemingly unrelated court ruling.
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