Santarus, Inc. (SNTS) reported first-quarter earnings of 5 cents per share, well above the Zacks Consensus Estimate of a loss of one cent and the year-ago earnings of 2 cents. Total revenues, consisting of net product sales, promotion revenues and license and royalty revenues came in at $39.7 million, up 14% from the year-ago period.
Product-related revenues, which consist of net product sales and promotion revenues, increased 18% to $37.8 million during the reported quarter. Zegerid net product sales were $29 million, up 5%. However, total prescriptions declined 19% in the reported quarter following Santarus’ decision to exit from non-performing government and managed care contracts.
We believe that Zegerid prescriptions will remain slightly down to flat in the first half of 2010.
Zegerid over-the-counter (OTC) was launched recently by Merck (MRK). Merck has launched a significant consumer advertising campaign for Zegerid OTC, which should increase awareness and help educate consumers about Zegerid’s features and benefits.
Promotion revenues of $8.8 million increased significantly from the prior-year period’s $4.5 million in promotion revenues, mainly due to those associated with the co-promotion of Depomed’s (DEPO) Glumetza. Glumetza total prescriptions increased 28% year over year.
While license fees and royalty payments declined to $19.2 million in the reported quarter, research and development (R&D) expenses increased to $5 million from $3.1 million in the prior-year period. The company attributed the increase to the ongoing phase III development of budesonide MMX. Results from the phase III studies should be available in the July – August timeframe. Positive results should allow Santarus to file a new drug application for budesonide in the second half of 2011. We note the company was earlier planning to file in the first half of 2011. Meanwhile, Santarus intends to file for approval of its other pipeline candidate, rifamycin SV MMX, in 2012.
Selling, general and administrative expenses remained flat at $26.5 million.
Updated Outlook for 2010
Santarus updated its outlook for the year based on the possibility of a generic version of its lead product, Zegerid, entering the market. Last month, a US District Court had ruled against the company in its patent infringement case with Par Pharmaceutical, Inc. (PRX). Par is seeking to launch its versions of Zegerid capsules and powder for oral suspension.
This ruling was a major setback for Santarus as the company is entirely dependent on Zegerid for growth. Santarus intends to appeal the decision.
In the meantime, Santarus has prepared a contingency plan which will come into force with the entry of generic versions of Zegerid. Under this plan, Santarus will stop promoting Zegerid, restructure and reduce its commercial structure and focus its promotion efforts on Glumetza. The company will also launch an authorized generic version of Zegerid. In the meantime, Santarus intends to evaluate its options with Zegerid.
Even if generic Zegerid hits the market, the company expects to remain profitable in 2010 excluding one-time charges associated with the generic launch and restructuring charges. The company does not expect the US healthcare reform to have a significant impact on results in 2010.
Meanwhile, Santarus is seeking approval from the US Food and Drug Administration (FDA) for a trade name for its tablet version of Zegerid that was approved in Dec 09. A response from the FDA should be out in June 2010, following which the tablet version should hit the market.
Santarus expects to make two success-based milestone payments in 2010 to the tune of $6 million. This includes a $3 million sales milestone to Depomed, Inc., payable if annual net product sales of Glumetza exceed $50 million, and a $3 million development milestone to Cosmo Technologies, payable upon the achievement of the primary end points in both of the phase III studies for budesonide MMX.
Research and development expenses are expected to increase to about $26 million, mainly due to costs associated with the development of budesonide MMX and rifamycin SV MMX.
Our Recommendation
We currently have a Neutral recommendation on Santarus. We believe the company will seek to expand and diversify its product portfolio through in-licensing and product acquisition deals in order to help make up for the loss of revenues that will take place once Zegerid goes generic.
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