Santarus (NASDAQ:SNTS), the specialty biopharmaceutical company focused on acquiring, developing and commercializing proprietary products that address needs within the Gastrointestinal (GI) Industry earned a $20 million milestone and may be entitled to receive up to an additional $37.5 million in sales milestones following a key FDA decision on Tuesday. The company is expecting another FDA decision this Friday.
Thus far, Marketing their two lead products, Zegerid® and Glumetza® has resulted in achieving a 70% Compound Annual Growth Rate (CAGR) (2005 – 2008) and a 23rd rank for the fastest growing company in North America by Deloitte and Touche technology fast 500.
Clearly SNTS has a proven track record, but can they maintain this successful growth given their key FDA related developments?
On Tuesay afternoon, the U.S. Food and Drug Administration approved Schering-Plough HealthCare Products, Inc.’s, New Drug Application (NDA) for ZEGERID OTC™ Capsules (omeprazole/sodium bicarbonate) with a dosage strength of 20 mg of omeprazole for over-the-counter (OTC) treatment of frequent heartburn. The NDA was submitted by Schering-Plough under the terms of a license agreement for OTC proton pump inhibitor (PPI) products using Santarus’ proprietary technology.
Upon approval, Santarus has earned a $20 million milestone and may be entitled to receive up to an additional $37.5 million in sales milestones. Santarus will also be entitled to a low double-digit royalty, subject to adjustment in certain circumstances, on net sales of any ZEGERID OTC products sold by Schering-Plough HealthCare Products under the license agreement. In turn, Santarus will be obligated to pay royalties to the University of Missouri on net sales of any such OTC products.
The OTC heartburn market in the U.S. is estimated at $1.7 billion based on data from Information Resources, Inc., a market research firm, and company estimates. Zegerid®'s over the counter use (OTC) can boost revenue up to ~$1 Billion in the U.S alone.
“We are pleased that Schering-Plough HealthCare Products has achieved this significant regulatory milestone for ZEGERID OTC and we look forward to seeing the product on retail store shelves across the United States in the first half of 2010,” said Gerald T. Proehl, president and chief executive officer of Santarus. “We believe the consumer advertising and publicity associated with the launch of ZEGERID OTC will increase awareness of the ZEGERID® brand.”
Proton Pump Inhibitors (PPI) are drugs that treat ulcers and Gastro esophageal reflux disease (GERD), which is a common condition in which food or liquid travels backwards from the stomach to the esophagus (the tube from the mouth to the stomach). This action can irritate the esophagus, causing heartburn and other symptoms.
Although the PPI market is saturated, no PPI is currently approved for the prevention of upper GI bleeding (UGI) and as an immediate release PPI. The table below shows the competitive product comparison (Rx=prescription, OTC= over the counter).
The table below shows popularity growth for Zegerid® over 12 months compared to its competitors (prior to Prevacid® OTC launch in Nov. 2009). [NRx=new dispensed prescriptions, TRx=total dispensed prescriptions]
With the OTC heartburn market growing from $1.14 Billion in 2005 to $1.24 Billion in 2008 and competitors like Novartis spending ~ $200 MM to launch Prevacid® OTC, increasing brand equity, Zegerid® OTC is a key contribution to the SNTS portfolio.
- SNTS' business strategy of licensing technology in niche markets and providing a service of clinical research, development, regulatory and commercialization without a full R&D department enables them to avoid the expense of drug discovery and infrastructure, while generating significant revenue through agreement payments and sales. In other words, efficiency is gained with high return and minimal investment, resulting in high bottom line growth.
- The on-going agreement with Schering Plough (S-P) to develop, manufacture, and commercialize Zegerid® OTC in North America leverages S-P’s expertise and success with transferring Claritin® Rx to OTC to build brand equity, optimizing sales
- The recent merger of Schering-Plough (S-P) and Merck may strengthen the S-P commercialization force of Zegerid® OTC in North America
- The on-going agreement with GSK to develop, manufacture, and commercialize both Zegerid® Rx and OTC in the International PPI markets worth $2.6 Billion should contribute significantly to revenue growth, given the FDA approval in some countries (excludes Europe, Australia, Japan and Canada)
- The agreement with Norgine to launch Zegerid® Rx in Europe leverages Norgine’s GI expertise without attracting attention from the more powerful competitors. Additional gains could be obtained via the Euro exchange rate conversion to the US Dollar
- Exclusive agreement with Depomed enables SNTS to promote Glumetza® and receive a fee payment ranging from 75% to 80% of the gross margin associated with net sales of Glumetza®. SNTS will be responsible for all costs associated with its sales force and for all other marketing expenses associated with its promotion of Glumetza®.
- Strong product differentiation, value positioning and brand equity. Zegerid® is the only PPI immediate release & UGI bleeding prevention drug. In fact, “74% of frequent heart burn sufferers indicated that they prefer an immediate release product over a delayed release product…”. Glumetza® grew to be the #1 prescribed metformin drug in July 2009 and is growing in popularity as the only extended release technology that accomplishes the ADA recommended titration levels without the competitor side effects.
- SNTS constantly tracks and monitors ROI to manage finances. For example, SNTS exited out of Medicaid and terminated its contract with Otsuka pharmaceuticals due to low ROI and to maintain efficiency. The $7.6 MM net income through Sept. 30 2009 and net positive cash flow are indicators of a healthy financial status
- SNTS seeks to increase current product sales penetration and expand its product portfolio by including Zegerid® OTC, Zegerid® tablet line extension, along with new diverse products Budesonide and Rifamycin that treat ailments affecting a total of 13.5 million patients a year, protected by patents from 2016 to 2025, pending some approvals
- SNTS 2010 revenue potential, considering only Zegerid® RX and OTC sales & agreements, totals up to ~ $2.67 Billion plus additional royalty payments plus additional sales from SNTS commercialization of Zegerid® Rx
- Zegerid® Rx indications are different from that of Zegerid® OTC, enabling SNTS to maximize sales for Zegerid® OTC without significantly reducing Zegerid® Rx sales. In fact, “Prevailing theory holds that switched products hold onto a good portion of existing prescription patients. However, that may only apply to first-in-class switches. Last year, Wolters Kluwer Health and The Nielsen Co. followed McNeil Consumer Healthcare's switch of Zyrtec, the second second-generation antihistamine to reach the market, finding that a full 84% of those who switched to Zyrtec OTC weren't former Zyrtec prescription users, but former Claritin® and Benadryl users. That suggests a lower carryover from the base of prescription users.”
- Proctor & Gamble sought a petition to prevent Zegerid® from claiming the powerful position as an “immediate release PPI”, which was rejected by the FDA. This is an opportunity for Zegerid® OTC to dominate PPI market sales
- Agreements can be terminated and constant effort must be exerted to seek new business developments. For example, TAP terminated the agreement to commercialize Zegerid® Rx. But, SNTS overcame the challenge and partnered with GSK and S-P.
- If Zegerid® OTC is approved, SNTS/ S-P face the challenge of persuading consumers to switch to Zegerid® OTC brand. Strong brand equity and value positioning, along with S-P success and expertise with OTC drugs should facilitate the persuasion, optimizing sales
- Managing growth with rapid expansion in multiple, diverse markets may pose a challenge. But licensing agreements with powerful resources like GSK and S-P should facilitate management
- Healthcare reform changes could impact revenue. Zegerid® OTC would be a positive move potentially offsetting any negative health care reform effects. In fact, “Consumer use of OTC heartburn medications saves the U.S. healthcare system $757 million annually, and saves the average consumer $174 annually. (CHPA and The Nielsen Company, 2009)”
- A recent FDA notice could negatively impact sales. 19 Nov 2009: “Federal health officials said a popular variety of heartburn medications [PPI drug class] can interfere with the blood thinner Plavix, a drug taken by millions of Americans to reduce risks of heart attack and stroke.” The FDA recommends a non-PPI from the H-2 blocker family for these patients.
- The judge has ruled Par Pharmaceutical infringed on the Zegerid® patent, but has yet to enforce it which would prevent Par from manufacturing a generic Zegerid®. Final ruling is expected in 2010 or later
- Threat of competition is high: The PPI drug market is saturated with powerful competitors. Merck was granted patent licensing rights to Depomed’s metformin technology in July 2009 to market the competitor Januvia® to treat diabetes type 2 and Teva Pharmaceuticals promotes the generic competitor Glucophage XR® as of April 2008. However, SNTS does not expect a significant impact on sales. Another law suit is pending with Lupin Pharmaceuticals for patent infringement on Glumetza®
- Threat of substitutes is moderate: As Diet & exercise and Obesity drugs promote a healthier lifestyle, they can negatively impact future sales, but not likely in the near future. In fact, “A number of studies suggest that obesity contributes to gastro esophageal reflux [GERD]. For instance, the Nurses Health Study found that being overweight or obese significantly increased reflux symptoms in women. (Women who lost weight in the study, meanwhile, had fewer symptoms.)” The recent FDA notice regarding PPI interference with Plavix, may drive sales away from PPI’s to H-2 blockers, depending on the percentage of the PPI target market taking Plavix
The Zegerid® Product (How it works)
The antacid, sodium bicarbonate neutralizes stomach acid and protects the PPI, omeprazole, from gastric acid degradation and allows for its rapid absorption, reducing relief time to within 30 minutes.
SNTS has a strong Track record of growth despite challenges and successful business management, indicating promising future performance, assuming the same management team exists.
Zegerid® OTC is a strong competitive product as the first and only PPI immediate release OTC drug AND the key product for significant net income growth for SNTS..
Terika Ray, PMP, M.S is a new contributor to BioMedReports who brings an expertise in Marketing/ Product Management, Portfolio Management, Engineering & Biomedical Sciences
Disclosure: Long SNTS
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