Santarus(SNTS) announced today that it had licensed Zegerid, a proton pump inhibitor(PPI) used for treating heartburn and related GI issues, to Schering-Plough(SGP). Schering Plough will develop and release a 20 mg version of Zegerid as an over the counter medication. Santarus will continue to promote and sell the existing prescription version in its various formulations.
Currently, Prilosec OTC is the only PPI available over the counter. The company believes that Prilosec OTC has annual sales of approximately $400 million. Unlike Prilosec, Zegerid, which contains the same active ingredient, is an immediate release formulation and provides quicker relief to patients. Santarus’ patent covering this formulation does not expire until the middle of 2016.
The deal appears to be a huge positive for Santarus. Though Zegerid sales have been climbing, they still only totaled $9.4 million in the most recently reported quarter. Sales should continue to increase as major health plans including UNH have recently added it to their list of preferred drugs. In the $13.4 billion prescription PPI market, small market share can still mean a great deal of money. Schering-Plough, which has extensive OTC experience with drugs such as Claritin, paid Santarus $15 million upfront and will pay up to an additional $65 million in regulatory and sales milestones on top of a “low double digit” royalty.
Under the terms of the agreement, Schering-Plough may not market any other OTC PPI during the life of the agreement. Schering-Plough is also responsible for all development, clinical studies, marketing and any other costs associated with the OTC product. No estimate has yet been given as to when this will hit the market, but the company will need to perform a label comprehension study and provide product stability data. It is not clear whether additional clinical data is needed, but this should become apparent once Schering-Plough meets with the FDA.
A legitimate concern is what impact Zegerid OTC will have on Zegerid RX. On its conference call, Santarus cited data from the Pepcid OTC launch which showed prescription sales continuing to grow after launch. The 40mg already accounts for over 90% of Zegerid sales and the prescription market, so even if 20mg prescription sales were to disappear, the impact would be negligible. Additionally, the patient profile for the RX versions tends to be for chronic use, versus occasional use for the OTC drugs.
The company declined to discuss Q3 performance, deferring such information to their earnings call on November 10, but we can make some reasonable guesses as to their tone. Sales growth should be strong given their increased presence in formularies and preferred status at prominent health plans. Cash position which was $54 million at the end of Q2 has probably dropped to $40-$45 million, but will jump back to $55-60 million range once the $15 million upfront is received. Over the next several quarters, Zegerid sales should move the company towards profitability. The company also has additional capital available under an equity financing agreement.
Unfortunately, there’s not currently anything behind Zegerid. The company stated that it is looking at acquiring or copromoting other GI drugs to take advantage of its existing sales force. In addition the company may license or acquire development products at the Phase I/II stage and use their experience to move those to approval. It is possible that Santarus’ proprietary technology can be applied to other PPIs as well, as a means of extending their patent protection.
Santarus’ management has proven capable of developing a drug franchise, and Zegerid’s future looks bright. Though the stock initially moved up dramtically from yesterday(10/18)’s close of $8.45 to an early high of $9.70, it has subsequently pulled back to just under $9, giving the company a market cap of $430 million. A small price to pay for a great deal of potential.
Disclosure: I own SNTS