Zacks_Analysts' Blog : Santarus Hit by Generic Zegerid - Analyst Blog

Santarus Inc. (SNTS) reported a loss of 32 cents per share in the third quarter, wider than the Zacks Consensus Estimate of a loss of 21 cents and the year-ago earnings of 9 cents. Results were affected by lower revenues following the genericization of Zegerid.

Total revenues, consisting of net product sales, promotion revenues and license and royalty revenues, came in at $18.1 million, down 54.2% from the year-ago period and $3.9 million below the Zacks Consensus Estimate.

Quarter in Details

Product-related revenues, which consist of net product sales and promotion revenues, plunged 53.5% to $17.8 million during the reported quarter. Zegerid net product sales, including sales of the authorized generic version, were $11 million, down 65%.

Following the launch of generic versions of Zegerid by Par Pharmaceuticals (PRX) in late June, Santarus has stopped promoting Zegerid and has launched an authorized generic version of Zegerid with Prasco.

Santarus recorded promotion revenues of $6.8 million under its co-promotion agreement with Depomed (DEPO) for Glumetza. Glumetza revenues were affected by a product recall initiated by Depomed in June 2010 due to the presence of certain substance in bottles containing Glumetza 500 mg. Depomed expects to resume normal supply later this year/early next year. This represents a delay from previously announced timelines under which supply was expected to resume by mid-August 2010.

While license fees and royalty payments increased to $16 million in the reported quarter, research and development (R&D) expenses increased to $4.4 million from $3.4 million in the prior-year period. The company attributed the increase in R&D spend to the commencement of a phase III study with rifamycin SV MMX for traveler’s diarrhea and start-up costs associated with a phase II proof-of-concept study with Rhucin. License fees and royalty payments included a $15 million upfront payment to Pharming for the North American rights to Rhucin.

Selling, general and administrative expenses declined 43% to $15 million, mainly due to lower employee-related costs, lower legal fees and a reduction in promotional activities for Zegerid. During the fourth quarter, Santarus expects to spend about $4 million - $5 million on the launch of Cycloset, a type II diabetes product. The company’s 110-person sales force will be promoting both Glumetza and Cycloset to endocrinologists and high prescribing physicians.

Updated Outlook for 2010

With generic versions of Zegerid eating into revenues and normal supply of Glumetza 500 mg yet to resume, Santarus reduced its revenue guidance for 2010. The company now expects revenues in the range of $115 - $118 million, down from its earlier guidance of $125 - $130 million. The guidance is based on the assumption that Santarus will not earn any promotion revenue on Glumetza 500 mg in the fourth quarter of 2010. Revenues could be boosted by about $2 million if Depomed is able to resume normal supply in December. Excluding one-time charges, the company expects to break-even in 2010. However, the Zacks Consensus Estimate points to a loss of 56 cents in 2010.

With Santarus focusing on the development of phase III candidates, budesonide MMX and rifamycin SV MMX, R&D expenses are expected in the range of $21 million (earlier guidance:$23 million).

The company recently reported positive top-line phase III results on budesonide MMX. Santarus is currently conducting a 12-month extension study that was requested by the US Food and Drug Administration (FDA). The study, which is scheduled to complete in the second quarter of 2011, will compare budesonide MMX's (6mg) safety and efficacy with that of a placebo. Positive results should allow Santarus to file a new drug application for budesonide in the second half of 2011.

Meanwhile, Santarus expects to finish a late-stage study with its other phase III pipeline candidate, rifamycin SV MMX, in the second half of 2011. According to the company, the peak sales potential of both these products taken together could be $200 - $400 million.

We expect R&D expenses to increase as the company moves other pipeline candidates into advanced stages of development in the coming quarters. The company plans to initiate a phase II proof-of-concept study with Rhucin in kidney transplantation in late 2010/early 2011. Additionally, Santarus is planning to commence a phase I dose escalation study with SAN-300, in the first half of 2011. 

Fourth quarter results will include a $3 million development milestone to Cosmo Technologies for the successful completion of two phase III studies for budesonide MMX. Santarus could make another $3 million milestone payment during the fourth to Depomed, payable if annual net product sales of Glumetza exceed $50 million.

Neutral on Santarus

We currently have a Neutral recommendation on Santarus, which is supported by a Zacks #3 Rank (short-term “Hold” rating). The company suffered a major setback earlier in 2010 when it received an unfavorable court ruling in its patent infringement case for flagship product, Zegerid. With Zegerid facing generic competition, Santarus has shifted its focus to Glumetza and its pipeline candidates. The company also implemented a restructuring initiative and entered into agreements to expand its product portfolio.

While we are pleased with the company’s attempt to expand its portfolio, we remain concerned about its foray into new therapeutic areas in which it does not have much expertise. We expect investor focus to remain on the company’s progress with its pipeline.