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Santarus, Inc. (NASDAQ:SNTS)

Morgan Stanley Global Healthcare Conference (Transcript)

September 10, 2013 03:30 PM ET

Executives

Gerry Proehl - CEO

Debby Crawford - CFO

Unidentified Analyst

Good afternoon everyone. I am Chris (inaudible) from Specialty Pharmaceutical’s team, and it's my pleasure to be joined on stage with the team from Santarus. Before we begin, I just want to remind you all morganstanley.com/researchdisclosures for reviewing pleasure.

With that it’s my pleasure to welcome Gerry Proehl and Debby Crawford, its Santarus’ CEO and CFO thanks for being here.

Debby Crawford

Thanks Chris.

Unidentified Analyst

So we were talking before and I think in this age I am stumped by anyone who is in a company for 14 and 13 years, respectively. So I think to start it off Gerry just to reflect a bit upon your history with Santarus and provide us an introduction to the company.

Gerry Proehl

Sure. I started back in 99, at the time Santarus was really a startup company. There were two venture capitalist that had started the company, they have a couple part time (inaudible) and they had licensed a technology out of Mayo Clinic. I started as the first full time employee in April of 99 and since then transitioned from [molecular] business development to becoming President and Chief Executive Officer in 2002.

So it’s been interesting 14 years, we’ve certainly had ups and downs. I think what we’ve been able to demonstrate is we are a specialty pharmaceutical company that’s involving into a combinations of specialty pharmaceutical and biotechnology. All the products that we have in our portfolio both on the market and development products have all been in licensed, some from U.S. companies, some from universities, and some from foreign companies and we expect to continuing to follow that path in the future.

Question-and-Answer Session

Unidentified Analyst

Great. Well I think so just to start off in terms of the UCERIS launch which has been incredibly strong to-date; could you just provide an update how that launch is progressing?

Gerry Proehl

Sure, UCERIS was approved for induction or remission of mild to moderate ulcerative colitis in January of this year. We launched the product in February of this year and it’s been off to a very nice start. I would say for a couple of reasons, number one, when doctors are treating patients with ulcerative colitis they typically are starting the patient up on 5-ASA Mesalamine product like Lialda, Asacol, Apriso. But usually those patients will continue to have flares and when you are talking about a flare they are going to a point where they have 15 or 20 bowel movements a day, blood in the stool and pain, and so they are seeking treatment.

Most typically when there is flare the doctor will use a systemic steroid to try to bring the flare under control. And systemic steroids are very effective products; the one drawback is really the side effect profile of the systemic steroids. Anybody that’s ever been on a steroid know you can gain weight anywhere from 20 to 40 pounds. People get what’s called moon face to face kind of [pus up], they can get acne, they can have trouble sleeping, some people get steroid rage.

Those are the things that patients are very concerned about and remember when you see patients are typically diagnosed in their teens and 20s. So here you are, you are 23 year old, you are dating and so on and now you just gaining 40 pounds and you have acne.

Unidentified Analyst

And they are angry

Gerry Proehl

And you are angry, and you can’t sleep and has nothing to do with staying out late at night either. So they are looking for a solution to the systemic steroids side effects. The physicians on the other hand are very concerned about the long term effects of steroids. The effects on bone mineral density; again because these patients are going to be on and off steroids they are worried about them breaking bones when they are in the 40 and 50s and they are also worried about steroid dependency. Many of these patient that go on steroids, they have a tough time taken them off a steroid without them flareing and then they end up having to maintain a month steroid and then worry about the long term effects.

So for all of those regions UCERIS is a minimally absorbed steroid, so none of the steroid relates side effects but the efficacy of a systemic steroid. What we heard from physicians and what they really appreciate about this product is that, when we survey the doctors have used UCERIS what they tell us is about 70% of the time, the patients are getting released from their symptom and that usually a reduction in their number of bowel movements, sometimes as much as 15 to 20 bowel moves down to 4 and 5. So the effects are very immediate and very apparent to the patients and it’s a great feedback loop to the physician because the patient, when they see their bowel movements go from 20 down to 5, first thing is you pick up the phone and thank the doctor for putting them on a product.

Unidentified Analyst

And could you just help us to understand where steroids sit in the treatment paradigm with 5-ASA I am thinking Mesalamine, the Asacol for ulcerative colitis?

Gerry Proehl

Sure, most patients will be started on 5-ASA that will be background therapy, normally they start them at 2.4 grams a day and they will maintain them on background 5-ASA therapy. But usually somewhere between 2 to 4 times a year the patients will flare, and when they flare they have to bring the flare under control.

Historically it used to be the doctor would put them on systemic steroid or they might double their dose of 5-ASA. Recently over the five to six years, there have been a couple of studies done with Lialda and Asacol HD where they demonstrated there was no really improvement going from 2.4 grams to 4.8 grams. The overall remission rates were the same. So most doctors have realized that doubling the dose of 5-ASA is probably not going to get them a significant improvement in efficacy. So they will typical use a steroid and now they have an option with UCERIS to use a non-systemic steroid get the same efficacy with less side effects.

Unidentified Analyst

So you know the study that’s on going with UCERIS together with the 5-ASA, when does that read out and really what are the commercial implications of that study, because it would appear that patients are already using the products right together.

Gerry Proehl

We do have a phase called CONTRIBUTE study, we should and complete the study here in about another month, and then we'll read out data either very late this year or early 2014. As Chris mentioned, a lot of doctors are already using UCERIS in combination with 5-ASAs. I think this will do is a couple of things; it will reinforce the fact that if a patients on background 5-ASA and they flare, you can put them on UCERIS and bring that flare under control.

That's the first thing and most important. But secondarily when you are launching a product, one of the most important things is that you continue to generate new clinical data, that's number one and can be presented medical meetings and also that the thought leaders can talk to the average practicing gastroenterologists about a speaker program.

So as you continue to generate more data, we talked about by the thought leaders and be top of mind for all of the gastroenterologists out there.

Unidentified Analyst

And are you pursuing a maintenance indication for UCERIS?

Gerry Proehl

We're looking to pursue a maintenance indication but not in ulcerative colitis. So one of the other areas that we've gotten very good feedback from physicians on has to do with another disease called microscopic colitis. So an ulcerative colitis is inflammation in the colon where you have actual ulcerations and you have actual bleeding so you find blood in the stool.

In microscopic colitis, it's really inflammation in the colon but no ulceration, no blood in the stool and it typically occurs in older patients, patients over 50. It's also very serious because you have frequent bowel movements and you have pain, but you don’t have any blood, you have no ulcerations. We're going to approach the FDA in the next couple of months on a clinical trial design that would look at number one, induction of remission of patients with microscopic colitis, but then the second piece would be actually looking at a maintenance dose to maintain these patients because what they find is when these patients are treated, if you induce remission, then you withdraw a product. They immediately go ahead and have another flare, and so we're going to look at both at induction and maintenance indication.

Unidentified Analyst

And what's currently is for microscopic colitis?

Gerry Proehl

So there is currently no product approved for microscopic colitis. Typically, the doctors are either going to use (inaudible), they will use systemic steroids or sometimes mesalamine or 5-ASA.

Unidentified Analyst

So I think you had guided to peak sales for UCERIS in this current indication of 3?

Gerry Proehl

300 million.

Unidentified Analyst

300 million? In terms of microscopic colitis, where could we see that impact the sales projection?

Gerry Proehl

So if you look at the size of the market for a mild to moderate you see it’s about 600,000 patients. If you look at microscopic colitis, it’s about 300,000 to 350,000 patients. And so the difference is if we can get a maintenance indication, we think that the size of the market could be almost as large as you see markets. So anywhere from maybe a $100 million to $300 million market opportunity.

And then the other indications for UCERIS will be looking at is pediatric you see, and there is about 50,000 patients that [piece] that have that have ulcerative colitis and it’s not a huge market, but maybe it’s another $25 million, $30 million opportunity.

Unidentified Analyst

And provided you are able to have a successful meeting with the FDA, is microscopic colitis something that could go into the clinic next year?

Gerry Proehl

Yeah, the plan would be, once we got the final approval from the FDA and the clinical trial design, it’s probably about five or six months to get the study up and running. So may be as early as second quarter of next year certainly we get positive feedback from the FDA.

Unidentified Analyst

That’s great. And then in terms of the IP for UCERIS, could you just remind us when your patents, how long your patents were on that product?

Gerry Proehl

Sure, we have multiple patents that expire in 2020.

Unidentified Analyst

And in terms of the citizen petition that you recently filed and how that kind of plays into to protecting the franchise or strengthening that franchise from generics?

Gerry Proehl

Well, anybody that fall this market knows in 5-ASA states, there are a number of products out there that have been on the market for a long period of time, (inaudible) patent for over 10 years with still no generic. And part of it is, when you are delivering products to the colon for ulcerative colitis over period of anywhere up to 24 hours, it gets much more difficult to show similar blood levels. And the way I compare mesalamine or 5-ASA to budesonide is in mesalamine you have 2.4 grams a day that’s delivered and the typical 5-ASA gets above 20% absorption. In budesonide you are delivering 9 milligrams and you get 10% absorption.

So the difference is in order to get generic size of the product you have to try to match 0.9 milligram over a 24 hour period which is a difficult thing to do and we file this is in the petition saying we think that not only you have to do dissolution at various PH levels and PK studies at various time points, but we also think that there is probably a need to do some type of clinical work in order to demonstrate efficacy.

Unidentified Analyst

And what’s the status to that CP?

Gerry Proehl

The FDA has basically said they will respond at sometime in the future.

Unidentified Analyst

Got it. And then turning to the audience, are there any additional questions on UCERIS before we move on to other marketed products in the pipeline? I think that covers it. So I just want to touch very quickly on your sales force strategy and what makes it unique and kind of issuing that more the single product concentration or single product focus, so what makes your sales force unique, how are you able to leverage that and drive extra value if you will?

Gerry Proehl

So we’ve taken a little bit different approach, we have a couple of products in the GI space, UCERIS and ZEGERID and then we have three products that are more in the metabolic space GLUMETZA, CYCLOSET, and FENOGLIDE and we call on about 2,500 endocrinologists, about 10,000 primary care docs and about 7500 gastroenterologist. All of our reps currently we gave 235 reps sell all of our products. And the reason we’ve structured it that way is, it allows us to have much smaller territories and improve the frequency of calls and doctors.

One of the things that we found to launching and re-launching products is that, the most important thing to change physician behavior is frequency of calls. If you are not in there frequently enough you can’t change physician behavior, and so we actually have territories are structured three different ways. We have single territories one rep and the territory, call in doctors. We have what we call hybrid territories where we have rep here and rep here and then we have third reps straddle two territories. And then we have territories where we have one to one near, so two reps in one territory. And here recently we did announce that after six months on the market to look at productivity and what we found was, what we had near territories we are by far the most predictive at generating prescriptions.

More so even than double what you would expect the single territories and it really goes back to the frequency of calls, If you can get in there early on the launch frequently, you can change physician prescribing behavior. And so recently we announced that we are going to increase the sales force by 25 reps. In that case what we are going to do is, we going take a lot of the hybrid territories to do near territories and we will take some of the single territories to do a near in order to get more frequencies.

Unidentified Analyst

So it is the idea that you will have two sales reps Bob and Marie both calling on Dr. Smith at various times to just keep UCERIS or FENOGLIDE will met the top of mind, is that the right way to think about?

Gerry Proehl

The frequency really becomes important in launching a product and it's difficult for one rep to go back week after week to the same doctor, doctor goes get lost, I saw you last week, I don't want to see you this week. But he forgets that you are in the last week and Debbie is going in there next week and you are different persons, so he doesn't even tie together at the same company, the same product. And so you can really improve your frequency of calls, which really we think changes behavior more rapidly.

Unidentified Analyst

And then I think that help that. I want you to spend some time on the pipeline and I think investors are very excited about UCERIS and the continued strong ramp of that product. I think what tends to be more underappreciated or more question by investors is kind of the pushing to more biotech compounds. And so, what makes the company, what unique capability Santarus have to kind of evolving to more of a hybrid biotech company.

Gerry Proehl

So, we have lots of people, it's interesting people. We don't have any biotech products, helping you do biotech products and when you actually look at the people we have within our company, we're located in San Diego, we have lots of people in our company that have work for biotech companies, some big companies Genetech or Amgen, some smaller biotech companies. We have folks that have biotech manufacturing experience, clinical experience or had a clinical did all the Rituxan work in rheumatoid arthritis. It was that Idec and then Biogen Ideck ahead of R&D has lots of biotech experience.

He actually was on the Board on Onyx. So we have a lot of experience in the biotech space. We just prior to bringing in, RUCONEST in our antibody program, SAN-300. We hadn’t yet developed the biotech product. A lot of the clinical type studies that you do are not that much different, whether it's a biotech product or whether it's a small molecule. It's really a lot of the early manufacturing and when we brought in our antibody program from Biogen, they had already done the initial development and manufacturing of the product. They did all the pre-clinical work. We brought it in, took it in to Phase 1 and at the same time, our folks went out and developed the subcu formulation, which we think, will be the product will take the market ultimately. So, we're slowly transitioning to more of a specialty/biotech company, but still with the focus on clinical development and commercialization.

Unidentified Analyst

You had mentioned RUCONEST, which I guess is the biologic that furthest along currently, and that’s in hereditary angioedema and you are pursuing an acute indication for that product. So what's the timing on your BLA?

Gerry Proehl

So we filed the BLA in April of this year. We have an April BLA or April PDUFA date of next year. It's currently under review. We do expect to go to advisory panel, probably early in 2014, most likely in the January recovery timeframe.

Unidentified Analyst

And in terms of the acute, it would appear to be relatively crowded space with other C1 esterase inhibitor. So, where is the niche for RUCONEST here?

Gerry Proehl

I think if you look at hereditary angioedema, it's really a replacement therapy these patients are missing a protein, they are replacing the protein, and so the best way to really treat these patients is replacing it. We think that the most effective and the safest way to do it is with RICONEST, for a couple of reasons. Number one the other two C1 esterase inhibitors in the market are plasma drive product, inherently there is some safety concerns of plasma drive products, anybody that has been in the hemophilia market 30 years ago, all you have to do is go talk with a hematologist and as their patient started contracting HIV and AIDS they moved everybody over to recombinant products.

That hasn’t happened yet in HAE but certainly its something that we think is going to be important that patients are going to want to understand the (inaudible) recombinant C1 esterase inhibitor. It’s also a pure product, and if you look at some of the other products they are not pure products, because you are get it in from blood plasma which means there is some other potential side effects like thromboembolic events that you see with some of the plasma drive products.

So we think there is a safety and efficacy issue that we can address and then the other thing is the cost of getting the plasma product is very expensive, the supply is always an issue, and we can actually scale up, because we use a recombinant process very quickly unlimited supply, and so we can deliver a lot of C1 esterase inhibitor.

I will give a comparison, in our product we will deliver 50 units per kilogram, the two competitive C1 plasma drive C1 esterase inhibitor [Santarus] delivers 13 units per kilogram and (inaudible) delivers 20 units per kilogram.

And we think part of the reason we see virtually no breakthrough is because we are delivering a lot more protein, we are replacing all the protein and therefore it’s a much longer period of time before the depletion of the protein and the patient could actually breakthrough with an attack. So would these products be more effective

Unidentified Analyst

Than the current…

Gerry Proehl

I think what you are going to find and what we have seen is very little break through attack and some of the other products you do see break through attacks.

Unidentified Analyst

And when will those occur after administration of the product within the first week or first couple of hours or…

Gerry Proehl

It depends on the product, it’s usually going to occur within the first couple of days and in some cases some of the other products it can occur within hours.

Unidentified Analyst

And in terms of the market opportunity for that product in the acute setting, how should we be thinking about that?

Gerry Proehl

What we have guided to is we think that a reasonable forecast in acute treatment of HAE is somewhere between 75 million and 100 million. But the real opportunity in this market is in the prophylaxis setting. It’s certainly a smaller number of patients but at a much higher price per year.

Unidentified Analyst

And are you pursuing that indication?

Gerry Proehl

We are going to be talking with the FDA in the fourth quarter on a prophylaxis indication. There are certainly questions out there with regards to the half life of (inaudible) which is a matter of hours versus (inaudible) which is around 50 hours. We’ve talked with some experts in the area and there really is a believe that it’s not the plaza half life that’s driving whether or not this product is going to be effective in prophylaxis. It’s the Cmax and the replacement of the protein so it’s a biologic half life that really determines the efficacy and we think we will be able demonstrate that we are in effective product also for prophylaxis

Unidentified Analyst

And is that a product that could also theoretically enter the clinic next year?

Gerry Proehl

The what?

Unidentified Analyst

The prophylaxis could you also push that in to a

Gerry Proehl

Yeah the plan would be to seek a special protocol access with the FDA this year and then initiate the study next year.

Unidentified Analyst

That would be a Phase III?

Gerry Proehl

That would be a Phase III study.

Unidentified Analyst

And before we bring in Debbie to discuss some financials, I wanted to touch quickly and on SAN-300, it’s an interesting story behind that and clearly it has potential in autoimmune and inflammatory diseases. How should we think about that opportunity where you focused on with SAN-300 at least initially?

Gerry Proehl

So SAN-300 is an anti-VLA-1 antibody that we licensed, actually we acquired a small company that license it out of Biogen Idec. It’s an interesting product and that it really approaches the treatment of inflammation from a little bit different angle than some of the other products. And it seems to affect [herculean] T cells and monocytes. The preclinical data all that was generated by Biogen was really very impressive. They used the couple of different ulcerative colitis and Crohn’s models or IBD model. These are couple different RA models. They looked at it in psoriasis and corneal transplant which really stunning results.

At the time there were some things going on with another integrin that was an anti-VLA-4 integrin called Tysabri all aware of got pulled off the market for PML and so on. This is also an integrin that’s anti-VLA-1 integrin. It doesn’t work in an MS animal model. It doesn’t seem to affect the brain at all Tysabri does. So we wouldn’t expect it will be affected there, but we also don’t expect we are going to see the same type of PML issues.

So we license this product and we took it into Phase I, but the Phase II study which we will start in the fourth quarter is in rheumatoid arthritis and the reason we are going after RA is for proof-of-concept it's probably the best diseases study. It’s been well characterized end points. We know what the FDA is going to require and we think we can demonstrate efficacy there.

We have worldwide rights to the product in all indications. Likely as we move further down the road, we will look to do some type of a partnership with some other company that will help us pay for some other development in RA. We see we’re more of a GI focused company. We will look to move forward with ulcerative colitis and probably Crohn’s disease. But it’s a very interesting compound that could have applications across a wide variety of diseases.

Unidentified Analyst

And that's great. And Derby to bring you into the discussion, could you just remind us of your 2013 guidance and kind of progress year-to-date and any sort of inflections we should be aware of in the third quarter, I think as you were re-training your sales force, any sort of UCERIS volatility we should be aware of?

Debby Crawford

Yes, certainly, Chris. We provide guidance or update our guidance typically on our financial quarterly conference calls. So our last call was August 6. And at that time, we were able to increase our financial guidance for 2013. We're not looking to revenues of $355 million to $360 million. That is the second time this year that we've been able to improve our financial outlook.

We also provide guidance on bottom line both from a GAAP and non-GAAP basis. And I think in particular this year given some of the accounting around our income tax benefit, it's probably more appropriate to talk first about the non-GAAP numbers.

And for the non-GAAP adjusted earnings, we have guided $97 million to $101 million for this year, and that's a $1.21 to $1.26 per share.

The tax benefit I am speaking to is approximately $55 million one-time tax benefit that we booked in the second quarter and it relates to our assessment of our ability to fully utilize in the future our deferred tax assets.

As we look at our financial performance, we entered the year with about $180 million in NOLs and we expect to use the substantial amount of those NOLs in the share and have a small amount remaining next year.

From a cash basis, we ended June with about $143 million in cash. In the six months period, we generated $48 million. So I think through the successful launch of UCERIS, having ZEGERID back in the sales rep bag and being a full force for ZEGERID, we're seeing some very, very nice topline and bottom line also with our GLUMETZA product continuing to show nice revenue growth.

As we look at the third quarter, just generally there is a bit of seasonality with regards to pharmaceutical products and in particular with UCERIS. We're seeing a little bit of dip in the increase in [NRx]. So we might see not as much absolute growth, but we still would expect to see growth in that product in the third quarter.

Unidentified Analyst

That's great. And with about 45 seconds left, do we have any additional questions from the audience?

No, I don't think so. But I guess, Gerry and Debbie to conclude, thinking about your cash position and the strength of UCERIS, would you just frame to us any sort of strategic priorities for the company on a go forward basis, whether it’d be product acquisitions company, company acquisitions, etcetera?

Gerry Proehl

Sure. So we have really two major strategic focus right now and the first one is in 2016, we have two products GLUMETZA and ZEGERID will go off patent. So we know we have a revenue gap in 16, we are very focused on filling that revenue gap. We are going to help do that with some of the development work we are doing with our current products and new indications.

But that won't certainly fill the entire gap, so we are also looking at product acquisitions that we can acquire either one of products or potentially companies that have products. So that the first thing, and that’s our main thrust. The second thing is Ted mentioned is we will be using up all of our NOLs mostly throughout this year and maybe early next year.

And so we will become a full U.S. corporate tax payer. We set our tax rate will be somewhere between 38% to 42% going forward, and so we are certainly looking at ways that we could improve our tax situation on a go forward basis.

Unidentified Analyst

That’s great. I think we are out of time. Gerry and Debby, thanks so much for joining us.

Gerald Proehl

Thanks, Chris.

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