Santarus Beats on Higher Revenues

| About: Santarus, Inc. (SNTS)

Santarus, Inc. (NASDAQ:SNTS) reported fourth quarter earnings of 40 cents per share, doubling the Zacks Consensus Estimate of 20 cents and far above the year-ago earnings of 7 cents. Performance was boosted by higher revenues.

Total revenues, consisting of net product sales, promotion revenues and license and royalty revenues came in at $62.4 million, up 66.3% from the year-ago period. Fourth quarter revenues included a $20 million milestone payment received by the company from Merck (NYSE:MRK) on the approval of the over-the-counter (OTC) version of Zegerid.

Full-year earnings came in at 54 cents, well above the year-ago loss of 9 cents. Total revenues, consisting of net product sales, promotion revenues, and license and royalty revenues increased 32% to $172.5 million.

The Quarter in Detail

Product-related revenues, which consist of net product sales and promotion revenues, increased 11.8% to $38.9 million in the fourth quarter of 2009. Zegerid net product sales were $32.2 million, up 8%. However, total prescriptions declined 8% in the reported quarter following Santarus’ decision to exit from Medicaid contracting.

We believe that Zegerid prescriptions will remain slightly down to flat in the first half of 2010. However, prescriptions should rebound, potentially by the second half of the year, with increased promotions for both the branded as well as the OTC product.

Promotion revenues of $6.7 million increased significantly from the prior-year period’s $5.1 million in promotion revenues, mainly due to those associated with the co-promotion of Glumetza. Glumetza total prescriptions increased 28% year-over-year.

License fees and royalty payments increased to $23.5 million in the fourth quarter of 2009, mainly due to the $20 million milestone payment from Merck for OTC Zegerid.

Research and development (R&D) expenses increased to $6.4 million from $5.5 million in the prior-year period. The company reported that some of the expenses associated with the ongoing phase III development of budesonide MMX have been shifted to the first half of 2010.

While results from the European study should be out in the second quarter of 2010, top-line data from the U.S. study should be available in the second half of 2010. Positive results should allow Santarus to file a new drug application for budesonide in the first half of 2011.

Selling, general and administrative expenses declined 6.3% to $25.5 million. The decline was primarily due to a decrease in legal fees and costs associated with advertising and promoting Glumetza.

2010 Outlook

Santarus provided first-time earnings guidance for 2010. Santarus expects net income in the range of $11-$13 million in 2010 on total revenues of $170 million to $175 million. Product-related revenues are expected to increase 14-17% to $163 million - $167 million.

Zegerid OTC should be available from April 1. Merck intends to launch a significant consumer advertising campaign for Zegerid OTC, which should increase awareness and help educate consumers about Zegerid’s features and benefits.

Meanwhile, Santarus is seeking approval from the US 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. (NASDAQ:DEPO), 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 $24 million - $26 million, mainly due to costs associated with the development of budesonide MMX and rifamycin SV MMX.

Santarus also announced that it may incur a loss in the first quarter of 2010 due to seasonality of prescription demand and timing of research and development expenses.

Our Recommendation

We currently have a Neutral recommendation on Santarus. Flagship product, Zegerid, has captured a nice niche of the gastroesophageal reflux disease market. We believe the company has good upside potential with Zegerid through its partnership deals with GlaxoSmithKline (NYSE:GSK), Merck and Norgine.

We are also excited about the re-acceleration in Glumetza prescriptions since Santarus started co-promoting the drug. Moreover, we are impressed with management’s ability to in-license new products and expand its pipeline.

However, the active patent challenge from Par Pharmaceuticals (NYSE:PRX) on Zegerid looms large. An unfavorable court ruling in the patent infringement case would be devastating as Santarus depends on Zegerid for growth.