West Coast Editor

With solid second-quarter revenues, victories at managed health care plans that should help drive prescriptions for the proton pump inhibitor Zegerid, and scientific support in a recent journal that deals with gastroesophageal reflux disease (GERD), Santarus Inc. might be a prime takeover candidate.

"It's the second-largest therapeutic class by [annual] sales, with $12.9 billion, right under statins," noted Russell McAllister, analyst with Merriman Curhan Ford & Co. in San Francisco.

Basel, Switzerland-based Novartis AG often is mentioned as having no GERD drug, along with GlaxoSmithKline plc, of London. A generics outfit also might be interested, since they typically are looking for higher-margin compounds.

If a buyer doesn't snatch up Santarus, the single-product specialty pharma firm could achieve a bigger chunk of market share simply by signing a larger co-promotion partner with a sales force greater than the 180-person team now provided by the American arm of Tokyo-based Otsuka Pharmaceutical Co. Ltd.

Santarus reported second-quarter revenue of $9.4 million from Zegerid - made of omeprazole combined with sodium bicarbonate for unique pharmacokinetics - compared to $3.8 million for the same period last year, and a net loss of $16.7 million (36 cents per share), vs. $19.5 million (54 cents per share) last year.

Thomson Financial analysts had predicted a loss of 45 cents per share on $10.4 million in revenue. The $1 million miss was blamed on discounts and fewer prescriptions, but the latter is about to change. When disclosing financials, Santarus told Wall Street that better deals regarding Zegerid have been negotiated with the UnitedHealthcare and Coventry health plans.

At Coventry, Zegerid moves to preferred tier 3 status, while competing PPIs will need to be pre-authorized by doctors. UnitedHealthcare is putting the drug on tier 2, up from tier 3, and the two market leaders, Nexium and Prevacid, are losing their preferred status, which means current prescription holders' co-pays will jump to a much higher level.

The moves by Coventry and UnitedHealthcare are particularly strong votes for Zegerid, since independent groups at both made their decisions by balancing efficacy with cost.

"If it were strictly based on costs, you would expect to see a greater use of generic products, and this is not the case," McAllister said. "Nexium, the most expensive, doesn't really offer benefits that justify the premium."

Reimbursement is as critical with chronic GERD therapy as in any other indication. McAllister himself is a GERD patient - he takes Aciphex (rabeprazole), the PPI from Madison, N.J.-based Johnson & Johnson, "because that's what my formulary would reimburse," he said.

Also in San Diego-based Santarus' favor: publication of an article in Medscape Gastroenterology that bolsters the case for the position that most patients who suffer from GERD also get nighttime heartburn, against which Zegerid has been shown to work better than existing therapies.

Surveys cited by the article show that, of the 15 percent of the U.S. population with GERD, as much as 79 percent report nighttime heartburn. A majority also complained of resulting sleep disturbances, daytime sleepiness, pain and impaired work performance,

Zegerid, indicated for a variety of upper gastrointestinal disorders, won approval in late 2004 as powder for oral suspension 40 mg, in February as capsules and as a chewable tablet with magnesium hydroxide 40 mg and 20 mg in March.

Twice-daily dosing seems to improve GERD symptoms, but most PPIs - such as Nexium, Prevacid and Protonix - still wear off too soon to make a major difference overnight, and patients end up with the condition technically known as nocturnal acid breakthrough (NAB).

In May, Santarus offered Phase IV data at Digestive Disease Week showing that only 61 percent of patients treated with Zegerid had NAB, compared to 92 percent of those given Nexium (esomeprazole, the "purple pill" from London-based AstraZeneca plc that sold $5.7 billion last year) and Prevacid (lansoprazole, from TAP Pharmaceutical Products, of Lake Forest, Ill.).

Head-to-head data with Protonix (pantoprazole, from Philadelphia-based Wyeth) dates to 2004, when Phase IV data proved 53 percent of Zegerid patients experienced NAB compared to 78 percent on Protonix. Twice-daily dosing put Zegerid at 12 percent, with Protonix at 72 percent. Protonix goes generic at the end of next year.

Scientifically, NAB is defined as an intragastric pH of less than 4 for at least 60 minutes, which does not necessarily equal nighttime heartburn, but it's close enough to get NAB mostly accepted as an endpoint in trials - even as researchers argue over the marker's worth, citing a small but well-known study in 22 patients (only 13 of whom got PPI therapy).

"All things being equal, you'd rather study outcomes in symptoms than, for example, stomach Ph," he said. "But people may be having reflux into the esophagus [at night] and not be aware of it [since they don't awaken]. In this case, the standard that emerged is NAB."

What's certain is that Zegerid knocks down acidity for long periods, a benefit that should bring value for Santarus, McAllister said. In the buyout scenario, he put the firm's price tag as high as $700 million, using a multiple of five to Zegerid's estimated 2007 sales of $140 million.

Nexium and Prevacid quickly seized market share, gaining as much as 10 percent of the total pie in the first year and a half or so. With more sales power backed by persuasive data, Zegerid could take off - and reach not just gastroenterologists but primary-care physicians, where the bulk of the GERD money is.

As of June 30, the company had about $54.4 million in cash, cash equivalents and short-term investments. Total costs and expenses hit about $53.9 million in the second quarter, compared to about $52.3 million for the period last year.

McAllister worries about the burn rate.

"This is a very competitive space and requires a lot of marketing and promotion expenses," he said. "It would take the company some time to get to the point where they're profitable with this structure."

But he's optimistic overall.

Santarus' story "makes sense if things don't change," McAllister said, setting the chances at 50 percent or better that a buyout or a co-promotion partnership will occur. "The key thing is for [Santarus] to get to a level of sales that shows they could eventually get to a significant share of the market."

The company's stock (NASDAQ:SNTS) closed Thursday at $8.02, down 20 cents.