West Coast Editor

Faced with a need for non-dilutive cash, Santarus Inc. found relief in Schering-Plough Corp.'s agreement to pay as much as $80 million for rights to an over-the-counter, lower-dose version of Zegerid (omeprazole) for heartburn-related indications.

Schering-Plough is paying $15 million up front and as much as $65 million in sales and regulatory payments, in a deal that gives Santarus enough to operate through June 2007, estimated Russell McAllister, analyst with Merriman Curhan Ford in San Francisco.

The specialty pharma firm's stock (NASDAQ:SNTS) rose slightly on the news disclosed mid-last week, and closed Friday at $8.77, down 20 cents.

Kenilworth, N.J.-based Schering-Plough will develop, make and sell Zegerid at the 20-mg dose, which likely will require "some type of clinical trials," Gerald Proehl, Santarus' president and CEO, told investors during a conference call.

Santarus will keep marketing the 40-mg and 20-mg dosage strengths of the proton pump inhibitor, Zegerid, for their prescription indications, which include gastroesophageal reflux disease (GERD), short-term treatment of erosive esophagitis and others.

Doctors write more than 95 percent of prescriptions for the 40-mg dose, Proehl said, a trend "in line with other PPI drugs available in more than one prescription strength." Prilosec (another, slower-release formulation of omeprazole), is the only OTC PPI available now. Procter and Gamble licensed Prilosec from AstraZeneca plc.

"We've looked at the impact that Prilosec OTC has had," Proehl said. Some managed-care establishments place the compound on Tier 1 of their formularies alone or with the generic form of omeprazole, while others do not reimburse over-the-counter drugs at all. Zegerid is expected to get similar treatment.

A threat on the horizon is an OTC form of Prevacid (lansoprazole), thanks to TAP Pharmaceutical Products Inc.'s arrangement with Novartis AG. Prevacid treats heartburn and other symptoms of GERD. The prescription version of Prevacid is losing patent protection soon, and will then have six months of pediatric exclusivity, with all protection ending "about the end of 2009," Proehl said.

"Whether Novartis will launch prior to that or at that time, I can't tell you," he said, adding that Schering-Plough and Santarus are moving "as fast as we can" on Zegerid. Analyst McAllister expects Schering-Plough to file a new drug application for Zegerid OTC by late 2007, with approval and launch possible by mid-2008.

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.

McAllister is optimistic. Zegerid's rapid onset and long action should let the drug "rapidly gain market share in the existing $400 million OTC PPI market, while also potentially taking share from H2-receptor antagonists such as Tagamet or Zantac or even antacids," he wrote in a research report.

The danger of OTC Zegerid cannibalizing the prescription form would be "more than offset by incremental royalties," which McAllister pegged at $3.2 million in 2008 (when Santarus could break even on its balance sheet), $17.3 million in 2009 and $27.2 million in 2010, he wrote.

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