In last week's article, I provided an overview of four biotech companies that recently went public. Many of you wrote me asking that I spend a little more time on some of these new companies, so this week I'll concentrate on the two new ones I think are among the most promising: Memory Pharmaceuticals
What was I writing about?
Oh yes, Memory Pharmaceuticals. This company is developing drugs for diseases of the central nervous system, including Alzheimer's disease, mild cognitive impairment, depression, and schizophrenia. In 2002, Memory landed a potentially lucrative deal with health-care development company Roche. Memory is responsible for the early stage clinical trials, but if Roche opts in, it has the responsibility for future development. If any of the drugs are commercialized, Memory can receive up to $150 million in milestone payments plus royalties on product sales.
Of the four new biotechs mentioned in today's article, Memory probably has the strongest management team in place. Upper management has extensive experience in the CNS space from prior positions with large pharmaceutical companies. Particularly notable is the expertise of co-founder and chairman of the scientific advisory board, Eric Kandel. Dr. Kandel has received the prestigious Lasker Award for work in the molecular biology of memory acquisition and storage, and shares the 2000 Nobel Prize for Medicine for work in signal transduction.
A low-risk drug developer
The discovery of new drugs is a risky endeavor with a high failure rate. Santarus is working around that problem by developing a proprietary formulation of a drug that already has a proven efficacy and safety profile. By working with a compound that has an extensive track record, the development risk is reduced considerably.
The company's only drug in development is Rapinex, which is a proprietary formulation of omeprazole, the active ingredient in AstraZeneca's
Rapinex is in a class of drugs called proton pump inhibitors (PPIs). These drugs potently suppress stomach acid production and are used to treat heartburn, gastroesophageal reflux disease (GERD), duodenal ulcers, and gastric ulcers. Combined, these indications make the PPIs some of the best-selling drugs in the world. Prevacid from TAP Pharmaceuticals had $4 billion in U.S. sales in 2003, while Nexium from AstraZeneca had $3.1 billion in U.S. sales. It should be noted that Nexium is the drug that AstraZeneca launched to protect its franchise as Prilosec lost patent protection.
The market for Rapinex is clearly immense and competition for market share will be intense. Santarus will have to battle both branded products from large pharmaceutical companies and cheap generic versions of Prilosec. This will be a difficult task. Fortunately for Santarus, it only needs a sliver of this market to be highly successful.
Santarus' big bang
Aiding Santarus in its task is a proprietary formulation. Without a unique approach, Santarus would essentially be marketing a generic Prilosec, and that is not an appealing proposition. Generic drug markets are highly competitive, with razor-thin profit margins.
What Santarus has done with Rapinex is use an antacid coating, instead of the enteric coating that is used in all other PPI drugs. The enteric coatings are delayed-release formulations that protect the drug from degradation by acid in the stomach. This delays the onset, and the drugs do not have an immediate therapeutic effect. For example, Nexium's label cites that peak plasma levels are attained after about 90 minutes.
In contrast to the competition, Santarus can speed up the drug's onset of action through the use of an immediate-release antacid coating (sodium bicarbonate). In the prospectus for the IPO, Santarus provides pharmokinetic data indicating that the formulation reaches peak plasma levels in 30 to 45 minutes.
The timeline to market is potentially very short, much shorter than one may expect for a newly public biotech. Santarus filed the new drug application (NDA) for a 20 mg dose of Rapinex in Aug. 2003. This dose is intended for the treatment of heartburn, GERD, and duodenal ulcers. The date by which the Food and Drug Administration (FDA) should respond is June 2004. So, the company should know shortly whether or not Rapinex will be approved. A second NDA was filed for a 40 mg dose in February of this year. Santarus proposes that dose be used for upper GI bleeding and gastric ulcers. The FDA should make a decision on that dose by the end of the year.
Supporting evidence that this antacid coating is the real deal comes from a license to the formulation that Santarus issued to TAP Pharmaceuticals in June 2002. With this deal, TAP has a license to apply this technology to their market-leading drug Prevacid. Intuitively, this looks like a way for TAP to protect its product franchise in the face of patent expirations later this decade. If Prevacid is approved using Santarus' antacid coating, TAP will pay milestones in excess of $100 million plus royalties on future sales. Royalties on a multibillon-dollar product would be substantial and very meaningful to a small company like Santarus.
I view Santarus as a drug-delivery company. By applying a proprietary formulation to a proven drug, Santarus is bypassing the very risky drug-development phase. However, in exchange the company is taking on marketing risk as the product differentiation between Rapinex and the competition may not be substantial. That seems to be a manageable risk, though, as all the company needs is to capture a small piece of a very large market to be successful. As I wrote earlier this month on a company with a very similar business model, Atrix Laboratories
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