After a truly remarkable 20-month 650% gain, shares of Santarus, Inc. (NASDAQ:SNTS) have fallen by more than 20% since its all-time high in early August. While this performance may be meaningless, it might also mean that Santarus’ rally has reached its end. Which is it?
Santarus at a glance
Santarus, Inc. (NASDAQ:SNTS) markets five drugs, using the “bunch of $100 million drugs versus one blockbuster drug” operational approach. In its most recent quarter, three of its five drugs saw double-digit growth, one was flat year-over-year, and the last drug launched this year. Combined, this created revenue growth of 89% year over year, which easily surpassed expectations.
Now, Glumetza — used to help improve glycemic control in adults with type 2 diabetes mellitus — is its biggest revenue producer, accounting for $44.4 million of the company’s $89.4 million during the company’s last quarter. However, Zegerid and Uceris are the ones that have taken Wall Street by storm and led to such mindboggling gains.
Zegerid treats heartburn, and prior to 2013 it faced generic competition from Par Pharmaceuticals. A major catalyst in 2012 was a court decision that ultimately gave Santarus, Inc. (NASDAQ:SNTS) exclusive rights to Zegerid. As a result, Zegerid sales for the first six months of 2013 have been $46.2 million, compared to just $18 million in 2012.
While the Zegerid news is nice, the real catalyst has been the success of Uceris. This drug, which treats mild to moderate ulcerative colitis, had very moderate expectations prior to its launch in the first quarter. In fact, management would hardly provide an outlook, and analysts forecast sales of $20 million for the entire year.
Uceris has already produced sales of $22 million in the first six months, however, and the tone surrounding this drug has completely changed. During the conference call, peak sales estimates of $500 million were discussed, which were far greater than the $300 million that were once considered a success.
Also consider Uceris’ development into additional indications. Ulcerative colitis is the largest indication with 700,000 annual cases, a market that’s expected to double by 2021. However, Santarus, Inc. (NASDAQ:SNTS) is also testing Uceris to treat microscopic colitis and pediatric UC, which combined is about half the size of the ulcerative colitis indication. The bottom line is that Uceris is a crucial piece of the Santarus puzzle.
What about valuation?
Back in the first quarter, Santarus, Inc. (NASDAQ:SNTS) said in its conference call that its five marketed products could produce peak sales of $700 million. That was before we knew of Uceris’ success, however. Peak sales could be closer to $900 million, and that’s not including additional indications or other pipeline products.
So, with a market cap of $1.4 billion, and $293.7 million in trailing-12-months revenue, Santarus trades at five times sales. On the surface this may look expensive, but when you consider peak product sales, is the stock really that expensive?
To answer that question, we can turn to other top-performing biotechs and their valuation relative to peak sales.
First, let’s look at Pharmacyclics, Inc. (NASDAQ:PCYC), and its market capitalization of $8.7 billion. The company’s clinical product ibrutinib treats various forms of leukemia/lymphoma and is expected to earn approval from the Food and Drug Administration early next year.
The most generous of outlooks, from Goldman Sachs, peg peak sales for ibrutinib at $6 billion if all indications are FDA approved. Due to Pharmacyclics, Inc. (NASDAQ:PCYC)’ partnership with Johnson & Johnson, sales are split down the middle, meaning that Pharmacyclics will only receive $3 billion if peak sales are reached. Thus, Pharmacyclics trades at nearly three times its share of peak sales.
