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Executives

Martha Hough - VP Finance & Investor Relations

Gerry Proehl - Director, President and Chief Executive Officer

Debbie Crawford - Senior Vice President, Chief Financial Officer, Treasurer and Secretary

Bill Denby - Senior Vice President, Commercial Operations

Wendell Wierenga - Executive Vice President, Research and Development

Analysts

Scott Henry - Roth Capital

David Amsellem - Piper Jaffray

Daniel Chang - Stifel

Brian Lian - SunTrust

Santarus, Inc. (SNTS) Santarus Receives FDA Approval of UCERIS (Budesonide) for the Induction of Remission in Patients with Active, Mild to Moderate Ulcerative Colitis January 15, 2013 9:00 AM ET

Operator

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Santarus Business Update Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Ms. Martha Hough. You may begin your conference.

Martha Hough

Thank you, Melissa. Good morning, and welcome to today's call. This is Martha Hough, Vice President of Finance and Investor Relations.

Joining me on the call today are Gerry Proehl, President and Chief Executive Officer; Debra Crawford, Senior Vice President and Chief Financial Officer; Bill Denby, Senior Vice President of Commercial Operations. Dr. Wendell Wierenga, Executive Vice President of Research and Development will also be available during the question-and-answer session.

Yesterday after market closed, Santarus issued a press release announcing FDA approval of UCERIS, extended release tablets. This press release is available on our website at www.santarus.com. We will also make a replay of today's call available for the next two weeks on the Investor Relations section of our website.

Please keep in mind that risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements made by management during today's call. As a result, the company's performance may differ from those expressed in or indicated by such forward-looking statements, which are qualified in their entirety by the cautionary statements contained in the press release and the company's Securities and Exchange Commission filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast on January 15, 2013. Santarus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

In this call, when talking about our company's financial outlook, we will also discuss adjusted EBITDA, a non-GAAP financial measure. You can find the reconciliation of adjusted EBITDA to GAAP net income in our press release issued yesterday.

I'll now turn the call over to Gerry Proehl.

Gerry Proehl

Thank you, Martha, and welcome to this morning's call. Yesterday FDA approval of UCERIS extended release tablets of the induction of remission of active, mild to moderate ulcerative colitis is exciting news and gives us strong momentum at the start of the New Year. We are very pleased to be preparing to launch UCERIS, an important new treatment for the active stage of mild to moderate ulcerative colitis to patients and gastroenterologists. We believe 2013 is shaping up to be another very successful year for Santarus.

UCERIS contains budesonide a locally acting steroid in an oral utilizing MMX colonic delivery technology, designed to release budesonide throughout the calling. In clinical testing UCERIS achieved statistical significant results for the induction of remission of ulcerative colitis over eight weeks compared to placebo.

In two pivotal studies and our 12-month extended use study, the frequency of treatment related adverse events for UCERIS was similar to placebo. We believe UCERIS is uniquely positioned to fill a gap in the treatment paradigm to patient suffering acute mild to moderate ulcerative colitis.

Our commercial group has been focused on preparing for the launch of UCERIS. Bill Denby will review our progress in expanding our sales organization and describe some of our upcoming promotional initiatives later in the call. We expect to complete the manufacturing activities related to labeling and final packaging over the next eight weeks and our planning for the commercial launch of UCERIS in March.

We believe, our strategic plan to prepare Santarus for significant future growth continues to show positive results. To that end, we expect to meet or exceed our full year guidance for 2012, and we are introducing what we believe is a strong 2013 financial outlook, which include substantial growth in revenues and profits over our current guidance for 2012.

I'll now turn the call over to Debbie Crawford to provide the details of our 2012 and 2013 financial guidance. Deb?

Debbie Crawford

Thank you, Gerry, and thank you to everyone for joining our call. As Gerry said, for 2012, we expect to meet or exceed the guidance that we provided on our third quarter financial results call on November 7th.

As a reminder, our guidance includes total revenues of approximately $210 million. Net income of approximately $12 million to $14 million, which includes a total of $14 million in expense for success-based regulatory and clinical milestones and adjusted EBITDA of approximately $29 million to $32 million.

Today, we are pleased to introduce our financial outlook for full year 2013, which includes significant top line growth coupled with bottom line expansion. Our estimates are total revenues of approximately $320 million to $325 million, net income of approximately $50 million to $54 million and adjusted EBITDA of approximately $73 million to $79 million.

Additional details on selected estimated expenses for 2013 are as follows. License fees will include a $5 million expense for a success-based milestone assuming FDA acceptance for review of the RUCONEST Biologics License Application. R&D expenses of approximately $34 million to $38 million, and SG&A expenses of approximately $131 million to $134 million, which include an incremental estimated $38 million to $40 million to fund the sales force expansion of 85 sales reps and promotional and other costs related to the UCERIS launch and ZEGERID re-launch.

Bill Denby will now give a brief overview of launch activities for UCERIS and the re-launch of ZEGERID.

Bill Denby

Thanks, Deb. We have nearly completed our recruiting efforts for our planned sales force expansion to facilitate the UCERIS launch and expect to have a total of 85 newly hired sales representatives on board for the launch meeting in mid-February. The addition of the new reps will bring our total sales force to approximately 235 representatives.

Our promotional planned sales training modules, advertising, patient outreach, and internet-based advertising and other demand creation tactics and awareness programs are ready to roll out. Marketing research suggest that physician see UCERIS as a powerful new therapy for their patients filling a key unmet need in active mild to moderate ulcerative colitis, our promotional focus on the two core strengths of UCERIS that were demonstrated in our pivotal clinical studies, the efficacy of a steroid combined with a favorable tolerability and safety profile.

Health professionals will see the UCERIS branding and messages during representative visits and other promotional speaker programs as well as through non-personal promotional via advertising in the top-five GI journals and regular direct communications. This will be complimented by a comprehensive digital marketing plan, including internet advertising and a full product website be up and running soon.

We also recognized that informed patients will be crucial to the success of UCERIS. Therefore, we have developed a complementary patient campaign to educate and motivate patients to seek medical attention when their disease flares and to ask their doctors about UCERIS. This campaign aims to reach patients where they go most frequently for information including social media outlets and key medical information websites.

In the coming days and weeks, we will also implement a communication program to notify our distribution partners, physicians, payors, pharmacists and patients of product approval and availability in March. We plan to have all 235 sales representatives promote both, the UCERIS and ZEGERID, primarily to gastroenterologists. They will also promote GLUMETZA, CYCLOSET and FENOGLIDE to high prescribing physicians who treat patients with type 2 diabetes.

We believe that having a single sales force promote all of our products is the most efficient way to deploy our resources. It allows us to reduce the size of our larger territories and near more of our existing territories to allow for higher frequency of calls while minimizing disruption and maintaining flexibility for future promotional exchanges. We believe the higher call frequency is essentially for success in launching a new pharmaceutical product as well as supporting growth for our in-line products.

The training of our existing sales organization is already underway and will conclude with comprehensive product training at the launch meeting in mid-February. In addition, the meeting will allow us to train our entire organization on ZEGERID and train the 85 new representatives on our other in-line products. Our commercial team is extremely pleased to be working toward the goal of successfully launching UCERIS, and continuing the growth of our in-line products to achieve our financial goals for 2013.

Now, I'll turn the call back over to Gerry to wrap it up.

Gerry Proehl

Thanks, Bill. We've achieved a number of important milestones in last 12 months that we believe have created significant value for our stockholders. We substantially grow prescriptions and net sales for GLUMETZA and CYCLOSET and added FENOGLIDE to our portfolio of promoted products.

We received a favorable outcome on ZEGERID patent litigation during the second half of 2012, which we expect will positively impact our revenues and cash flow to the patent life ending in mid-2016.

On the product development side of the business, we initiated the Phase IIIb clinical study to evaluate the use of UCERIS as add-on therapy with 5-ASA drugs. We reported positive Phase III results for both, RUCONEST in hereditary angioedema, and rifamycin SV MMX in travelers' diarrhea.

We also completed dosing in healthy volunteers in the Phase I clinical study with SAN-300 testing a subcutaneous formulation developed internally by our product development group and an IV formulation. The approval of UCERIS is a major accomplishment for our company and I would like to thank our entire team, especially our colleagues and clinical regulatory product development manufacturing and our UCERIS launch team that has worked so hard to achieve this positive result.

I would also like to thank our development partner Cosmo Technologies for working in close collaboration with us. We look forward to reporting on a commercial launch of UCERIS in the months to come.

I'd now like to open the call up to question. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Scott Henry from Roth Capital. Your line is now open.

Scott Henry - Roth Capital

Thank you and good morning, and congratulations. Certainly a lot of positive news lately.

Gerry Proehl

Thanks.

Just to get started, when you look at your 2013 guidance, could you give me any color on what you are expecting for some of the top line sales targets and perhaps UCERIS as well?

Debbie Crawford

Yes, Scott. Hi. This is Debbie. When we think about 2013 revenue, we expect continued growth in GLUMETZA and for it to be a major contributor to our revenues in 2013 as it has been in 2012. We also expect ZEGERID to be a significant contributor to the top line as well as to the bottom line, because we have very attractive margins on ZEGERID.

When we look at the prescription trends for CYCLOSET, we see they continue to be incrementally positive than we would expect that to continue as well as FENOGLIDE to show some modest growth. When we think about UCERIS, as Gerry mentioned, we are looking at a commercial launch in the March timeframe, so we expect the impact of UCERIS to be small in the first quarter and to be increasing as we move throughout the year.

Again, I think when we look at the UCERIS launch, it will be important to factor in the availability of patients and how quickly patients might require treatment and in fact seek treatment from their physicians, so I think it's important that the forecast related to UCERIS, keep in mind, are need to ensure that patients are getting to their physician offices to understand that we have this new treatment option available to them.

Scott Henry - Roth Capital

If I could just follow-up on UCERIS, I would assume you will book only demand revenues at this point in time and you will defer the stocking revenues. One, is that the correct assumption. And, in the bigger picture, how should we expect scripts to, how should we think about that trajectory. And, even longer term, how big of a lever is combination of 5-ASA trial now that you have approval?

Debbie Crawford

To answer your first question, Scott, our assumption in our guidance is that, we will be booking revenues based upon shipments. However, we are not planning to have a large amount of product in initial stocking. I think, given the pricing of the product. That's a key dynamic when we think about the ordering patterns that we'll likely see from wholesalers and our pharmacies, so that is our current thinking given our experience with a vast number of commercial products we believe we'll be able to recognize the revenue upon shipments.

Maybe I'll turn the call over to Gerry or Bill to talk about prescription.

Gerry Proehl

Scott, one of the things that we've found as we've gone out and talked with both, physicians and patients, first with physicians. Because they have so much experience with Entocort EC for Chron's disease, they have very good understanding of UCERIS and where it fits in the treatment paradigm. They don't seem to have much issue with thinking about using UCERIS to treat their patients that are flaring.

I think what we've identified is, any time you launch a new product, probably the biggest challenge in a category like that is getting patients actually go and seek treatment from their physician. There hasn't been any really new therapy to treat patients with mild to moderate ulcerative colitis in quite a few years. There has been some improved dosing of 5-ASAs, but not any new therapies and so one of the things Bill mentioned is, we are going to be doing a lot of social media, we are going to be working with the Chron's and colitis foundation to try to get to the patients who would like to know that there is a new therapy available, but we think that will take a little bit of time.

The other customer certainly is dealing with managed care and we have account team that's on the ground. They have been working with managed care. In fact, there was talking with our director of managed care, we've got meeting set up the rest of this week with some of the bigger managed care plans to talk about UCERIS and getting that reimbursed, but it's always a challenge initially when you are launching a product, because formularies have already been established for 2013, so you have to work with the managed care plans in order to get reimbursement, but we feel like the product is going to do well. It will take a little bit of time to get it started, but as we've said before, we think that peak sales for this product about $300 million.

Debbie Crawford

Sorry, Scott, as there are some other the people in the queue to ask questions, so maybe you can jump back in the queue and let the next person come up?

Scott Henry - Roth Capital

Great. Well, thank you for taking the question.

Operator

Your next question comes from the line of David Amsellem from Piper Jaffray. Your line is now open.

David Amsellem - Piper Jaffray

Thanks. Just a couple of questions specific to the managed care strategy on UCERIS, so I wanted to get more color on what your goals are in terms of Tier-3 or even Tier-2 access on commercial plans and then get a sense of a kind of co-pay assistance you are planning to put in place on the product.

Bill Denby

Hi, David. This is Bill. As Gerry enumerated, sometimes depending on the plan takes a little time for them to do their review, in the meantime the vast majority of plans will make the product available Tier-3 as they go through their valuation process anywhere from three to six months going forward.

In terms of co-pay assistance, we plan as we have for the other products, the in-line products to implement an e-voucher at a $25 co-pay, so almost immediately the product will be available for the vast majority of commercial patients at a $25 co-pay, so that's how we have tried to handle managed care. And as Gerry said, we've lined up clinical reviews with all the major plans throughout the country in the coming weeks and months.

David Amsellem - Piper Jaffray

Okay. That's helpful. One quick follow-up. Can you just talk about the percentage of UC patients that are covered by Medicaid and are there any meaningful numbers covered by Medicare? How do you see the landscape regarding government payors playing out?

Gerry Proehl

Well, I think I can't remember off the top of my head what the percentages are, but they are relatively minor pieces of business, the government side. I would say anywhere from 5% to 10%, something like that. So, we pay our primary attention to the majority of the marketplace to make sure that 80% to 90% folks on the private pay side are getting covered and get access to the product.

David Amsellem - Piper Jaffray

Okay. That's helpful. Very quick question on the R&D spend guidance. Can you just point out the main drivers of the increase from 2012? I am specifically interested in newly initiated studies for '13 that are contributing to the growth.

Debbie Crawford

Yes. Hi there, David. We look at the R&D expenses. One of the primary contributors is the ongoing UCERIS Phase IIIb clinical study. At the end of December, we had enrolled approximately half of the planned 500 patients into that study, so we will see the expenses continuing into 2013. We also plan to initiate a Phase IIa study with SAN-300 in RA patients probably around the middle of the year.

We are also looking at initiating an exploratory study with RUCONEST and acute pancreatitis and we will be incurring cost associated with the submission of the RUCONEST BLA, and also potentially some cost associated with rifamycin NDA preparation cost depending on the outcome of the second Phase III study, so those are the primary activities contributing to the R&D estimate in addition to just our infrastructure cost, which include Wendell and his team and others as well as general overhead expenses.

David Amsellem - Piper Jaffray

All right. That's helpful. Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Daniel Chang from Stifel. Your line is now open.

Daniel Chang - Stifel

Hi. Thanks very much and congrats on the approval. Just had a couple of questions here, firstly on the label and the dosing was there anything surprising in the label? And also, as far as the dosing is concerned, do you expect patients to take up to full eight weeks on a regular basis for the dosing regimen?

Wendell Wierenga

This is Wendell. Regarding the label, the label was as expected in terms of 9 milligrams for the induction treatment of the mild to moderate ulcerative colitis for eight weeks, which of course follows the protocols that were submitted to support the application in the first instance and the remainder of the label relates of course to information regarding long-term safety, which represents the 12-month study that we have referred to earlier as well as safety during the induction phase of treatment, so that is really what we had expected and that's as you will see a description of the label itself.

We would anticipate that the treatment of patients who pretty much follow this, because it’s a pretty standard [induction] treatment with other agents in this category.

Daniel Chang - Stifel

Okay. Then I had another question on the financials for the NOLs. Can you just give some idea of how long you expect the NOLs to last for like first half of 2014, something like that?

Debbie Crawford

With regards to our NOL, we've reported that at the end of 2011, we had approximately $160 million worth of NOLs. We have not provided financial guidance specifically to years beyond now 2013, but if you look at the guidance we have provided for '12 and '13, certainly, we believe we have sufficient NOLs to cover those periods and would have a balance moving into 2014.

Daniel Chang - Stifel

Okay. Great. Thanks.

Operator

Your next question comes from the line of Brian Lian SunTrust. Your line is now open.

Brian Lian - SunTrust

I may have missed this, but have you disclosed pricing or can you give a range of what would be reasonable pricing?

Gerry Proehl

Brian, this is Gerry. As we have said before, we expect price of UCERIS in the range of Entocort EC. It's going to be used very similar to Entocort EC was used Chron's disease primarily as an induction dose as opposed 5-ASAs that are primarily used as maintenance dosages. So, we price it like an induction dose.

Brian Lian - SunTrust

Okay. Thanks. Is there a target gross to net that you have in mind when you account for some of the e-voucher and other incentives?

Gerry Proehl

I don't know that we have a target gross and net. Certainly, our experience is almost universally out the gate, you can expect 15% to 20% discounts when you add everything up. That includes wholesaler fees, prompt pay, just some of the discount you will get with managed care, some of the discounting with the e-voucher program. So, I think on a general basis, that's a pretty good number to use.

As we start to engage managed care plans, we'll get a better feel on whether or not that will go up or down and that will vary based on whether or not we are able to get on Tier-2 or not, but if you use 15% to 20% starting off, it's probably a good range, but normally what we do when we look at that is, we try to determine how much volume we can drive based on prescriptions. When we gave you our number, we reported our number, it's a net number certainly.

Brian Lian - SunTrust

Okay. Then just finally on the sales reps that you have identified and expect to bring in, can you talk a little bit about their profile and what their experience typically looks like. Thanks.

Bill Denby

Hi. This is Bill. First of all, we are about 85% to the of getting 85 reps on board and they are currently right now transforming from contingent offers to employed offers so to speak, so we are very excited that we are close to the number that we are trying to get to and the people that are on board now will accelerate their training. The profile turns out to be we started off with a minimum of two to four years of experience and I think the average is more on the order of five to seven years of experience and there were new reps that are on-boarding as we speak.

So, we have on balance a highly experienced 235 people. The challenge will be to ramp everybody up on the five products we'll be promoting as of March and with the main focus and making sure that we get the optimal trajectory in the launch of UCERIS.

Operator

Your next question comes from the line of (Inaudible). Your line is now open.

Unidentified Analyst

Hi, Gerry and crew. Once again you shocked me on the upside, so congratulations. I have two questions. First one is, what's the total size of the market for UCERIS? The second one is, how much of your 2013 expectation of expenses will not be in 2014?

Gerry Proehl

Maybe I'll touch on the first and Debbie can address the second question. As far as the size of the market, if you look at the full inflammatory bowel disease market, it's just a little under $2 billion market that it certainly includes 5-ASAs. Most of the 5-ASAs or actually all the 5-ASAs are approved ulcerative colitis although we know that some of the 5-ASAs are used off label for Chron's disease and obviously Entocort when it had peak sales of about $375 million for Chron's disease.

If you look at the split between ulcerative colitis and Chron's, it's almost a 50-50 split. There are about equal number of patients that have UC, that have Chron's. We think that the market probably for UC as far as dollars is a little bit higher than the market for Chron's disease, but overall you could say it's probably about $1 billion market for UC.

Debbie Crawford

With regards to our planned expenses, when we think about the component, certainly the cost of expanding with 85 sales reps, that will be an ongoing expenditure for us and the launch activity certainly are higher in the first year as a percentage of revenue, but when we think about it going forward, we may have the same dollar amount of expenses or close to it, but as a percentage of revenue that would be going down, so we will evaluate the level of marketing and other expenditures as we move through the launch period and see how we are doing with regards to the growth of the product, but certainly UCERIS is an important product for us and we felt that it was important to have the appropriate level of resources and spend behind the launch activity.

Unidentified Analyst

Okay. Thank you. Just for your information stock is trading $12.91 right now.

Gerry Proehl

Great. Thank you.

Operator

Your next question comes from the line of Scott Henry from Roth Capital. Your line is now open.

Scott Henry - Roth Capital

Thank you for taking the follow-up question. Gerry, I was wondering, could you give any color on the ZEGERID re-launch. How should we think about that line in terms of revenues when we look out to 2013?

Gerry Proehl

Scott, I'll try to give you a little bit of color to the re-launch. I am not sure that I will give you enough clarity that what you want for revenues of ZEGERID, but what we've said before with regards to ZEGERID over the past two years, as it went generic. We lost about 15% of the prescription volume. If you add up our brand volume, the volume from Proscar, authorized generic and the volume from PARS generic. Volume was down about 50%.

Certainly with PAR, stopping shipping of their product, we've been able to capture most of their generic business and we are at about 96% of the generic business that's going to Prasco, and Prasco has taken their price up fairly substantially. That's obviously going to help our revenue. What we are trying to do with the re-launch of ZEGERID is, number one, stop the decline of the prescription trend. That will be our first focus.

We'll be putting ZEGERID in the second detailed position behind UCERIS. When we are calling on gastroenterologists, and then there's a select group of primary care physicians that we call on for GLUMETZA that will also be detailing ZEGERID too, and we expect then in 2013, to really stop the decline of the prescriptions as we move towards the end of 2013, then we'll look to start to actually see some slight growth in the prescription trends, but at a much price than it was before PAR stopped shipping their generic.

Scott Henry - Roth Capital

Thank you for that color. Then I guess just a follow-up to the NOL question for Debra. I guess, I could try to back out the tax rate, but I just wanted to see if you could give any guidance on what are the tax rate, I am sure they are at certain minimum level of taxes you pay in 2013. What's a good rate to think about for that year?

Debbie Crawford

I think, Scott, the way we have provided the guidance and the adjusted EBITDA reconciliation, is that we are anticipating income tax expense of about $4 million on that net income of $50 million to $54 million. That's net of the $4 million in taxes for 2013.

Scott Henry - Roth Capital

Okay. Great. Thank you for the added color and thank you for taking the question.

Gerry Proehl

Great. Thanks, Scott.

Debbie Crawford

Thanks, Scott.

Operator

There are no further questions at this time. I'd like to turn the call back over to the presenters.

Gerry Proehl

Great. Well, I'd like to thank you for your interest in Santarus and for joining this morning's call. If you do have any further questions, feel free to call Debbie, myself or Martha Hough. Thank you and have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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