Santarus, Inc. Q4 2008 Earnings Call Transcript

Santarus, Inc. (SNTS)

Q4 2008 Earnings Call

March 5, 2009 5:00 pm ET

Executives

Martha Hough - Vice President, Finance and Investor Relations

Gerald T. Proehl – Chief Executive Officer, President, and Executive Director

Debra P. Crawford - Senior Vice President and Chief Financial Officer

William C. Denby III – Senior Vice President of Commercial Operations

Dr. David Ballard – Senior Vice President of Clinical Research and Medical Affairs.

Analysts

David Amsellem – Piper Jaffray

Larry Smith - DLS Research

Andrew Levin - Tang Capital

Greg Gilbert – Bank of America

John Szabo – Flintridge Capital

Presentation

Operator

Welcome to the Santarus fourth quarter 2008 financial results conference call. At this time, all participants are in a listen only mode. Following management’s prepared remarks, we will hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded on March 5, 2009.

I would now like to turn the conference over to Ms. Hough.

Martha Hough

Good afternoon and welcome to today’s call. This is Martha Hough, Vice President of Finance and Investor Relations. Joining me on the call today are Gerald Proehl, President and Chief Executive Officer; Debbie Crawford, Senior Vice President, Chief Financial Officer, Treasurer and Secretary; Bill Denby, Senior Vice President, Commercial Operations; and Dr. David Ballard, Senior Vice President, Clinical Research and Medical Affairs.

Earlier today, Santarus issued a press release announcing our fourth quarter and full year 2008 financial results which is available on our website. This call is also being broadcast live over the internet at www.santarus.com, and a replay of the call will be available for the next two weeks under 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 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, March 5, 2009. Santarus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

With those comments, I would now like to turn the call over to Gerry Proehl.

Gerald T. Proehl

My thanks to everyone for joining us this afternoon. Two weeks ago, we reported 2008 topline financial results for what we considered to be a very good fourth quarter and year for Santarus. Our full report of financial results today reflects significant progress in our commercial business, and we are pleased to have a pipeline of promising lower GI candidates. We are reporting record revenues in the fourth quarter of 2008 of $37.5 million, an increase of approximately 33% over the prior year period. Our net loss in the quarter was $10.2 million. However, excluding approximately $13.9 million in fees and expenses associated with our strategic collaboration for two late stage GI compounds, we had net income of approximately $3.7 million, exceeding our goal of reaching breakeven on our commercial business in the fourth quarter.

Our Zegerid net product sales also reached a record $29.7 million in the fourth quarter. This represents an increase of approximately 24% compared with 2007 fourth quarter and approximately 6% over 2008 third quarter, which was our prior quarterly sales record. We attribute our sales performance to continued steady prescription growth and stabilization of our average selling prices. For 2008 full year, Zegerid net product sales reached $101.2 million, up approximately 27% over 2007 and exceeding our guidance of year over year growth of at least 25%. We are reporting $130.2 million in total revenues, also better than our guidance to exceed $125 million.

In December, we announced a collaboration with Cosmo Technologies Limited that supports an important strategic objective of Santarus of adding a pipeline of late-stage GI development products. The Cosmo agreement grants Santarus exclusive rights to develop and commercialize two proprietary compounds, Budesonide MMX and Rifamycin SV MMX for lower GI conditions in the US market. Budesonide MMX and Rifamycin SV MMX are formulated using Cosmo’s patented Multi-Matrix Delivery Technology which is designed to produce a controlled release homogenous local application of drug throughout the entire colon potentially limiting systemic absorption and offering opportunity for reduced side effects. Budesonide MMX is in phase III clinical trials for induction of remission in patients with mild to moderate active ulcerative colitis and Rifamycin SV MMX has completed a phase II clinical program in traveler’s diarrhea.

The MMX technology has been commercially introduced in the US in the successful drug Lialda which is a formulation of methylamine, a 5-ASA drug, and is indicated for the treatment of ulcerative colitis. Lialda is promoted in the US by Shire. In 2008, IMS reported retailed sales of Lialda of $143 million, up 170% over 2007. Lialda’s US prescription growth was even more impressive with year-over-year growth of 204%. Lialda is being promoted in the $1.2 billion US market of 5-ASAs and corticosteroid treatments for inflammatory bowel disease.

Later in today’s call, Bill will give you a brief overview of the IBD market and Dr. David Ballard will provide an update on our clinical development program. I would now like to review several significant recent events. Last October, our sales organization began detailing Glumetza, a once daily extended release formulation of metformin that is indicated as an adjunct to diet and exercise to improve glycemic control in adults with type II diabetes. We licensed Glumetza from Depomed in July 2008 under an exclusive US promotion agreement.

Depomed had maintained a limited promotional effort for Glumetza from January 2008 to August 2008 with 30 part-time sales representatives. We are pleased with the Glumetza script trends in the fourth quarter following the commencements of our promotional efforts. New prescriptions grew 6% compared to 2008 third quarter, exceeding our goal to stabilize scripts in the first several months of promotion. Bill Denby will be discussing our commercial activities later in today’s call.

Turning to our patent infringement litigation with Parr Pharmaceuticals, last November, we had a very successful outcome in our patent claim construction or Markman Hearing. At the hearing, Parr disputed the meaning of several terms in our patent claims. At the conclusion of the hearing, the court rejected all of Parr’s arguments and adopted our proposed constructions. The trial is currently scheduled for July 2009.

In January, we announced that Schering Plough Healthcare Products received a complete response letter from the FDA for its new drug application seeking approval to sell a Zegerid-branded omeprazole sodium bicarb 20-mg product in the US OTC heartburn market. We are in regular communications with Schering Plough who continue to work closely with the FDA to define the nature and content of the response to the FDA. Santarus believes that the response will be based on further analysis of existing data. While you cannot predict with certainty what the FDA will require, if the analysis of the existing data is acceptable to the FDA, Santarus does not believe there will be a need for any additional clinical study.

In late January, we submitted to the FDA an NDA for an immediate release tablet formulation of Zegerid which combines omeprazole with a mix of buffers. We believe this new tablet has the potential to provide features and benefits that we believe will be important to physicians and their patients with GERD. Our objective is to have the new Zegerid tablet product commercially available in the US in the fourth quarter of 2009.

I would now like to turn the call over to Debbie Crawford to discuss our fourth quarter and full year financial performance.

Debra P. Crawford

I would like to add my welcome to those joining us this afternoon. I will review highlights of our fourth quarter statement of operations and balance sheet and introduce our outlook for 2009. Additional financial information will be included in our Form 10-K for the year ended December 31, 2008, which we expect to file with the SEC later this week.

We have expanded our recording of revenue in the fourth quarter to provide greater transparency which we hope will be helpful to investors. To get more visibility of the results produced by our sales organization, we have separated product-related revenue associated with our promotion efforts from our license and royalty based revenue. The product-related revenue includes 2 line items of net product sales and promotion revenue. Net product sales include sales revenue associated with our Zegerid products and promotion revenue includes primarily Glumetza promotion revenue in the fourth quarter, but also includes revenue from our earlier co-promotion agreements with Victory and Fleet.

License and royalty revenue includes amortized revenue from upfront fees, milestone payments, and royalties. Total revenues in the fourth quarter were $37.5 million compared to $28.3 million in the fourth quarter of 2007. Product-related revenue was $34.8 million in the fourth quarter of 2008 which consisted of $29.7 million in Zegerid net product sales and $5.1 million in promotion revenue primarily associated with Glumetza. License and royalty revenue was $2.7 million in the fourth quarter of 2008.

Product-related revenue for the fourth quarter of 2007 was $25.9 million which consisted of $24.1 million in Zegerid net product sales and $1.8 million in promotion revenue. License and royalty revenue was $2.4 million in the fourth quarter of 2007.

Zegerid average selling prices were stable in the fourth quarter, maintaining the positive trends we saw in the second and third quarters of 2008. We took a pricing action in January of 2009 increasing the Zegerid wholesale acquisition cost or WAC to $4.64 per capsule and $4.96 per packet of powder, representing an increase of approximately 9% for the capsule and 7% for the powder.

We reported a net loss for the fourth quarter of 2008 of $10.2 million or $0.19 per share compared with a net loss for the fourth quarter of 2007 of $8 million or $0.16 per share. Excluding the $13.9 million in fees and expenses payable to Cosmo, Santarus achieved net income of approximately $3.7 million which exceeded prior guidance of break even in the fourth quarter excluding fees and expenses payable to Cosmo.

Our cost of product sales was $2 million in the fourth quarter of 2008 or 7% of net product sales compared with $2.2 million in the fourth quarter of 2007 which was approximately 9% of net product sales. The decrease in cost of product sales as a percent of net product sales was primarily due to increased average selling prices for Zegerid products and certain fixed overhead costs being applied to increased sales volumes.

We reported license fees and royalties of $12.5 million in the fourth quarter of 2008 which consisted of approximately $10 million in upfront fees paid to Cosmo. This included $2.5 million in cash and the estimated fair value of 6 million shares of Santarus common stock which was recorded at a discount to the market price reflecting the 15-month contractual restriction on selling these shares. Also included was $2.2 million in royalties and license fees payable to the University of Missouri based on Zegerid net product sales. This amount includes $688,000 toward a $2.5 million one-time sales milestone payable because annual Zegerid net product sales including sales under the License and Distribution agreements with GSK reached $1 million in calendar 2008.

Lastly, license fees and royalties included $375,000 of amortization of the $12 million upfront fee paid to Depomed in July 2008 for exclusive US promotion rights to Glumetza. The upfront fee is being amortized on a straight line basis through mid 2016. License fees and royalties in the fourth quarter of 2007 were $3.4 million which consisted of royalties payable to the University of Missouri and to Otsuka America. With the termination of our co-promotion agreement with Otsuka America as of June 30, 2008, Santarus is no longer obligated to pay the high single-digit royalty to Otsuka based on Zegerid net product sales.

Research and development expenses were $5.5 million in the fourth quarter of 2008 compared with $1.9 million in the fourth quarter of 2007. The increase in R&D spending was primarily due to the $3.9 million payable to Cosmo for our 50% share of the out-pocket cost for the phase III clinical program for Budesonide MMX through December 31, 2008.

Selling, general, and administrative expenses were $27.2 million for the fourth quarter of 2008 compared with $29.5 million for the fourth quarter of 2007. The decrease in SG&A expenses was primarily due to a decrease in Zegerid promotional activities and a decrease in stock-based compensation, offset in part by increases in promotional activities for Glumetza and legal expenses.

For the year ended December 31, 2008, total revenues increased 38% to $130.2 million compared with total revenues of $94.4 million for the year ended December 31, 2007. In 2008, product-related revenues of $111 million consisted of $101.2 million in Zegerid net product sales and $9.8 million in promotion revenue. License and royalty revenue was $19.2 million in 2008.

Product-related revenues in 2007 were $81.2 million and consisted of $79.4 million in Zegerid net product sales and $1.8 million in promotion revenue. License and royalty revenue in 2007 was $13.2 million. For the year ended December 31, 2008, we reported a significantly reduced net loss of $18.5 million or $0.36 per share compared with a net loss of $44.3 million or $0.87 per share for the year ended December 31, 2007. The 2008 full year net loss was 58%, lower than the full year net loss in 2007. Excluding the $13.9 million in fees and expenses payable to Cosmo, Santarus achieved a net loss of approximately $4.6 million for the year ended December 31, 2008.

In arriving at our net loss for 2008, we recorded income tax expense of approximately $534,000. Although we reported a book loss, we had taxable income due to the disallowance of certain deductions for tax purposes until future years. After utilizing net operating loss and R&D tax credit carry forwards as appropriate, our income tax expense for the year was comprised of federal alternative minimum tax and certain state tax liabilities including a California tax liability due to the state’s suspension of net operating loss carry forwards for the 2008 and 2009 cash years.

Moving on to some balance sheet highlights, as of December 31, 2008, Santarus had cash, cash equivalents, and short-term investment of $52 million compared with $64.7 million as of December 31, 2007. The decrease of $12.7 million resulted primarily from the company’s net loss for 2008 adjusted for changes in operating assets and liabilities and non-cash expenses including $7.5 million related to the issuance of common stock to Cosmo and $4.2 million in stock-based compensation. In addition, Santarus paid a $12 million upfront fee in cash to Depomed in July 2008 for exclusive US promotion rights for Glumetza. The decrease in cash, cash equivalents, and short-term investments was offset in part by a drawdown of $10 million on the company’s revolving credit line with Comerica Bank in December 2008.

In addition, due to the illiquid state of our auction rate securities, we re-classified the fair value of these securities from short-term to long-term investment in the year ended December 31, 2008. In November 2008, we obtained auction rate security rights from our investment advisor, UBS Financial Services, which allows Santarus to require UBS to purchase the company’s auction rate securities at par value any time during the period of June 30, 2010, through July 2, 2012. Under the right’s agreement, UBS has the discretion to purchase or sell our auction rate securities at any time without prior notice so long as Santarus receives the payment at par value upon any sale or disposition. The aggregate fair value of our auction rate securities and auction rate securities rights was approximately $4.3 million as of December 31, 2008.

I’m pleased to report that we generated approximately $7.2 million in positive cash flows from operating activities in the fourth quarter, and our operating cash burn for the full year was approximately $6.5 million in 2008. We believe that we will not need to raise additional funds to finance our current operations for at least the next twelve months; however, we may pursue fundraising in connection with licensing or acquiring new products. Sources of additional funds may include may include funds generated through strategic collaborations or licensing agreements or through debt, equity, and/or royalty financing.

Turning to our financial outlook for 2009, we expect report product-related revenue of approximately $138 million, representing an increase of approximately 24% over 2008, and total revenues of approximately $145 million. Research and development expenses for 2009 are expected to be approximately $20 million to $23 million which includes expenses associated with Budesonide MMX and Rifamycin SV MMX as well as costs associated with the new ZEGERID tablet formulation. Our bottomline estimate ranges from breakeven to a net loss of $3 million for the full year. In addition, if Schering-Plough receives FDA approval of its NDA for an OTC ZEGERID product, we will earn a $20 million regulatory milestone. Therefore, if the FDA approval occurs in 2009, it will positively impact our financial outlook in the current year.

With those comments, I’d like to turn the call over to Bill Denby.

Bill Denby

We have entered 2009 with solid growth momentum in both ZEGERID and GLUMETZA. With ZEGERID, new and total prescriptions grew sequentially grew starting in the second quarter of 2008 and throughout the balance of the year. From a seasonality point of view, the first quarter is typically the softest quarter of the year for prescription growth.

In 2008, new prescriptions decreased 1.2% in the first quarter, but then they increased 1.6% in the second quarter, 3.5% in the third quarter, and 6.5% in the fourth quarter. Each compared with a proceeding quarter. Likewise, total ZEGERID prescriptions were sequentially flat, 0.4% in the first quarter of 2008, up 3.9% in the second quarter, up 5.5% in the third quarter, and 7.3% in the fourth quarter of 2008. In fact, we reported double digit ZEGERID prescription growth during the fourth quarter of 2008 over the prior year period while branded PPIs as a group declined.

In the fourth quarter of 2008, total ZEGERID brand prescriptions of approximately 297,000 were up 17%, and ZEGERID capsule prescriptions of approximately 270,000 were up 21%. Both compared with 2007 fourth quarter. In that same period, total prescriptions for the branded PPIs, Nexium, Prevacid, and Aciphex, as a group declined approximately 5% in the 2008 fourth quarter compared with 2007 fourth quarter. For the full year 2008, total ZEGERID prescriptions were up more than 26% compared with 2007. Prescriptions for the three promoted delayed release brands as a group declined by more than 6% for that same period.

We have been able to promotionally competitive and have maintained our share of voice in 2008 while effectively managing our promotional spending on ZEGERID. We were able to achieve double digit growth in total prescriptions which we believe was due to our accumulative promotion effort over time. Our commercial team has consistently delivered messages about what we believe are ZEGERID’s advantages.

We have also worked to optimize our physician targets throughout the year. Our marketing research indicates that awareness of ZEGERID brand has increased with our targeted gastroenterologist and our primary care physicians in 2008 compared with 2007, reaching levels that we believe are comparable to those of other branded PPIs in the same positions. For example, in 2008, ZEGERID awareness was 88% with our targeted primary care physicians and 95% with targeted GI docs, both all time highs.

In late January 2009, Takeda’s new PPI drug KAPIDEX was approved by the FDA, and Takeda has recently began launch activities. Takeda’s PPI drug Prevacid will face the expiration of patents and exclusivity in the fourth quarter of this year, and Takeda may be focused on converting Prevacid sales to KAPIDEX. We believe that Takeda is likely to direct significant promotional dollars to the launch of KAPIDEX in 2009. History tells us that the launch of a new PPI into the market may impact market dynamics for several quarters. However, we believe that KAPIDEX will have the most significant impact on Prevacid sales.

To sum on ZEGERID, we posted a solid 26% prescription growth. Product awareness is at historical highs. New prescriptions reached record levels in the fourth quarter, and we reduced expenses. Importantly, ZEGERID prescriptions continue to grow in the second half of 2008 even after the termination of our agreement with Otsuka America, a move that significantly reduced the overall cost of our selling efforts.

Now turning to GLUMETZA, in October, we began promoting this extended release formulation of metformin as an adjunct to diet and exercise for the treatment of type 2 diabetes, and we are encouraged by our initial results. The success of our sales force can be seen in new prescription growth of 6% in the fourth quarter compared with the third quarter, following sequential quarterly declines in prescriptions during the first three quarters of 2008. Likewise, total prescriptions were up more than 2% in the fourth quarter after declines of 4% in each of the prior two quarters. These results exceeded our expectations which were to stabilize GLUMETZA prescriptions during the first three to six months of promotion.

Our marketing messaging for GLUMETZA focuses on the potential to bring patients to optimal levels of glycemic control with fewer discontinuations of therapy due to GI side effects. In a pivotal clinical trial, significantly more patients reached their glycemic control with GLUMETZA at 2000 mg taken daily than with immediate release of metformin at 1500 mg per day. Many patients do not reach the ADA recommended level of glycemic control due their inability to tolerate the GI side effects associated with higher dosages of metformin.

Our commercial organization has welcomed the addition of GLUMETZA with great enthusiasm due to the advantages I just described, and more importantly, we are finding that physicians are receptive. With a good start in the 2008 fourth quarter, we plan to build a solid and growing base of GLUMETZA business over the long term.

Price increases were implemented for both ZEGERID and GLUMETZA in January of this year. As Debbie mentioned, the price increase for ZEGERID was approximately 9% for the capsule and 7% for the powder. The GLUMETZA pricing action was 8% on both the 500 mg and the 1000 mg dosage strength. With these price increases, ZEGERID and GLUMETZA both remain competitively priced compared to the branded competition. ZEGERID continues to be priced between 7% to 11% below the leading PPI brands, while GLUMETZA is 18% to 21% under Fortamet, the other promoted brand of metformin. We intend to build on the growth momentum of our ZEGERID franchise by continuing to capture PPI market share, and we are excited and optimistic about the GLUMETZA opportunity.

Now before turning the call over to Dr. David Ballard who will provide a brief update on our two lower GI product candidates, I’d like to briefly discuss the IBD market in the US. IBD affects an estimated 1.2 million Americans, including more than 730,000 patients with ulcerative colitis and more than 480,000 with Crohn’s disease. As Jerry mentioned, US retail sales of prescription pharmaceuticals for the treatment of IBD were approximately $1.2 billion for the year ended December 2008. Treatments for ulcerative colitis are aimed at inducing remission of inflammation and its symptoms and maintaining remission.

Currently, the first line pharmaceutical therapy for ulcerative colitis is treatment with a systemic or topical 5-ASA drug. However, a significant number of patients taking 5-ASA may experience adverse events such as nausea, vomiting, and diarrhea. Selected treatments for IBD in the US include P&G’s Asacol, the largest selling 5-ASA with $600 million in sales in 2008 according to IMS. Asacol is dosed with two 400-mg tablets three times a day for induction therapy. The next largest product in the 5-ASA category is Shire’s Pentasa with IMS sales of $190 million. Pentasa is dosed with either two or four tablets depending on the dose and strength and at four times a day for induction. Asacol and Pentasa are older 5-ASA products with dosing schedule that may make compliance difficult.

Entocort EC is a budesonide product indicated for the treatment of Crohn’s disease which is dosed with one tablet three times a day. Entocort EC had IMS sales of approximately $150 million in 2008, growing approximately 28% over 2007. Entocort EC is promoted by Prometheus Labs. And as Jerry mentioned, Lialda is the newest entrant to the IBD market with 2008 IMS sales of $143 million, up 170% over 2007. Lialda is dosed with 2 to 4 tablets once daily. We hope to demonstrate that Budesonide MMX can be used to treat ulcerative colitis with limited systemic side effects. We also believe that Budesonide MMX, a potential dosing schedule of 1 tablet once daily will be a significant advantage for patient convenience and compliance.

Now, David Ballard will discuss our clinical programs.

David Ballard

I’ll start with the review of clinical development activities for Budesonide MMX which is currently being studied in two multicenter double-blind phase III clinical trials in North America and Europe to evaluate induction of remission in patients with mild or moderate active ulcerative colitis. In each trial, patients are being doses with Budesonide MMX at either 6 mg or 9 mg once daily compared to placebo over an 8-week course of treatment. A fourth arm to compare an active reference drug is included in each trial. With the US registration trial using Asacol tablets and the European trials using Entocort enteric coated capsules as the active comparators. The trials are expected to enroll approximately 900 patients or more than 100 patients per ARM.

The primary endpoint of the phase III clinical trials is the percentage of patients achieving clinical remission in each of the Budesonide MMX groups versus placebo groups after 8 weeks of treatment. Clinical remission will be measured by an ulcerative colitis disease activity index score. Specific measurements will include rectal bleeding, stool frequency, mucosal appearance, and the physician’s rating of disease activity. The reference arms are not powered to show statistical difference between Budesonide MMX and the reference drug. Patient enrollment began in mid 2008 in Europe and in the third quarter of 2008 in the US registration trial. Assuming planned patient enrollment, we currently expect that we will have preliminary results from the phase III program excluding the extension trial during the first half of 2010 and assuming successful and timely completion of the phase III program including the extension trial, we plan to submit an NDA for Budesonide MMX to the FDA in 2011.

Turning to the Rifamycin SV MMX product candidate, a pre-IND meeting was held with the FDA in January 2009. Because Rifamycin SV has not been approved for any indication in the US, it is a considered a new molecular entity and will require additional development activities to be completed before the IND application can be submitted. These studies include a multiple dose pharmacokinetics study and a single dose food effect clinical study in healthy volunteers as well as a genotoxicity study in an appropriate animal species and a reproductive toxicity study.

Cosmo plans to undertake and pay for these studies. So assuming successful completion of these activities, we would expect to file an IND and initiate the phase III US registration trial in traveler’s diarrhea in the first half of 2010. The size of the phase III clinical program is still being discussed with the FDA and will need to provide an adequate safety database of approximately 1000 patients exposed to Rifamycin SV MMX. As we have previously discussed, we will conduct and pay only for the phase III US registration trial while Cosmo and its European partner are responsible for the European phase III clinical trial. Both trials are intended to support US regulatory approval. We will seek to set up the US registration study at centers and countries where traveler’s diarrhea occurs with frequency, using sites outside of the US that had been vetted in prior studies in this area.

I’d now like to turn the call back to Jerry.

Jerry Proehl

Before opening the call to questions, I want to emphasize that we are building on our 2008 momentum and are optimistic about our prospects in 2009. We are executing on our strategy to build Santarus into a premiere specialty pharmaceutical company. In the near term, we remain focused on increasing ZEGERID and GLUMETZA revenues and managing our expenses. Over the medium term, we are seeking to diversify our sources of revenue through our OTC license agreement in the US and our license agreement with Glaxo-SmithKline in international markets. IMS data indicate that the PPI sales continue to grow in excess of 20% in the covered international markets licensed to GSK. Over the longer term, we’ll aim to move our lower GI compounds successfully through late stage clinical development.

I would now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions).

Jerry Proehl

While we are waiting for questions, I’d like to mention that we will be presenting at the 29^th annual Cowan and Company healthcare conference on Tuesday, March 17^th at the Boston Marriot Copley Place. We look forward to meeting you in person if you are planning to attend. A web cast of our corporate presentation will be available on the Santarus website. Operator, we are ready for the first question.

Operator

Your first question comes from the line of David Amsellem with Piper Jaffray.

David Amsellem – Piper Jaffray

Do you have any IP separate from the orange book, listed IP on the capsules, and do you have any IP pending around that formulation. Secondly, is it reasonable to assume that there won’t be any three years of hatch protection for the tablet?

Jerry Proehl

To address your last question, there is no additional three years of exclusivity on the tablet. The University of Missouri has filed patents that cover the tablet formulation and Santarus has also filed separate patents that cover the tablet formulation. The Santarus patent would actually go beyond the 2016 date that the Missouri patents would cover.

David Amsellem – Piper Jaffray

Can you say how many shares you are assuming in your 2009 guidance, and actually, put in another way, how many shares did you issue to Cosmo?

Debbie Crawford

We have issued 6 million shares to Cosmo in December, so at December 31^st, we had 57.8 million shares outstanding. There is a provision in the agreement with Cosmo whereby as certain milestones are achieved, Cosmo would have the option of obtaining payment for those milestones in shares or cash, so at this time we are not predicting what Cosmo would decide to do, so at this time, we are not assuming any significant additional issuance of shares.

Operator

(Operator Instructions) Your next question comes from the line of Larry Smith with DLS Research.

Larry Smith – DLS Research

Jerry, in posting a 9% price increase for ZEGERID, what does that really mean in terms of the effective price increase across the whole ZEGERID product line? You obviously have some accounts which are contracted where the price increase probably doesn’t mean a whole lot, but what does it really mean in terms of the weighted average price increase on ZEGERID in 2009?

Jerry Proehl

Certainly we don’t get into the specifics on each of the individual accounts. What I will say is as you mentioned we contract with managed care accounts, we contract with the government. Some of those contracts are written such that those accounts get a net price, so when you take a pricing action, that pricing action won’t actually end up being passed on to those accounts. Other accounts, we negotiate a deal where we can actually pass on some of that price increase. Sometimes it’s the full price increase, sometimes it is a portion of the price increase, and then obviously there is business that is non-contracted business that we would be able to get the full price increase, so you are right, ultimately it’s not the full 9%. It’s something less than that, but we haven’t gotten into the specifics of what would be.

Operator

Your next question comes from the line of Greg Gilbert with Bank of America.

Greg Gilbert – Bank of America

How do we differentiate the tablet form from the current form in the market place, and secondly, does Schering-Plough expect to get three years of exclusivity for the OTC form?

Jerry Proehl

To address the first question, what we said about the tablet formulation to this point is that it is a combination of omeprazole in a multi-buffer system. For competitive reasons, we have not disclosed anything else about the products. There are some differential features that we believe through some discussion with our customers that our customers would appreciate, but we are not getting into specifics because quite honestly we don’t want to disclose any more information about our tablet at this point in time. As far as Schering-Plough, we can’t comment specifically on their particular regulatory strategy. That’s something that you will have to address directly with them.

Operator

Your next question comes from the line of John Szabo with Flintridge Capital.

John Szabo – Flintridge Capital

Just a question regarding how the script trend should unfold over 2009. Where you suggesting that it should follow a similar pattern to last year where it was a little bit soft in the first part of year and then accelerated. Do you expect to see that? Again, is that what you were saying?

William C. Denby

Yes. I think that’s generally correct. I think we talked about KAPIDEX a little and the fact that there are going to spend a lot of money trying to covert their business over to KAPIDEX, so we have tried to some of the impact of that launch on to ZEGERID, but generally that’s correct. I think the first quarter is soft and then we will see an acceleration through the second, third, and fourth quarters.

John Szabo – Flintridge Capital

Are you going to adjust your promotion of ZEGERID to try to defend it during that launch or do you think that that may not be money well spent while they are doing that? How do you think about?

William C. Denby

The way we think about it here is really to try and not have that be a distraction and stick to the ZEGERID advantages we have described in prior calls and our advantages in terms of pH control and the studies we have done in terms of head to head comparisons of our product, and we really want to try and not to be distracted and get the conversation focused on ZEGERID whenever we’re having those with docs.

John Szabo – Flintridge Capital

Do you actually have the script data for the fourth quarter for GLUMETZA?

Debbie Crawford

Yes. I believe that scripts for GLUMETZA were about 61,000, and that was slightly more than 2% over the third quarter.

John Szabo – Flintridge Capital

The 20-23 that you are projecting for ’09, would that exclude any potential milestone payments that might be made or is there some assumption in there about that?

Debbie Crawford

With regards to the guidance, we’ve really tried to look at what our total exposure would be, and it would be primarily related to the programs themselves, the clinical activity.

John Szabo – Flintridge Capital

That’s only for the 50% of the phase III?

Debbie Crawford

It’s 50% of the phase III program for budesonide, so it’s our half of the European study as well as only half of the cost of the US study and the extension trial.

John Szabo – Flintridge Capital

So if you do have to make a payment, that would be considered separate then, right as progress payment on the regulatory?

Debbie Crawford

We have not anticipated the need to make milestone payment in 2009.

John Szabo – Flintridge Capital

On the cash flow from operations, you did make the cash payment of $2.5 million to Cosmo in the quarter?

Debbie Crawford

Yes, that’s correct, so that is reflected in that number.

John Szabo – Flintridge Capital

Do you think that you can replicate that run rate going forward?

Debbie Crawford

We haven’t really provided any quarterly guidance or any specific guidance on cash flow, but I think it’s fair to say that first quarter typically is one that has payment outflows that don’t generally occur in other parts of the year, for example, bonus payments that are annual, so I would not expect to be able to replicate that in each quarter. I think probably it’s more important to look at the overall guidance for the year with respect to bottomline.

John Szabo – Flintridge Capital

You did make the $2.8 million payment in January?

Debbie Crawford

The payment for the clinical cost to Cosmo, yes. That was $3.9 million.

John Szabo – Flintridge Capital

3.9 or 2.9?

Debbie Crawford

What we accrued through the end of the year related to clinical cost was 3.9. We also had paid 2.5 in December as part of the license fee. One other thing that will happen in first quarter is the $2.5 million sales milestone to University of Missouri which would be on top of the run rate royalties that we typically pay quarterly.

John Szabo – Flintridge Capital

Will that be paid in cash in the first quarter?

Debbie Crawford

Yes.

John Szabo – Flintridge Capital

You have been accruing for that, right?

Debbie Crawford

That’s correct. The full 2.5 is accrued in our total year 2008 result.

John Szabo – Flintridge Capital

Could you help me with the tax, and I guess maybe we will see a little bit more this when you file your 10K. Hypothetically, if you were to get that payment from Schering, and based on your current guidance, that would make you profitable for the year, would you release whatever valuation allowance you have on the deferred tax assets and then report a full tax rate and then go against the deferred tax asset? How is that going to work and what have you assumed in your guidance?

Debbie Crawford

Our guidance does not include the Schering-Plough 20 million, so I think it is probably a little premature John to talk about if we were to receive that money how we will report taxes. Maybe that’s something we can just continue to monitor as we move through the year.

John Szabo – Flintridge Capital

Is there going to be any material difference in the deferred tax versus the ’07 number?

Debbie Crawford

Well, it’s something that has to be assessed at a point in time based on the company’s outlook at that time. I would say that we did complete our analysis of our ability to utilize our NOL from a 382 point of view, and at the end of December, we felt that we had no limitations, so we feel good about that that we have about $200 million in net operating loss carry forward.

John Szabo – Flintridge Capital

So under any circumstance you could foresee, you wouldn’t see paying cash taxes other than the fact that the State of California is not allowing you to take that for the next year?

Debbie Crawford

I think yes. The State of California, there are some other state liabilities that aren’t necessarily tied to just income, but also there is federal alternative minimum tax, so I think it’s fair to say those are the types of the taxes we would be subject to in ’09 if we were to have taxable income.

John Szabo – Flintridge Capital

Just going back to the commentary about how the scripts are going to roll out for ’09, is there any evidence that the economy is having any impact or is GLUMETZA for example on a different trajectory because of the marketing ramp or any commentary on that?

Jerry Proehl

I will talk about ZEGERID, and then we talk about GLUMETZA. If we look at ZEGERID throughout 2008, each of the quarters we actually showed improved growth in ZEGERID itself. That may mean that based on the financial markets, there’s a lot of people with heartburn out there, and we’re getting a lot of use of ZEGERID. As it relates to GLUMETZA, what we were very happy with is we saw a decline of 4% in Q2 and Q3 on prescriptions of GLUMETZA, and many times it takes at least a quarter or two to stop that decline, but what we found is within the first few weeks, we were already growing new prescriptions, so we actually think that there are lots of upside potential on GLUMETZA as we get out there and get the message out about the product and some of the advantage of GLUMETZA.

I think the other thing is that doctors are really seeing not only the side effects but some of the other potential safety issues and some of the newer diabetes products, and many doctors are going back to metformin and really trying to figure out how do they push the dose of metformin to get glycemic control, and that’s the message we are trying to deliver with GLUMETZA, and we think it’s a very message that doctors are very receptive to.

Operator

Your next question is a followup from the line of Larry Smith with DLS Research.

Larry Smith – DLS Research

In terms of your guidance, our country is facing an economic crisis which is unprecedented since the Great Depression, and indeed I think this period is probably going to be classified as a depression. Some of the major pharmaceutical companies are warning of pressure on pricing and also loss of health insurance impacting prescriptions. How can we have any confidence in guidance in a period where there’s no precedent; you can’t take the past and extrapolate in the future because the future is an entirely new world. So, when you issue guidance, and I believe Debbie, you issued guidance of $145 million of total revenues, how can you have any confidence that that may indeed actually be a good number?

Gerald T. Proehl

Larry, I think obviously we try to take into account what we think the trends have been on our products, the economic environment, as well as the competitive environment that’s out there. I understand the situation with many pharmaceutical companies I think as it relates to the PPI market, as you are well aware, the PPI market has been a very very high price-sensitive marketplace for a number of years. There are certainly lots of other products and other categories that maybe haven’t been or are neat the pricing controls that the PPIs have been under, and in those cases I think pharmaceutical companies are probably that they’re going to be under more controls, but we’ve seen this for quite a few years. This market has had generic omeprazole for quite a few years and so we believe that our guidance is something that we can meet or exceed; otherwise we wouldn’t provide the guidance.

Larry Smith - DLS Research

If I could follow up to that; Debbie, I believe your guidance was $145 million of revenues for 2009?

Debra P. Crawford

Yes, that’s correct.

Larry Smith - DLS Research

Now, if I took the fourth quarter and annualize it, and I realize that that’s the wrong thing to do because there is a discrepancy in quarterly revenues, but if I annualize the fourth quarter, I get $148 million in revenue. How do you rationalize $145 million versus annualizing the fourth quarter, and again, I recognize it’s wrong to do that, but if you annualize the fourth quarter, it’ll come out to be $148 million versus your guidance of $145 million?

Debra P. Crawford

I think for all the factors that you just mentioned Larry, in addition to our assessment of what could be some changes in the market with a new product, a new competitor with fairly significant promotionally, try to take all that into account, and I’m glad to hear you say that you recognize that you shouldn’t annualize fourth quarter because that does tend to be the strongest quarter, and you may or may not see sequential growth or even an ability to sustain that level throughout the following year. For example, with regard to even GLUMETZA, we felt very good our promotion revenue in the fourth quarter specially in light of what we paid for the product rights, but there were some accounting changes that Depomed had implemented in the third quarter whereby they converted from recognizing revenue based on prescriptions to recognizing revenue based on shipments; you have the launch of the 1000 mg, and so you do have some of those variations also to take into account when you think about fourth quarter versus the total year. So, that’s what we’ve tried to do in providing the guidance that we’ve provided.

Larry Smith - DLS Research

Jerry, if I could ask you, it’s strange to the imagination to think that there is much novelty in a formulation, a ZEGERID tablet formulation; am I wrong in assuming that? Is there some novelty so that the IP surrounding ZEGERID tablet could really be important to the company?

Gerald T. Proehl

What I would say Larry is that when we first launched ZEGERID most doctors thought there was probably little novelty in ZEGERID compared to delayed-release Prilosec and I think we’ve been able to demonstrate that there was differentiation. When it comes down to it I think it’ll be our job to demonstrate that with ZEGERID tablet that there is some differential advantages to the product that benefit the patient, and certainly we believe that there is and when we go ahead and get the product approved, then we’ll be out there in the marketplace talking to doctors about the differences.

Larry Smith - DLS Research

Jerry, I have a lot of confidence that you can convert the capital into tablets, but I’m wondering about the IP as it relates to generic challenges.

Gerald T. Proehl

As I said we’ve certainly filed additional patents. Whether or not the patent office issues us those patents, we’ll have to wait and see. Again, when you formulate products you find some things out, sometimes there are unique things and you try to go ahead and put the patents into the PPO and see if you can see patents issued; so we believe there are some unique characteristics in the product.

Larry Smith - DLS Research

What are those unique characteristics?

Gerald T. Proehl

As I said before, for competitive reasons we’re not disclosing anything other than that it’s a combination of omeprazole and mix of buffers.

Operator

Your next question comes from the line of Andrew Levin - Tang Capital.

Andrew Levin - Tang Capital

Just have three quick questions; first one to confirm on the GLUMETZA, it was just an 8% price increase in January?

Gerald T. Proehl

That’s correct.

Andrew Levin - Tang Capital

When was the last price increase?

Gerald T. Proehl

I believe the last price increase was I think around April of 2007; we weren’t directly involved with the product at that point in time, but I think it was around that timeframe.

Andrew Levin - Tang Capital

Finally, given the 8% price increase in January, what’s the current run rate?

Debra P. Crawford

Prescriptions in the fourth quarter were about 61,000.

Andrew Levin - Tang Capital

Alright, I can calculate it then.

Operator

Your next question is a followup from the line of Larry Smith - DLS Research.

Larry Smith - DLS Research

Jerry, I don’t think you’re going to answer this question, but it just boggles the mind to think that you get a complete response on a combination of omeprazole plus baking soda. Omeprazole is already approved in the market. What possible questions can the FDA have that would warrant a complete response to you guys? Or is it a Schering plan?

Gerald T. Proehl

All I’ll say Larry is that baking soda is also available in the OTC market through Alka-Seltzer; there are certainly things that the FDA wants to make sure that they see. Schering is working with the FDA very closely and beyond that we can’t really disclose anything else. We feel that ZEGERID is a safe and effective product, and quite honestly I think it’s going to be an outstanding OTC product that is going to benefit many patients once the product gets approved, but beyond that we can’t really disclose anything else.

Larry Smith - DLS Research

And if I might ask you a question on GLUMETZA; I am not sure this applies to the situation, but sometimes when a product transfers from one marketing organization to the other, prior to the transfer, they jam the pipelines with inventory, and I’m wondering if that is the case with GLUMETZA that you were going into a glutted inventory of pipeline situation, and whether we should look at the $5.1 million of revenues in the fourth quarter as something to base our estimates for 2009 or whether we should adjust it for some reason like there was indeed stuffing in the pipeline?

Debra P. Crawford

I certainly would not characterize any of Depomed’s activities as inappropriate. I think they have put into the pipeline what they feel are appropriate quantities of products, but I do think when you launch a new dosage strength as we just have the 1000 mg, you could have a situation where it may take a quarter or two to work through the inventories. So, I think as we discussed before, and I would just clarify GLUMETZA promotion revenue was $4.7 million in the fourth quarter, that I don’t think that is necessarily appropriate to assume that level of promotion revenue in the first quarter given the launch activities on the 1000 mg. so, it’s probably more appropriate to look at the 500 mg and its prescription trends because I think it’s been on the market for some time and I think the inventory levels and more traditional in the pipeline.

Operator

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Gerald T. Proehl

I’d like to thank each of you for your interest and your questions in Santarus and for joining us for this call. We’re pleased to report record revenues in the fourth quarter, record sales of ZEGERID, and traction we’re seeing of early promotion of GLUMETZA. We’re excited about the potential we see in the development and commercialization of budesonide MMX and rifamycin SV MMX, and we look forward to keeping you apprised of our progress and brining them to market. If you have any further questions, feel free to contact me, Debbie Crawford, or Martha Hough. Thank you and have a great night.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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