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Santarus, Inc. (NASDAQ:SNTS)

Q3 2013 Earnings Conference Call

November 07, 2013 4:30 PM ET

Executives

G. Michael Freeman – Associate Vice President, Investor Relations and Corporate Communications-Salix Pharmaceuticals, Inc.

Adam C. Derbyshire – Executive Vice President and Chief Financial Officer-Salix Pharmaceuticals, Inc.

Carolyn J. Logan – President and Chief Executive Officer

William P. Forbes – Executive Vice President-Medical, Research and Development and Chief Development Officer

Analysts

Gregg Gilbert – Merrill Lynch, Pierce, Fenner & Smith, Inc.

David A. Amsellem – Piper Jaffray, Inc.

Jason M. Gerberry – Leerink Swann LLC

Tim F. Lugo – William Blair & Co. LLC

Andrew J. Finkelstein – Susquehanna Financial Group LLLP

Irina Rivkind – Cantor Fitzgerald Securities

Mario V. Corso – Mizuho Securities USA Inc.

Gary J. Nachman – Goldman Sachs & Co.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc

John L. Newman – JMP Securities LLC

Operator

Good day, and welcome to the Salix Pharmaceuticals Third Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Freeman. Please go ahead, sir.

G. Michael Freeman

Good afternoon. Thank you for joining us today. I am Mike Freeman, Associate Vice President of Investor Relations and Corporate Communications for Salix Pharmaceuticals.

With me today are Carol Logan, President and Chief Executive Officer; Adam Derbyshire, Executive Vice President and Chief Financial Officer; and Bill Forbes, Executive Vice President, Medical, Research and Development and Chief Development Officer.

Adam will begin the presentation with a review of financial results for the third quarter of 2013. Carol will then review operations for the quarter and then comment on today’s news regarding the definitive merger agreement under which Salix will acquire all of the outstanding common shares of Santarus for $32 per share in cash. At the conclusion of these comments, management will respond to appropriate questions.

Various remarks that management might make during this conference call about future expectations, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our press releases and SEC filings, including our Form 10-K for 2012. Specifically, the information in this conference call related to projections, development plans and other forward-looking statements, is subject to this Safe Harbor.

I now will turn the call over to Adam.

Adam C. Derbyshire

Thank you, Mike. Total product revenue was $238.2 million for the third quarter of 2013, a 29% increase compared to $185.1 million for the third quarter of 2012. Total product revenue for the first nine months of 2013 was $676.2 million, a 26% increase compared to $537.3 million for the first nine months of 2012.

XIFAXAN revenue for the third quarter of 2013 was $165.9 million, a 20% increase compared to $137.9 million for the third quarter of 2012. XIFAXAN revenue for the first nine months of 2013 was $469.8 million, a 28% increase compared to $367.5 million for the first nine months of 2012.

APRISO revenue for the third quarter of 2013 was $38.1 million, a 93% increase compared to $19.7 million for the third quarter of 2012. APRISO revenue for the first nine months of 2013 was $91.5 million, a 62% increase compared to $56.6 million for the first nine months of 2012. We’ve provided a table in our third quarter press release issued earlier today, which provides more detail of net product revenues.

Total cost of products was $42.9 million for the third quarter of 2013 and $122.5 million for the first nine months of 2013, compared to $26.5 million for the third quarter and $93.9 million for the first nine months of 2012. Gross margin on total product revenue, excluding $11.2 million and $11.3 million in amortization of product rights and intangible assets, for the three periods ended September 30, 2013 and 2012, respectively, was 82% and 86%.

Gross margin on total product revenue, excluding $33.5 million and $34 million in amortization of product rights and intangible assets, for the nine-month periods ended September 30, 2013 and 2012, respectively, was 82% and 83%. Gross margin fluctuates from quarter-to-quarter due to product mix. We continue to believe gross margin on total product revenue for 2013 to be approximately 82%.

Research and development expenses were $38.2 million for the third quarter of 2013 and $113.7 million for the first nine months of 2013, compared to $32.8 million and $86.7 million, respectively, for the prior year periods. The increase in research and development expenses for the third quarter of 2013 compared to the third quarter of 2012 was due primarily to the costs associated with the XIFAXAN retreatment study known as TARGET 3.

Selling, general and administrative expenses were $67.2 million for the third quarter of 2013 and $223.8 million for the first nine months of 2013, compared to $61.5 million and $187.3 million, respectively, for the prior year periods. The increase in selling, general and administrative expenses for the third quarter of 2013 compared to the third quarter of 2012 was primarily due to increased personnel cost and increased legal expenses.

The Company reported GAAP net income of $47.3 million, or $0.71 per share, fully diluted, for the third quarter of 2013, and $90.8 million, or $1.40 per share, fully diluted, for the nine-month period ended September 30, 2013.

For the three-month period ended September 30, 2013, earnings before interest, taxes, depreciation, stock-based compensation expense and amortization and the noncash charge in acquisition-related contingent consideration known as EBITDA, was $98.6 million, and the non-GAAP net income was $59.8 million, or $0.89 per share, fully diluted. Non-GAAP net income is comprised of EBITDA, adjusted for cash interest expense and interest income and a provision for income taxes based on non-GAAP income before tax.

For the three-month period ended September 30, 2013, non-GAAP net income with income taxes provided on a cash basis, was $70.7 million or $1.06 per share, fully diluted. We believe these non-GAAP measures might provide investors additional relevant information, in part for purposes of historical comparison. In addition, we use these non-GAAP measures to analyze our performance in more detail and with better historical comparability.

However, you should be aware that non-GAAP measures are not superior to nor a substitute for the comparable GAAP measures, and these non-GAAP measures might not be comparable to similar-named measures disclosed by other companies. We’ve provided a table in our third quarter press release issued earlier today, which provides a reconciliation of actual results and future guidance for these non-GAAP measures to the most closely related GAAP measures.

Cash and cash equivalents were $817.7 million as of September 30, 2013, and $852.1 million as of October 31, 2013. XIFAXAN 550 continued to perform well during the third quarter of 2013, as demonstrated by impressive prescription growth of 24% compared to the third quarter of 2012. APRISO also demonstrated a strong prescription year-over-year growth of 53% in the third quarter of 2013 compared to the third quarter of 2012. RELISTOR prescriptions increased 28% year-over-year for the third quarter of 2013, compared to the third quarter of 2012.

We continue to believe total Company revenue for 2013 will be approximately $920 million, representing 25% growth over 2012 revenue. Excluding expenses associated with the pending acquisition of Santarus, we continue to believe we’ll be able to generate EBITDA for 2013 of approximately $353 million, representing 37% growth over 2012 EBITDA.

Non-GAAP net income for 2013 should be approximately $211.1 million, or $3.20 per share fully diluted, for the full year ending December 31, 2013. For the full year ending December 31, 2013, non-GAAP net income with income taxes provided on a cash basis should be approximately $243.1 million, or $3.68 per share, fully diluted.

The current annualized run rates, based on dollarizing September 2013 prescription data for XIFAXAN, MOVIPREP/OSMOPREP, APRISO, RELISTOR and our other products, are approximately $630 million, $106 million, $128 million, $46 million and $48 million, respectively. Based on the full year 2013 guidance provided above, for the fourth quarter of 2013, we anticipate total product revenue to be approximately $243.8 million and EBITDA, excluding expenses associated with the acquisition of Santarus, to be approximately $102.5 million.

Non-GAAP net income for the fourth quarter should be approximately $61.7 million or $0.90 per share, fully diluted. For the three-month period ending December 31, 2013, non-GAAP net income, with income taxes provided on a cash basis, should be approximately $69.6 million or $1.01 per share, fully diluted.

I now will turn the call over to Carolyn Logan, our President and CEO.

Carolyn J. Logan

Thank you, Adam. XIFAXAN 550 for the treatment of hepatic encephalopathy continues to demonstrate sustained growth and market penetration. During the past 12 weeks, XIFAXAN 550 achieved a record high level of total prescriptions in 10 of those 12 weeks.

In October, the American Liver Foundation named Salix as the National Corporate Partner of the Year. The award recognizes Salix’s contribution to the development and introduction of XIFAXAN and the Company’s support of the foundation’s efforts to educate patients and caregivers. We are honored by this recognition and believe that this award exemplifies our commitment to collaborating with health care providers, caregivers and patients to diagnose and manage hepatic encephalopathy.

This year, we partnered with the foundation to launch several initiatives, including H.E.123. H.E.123 is the most comprehensive online resource available for patients and caregivers to learn about hepatic encephalopathy. We look forward to continuing our relationship with the American Liver Foundation in our mutual effort to lessen the burden of liver disease.

During the third quarter of 2013, APRISO, our once-a-day treatment for the maintenance of remission of ulcerative colitis, continued to benefit from changes in the marketplace. Since the beginning of 2013, APRISO’s share of the branded 5-ASA market for ulcerative colitis has increased 40%, and the product currently holds approximately 12.5% market share. The number of APRISO prescriptions sold during the first nine months of 2013 equals the total number of prescriptions sold during the entire year of 2012.

During the quarter our HIV therapeutic specialists and the Futura specialty sales force continued our launch of FULYZAQ for the symptomatic relief of non-infectious diarrhea in adult patients with HIV or AIDS who are on anti-retroviral therapy. We are pleased to announce that the FULYZAQ Patient Assistance Program has been launched and is now serving both underinsured and uninsured patients who meet the predefined eligibility criteria.

Additionally, several state AIDS Drug Assistance Programs or also called ADAPs, added FULYZAQ to their formularies during the third quarter. We continue to leverage our expertise in gastrointestinal medicine in order to effectively deliver this much-needed treatment to patients.

On October 1, we announced that the FDA would convene an Advisory Committee on March 10 and 11, 2014, regarding our Supplemental New Drug Application, or sNDA, for RELISTOR for opioid-induced constipation in patients with chronic pain. The FDA intends to seek input from this Advisory Committee prior to answering the Company’s formal appeal to a complete response action that the FDA took on July 27, 2013 regarding our RELISTOR sNDA.

We remain hopeful that a path forward can lead to the expansion of the use of this new and alternative therapy to treat OIC in patients suffering chronic pain. The FDA has stated that it will take action under the appeal within 30 days after receiving input from this Advisory Committee.

Progress continued during the third quarter with respect to TARGET 3, our Phase 3 study to evaluate the efficacy and safety of repeat treatment with rifaximin 550 milligrams TID, or three times a day, for 14 days in subjects with irritable bowel syndrome with diarrhea, which is also called IBS-D, who responded to an initial treatment course with rifaximin 550 milligrams TID for 14 days. We continue to enroll subjects into the double-blind retreatment phase of the study, and anticipate securing a FDA decision regarding approvability during the second half of 2014.

Earlier in the year, we announced statistically significant results for budesonide foam in the treatment of active mild-to-moderate ulcerative proctitis or ulcerative proctosigmoiditis in 2 Phase III studies. The company plans for an NDA submission during the fourth quarter of 2013.

During the third quarter of 2013, patient enrollment continued in our Phase II, double-blind, placebo-controlled, dose-ranging study of rifaximin, solid, soluble dispersion, or SSD tablet, for the prevention of complications of early de-compensated liver cirrhosis. Rifaximin SSD, formerly referred to as next-generation rifaximin, was formulated to maximize both the dosing efficiency, as well as the efficacy of rifaximin.

We continued discussions with the FDA during the third quarter regarding the design of the Phase III trial of extended intestinal release, or EIR rifaximin. We anticipate initiating patient enrollment in two Phase III trials by the end of 2013, with the goal of securing FDA approval to market EIR rifaximin for the treatment of Crohn's disease.

Over the course of the past several months, we continued to enhance our intellectual property positions relating to XIFAXAN, FULYZAQ and RELISTOR. We secured an additional pharmaceutical formulation patent containing a rifaximin polymorph that should provide protection until 2026 and a patent covering the formulation, methods of administering and methods of making the extended intestinal release formulation of rifaximin that should provide protection until 2027.

We secured a formulation patent covering our RELISTOR syringe, vial, prefilled syringe and multi-dose pen products that should provide protection until 2024, and a formulation patent covering our oral RELISTOR product that should provide protection until 2031. We also secured a method of treatment patent covering FULYZAQ that should provide protection until 2018.

Earlier this afternoon, Salix and Santarus announced that the companies have entered into a definitive merger agreement, under which Salix will acquire all of the outstanding common stock of Santarus for $32 per share in cash without interest. The all-cash transaction values Santarus at approximately $2.6 billion. The $32 per share price represents a 36% premium over Santarus' November 6, 2013 closing price of $23.53 per share and a 39% premium over Santarus' average closing stock price for the prior 30-day trading period.

The proposed transaction has been unanimously approved by the Boards of Directors of both Salix and Santarus. We expect to close the transaction in the first quarter of 2014. We view this acquisition as transformative, both commercially and financially for Salix. The combination of the two companies fulfills many of our strategic needs, while providing immediate and significant accretion in 2014 and beyond.

We're very pleased to be able to merge our sales forces, combine two complementary product portfolios, expand our pipeline, diversify revenue, access health care providers in primary care and add a significant number of healthcare prescribers to our called-on universe.

We look forward to combining the assets of both companies in order to create a larger, even stronger company with greater scope and impact than either company could offer independently. This strategic combination positions us to further strengthen our presence in the gastroenterology market and also to expand our digestive disease expertise into the primary care market.

I would like to take this opportunity to compliment and thank Gerry Proehl, his management team and all the Santarus employees for their hard work in building Santarus into a premier specialty biopharmaceutical company. Salix looks forward to the opportunity to build on Santarus' success.

Additionally, I'd like to thank all of our stakeholders for their ongoing confidence in, and commitment to, our success. We look forward to all of our stakeholders, patients, healthcare providers, employees and stockholders benefiting from the increased scale created by a larger, even stronger Salix.

Salix has grown significantly since the launch of our first commercial product in 2001. For the past 13 years, we've been striving to achieve and continue our mission of being the leading gastroenterology-focused specialty pharmaceutical company. This acquisition clearly solidifies achievement of this goal and we believe creates a platform for even greater future growth and success. We believe this combination should have potential impressive impact in several aspects of our business.

Just to highlight some of the most important aspects of this pending acquisition, I'll call your attention to the fact that the combination of Salix and Santarus solidifies our leading position in gastroenterology. While each company is specialty-focused, there is no overlap in our marketed products or in development products.

The combined company offers a commercial profile of 22 marketed products, including XIFAXAN, UCERIS, GLUMETZA, APRISO, ZEGERID, MOVIPREP, RELISTOR, SOLESTA, FULYZAQ, CYCLOSET and FENOGLIDE.

The expansion of our commercial product portfolio, combined with the expansion of our sales force creates opportunities to provide more solutions for patients and healthcare providers. These are opportunities that we look forward to with great anticipation.

The combination should also provide meaningful revenue diversification. UCERIS, GLUMETZA and ZEGERID have the potential to diversify Salix's product offering and revenue base in the short-term and potential growth from recently launched UCERIS is expected to provide increased revenue diversification in the longer term.

Based on pro forma estimates, no product is expected to account for more than 50% of the combined company's revenue. We believe the transaction should create a company with a stronger and more attractive financial profile than either company could create independently.

The annualized combined company's financial results, based on the quarter ended September 30, 2013 were revenue of $1.348 billion and adjusted EBITDA of $537 million. We expect this strategic combination should generate immediate and significant accretion in 2014 and even greater earnings per share accretion in 2015.

Revenue synergies from the increased number of sales representatives in gastroenterology and the expanded presence in primary care, combined with strong growth and the realization of additional synergies should drive this accretion.

It should be noted that these revenue synergies are not included in our guidance. For 2014, we expect to generate GAAP EPS of approximately $3.85 per share, fully diluted or non-GAAP EPS of approximately $5 fully diluted. We provided a table in our press release issued earlier today that reconciles these 2014 GAAP and non-GAAP estimates. These EPS estimates assume no upside from revenue synergies, product launches or indication approvals.

And very importantly, the strong cash flow expected to be generated by the company should lead to rapid debt repayments. We are targeting over the next three years to de-lever to a debt-to-EBITDA ratio of approximately three times.

We also look forward to the combined company, creating opportunities for significant revenue synergies. Salix's increased presence in the gastroenterology market should benefit UCERIS as well as Salix's products. Additionally, the strategic combination leverages Santarus' experienced specialty sales force immediately to gain revenue synergies from Salix's existing products, while continuing to grow Santarus' products.

The creation of a third sales force in gastroenterology and hepatology will allow key GI products to have increased promotional exposure. And importantly, the addition of Santarus' experienced specialty sales force achieves Salix's goal to expand its GI products into primary care to capture significant product sales currently not accessed by the Salix sales effort.

Again, thank you for your ongoing interest in and support for Salix. This completes my formal comments and thank you for your participation in today's call.

Now, I'll turn the call over to the operator to begin the question-and-answer session. Thank you.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) we'll take our first question from Gregg Gilbert with Merrill Lynch.

Gregg Gilbert – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Thank you, good afternoon. I'll just ask three quick ones upfront. First, are there any cost synergies you're factoring in? Can you quantify those? Second, Adam, what's a good number to use for cost of debt or a range? And third, maybe for Carolyn, can you give us some color on the duration of some of the key products from the Santarus side? Thanks.

Adam C. Derbyshire

Sure. The synergies that we assumed are actually built into our guidance for 2014 and keep in mind, this is preliminary guidance. We wanted to give people an idea of where this is heading for 2014. Obviously, on our year-end call in February, when we give more specific guidance, we will be doing that on that call. So again, the synergies are built into that guidance. And your second question?

Carolyn J. Logan

Cost of debt.

Adam C. Derbyshire

Cost of debt, yes, it's in the 4% to 5% range.

Gregg Gilbert – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. And some of the key patent lives or how you think of duration for the key assets from Santarus?

Carolyn J. Logan

UCERIS has patent protection that should protect it out until 2020. And GLUMETZA and ZEGERID have a shorter life. They are going to be lost to generics in 2016, but we are aware of that and can plan for it and we are comfortable with that.

Gregg Gilbert – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Thanks. I will get back in line.

Operator

Our next question is from David Amsellem with Piper Jaffray.

David A. Amsellem – Piper Jaffray, Inc.

Thanks. Just a couple on Santarus. So I guess, the first is, are you at all concerned about the trajectory of the UCERIS prescriptions, which recently look to have slowed? And I guess, how did you think about that in your diligence on Santarus?

Santarus also has spent a lot of resources on RUCONEST. What are your thoughts on that product, given that HAE is out of your traditional wheelhouse? And what are your thoughts on Santarus' efforts to pursue development in acute pancreatitis there?

And then I guess, lastly, you've mentioned primary care. Does this mean with a primary care sales force now, that you would not necessarily need to undertake a major sales force expansion if you got label expansions in IBS for XIFAXAN or for RELISTOR? Thanks.

Carolyn J. Logan

We, David, we believe that UCERIS will greatly benefit from an increased presence in gastroenterology. And of course, we believe we'll be able to add value to that. So we think that it – we’ve seen that the product works well, that physicians who try seem to adopt it rather quickly. Our market research tells us that they see efficacy pretty rapidly with this product. There are a lot of things about this product that we like a lot. And of course, we also have what we believe could be a complementary product. If it's approved, we, of course, we're going to be filing it later this year, is our budesonide foam.

So we see those products as being able to – be able to be used complementary for ulcerative colitis patients who may need that. So no, we're not concerned. We're anxious to be able to get this transaction closed in the first part of 2014 and get our people trained on UCERIS and be able to add value there.

As far as RUCONEST, I think we don't know a lot about it at this time, from what we know. I'm sure you're familiar with the term jumping the gun. So in between announcing this deal and closing, we really can't have a lot of interaction with Santarus. They have to run their business on their own. We have to continue to run our business on our own. And I'm sure you and probably everybody on the phone is familiar with those rules.

Adam C. Derbyshire

And David, that's why – yes, that's why our projections do not include, for both Santarus and us, do not include any new approvals, new indications, product launches, no revenue synergies. So that's why we provided the projections in that way.

David A. Amsellem – Piper Jaffray, Inc.

And the sales force, the primary care sales force, we should think about eventual expansions if you got TARGET 3 in the label or OIC?

Carolyn J. Logan

Yes, I think it's safe that you could assume that. But of course, as we make those decisions, we'll keep everybody fully informed. Of course, it's kind of premature to start giving numbers on that right now. But yes, I think it would be safe to assume that we would need an additional expansion if we are granted the IBS indication.

David A. Amsellem – Piper Jaffray, Inc.

All right, thank you.

Operator

Our next question is from Jason Gerberry with Leerink Swann.

Jason M. Gerberry – Leerink Swann LLC

Sorry, I was on mute. Thanks for taking the question. I guess, some of the feedback earlier we're getting from investors is the multiple on the transaction seems a little high. And so I guess, with a number of products from the Santarus portfolio coming off patent, just kind of wondering, was there a particular pipeline asset that you were particularly attracted to? Or was the deal ultimately motivated by some cost bearing in terms of your need to invest in a primary care sales force down the road? I'll stop there.

Adam C. Derbyshire

Sure. Actually, if you look at it based on comparable companies and comparable transactions, the multiple is not much higher. And then if you look at – and that's for 2013, if you look at it against comparable companies and comparable transactions for 2014 and 2015, with or without synergies, it's actually below those multiples. So we think the multiple is fair.

Jason M. Gerberry – Leerink Swann LLC

And then, I guess, just on the opportunity for cost bearing from a primary care perspective?

Carolyn J. Logan

Yes, on that last part of your question, obviously, one of the things that we were very interested in and very excited about was being able to access that market now because we realize that with XIFAXAN 550, that there is a lot of potential there in hepatic encephalopathy patients. Our market research has shown us that somewhere in the neighborhood of 25% to 30% could be even a little bit more than that, is treated by the primary care physician audience. And up until now, we have not really had much of an access to that market. So that was very exciting to us.

Jason M. Gerberry – Leerink Swann LLC

Great. And I guess just one last follow-up. Maybe I missed this in the press release, there's a lot of information we're getting tonight, but any chance based on the enrollment of TARGET 3, we can get those data in the fourth quarter? Or we should be thinking about that as a next year event?

Carolyn J. Logan

Well, Dr. Forbes is with us, so he's probably best equipped to answer that.

William P. Forbes

Hi, Jason, this is Bill Forbes, and let me just give you an update on TARGET 3. Operationally, TARGET 3 is progressing very well. Based on the current enrollment efforts and discussions with the GI Division, we hope to submit our response to the Complete Response Letter right now, probably at the later part of the first half of 2014. And that will allow for an action, hopefully, to occur in the later part of 2014, the second half of 2014.

So I'll also add to that, we've been proactively engaged in discussions with the GI Division regarding expectations around study conclusion and submission of the information needed to fully address the Complete Response Letter. And there have been several agreements that have been put in place with the Division, including the microbiome sequencing, fecal antibiotic resistance, skin swabs, spore bacterial resistance and related data structure layouts. So that has gone very well. It has been the preference of the Division to have all of the study data submitted and available for review in the Complete Response.

And we are in agreement that a review based on the totality of the study data collected provides for – oftentimes provides for a much better assessment, and subsequently, we have a better chance to affect labeling, which would provide better information to the physicians, as well as to the patients and prescribers.

So I think with everything given, we've decided to work with the Division as best we can to make sure that we bring all of the data into them at one point in time, so that they have it at the beginning of their six-month review, as you know, a Complete Response – to a Complete Response Letter, they have six months to review it. And hopefully, that will reduce the likelihood or potential for a delay in review based upon request for additional information.

Jason M. Gerberry – Leerink Swann LLC

So top line data from TARGET 3 could potentially be a 2Q event now, just to be clear?

William P. Forbes

Correct.

Jason M. Gerberry – Leerink Swann LLC

Okay, thank you.

Operator

Our next question is from Tim Lugo with William Blair.

Tim F. Lugo – William Blair & Co. LLC

Thanks for the question and congratulations on the transaction. Obviously, the Company has a positive Phase III with the MMX compound in travelers' diarrhea. Can you tell us how that fits in with your own XIFAXAN next-generation compound and maybe how that fits in with – even in the TD indication.

Carolyn J. Logan

As part of this negotiation and as part of this transaction, we are actually returning rifamycin MMX to Cosmo. But we, of course, will be keeping UCERIS.

Tim F. Lugo – William Blair & Co. LLC

And is that the only asset that you will be looking to divest?

Carolyn J. Logan

Yes.

Adam C. Derbyshire

Yes.

Carolyn J. Logan

At this time, there are no plans to divest anything else.

Tim F. Lugo – William Blair & Co. LLC

All right, thank you.

Operator

Our next question is from Andrew Finkelstein with Susquehanna Financial Group.

Andrew J. Finkelstein – Susquehanna Financial Group LLLP

Thanks very much for taking the question. One quick one off the bat, the guidance you provided for 2014. How is tax provided in that? Is it comparable to the $3.20 for this year or the $3.68? And then second, could you talk at all about the process, and given the possibility of another bid, your comfort that you have the financial capacity to raise additional financing, if needed? Thanks.

Adam C. Derbyshire

Sure. Yes, the tax rate that's assumed is an effective rate of 38%. So it would be in line with the $3.20. And your second question, I really don't think we can comment that's just hypothetical.

Andrew J. Finkelstein – Susquehanna Financial Group LLLP

Okay. Then, if I could, could you talk at all about the sales force structure that you see post the deal and where you think the biggest incremental return is to generate those revenue synergies? What products benefit the most from additional promotion?

Carolyn J. Logan

Actually, at this time, we aren't allowed to have finite or definitive plans or discuss those because the transaction is not closed. We have to wait until after the close of the transaction to roll that out. Obviously, we do have some thoughts and plans. But we really don't want to discuss those at this point.

XIFAXAN being our largest product, obviously, you would expect it to benefit from being able to go into the primary care marketplace in a much larger way, because as I mentioned earlier, we know that we are missing a lot of hepatic encephalopathy business in that market. And then, of course, we believe that UCERIS will benefit greatly from having a lot of increased exposure in gastroenterology, if the transaction should proceed to close as we expect it to.

Andrew J. Finkelstein – Susquehanna Financial Group LLLP

So even separate from this transaction, if on your own, you're going to have additional reps, your biggest priority would be to have them in HE in a primary care setting?

Carolyn J. Logan

Well, to be able to have them sooner. We have repeatedly said that should we get the IBS-D indication or should we get an indication potentially in chronic pain for opioid-induced constipation, we’ve talked repeatedly in the past about wanting to increase our presence in primary care for either of those products, primarily IBS-D. And this allows us to do that prior to that approval because we also had said repeatedly we wouldn't take a step like that and add a large number of representatives without having the approval first.

So this allows us, hopefully, to be able to have a presence there and be established with representatives knowing their way around, knowing their physicians, having good relationships, et cetera prior to that approval. So this allows us to have a sales force that's already profitable right out of the gate. And that is something we were very interested in. And whenever we've been asked business development questions, we have signaled that, that was something that was of particular interest to us.

Andrew J. Finkelstein – Susquehanna Financial Group LLLP

Thanks very much.

Operator

Our next question comes from Irina Rivkind with Cantor Fitzgerald.

Irina Rivkind – Cantor Fitzgerald Securities

Hi, thanks for taking the questions. I have three quick ones. Number one, do you feel like you're done with M&A for some time now? Or will you still opportunistically add to your portfolio? The second question is, on rifamycin that you return to Cosmo, do you view that product as any sort of strategic threat to XIFAXAN in case anyone else picks it up? And then the final question is on TARGET 3 data. Just wondering, when you released the top line, are you going to also present results from some of your microbiologic studies or are you just going to present safety and efficacy? Thanks very much.

Adam C. Derbyshire

Sure, Irina, I'll cover the M&A question. Clearly, we're not looking to do anything along these lines. But no, we – you know our philosophy about business development. We never stop looking. We can't afford to stop looking. So we will continue looking. The things that we are looking at right now are more of those tuck-away type opportunities, like we did with Dr. Falk Pharma for APRISO and budesonide foam, where it's a late-stage opportunity that requires minimal money upfront, we do the development and there could be some milestones associated with it. So those are the kinds of things that we are looking at and we have room to do more of those kinds of things.

Carolyn J. Logan

As far as rifamycin MMX being a strategic threat, it looks as though from one completed study that they do have efficacy in travelers' diarrhea, but travelers' diarrhea is less than 1% of our business. It's an insignificant portion of our business. And with hepatic encephalopathy and with IBS, we know that there is a lot of small bowel involvement, maybe predominantly. We're not – and guess anyone knows for sure, but we certainly know for a drug to be effective there, it would have to have small bowel effect. And of course, with the MMX technology, one of the beautiful things about that is it protects it until it gets to the colon, but it's also a drawback if you need small bowel efficacy. As for the TARGET 3 data and releasing microbiome data, I'll defer that to Dr. Forbes.

William P. Forbes

Yes, I think, Irina, I think that would be the goal, is to try to release information on the totality of the package when we do the press release. And I think as it relates to the microbiome, that is another component that the Agency would like to see completed and part of the full package. And so when we just took a look at all the timelines, it just made sense to push it back a little bit, make sure we give them the totality of the data so that they can do their review as efficiently as possible, and we've been able to make some great progress on the microbiome data.

So we're certainly encouraged early on with what we see. And we want to make sure that gets into the package as well, and hopefully, we'll press release that at the same time.

Irina Rivkind – Cantor Fitzgerald Securities

Thanks very much.

Operator

Our next question comes from Mario Corso with Mizuho USA.

Mario V. Corso – Mizuho Securities USA Inc.

Good evening. Thanks taking my questions. I understand you can't give projections, but can you talk a little bit about sales force size, your own now, what Santarus brings to the table? And I know with UCERIS, for example, I think Santarus had been talking about peak-type sales of $300 million. So I'm assuming that with a larger sales force, you would believe you can do better than that?

And then secondarily, on XIFAXAN, anything unusual in the quarter be it inventory, price, anything like that? Thank you very much.

Carolyn J. Logan

Mario, I'll start with sales force side. Currently, we have 2 sales forces. I'm sure you know this, Integra and Futura, approximately 100 representatives in each. We also have a 40 person institutional sales force. And then we have a group of people in federal account, HIV therapeutic specialists, a national accounts group. And so with this, as I mentioned earlier, we really aren't allowed to give definitive answers, but I can tell you that we've looked at initially wanting to start in primary care with somewhere in the neighborhood of 160 to 180, somewhere in that range possibly. And then you could expect that adding an additional GI sales force, it would be in the approximate range of the other two. So I think we can talk in those terms.

And as far as peak year sales on UCERIS, yes, we do see that product peaking out at something north of $300 million, and so I think we're looking more in the $500 million range for that product. And then, I forgot you were about XIFAXAN.

Mario V. Corso – Mizuho Securities USA Inc.

Yes.

Adam C. Derbyshire

Yes, Mario, in terms of XIFAXAN, so demand for the quarter was about $159 million. And of course, we shipped about $165 million, $166 million. So it was a little bit ahead of demand.

Operator

Our next question is from Gary Nachman with Goldman Sachs.

Gary J. Nachman – Goldman Sachs & Co.

Hello, hi, good afternoon. A few questions; first, Adam, what will the debt-to-EBITDA be when you close the deal and how quickly could you get it down to below four times or, I guess the target of three times? Could that actually be sooner than three years and any manufacturing synergies that you would expect from this transaction? And then I'll ask a follow-up.

Adam C. Derbyshire

Yes, based on annualizing third quarter, you're roughly looking at 5.5x and if you look at our EBITDA, pro forma EBITDA by annualizing third quarter, it's about $540 million and obviously, that will be growing at a rapid rate. So you can imagine that we can delever rapidly. So we said 3 years, and we're very comfortable within 3 years, that we can get to the 3x level that we want to get to.

Gary J. Nachman – Goldman Sachs & Co.

Okay. And then manufacturing synergies, anything between the 2 companies that could help improve margins?

Adam C. Derbyshire

No, we actually share some of the same manufacturers. But they're typically, for instance, XIFAXAN, it has a dedicated line, couple of our products have dedicated lines. So I mean, I guess, there are synergies in terms of the relationship, but really, no major savings with respect to manufacturing.

Gary J. Nachman – Goldman Sachs & Co.

Okay. And then Carolyn, has your view changed at all in terms of the potential risk for a generic XIFAXAN or are you just as confident today as you were, I don't know six months or 12 months ago that the hurdles are pretty high there? Just considering the bioequivalence guidelines that are out there and where you stand today on that? Thanks.

Carolyn J. Logan

Yes, I am just as confident today as I have been in the time periods that you mentioned. We just have a tremendous amount of IP around this product now. We've worked very hard on that. And of course we have orphan through March 24, 2017. The bioequivalence draft, bioequivalence guidance by the FDA is a pretty high hurdle and so yes, for all of those reasons, we do have as much comfort level as you ever had.

Gary J. Nachman – Goldman Sachs & Co.

Okay, thank you.

Operator

We'll now go to Annabel Samimy with Stifel.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc

Hi, thanks for taking my question. I just wanted to go back to the products and the sustainability of the products. I mean, we’re well aware of 2016 close for both ZEGERID and GLUMETZA. And you mentioned that you had some strategies to deal what that. Maybe you can highlight those?

And also for UCERIS, that goes till 2020 and you mentioned also that you feel comfortable with that product. It can be closer to $500 million range rather than $300 million to $350 million range. So products essentially have anywhere between two years of life and obviously up to 2020, it’s about six years of life. So what are some of those strategies that you're doing to get a little bit more sustainability out of these products?

And then on the question of erythromycin, given that it is MMX technology and it targets the bowel, and you’re focused a little bit more on the small intestine. What was the rationale for giving back the product, given that you could have potentially targeted some other indications that involve the bowel? Thanks.

Carolyn J. Logan

Starting with your last question first, it was just a part of the negotiation. And so that is really about all we can comment on, on that. We certainly can't comment on the negotiation that took place there. But that was part of the negotiation and we are very comfortable with our products in the large markets that they're in. And I really don't know much else to say about that.

As far as GLUMETZA and ZEGERID, I would imagine you're fairly familiar with Santarus, maybe not. But if you are, you realize that the profitability on GLUMETZA is not nearly as strong as it is on a product such as UCERIS. So even when potentially revenue is lost, the profitability as UCERIS ramps is going to really take care of a lot of that.

On UCERIS, as far as viable, we believe that it could or it does have potentials to be larger. It's really just the frequency of calls, the number of calls, the expanded presence and we will put all of the usual marketing muscle that we do with our other products behind it. There certainly are unfortunately a lot of Crohn's patients. It's an unsatisfied market in many respects. These patients are often on multiple products. And we just believe that this product has a great future and that we will be able to be able to achieve sales in that range.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc

Okay. If I could just follow up on the UCERIS question. Santarus was doing a lot of additional development to potentially expand the label past ulcerative colitis. Are you committing additional R&D to that product to be able to expand the label to Crohn's disease or microscopic colitis or any of the other indications?

Adam C. Derbyshire

Again, until this deal closes, that's why in our projections we did not include any upside for Santarus or Salix for any pipeline, new indications, new launches. So until this closes, we really can't comment.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc

Okay. And then if I could ask one more. On the debt situation, did you mention how much debt you would be raising or are you raising additional debt here?

Adam C. Derbyshire

It's in the press release. It's $1.95 billion, yes.

Annabel E. Samimy – Stifel, Nicolaus & Co., Inc

Okay, thank you.

Operator

Our next question is from John Newman with JMP Securities.

John L. Newman – JMP Securities LLC

Hi, guys, thanks for taking the questions and congrats on a nice deal. Just wanted to ask, when you were doing the due diligence on this deal, if you can comment on your thoughts to the magnitude of damages that you might receive from the litigation with Par over ZEGERID. I also had a more general question on whether you have considered or may consider going forward trying to establish a lower tax structure, as many of your peers have. And then….

Carolyn J. Logan

You've got a third one?

John L. Newman – JMP Securities LLC

Sorry, my last question was just, given your initial thinking on RUCONEST, I'm just curious if you have any thoughts as well on the SAN-300 pipeline asset that's being tested in RA and potentially going forward in ulcerative colitis? Thanks.

Carolyn J. Logan

As far as any potential damages, I mean, obviously, we have done due diligence. We've done a lot of diligence before doing a transaction like this. But we are not going to speculate on what that might be. We just don't think it would be wise to do that. And the same thing on RUCONEST and SAN-300, we really are not allowed to talk about that. In our guidance, we didn't include any of that. So we would wait for this transaction to close.

And then, of course, our R&D people have already had some conversations with R&D people at Santarus and they're doing good work over there and so we will collaborate and work closely and we'll just have to give you an update at a later point, but we're not really going to go much beyond that right now.

John L. Newman – JMP Securities LLC

And then your thinking regarding maybe longer-term thoughts on your tax structure and whether you might try to address that at some point?

Adam C. Derbyshire

What we said about that is that, we like for our M&A and business development activities to remain strategic. And so if in the future we do come across something that is of that nature and there's a tax benefit to it, then by all means we would do that. But we're not, right now in a position to go after something just to have a tax arbitrage.

John L. Newman – JMP Securities LLC

Okay, great. Thank you very much.

Operator

We have time for one final question from Mr. Gregg Gilbert with Merrill Lynch.

Gregg Gilbert – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hi, I just have one follow-up for Dr. Forbes. I'm sorry if I'm being sick about this a bit. As it relates to your IBS program and now filing by midyear, I'm curious about the communication, though, of whether you hit or miss the primary endpoint. Do you still expect to know that late this year or early next? And isn't that something that, in and of itself is material enough that we should at least be notified of that, we being the investment community or am I missing something there? I understand the FDA strategy part. I'm just asking more about the communication, did you hit or miss on the primary endpoint.

William P. Forbes

Gregg, let me answer it straight up. We haven't done analysis on the primary endpoint and we won't do that until the study completes and we provide all the information. So when we do the analysis, of course that will be material, and we'll go ahead and announce it. And the study is enrolling very quickly. And then the patients are relapsing. So I think the news here is that the study is performing as expected, and we hope that when we have a chance to unblind everything, when everybody's done, we'll have the microbiome data as well as the top line data. So it's not that we have the data and we're not disclosing it. It’s that we haven't done the analysis. So we anticipate that to be given to you all at once. And as I said, I think it's really looking at the second quarter of next year.

Gregg Gilbert – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Thanks. That’s very clear.

Operator

Ladies and gentlemen, that's all the time we have for questions today. At this time, I'd like to turn the conference back to Ms. Carolyn Logan for any additional or closing remarks.

Carolyn J. Logan

I'd just like to say thank you for joining us today and we look forward to speaking with you on our next call. Have a nice evening, everyone. Goodbye.

Operator

This does conclude today's conference. Thank you for your participation.

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