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Santarus, Inc. (NASDAQ:SNTS)

Q3 2010 Earnings Conference Call

November 8, 2010 4:30 PM ET

Executives

Martha Hough – VP, Finance and IR

Gerry Proehl – President and CEO

Bill Denby – SVP, Commercial Operations

Debbie Crawford – SVP, CFO, Treasurer and Secretary

David Ballard – SVP, Clinical Research and Medical Affairs

Analysts

Scott Henry – ROTH Capital Partners

Ian Sanderson – Cowen and Company

Michael Dinerman – Piper Jaffray

Jelena Ofengein – Stifel Nicolaus & Co.

Operator

Welcome to the Santarus Third Quarter 2010 Financial Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Martha Hough. Please go ahead, ma’am.

Martha Hough

Thank you, Carey. 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 Gerry Proehl, President and Chief Executive Officer; Dr. David Ballard, Senior Vice President, Clinical Research and Medical Affairs; Bill Denby, Senior Vice President, Commercial Operations, and Debbie Crawford, Senior Vice President, Chief Financial Officer, Treasurer and Secretary; and will also join us for today’s question-and-answer session.

Earlier today Santarus issued two press releases. The first announced top-line data from our European clinical data with Budesonide MMX and the second announced our third quarter 2010 financial results. If you have not received a copy of these news releases, you can access it on our website at www.santarus.com. A replay of this call also will be available on our website and can be found in the Investor Relations section for the next two weeks.

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

The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast on August 2, 2010. Santarus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

I’ll now turn the call over to Gerry Proehl. Gerry?

Gerry Proehl

Thank you, Martha, and welcome to this afternoon’s call. We are pleased to report that earlier today; we announced positive top-line result from the Budesonide MMX, which was conducted in Europe. In both the U.S. and E.U. Phase III studies, Budesonide MMX 9 milligram achieved statistically significant results for the induction of remission of mild or moderate active ulcerative colitis compared to placebo.

Our next step is to complete the extended use study in second quarter 2011 and then move forward with the submission of an NDA for Budesonide MMX in the second half of 2011. The successful completion of these two Phase III studies is a significant accomplishment for Santarus and Cosmo and I’d like to thank all the colleagues and both companies who contributed to these positive pivotal studies.

We’ve been working hard on all fronts of Santarus over the last few months. Since our last quarterly call, we’ve completed three transaction that support our strategic objective of creating shareholder value by adding an approved product to drive near-term revenue and two development stage products with potential for future revenue growth. We believe these transactions will have a positive impact by leveraging our sales organization and broadening our development pipeline.

We are very busy with the pre-launch activity to prepare for launch in CYCLOSET, a first in class in therapy for type 2 diabetes. CYCLOSET is approved by the FDA as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes and it’s the first and only centrally acting dopamine agonist oral anti-diabetic drug approved for the treatment of type 2 diabetes.

We have exclusive U.S. license and distribution rights to CYCLOSET. We believe this product is an excellent fit with our commercial activities for GLUMETZA, which is also indicated for the treatment of patients with type 2 diabetes. We’ve moved very quickly to ramp up manufacturing and to train our sales organization to promote the product. In a few minutes, Bill Denby will discuss our planned promotional messaging and launch activities.

We also have added two promising novel biologic drug candidates to our development pipeline. We believe these drugs offer substantial medium to long-term revenue potential in especially markets that are readily addressable by a small sales organization.

First from Pharming, we obtained North American rights to RHUCIN, which is recombinant human C1 inhibitor that acts to regulate important aspects of human immune response. RHUCIN is an intravenous drug and late stage clinical development in the U.S. for acute attacks of Hereditary Angioedema or HAE, which is cost by C1 inhibitor deficiency.

In two randomized placebo-controlled double-blind studies conducted by Pharming, RHUCIN demonstrated statistically significant and clinically relevant improvement in the primary end point of time, the beginning of relief of symptoms at two dosage strengths.

Pharming recently received European marketing authorization for RUCONEST, RHUCIN’s trade name in Europe for the treatment of acute HAE. RUCONEST has been granted orphan drug and fast track by the FDA for the acute HAE indication. HAE is a serious disease that is characterized by acute attacks of painful and in some cases fatal slowing of soft tissues.

Pharming plans to submit a BLA in December or January, and based on prior discussions with the FDA, Pharming plans simultaneously to initiate an additional 50-patient study to confirm the efficacy, safety and lack of immunogenicity of RUCONEST 50 units per kilogram, which is the lower dose investigated in the late stage clinical study for the treatment of acute HAE attacks.

Pharming will also be responsible for conducting and paying for this additional clinical study. We believe it will take 12 to 18 months to complete this study and that the FDA may want to review the data prior to completing their review. We believe RHUCIN also has potential in other indications including antibody mediator rejections and delayed graft functions following solid organ transplantation. We plan to initiate a Phase II proof of concept study in early antibody immediate rejection in kidney transplantation later this year or early next year.

Santarus and Pharming will jointly conduct the study and share study cost. We also have acquired the worldwide rights to an early stage program, SAN-300, our internal name for a humanized anti-VLI 1 antibody that offers a novel approach to treat inflammatory and autoimmune diseases. We gained this program through the acquisition of closely held Covella Pharmaceuticals and an associated licensed agreement with Biogen Idec’s. The basic research and pre-clinical development of the humanized antibody was conducted by Biogen Idec, a company with extensive experience in developing biologic drugs.

The anti-VLI 1 antibody has showed positive activity in multiple pre-clinical models of inflammatory and autoimmune disease including rheumatoid arthritis, inflammatory bowel disease, psoriasis and organ transplantation. We are planning to begin a dose escalation clinical study with SAN-300 in the first half of 2011.

Assuming positive results, we expect to assess SAN-300 and clinical studies as a treatment for patients with rheumatoid arthritis, who have inadequately responded to treatment with TNFN inhibitors or other biologic agents.

We chose these two biologics for development as they have the potential address substantial unmet medical needs. If successfully developed and approved for marketing in the U.S., we expect each will qualify for 12 years of data exclusivity under the Federal Healthcare Reform Legislation in active earlier this year. Additionally, we believe both are covered by string intellectual property protection and post significant development and manufacturing hurdles for would be competitors.

Next, David Ballard will provide an update on Budesonide MMX data announced today and our other clinical activities. Thanks, Gerry. Today, we announced positive top-line data from the European Budesonide MMX Phase III clinical study based on the intent-to-treat population and the pre-defined statistical analysis plan. These results were very consistent with the top-line data from the U.S. study we announced late September.

The European results show that Budesonide MMX 9 milligrams taken once daily achieved a remission rate of 17.4%, which was statistically superior of 4.5% at a P value of 0.00047. In the U.S. study, Budesonide MMX 9 milligrams achieved a remission rate of 17.9%, which was statistically superior to the placebo rate of 7.4%. In both studies, treatment with the lower dose Budesonide MMX 6 milligrams did not achieve statistical superiority to placebo.

Clinical remission was measured by an ulcerative colitis disease activity index score in both studies. Statistic measurements including rectal bleeding, stool frequency, mucosal appearance and the physician’s rating of disease activity. The studies were not powered to show a statistical difference between Budesonide MMX and the reference drug to Entecort EC in the E.U. study and Asacol in the U.S. study.

We are very pleased to see the consistent efficacy results from these two pivotal studies and the top-line study results from both studies also indicate a Budesonide MMX 9 milligrams and 6 milligrams, where generally well-tolerated and the frequency of treatment-related adverse events were similar across all treatment groups.

As we have previously reported, a total of 123 patients from the Phase III studies were enrolled in a 12-month extensive study to evaluate the safety and efficacy of daily Budesonide MMX 6 milligrams versus placebo and the maintenance of remissions in subjects with ulcerative colitis. The last patient visit from this study is expected in the second quarter of 2011 and once completed; we plan to move forward with the preparation and submission of the new drug application and the second half of 2011.

Turning to Rifamycin SV MMX, we have recruited about 30% of the patients we think to enroll in our first Phase III clinical study in traveler’s diarrhea. Given current enrollment rates, we now expect the Rifamycin SV MMX clinical study to be completed in the second half of 2011.

Turning to CYCLOSET, an abstract presented in a post-recession at the World Congress on Insulin Resistant Diabetes and Cardiovascular Disease summarized the analysis from a 379-patient subset in the Phase III safety study with CYCLOSET. This subset analysis investigated the relationship between the duration of type 2 diabetes disease, patient age and treatment with CYCLOSET as an add-on to one or two oral anti-diabetes drugs. The finding suggests that when given as an add-on to oral anti-diabetes drugs, CYCLOSET produce improvements in glycemic control irrespective of baseline duration of disease.

We are fortunate to have a robust set of clinical data for CYCLOSET. Over the past several weeks, our scientific affairs liaisons have been meeting with endocrinologist to discuss the CYCLOSET data and gather impressions from key physician opinion leaders. Overall, the response has been very positive with the surprising amount of time given to understanding the data and the impact of CYCLOSET centrally acting dopaminergic activity on glycemic control. We believe this strong interest in CYCLOSET indicate disposition to desire a drug with a new mechanism of action to treat type 2 diabetes.

Now, I’ll turn the call over to Bill Denby to discuss the commercial launch plan for CYCLOSET. Bill?

Bill Denby

Thanks, David. Over the last few months, we’ve been busy with a number of pre-launch activities to prepare for the launch of CYCLOSET Bromocriptine Mesylate Tablets, which include positioning research, early meetings with managed care organizations, attending and exhibiting of key diabetes meetings, a journal advertising and direct mail, meeting with key thought leaders and developing extensive training materials that have already been utilized for the coming launch.

CYCLOSET is a dopamine receptor agonist indicated as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes. Our positioning for CYCLOSET is as the first and only centrally acting dopamine agonist oral anti-diabetic that provides improves glycemic control with demonstrated cardiovascular safety.

Although its precise mechanism of action is unknown, it is believed that CYCLOSET provides significant post-prandial glucose reductions throughout the day without increasing plasma insulin concentrations.

By increasing the dopaminergic activity in the CNS when taking once daily within two hours of waking, as background on CYCLOSET clinical data, the study evaluating CYCLOSET in combination with other oral anti-diabetic treatments such as metformin, sulfanurea and TZD drug showed that 35 to 40% of patients failing on other oral anti-diabetics reach their A1C goal within 24 weeks. A1C is a standard measurement of glucose that is used to determine the efficacy of diabetes therapy.

The adjusted A1C reduction observed with CYCLOSET as an add-on therapy ranged from 0.6 to 0.9%. Additionally, in a 52-week safety study involving more than 3,000 patients, CYCLOSET use was not associated with an increase for adverse cardiovascular events. In fact, a 42% relative risk reduction for the composite cardiovascular endpoint was observe for CYCLOSET versus placebo.

It’s important to note that placebo in this study was the standard of care for diabetes therapy including the continuation of cardiovascular medications, if applicable. This relative risk reduction corresponds to a hazard ratio of 0.58 at a confidence of interval of 95%. In the study, 1.5% of patients on CYCLOSET versus 3% on placebo experienced one adverse [ph] events in the pre-specified composite cardiovascular endpoint, which included mild cardial infarction, stroke, coronary revascularization, hospitalization for angina and hospitalization for congestive heart failure.

The overall safety profile of CYCLOSET demonstrated in clinical studies was comparable to placebo, but an incidence of serious adverse events of 8.5% versus 9.6% for placebo. There was no significant weight gain or severe hypoglycemia observed in the clinical trials, nausea was the most common adverse event, which was generally transient and was experienced during the initial titration period lasting less than two weeks.

In controlled clinical studies, the adverse reaction reported in greater than 5% of patients treated with CYCLOSET and reported more commonly than in patients treated with placebo included nausea, fatigue, dizziness vomiting and headache.

Now, switching to product positioning, which was based on the clinical data from the Phase III safety study and our quantitative and qualitative marketing research with more than 700 physicians, we are focusing core market messages for CYCLOSET on its novel regulation of CNS system dopamine activity, consistent glycemic control throughout the day, demonstrated cardiovascular safety and demonstrated overall safety.

When presented with a product profile of CYCLOSET, a very high number of physicians in our marketing research studies indicated interest in the product with equal interest from endocrinologist and primary care physicians. We also found that a significant number of endocrinologist and primary care physicians would be comfortable with initiating CYCLOSET treatment after viewing the product profile. We believe this can be attributed to CYCLOSET safety profile demonstrated in large Phase III safety study.

Our marketing research indicates that most physicians expect to use CYCLOSET following metformin or other therapies and view CYCLOSET as an ideal add-on drug when other oral anti-diabetic therapy has not brought the patient to the A1C goal. As expected, our research indicated the pre-launch awareness of CYCLOSET is low.

Therefore, in October, we began running pre-launch coming soon ads in six medical journals with the message “The First and Only Centrally Acting Dopamine Agonist Oral Anti-diabetic that Keeps the Heart and Mind.” We will be supporting the commercial launch for the number of additional promotional activities directed to those physicians who treat type 2 diabetes. We have established a CYCLOSET.com coming soon website, are undertaking direct mail and email awareness campaigns and will be conducting a Physician’s Speaker’s Bureau. We will also undertake pharmacy programs to increase the awareness and understanding of the significant differences between CYCLOSET, a quick release bromocriptine versus other bromocriptine.

The promotional fit between GLUMETZA and CYCLOSET is strong with good overlap and called on positions. We believe that our sales representatives are likely to gain increase time with physicians to discuss both drugs particularly given CYCLOSET’s novel mechanism of action.

Turning to GLUMETZA, our commercial group is also ready with a re-launch campaign for GLUMETZA 500-milligram tablet. To the re-launch here in December or early next year, assuming Depomed is able to re-supply the product at that time.

At that time, the recall was initiated last June. GLUMETZA 500-milligram was approximately 60% of total prescriptions. While we’ve seen a significant drop in GLUMETZA prescriptions for the 500-milligram product, we have currently seen a significant increase in 1000-milligram product scripts and continued interest from physicians in GLUMETZA message of efficacy and GI tolerability. With regard to the 1000-milligram dosage strength, the new manufacturing site in Canada for GLUMETZA was recently approved by the FDA and we expect product shipments from that facility to begin in November.

As we’ve discuss previously, the managed care picture for drugs to treat diabetes is very different from what we experienced with ZEGERID in the PDI space. Managed care is more open to placing anti-diabetic drugs on formulary and to placing fewer restrictions on access primarily due to the severity of the disease and the long-term morbidity, if not properly treated.

Having just completed our launch meeting, our commercial organization is energized and excited by CYCLOSET and from the early positive feedback they’d received from physicians as well as the pre-launch marketing research results. We look forward to announcing the availability of the product and pharmacies very soon and reporting our progress on CYCLOSET in our next quarterly call.

Next, Debbie Crawford will discuss our financial performance.

Debbie Crawford

Thank you, Bill. Our third quarter financial results reflected a number of changes to our business, including the impact of the first full quarter of generic competition for ZEGERID, also associated with our corporate restructuring announced in June and the upfront payments associated with our recently announced business development transactions.

For the third quarter of 2010, total revenues were $18.1 million, a decrease of $21.4 million compared with the prior year period. The reduction in total revenues is primarily due to lower net sales of ZEGERID, which was impacted by the launch of generic versions of the drug.

GLUMETZA promotion revenue was $6.8 million in both the third quarter of 2010 and in the third quarter of 2009. Our promotion revenue in the third quarter of 2010 was negatively impacted by Depomed’s voluntary recall of the 500-milligram product announced in mid-June 2010 and the related suspension of 500-milligram product shipments. Depomed currently expects to resume GLUMETZA 500-milligram product shipment in December or in early 2011.

We reported a net loss of $25.7 million or $0.44 per share for the third quarter of 2010 compared with a net income of $5.3 million or $0.09 per share for the third quarter of 2009. The 2010 third quarter loss includes approximately $7.3 million of one-time restructuring cost and $15 million upfront payment to Pharming Group for North American rights to RHUCIN.

The cost of product sales was $1.2 million in the third quarter of 2010 or approximately 11% of net product sales compared with $2 million in the third quarter of 2009 or approximately 6% of net product sales. The increase in our cost of product sales as a percentage of net product sales is primarily due to certain fixed cost being applied to decrease sales volume.

We reported license fees and royalties of $16 million for the third quarter of 2010, which included the $15 million upfront payment made to Pharming.

R&D expenses were $4.4 million for the third quarter of 2010, an increase of $1 million over the prior year period. The increase in R&D expenses was primarily due to cost associated with the Rifamycin SV MMX Phase III clinical study in patients with traveler’s diarrhea, which began enrolling patients in the second quarter of 2010, and startup cost associated with our Phase II proof of concept study evaluating RHUCIN and early antibody mediated rejection in renal transplant patients.

SG&A expenses were $15 million for the third quarter of 2010, down approximately $11.3 million from the third quarter of 2009. The decrease is principally due to reduction in compensation benefits and related employee cost, a decrease in promotional spending related to the decision to cease promotion of ZEGERID products and lower legal cost. We also reported a restructuring charge of $7.3 million in the third quarter of 2010.

Our corporate restructuring included a workforce reduction of approximately 34% or 113 employees in our commercial organization and other operations. We retained approximately 110 sales representatives, who have been focused on promoting GLUMETZA.

With regards to our year-to-date financial results, for the nine months ended September 30, 2010, we reported total revenues of $99.5 million, a decrease of approximately 9.6% over the prior year period. We reported a net loss of $16.4 million or $0.28 per share for the first nine months of 2010 compared with net income of $7.6 million or $0.13 per share for the first nine months of 2009.

As of September 30, 2010, Santarus’ net cash, cash equivalents and short-term investments of $65.1 million, a decrease of $28.8 million from December 31, 2009. The decrease resulted from our net loss for the nine months ended September 30, 2010, which included the $15 million upfront fee paid to Pharming, adjusted for non-cash charges and changes in operating assets and liabilities.

Turning to our financial outlook, we are updating revenue guidance. We now expect 2010 full year total revenues of $115 million to 118 million, which assumes no promotion revenue associated with GLUMETZA 500-milligram in the fourth quarter of 2010. If Depomed establishes the re-supply of GLUMETZA 500-milligram in December 2010, Santarus estimates a positive impact on promotion revenue of approximately $2 million.

We expect expenses for 2010 will include the following: R&D expense of up to $21 million, including estimated cost associated with the Phase III clinical program for Budesonide MMX and Rifamycin SV MMX and cost associated with the addition of RHUCIN and SAN-300 to our development pipeline. SG&A expenses associated with the CYCLOSET launch activities are estimated at $4 million to 5 million.

In the fourth quarter of 2010, license fees will include a $3 million clinical milestone payable to Cosmo Technologies Limited for the successful completion of two Phase III clinical studies that achieve the primary end point with statistical significance and adequate safety. The milestone is payable in cash or through issuance of shares of Santarus’ common stock at Cosmo’s option subject to certain limitations.

License fee expenses may also include a sales milestone of approximately $3 million to Depomed, which is payable of annual net product sales of GLUMETZA exceed $50 million for the period of January 1, 2010 through January 31, 2011. We expect to report a net loss of approximately $31 million to $33 million in 2010, which includes $7.3 million in one-time restructuring charges, the $15 million upfront payment to Pharming for North American rights to RHUCIN and $11 million in CYCLOSET launch cost and success base milestones as prescribed above. Excluding these items, we expect to be approximately breakeven for the full 2010 year.

I’ll now turn the call back to Gerry.

Gerry Proehl

Thanks, Deb. It’s a very exciting time at Santarus. In our commercial operations, we are launching CYCLOSET into the rapidly growing $7.7 billion U.S. market for branded non-insulin anti-diabetes medications. We are anticipating the return of GLUMETZA 500-milligram tablets of our product line in December or early next year, and we see good overlap in called on physicians with our promotions of CYCLOSET and GLUMETZA.

Although our financial results for the third quarter were impacted by the launch of generic versions of ZEGERID, our corporate restructuring and three business development transactions, we completed. We believe we’ve taken appropriate steps to positioning the company for future growth with a product portfolio of 4% especially in markets including an attractive mix of commercial and development opportunities.

We have three product candidates in late stage clinical development. Importantly, Budesonide MMX and RHUCIN have demonstrated efficacy in Phase III clinical studies. We are also enrolling patients in our first Rifamycin SV MMX Phase III clinical study. We have an exciting opportunity with SAN-300, our early stage anti-VLI 1 antibody, which we expect to take into Phase I clinical test in the first half of 2011.

Additionally, we plan to initiate a Phase II proof of concept study with RHUCIN in early antibody mediated rejection in renal transplantation later this year or in early 2011.

Our commercial products together with our pipeline provide what we believe is significant future potential for Santarus. GLUMETZA and CYCLOSET could reach peak sales of $300 million to 400 million on a combined basis over the next five years and provide for substantial contribution to fund the development of our pipeline products.

We’ve estimated future peak sales of $200 million to 400 million for our two MMX product candidates and approximately $200 million in potential peak sales for RHUCIN in the treatment of HAE.

We believe our MMX and biologic product candidates aimed at difficult to treat diseases or disorders that are treated by specialty physicians are key for our future success.

I’d now like to open the call up and take some questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Martha Hough

While we’re waiting for questions, I’d just like to mention that we will be presenting at the 22nd Annual Piper Jaffray Healthcare Conference on Tuesday, November 30th, at the New York Palace Hotel. We hope to see you there. But if you’re unable to attend the conference, an audio webcast will also be available on the Santarus website.

Okay, Carey, we’re now ready for the first question.

Operator

Our first question is from Scott Henry with ROTH Capital. Please go ahead with your question.

Scott Henry – ROTH Capital Partners

Thank you and good afternoon. I want to start on the Budesonide MMX trial because I think there are a couple of interesting questions to ask. For starters, I mean it’s very clear that the 9-milligram is the dose that works, but the safety trial is in the 6-milligram dose. I mean how do you think of it, I mean why does that long-term safety study still pertain to the 9-milligram and do you have any worries that you may have to do data on the higher strength.

David Ballard

This is David. The first, I think, to remember that is from the FDA perspective and as far as our ability to get Budesonide approved, it’s really about the Phase III study. The FDA had requested a longer term use study. It’s fairly common what other compound at sometimes that you look at a lower dose. Our plan is to continue to move forward with what the agency is expecting for that longer term study of the 6 milligrams and when we have our subsequent meetings with the agency, we’ll engage them in that discussion. But from our vantage point, approval of this product will be on the basis of the Phase III program for the acute studies.

Scott Henry – ROTH Capital Partners

Okay. Do you have a high level of confidence in that? David, if I may ask.

David Ballard

As far as the Phase III studies?

Scott Henry – ROTH Capital Partners

As far as the requirements for 6-milligram being enough for long-term safety.

David Ballard

I think there is – has been precedence set with other companies that we will use in the discussion with the agency and I think it will put us in a very good position. I think it will put us in a very good position.

Scott Henry – ROTH Capital Partners

Okay, fair enough. Now, just shifting – staying on the same topic, but digging a little deeper. In the recent European trial, there was a rate of about 9% of serious adverse events versus 4% on placebo. Could you give any more color in terms of what were those types of severe adverse events did they correct when going off therapy. Just any color around that.

David Ballard

Right now, we don’t have the color as we just now have the top-line results and we’ll have to dig a little bit deeper into that. But I think the – in my mind, the important questions, the focus on is the treatment-related events because the treatment-related events were similar across all treatment groups. So, you’re right, when you look at the severity, they’re more patience in the severe category. But we don’t, at this point, can’t really align that with relatedness and I think we also have to put it in context, the placebo rate for severe patients in the dimension was, it was 3.9%. But in the U.S. study, it was 11.6%.

So, when we look at across the studies, we know that overall severity is going to bounce back and forth. I think moreover this, if your question is that we think that we have any risk, if you look at our event rate in the E.U. study and compare it to Entecort; the severity is very, very similar. So, in our mind, there aren’t any big major flags at this point, but we still have a lot of data to analyze. It’s very early at process.

Scott Henry – ROTH Capital Partners

Okay, thank you. I appreciate that color that is helpful. If shifting gears a little bit. Just looking at the income statement, I had a couple of just quick questions. First of all, in terms of the authorized generic for ZEGERID, are you putting that in product sales now? I was under the impression to be in promotion revenue, it looks like it’s in product sales? Is that correct?

Debbie Crawford

You’re correct, Scott. The sales related to the authorized generic are reported in the same line as the ZEGERID brand sales, product sales net.

Scott Henry – ROTH Capital Partners

Okay, that’s helpful. And then on the Rifamycin MMX, you mentioned you would get data on the first trial in the second half or we completed in the second half of 2011. How do you think about the second trial, do you think anticipate starting that in the beginning or in first half of 2011 or do you wait for the data?

Gerry Proehl

Yes, Scott. This is Gerry. I think we’re likely to wait for the data. We want to make sure that we have, felt positive first trial. We’re certainly – what we’re seeing as is what we said before is a little bit slower enrollment than what we have initially expected due to some of the violence gone in Mexico or keeping folks from traveling down there. We want to see the results in the first study before we start the second study.

Scott Henry – ROTH Capital Partners

Okay. And then just final question, on CYCLOSET, the $11 million in launch cost how much of that is one-time or how much of that will be ongoing cost. How do we think about that $11 million just from a modeling perspective?

Debbie Crawford

Yes, perhaps to clarify. The $11 million is really the combination of the CYCLOSET launch cost plus the two success place milestones of $3 million each. So, when we think about the CYCLOSET launch cost, we’re estimating $4 to 5 million here in 2010. I think that is probably a rate higher than we would expect to see on a non-going basis. I think we’ll be evaluating the level of promotional spend based upon the uptick in the product, but that really is an unusual level of spend associated with launch.

Scott Henry – ROTH Capital Partners

Okay. Well, I think that does it for my first round. But thank you for taking all the questions. Obviously, you’ve been very busy over the past couple of months.

Gerry Proehl

Thanks.

Scott Henry – ROTH Capital Partners

Thank you.

Operator

Your next question comes from the line of Ian Sanderson of Cowen. Please go ahead with your question.

Ian Sanderson – Cowen and Company

Hi. Good afternoon and thanks for taking the questions. Debbie, can you repeat the sales force numbers, how that change through the restructuring and what is the plan for the sales force behind the launch of CYCLOSET.

Debbie Crawford

Yes. We currently have about 110 sales reps and we believe that’s an appropriate size for us to promote both GLUMETZA and CYCLOSET at this time. Previously, we had 270 or so sales reps between the Santarus and the inventive organization. So, when we talk about our reduction in our employee base, so that percentage did it include the inventive, which was about another 100 people impacted.

So, 110 reps, we think that a good size organization. We’re very focused on calling on the endocrinologist and the high prescribing primary care physician.

Ian Sanderson – Cowen and Company

Any thoughts, I don’t know how you made this, but any thought given to putting a CSL in place in 2011 to jumpstart CYCLOSET?

Gerry Proehl

Yes, Ian. This is Gerry. I think at this point, we think the 110 reps are appropriate for us to launch the product. Certainly, if the product takes off, we’re going to look at all [inaudible] at different options. But we think the 110 reps are effective group to call and the folks that we need to call on. It represents about 25% of the diabetes prescriptions is what were able to get to 110 reps.

Ian Sanderson – Cowen and Company

Thank you very much. And have you discussed the economics on CYCLOSET that you will book all of the sales, as I understand and then there’s a payment out to the – I don’t know with the [inaudible], the two company …

Gerry Proehl

If the gross margins put up 65% towards then 35 to S2 and VeroScience to partner companies.

Ian Sanderson – Cowen and Company

Okay. Thank you.

Gerry Proehl

Thank you.

Operator

Your next question comes from the line of Annabel Samimy of Stifel Nicolaus. Please go ahead with your question.

Gerry Proehl

Hey, Annabel.

Operator

Annabel, your line is open.

Martha Hough

It sounds like we should move to the next person.

Operator

Your next question comes from the line of David Amsellem of Piper Jaffray. Please go ahead with your question.

Michael Dinerman – Piper Jaffray

Hi. It’s actually Misha Dinerman for David. Just a quick question on RHUCIN. With Kalbitor and Cinryze on the market, just wondering what the message is versus the other HAE compounds and how you’re going to market that.

Gerry Proehl

Just wanted to clarify, did you mean Kalbitor.

Michael Dinerman – Piper Jaffray

Yes, I’m sorry.

Gerry Proehl

Okay. Obviously, ours is the first recombinant C1 inhibitor that will come on to the marketplace as the other two products. The one you didn’t mentioned was Berinert, which is on the market and Cinryze, are both plasma based derived product. Ours is recombinant C1 inhibitor for acute use of HAE. We think that not only that they have excellent efficacy, but there’s certainly the interest from physicians and specifically from patients of being able to use recombinant product for some blood-based products.

Michael Dinerman – Piper Jaffray

And is there any intention to pursue a prophylaxis of the potential indication?

Gerry Proehl

We’re certainly looking at all options as we work with Pharming. But the initial indication will be for acute use.

Michael Dinerman – Piper Jaffray

Okay. And then last question, just in general, what is your appetite, I guess, for further acquisitions in licensing of medical stage products or commercially available products. Thanks.

Gerry Proehl

Yes. I think right now we’re very focus on the things that are on the plate in successfully launching CYCLOSET, re-launching the GLUMETZA 500-milligram and moving forward to development of our current products. We’re always on the lookout for additional products that make sense and if we found another marketed product that was complimentary to what we’re doing, we certainly look to add that in. we think it optimizes our sales organization. But I would say in the short-term, we’re very focus on what we’re doing right now.

Michael Dinerman – Piper Jaffray

Okay, thank you.

Gerry Proehl

Yes.

Operator

(Operator Instructions) Your next question comes from the line Jelena Ofengein [ph] of Stifel Nicolaus. Please go ahead with your question.

Jelena Ofengein – Stifel Nicolaus & Co.

Hi. This is Jelena Ofengein for Annabel Samimy. Just a couple of questions here on the CYCLOSET launch. Do you think you have sufficient funds for the appropriate promotion? Also maybe you could comment on the reimbursement. Do you think you’re going to have reimbursement right away or there may be a delay in uptake related to contracting with managed care? And then I have a follow-up on the baseline data. Thank you.

Bill Denby

Okay. This is Bill Denby. Hi, how are you?

Jelena Ofengein – Stifel Nicolaus & Co.

Good.

Bill Denby

We’re very excited about the launch of CYCLOSET. We think we’ve appropriately planned the promotional platform for the product and we have sufficient funds to take full advantage of the product opportunity.

As it relates to managed care, we’ve had early conversations with managed care and an indication as I said in my prepared comments is that this product will be covered unrestricted primarily and that’s due to the fact that this is a severe disease that people really need pharmaceutical intervention. This provides a new first and class opportunity to do that. So, we don’t see managed care as a particular barrier. This is in sharp contrast to the ZEGERID PDI situation that we experienced over the last few years.

Jelena Ofengein – Stifel Nicolaus & Co.

Okay, great. Thank you. And also on Budesonide MMX, have you notice any clear differentiation emerging on the safety side versus current steroid products?

David Ballard

We obviously don’t have a direct comparison of other steroid products on the market. So, all we can do is really state what you’ve seen thus far with our current safety profile. So, we believe that it’s safe and we haven’t seen any issues there, but we do not have any head to head comparisons.

Jelena Ofengein – Stifel Nicolaus & Co.

Okay. Thank you. That’s all I have.

Operator

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

Gerry Proehl

Great. Well, I’d like to thank you for your interest in Santarus and for joining us on today’s call. We’re excited about the recent developments that position us a commercial biopharmaceutical company with a diverse development pipeline and active clinical development agenda. We invite you to watch our progress.

If you have any further questions, please feel free to contact me, Debbie Crawford or Martha Hough. Have a great evening.

Operator

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

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Source: Santarus CEO Discusses Q3 2010 Results – Earnings Call Transcript

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