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Santarus, Inc. (NASDAQ:SNTS)

Q3 2011 Earnings Conference Call

November 7, 2011 4:30 PM EST

Executives

Martha Hough – VP, Finance and IR

Gerry Proehl – President and CEO

Debbie Crawford – SVP and CFO

Bill Denby – SVP, Commercial Operations

Wendell Wierenga – EVP, Research and Development

David Ballard – SVP, Medical Affairs and Pharmacovigilance

Analysts

Scott Henry – ROTH Capital

Annabel Samimy – Stifel Nicolaus

Operator

Good afternoon, and welcome to the Santarus Third Quarter 2011 Financial Results Conference Call.

At this time, all participants are in listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded, November 7th, 2011.

I would now like to turn the call over to Ms. Martha Hough. Ms. Hough, please go ahead.

Martha Hough

Thank you, Dia. 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; Debbie Crawford, Senior Vice President and Chief Financial Officer; Bill Denby, Senior Vice President of Commercial Operations; and Wendell Wierenga, Executive Vice President of Research and Development. Dr. David Ballard, our Senior Vice President, Medical Affairs and Pharmacovigilance will also be available during today’s question-and-answer session.

Earlier today Santarus issued a press release announcing our third quarter 2011 financial results, which is available 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.

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, November 7th, 2011. 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’d now turn the call over to Gerry Proehl.

Gerry Proehl

Thank you, Martha, and welcome to this afternoon’s call. I’m very excited to discuss the steps we’re taking to accelerate the growth of GLUMETZA and CYCLOSET and to support the successful future launches of our late stage development products, UCERIS, which is the proposed trade name for our budesonide MMX and RHUCIN.

With our commercial products, we restructured our GLUMETZA agreement with Depomed. We also implemented the GLUMETZ eVoucher program lowering the copay for many patients to $10 per prescription. And we accelerated support for CYCLOSET among key endocrinologists. With our late stage development programs, we announced positive results from the UCERIS 12-month extension study and reinitiated enrollment in the RHUCIN Phase III clinical study after reaching an agreement with the FDA on the design of the Phase III study under a special protocol assessment.

As a result of our commercial initiatives, the growth of new prescriptions for both GLUMETZA and CYCLOSET has accelerated in recent weeks. To support continued product growth, we are increasing our promotions by adding 40 contract sales representatives in the first quarter of 2010, bringing our total field sales representatives to 150. This expansion will allow us to reduce the size of our larger sales rep territory resulting in an improved inVentiv sales rep productivity, while also increasing average frequency of physician calls. We believe that our expanded sales force will have a positive impact on revenue in 2012. Bill Denby will talk more about the expansion later in the call.

We continue to made good progress with our late state development products and I’m very excited about the future commercial potential of UCERIS and RHUCIN. In September, we announced positive results from our 12-month extended use study with UCERIS, and we are on track to submit the NDA next month. To support the continued development and future commercialization of UCERIS and to provide new data to potentially expand its label and market opportunity, we have decided to initiate a Phase IIIb clinical study to evaluate UCERIS 9 milligrams as an add-on therapy to current oral 5-ASA drugs for induction of remission of active ulcerative colitis.

Key thought leader for inflammatory bowel disease as well as practicing gastroenterologists have indicated to us that clinical data assessing UCERIS as an add-on therapy could help to accelerate adoption of UCERIS for the treatment of patients with active ulcerative colitis.

With regard to RHUCIN, we now have an FDA approved special protocol assessment in place and we have reinstated enrollment of patients into the Phase III clinical study, assessing RHUCIN in acute attacks of hereditary angioedema, which we expect will be completed by the third quarter of 2012. Wendell Wierenga will provide further details on our clinical programs later in the call.

Finally, the ZEGERID authorized generic capsules sold by Prasco maintained its slightly more than 50% share of the generic market during the third quarter. As of September, ZEGERID branded capsules run at approximately 7.5% of pre-generic levels. The lower court decision on the ZEGERID patent appeal is still pending and we anticipate a decision later this year, although the timing is completely at the discretion of the appellate court.

With that overview, Debbie will review our financial results.

Debbie Crawford

Thank you, Gerry. I’d like to add my welcome to those joining our call today. Total revenues were $26.8 million for the third quarter of 2011, a 48% increase from $18.1 million for the third quarter of 2010. Net income was $563,000 or $0.01 per diluted share for the third quarter of 2011. This compares with a net loss of $25.7 million in the prior year third quarter, which was the first quarter of generic competition for ZEGERID capsules and included $7.3 million in one-time restructuring cost, and a $15 million upfront payment to Pharming for North American rights to RHUCIN.

Net product sales for the third quarter of 2011 were $19.8 million and included approximately $9.9 million of sales from ZEGERID brand and authorized generic products, $2.1 million of CYCLOSET net sales. And, for GLUMETZA, we recorded approximately $7.8 million for the month of September. GLUMETZA net sales reflect a gross to net adjustment for eVoucher discounts of approximately $700,000, related to potential eVoucher redemption on shipments of GLUMETZA that occurred prior to September 2011. Net product sales for the third quarter of 2010 were $11 million and consisted of net sales of ZEGERID brand and authorized generic prescription products.

We began recording the net sales for GLUMETZA as of September 1st, under the new commercialization agreement that Gerry mentioned earlier. We are now responsible for managed care contracting, pricing, and product distribution, and certain manufacturing activities are currently being transitioned to us. In addition, Depomed has transferred the GLUMETZA NDA to Santarus and we are responsible for US pharmacoviligance activities. We’re very pleased to take on these commercial manufacturing regulatory activities for GLUMETZA which is the product that we believe has significant potential in the type 2 diabetes.

Promotion revenue of $6 million in the third quarter of 2011 was based on a gross margin split of GLUMETZA net sales recorded by Depomed for July and August under our prior promotion agreement. Depomed’s net sales for GLUMETZA were impacted by a $3.5 million increase in the allowance for product returns related to a pricing action taken in August 2011.

Royalty revenue was $979,000 in the 2011 third quarter and included approximately $756,000 in ZEGERID OTC royalties, and approximately $223,000 were associated with royalties on sales of TRINSICA, GSK’s omeprazole/sodium bicarbonate PPI product that was launched in Mexico in the second quarter of this year.

R&D expenses for the third quarter of 2011 were $3.8 million. The approximately $600,000 decrease from the 2010 third quarter was primarily due to lower costs associated with the UCERIS Phase III clinical program.

SG&A expenses of $16.2 million were approximately $1.2 million higher than the third quarter of 2010, primarily due to an increase in promotional spending related to GLUMETZA and CYCLOSET.

Turning to the nine months ended September 30, 2011 total revenues were $76.2 million, R&D expenses were $11 million, and SG&A expenses were $48.7 million. Net income for the nine months period was $2.8 million or $0.04 per diluted share. And as of September 30, 2011 cash, cash equivalents and short-term investments were $58.7 million, an increase of approximately $2.1 million during the third quarter.

We’re providing an updated outlook for 2011 as follows. We affirm our expectations for total revenues of approximately $115 million. We are providing guidance for 2011 license fees and royalties of approximately $18 million, which now include royalties payable to Depomed on net sales of GLUMETZA under the new commercialization agreement. We now expect R&D expenses of $19 million to $21 million compared with our prior estimate of $20 million to $23 million.

In addition to our ongoing clinical development costs, in the fourth quarter, we also expect to pay an approximate $2 million filing fee in December for our UCERIS NDA and to incur startup costs associated with the UCERIS Phase IIIb clinical study. We expect SG&A expenses of up to approximately $68 million versus our prior estimate of approximately $70 million. And we are improving our net income outlook to approximately $3 million, up from our prior estimate of $2 million.

I’ll now turn the call over to Bill Denby, to discuss our commercial activity.

Bill Denby

Thanks Deb. We took advantage of the new commercialization agreement for GLUMETZA to implement programs to support continued prescriptions and revenue growth. In mid September, we put in placed an electronic voucher that automatically reduces a patient’s pharmacy copay to $10. This program is designed to benefit patients covered by health insurance who fill prescriptions in approximately 33,000 pharmacies, and impacts an estimated 25% of our prescriptions. Under the eVoucher program, we expect to subsidize about $45 to $55 per prescription plus administrative expenses. We believe the eVoucher programs lower copay removes an important barrier to prescribing GLUMETZA and reduces the potential for generic switching at the pharmacy. We also are offering a similar $10 copay coupon for use of pharmacies that do not participate in our eVoucher program.

In our marketing research, physicians have told us that with the absence of the copay barrier, they preferred to prescribe GLUMETZA’s first line therapy, under the belief that patients have fewer GI side effects with GLUMETZA compared with immediate release generic metformins. GLUMETZA’s controlled delivery is designed to reduce GI side effects which may allow for a more rapid titrating to an optimal dose, which likely results in better A1c control. Our ability to reduce generic switching at the pharmacy or convert even a small fraction of the nearly 59 million annual prescriptions in the generic prescription metformin market would have a very positive effect on GLUMETZA prescriptions. Although, it’s early, the eVoucher program is tracking as expected, and new prescriptions appear to be trending upward. Specifically, as of the week of October 28th, average new prescriptions for GLUMETZA are up about 11% from the four-week average prior start of the eVoucher program in September. And average total prescriptions are up more than 6%.

As Gerry discussed, we are expanding our sales organization to about 150 sales reps. An action we believe will favorably impact our ability to educate physicians and create greater demand for both GLUMETZA and CYCLOSET. Based on our positive past experience, we have again contracted with inVentiv Health for the 40 new sales reps and expect to have territories realigned and the new reps in place in the first quarter of 2012. We expect the expansion will increase the efficiency of our sales organization by shrinking some of our largest territories and increasing call frequency with our most important high prescribing doctors, and may result in increased prescribing. The eVoucher program and the recent decision of increased to sales force size have met with great enthusiasm by our entire commercial team.

Moving to CYCLOSET, we continue to believe that as physicians become familiar with the clinical profile of CYCLOSET, their willingness to prescribe increases significantly. We see a strong correlation between sales call frequency and physicians prescribing CYCLOSET. Our focused efforts on those physicians most likely to prescribe CYCLOSET resulted in more than 21% growth in total prescriptions within an eight over eight-week period, ending October 28th. And we are pleased to report that CYCLOSET has very recently been to Aetna’s preferred drug list, with a tier 2 placement on the formulary, which will result in an average copay of approximately $25 for most Aetna patients. Aetna is one of the largest health insurance companies in the country, operating in all 50 states and covering about 9.5 million pharmacy lives.

With that overview, I’ll now turn the call over to Wendell Wierenga.

Wendell Wierenga

Thanks Bill. In late September, we announced supportive top line data from our extended use study with UCERIS or budesonide MMX. This was a double-blind multi-centered 12-month clinical study and 123 patients treated nearly with the UCERIS 6 milligrams or placebo. Top line safety results from the study indicated the frequency of treatment related adverse events for UCERIS 6 milligrams was 21%, and was similar to the 21.3% observed for a placebo. Secondly, mean morning plasma Cortisol levels remained within normal limits at all visits for both UCERIS 6 milligrams and placebo, and incidence of glucocorticoid effects were comparable between the two cohorts. And thirdly, there were no clinically meaningful differences in the number of patients with abnormal bone mineral density skins at baseline and end of study between UCERIS 6 milligram and placebo.

Last week, an analysis of pooled data from 672 patients in the predefined intent-to-treat population from two Phase III clinical studies with UCERIS were presented at the poster session at the American College of Gastroenterology’s Annual Scientific Meeting in Washington, DC. This analysis indicated that UCERIS 9 milligram taken once daily for the induction of remission of mild to moderately ulcerative colitis was statistically superior to placebo in clinical and endoscopic remission and for symptom resolution. Treatment-emergent adverse events, including potential glucocorticoid effects, occurred with similar frequencies across all study groups.

We believe this pooled data provides important information about UCERIS 9 milligram in patients with mild or moderate active ulcerative colitis. The pooled data and the extended use data will be included in the integrated safety and efficacy analyses for the UCERIS NDA, which we remain on track to submit to the FDA by the end of this year.

As Gerry mentioned, we are planning a multi-centered randomized double-blind placebo-controlled Phase IIIb clinical study with the UCERIS 9 milligram to evaluate the incremental benefit of adding UCERIS 9 milligram to current oral 5-ASA therapy such as Asacol or Lialda for patients with mild or moderate active ulcerative colitis who are experiencing a flare while on stable doses of oral 5-ASAs. This Phase IIIb study is a natural evolution of drug development, recognizing both regulatory guidance for drug approval as well as the standard of care in ulcerative colitis. Following input from gastroenterology key opinion leaders, we concluded that evaluating UCERIS as an add-on therapy will be an important new indication to explore. Assuming positive results, we would expect to submit the data from the Phase IIIb study to the FDA to potentially expand the label for UCERIS.

This Phase IIIb study design will evaluate patients with mild or moderate active ulcerative colitis who continue using their current 5-ASA treatment regimen and for an eight-week period will add either UCERIS 9-milligram or placebo administered once daily. The primary endpoint of the study will be remission at week eight, defined as a UCBAI score of less than or equal to one, with a zero score for rectal bleeding, stool frequency and mucosal appearance. We expect to enroll approximately 500 patients, 250 patients in each arm and approximately 120 clinical sites with more than 50% of the sites in the US and the remainder in Canada and Europe. We expect to begin enrolling patients in the first quarter of 2012.

With regards to our RHUCIN development program, our collaboration partner Pharming has reinitiated randomizing patients into the Phase III study for the treatment of acute attacks of angioedema and HAE patients. We expect to enroll approximately 75 patients in this study, with 45 receiving RHUCIN and 30 placebo. And we expect to complete enrollment by the third quarter of 2012.

Finally, we are approximately 70% enrolled in the Phase III rifamycin SV MMX clinical study in travelers' diarrhea. At this time, we expect to complete patient enrollment in the second half of 2012.

I’ll now turn the call back over to Gerry.

Gerry Proehl

Thanks Wendell. In closing, we are focused on the following: increasing prescription and revenue growth for GLUMETZA and CYCLOSET, and we are significantly increasing our commercial activities to capture additional sales potential for these products; completing the preparation of the NDA for UCERIS for our planned submission to the FDA next month; and initiating the Phase IIIb clinical study for use of UCERIS as add-on therapy; advancing the Phase III clinical studies for RHUCIN and rifamycin SV MMX, as well as advancing our antibody program; and continuing to manage our expenses to achieve profitability. We are also actively pursuing additional complementary marketed products to add to our commercial portfolio.

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

Question-and-Answer Session

Operator

(Operator Instructions).

Martha Hough

This is Martha. And, while we’re waiting for those questions, I just like to mention that we'll be presenting at two upcoming investment conferences. The first is at the Lazard Capital Markets Annual Healthcare Conference on November 15th at the Pierre Hotel in New York City, and then followed by the presentation at the Piper Jaffray Healthcare Conference on November 29th at the New York Palace Hotel.

Okay, Mia, if you there are questions, we're ready for the first one.

Operator

Yes, ma’am. The first question will come from Scott Henry with ROTH Capital.

Scott Henry – ROTH Capital

Thank you and good afternoon. I guess just for starters, kind of a big picture question. The Phase IIIb in UCERIS, I guess, why do that before getting the first indication approved? Is there any risks that, you start another Phase III trial and the FDA may want to see the results of that before making an approval decision? How are you thinking about it? And as well, could you potentially have a combination product down the road?

Wendell Wierenga

Well, we’ve designed this study, of course, on the basis of real recognition of the use of 5-ASAs and the treatment of mild to moderate and the realization that steroids would be not only add-on but also used in sequence with treatment. And, therefore, the sooner we get that data in hand, the better we are going to be in terms of providing information to prescribing physicians as to how to utilize budesonide MMX or UCERIS when it does become available. So that’s really the principal reason for activating that trial now as opposed to waiving. We fully expect that the data for UCERIS 9 milligram will be convincing in terms of the current NDA package that we’re putting forward to the agency.

Scott Henry – ROTH Capital

No. I guess, to re-raise the question, do you think running another Phase III trial increases risks that the FDA may ask to see those results prior to approval?

Wendell Wierenga

Well, one always runs that risk when you’re doing a trial in parallel with a review of an ongoing submission. However, this would be a different indication for the drug; it’s not for the single agent treatment of mild to moderate. And, therefore, represents a different patient population than what’s in our current submission. So while there is a risk there, we do not think it is a very significant risk.

Scott Henry – ROTH Capital

Okay, fair enough. Shifting gears to GLUMETZA. You’ve given – I don’t know if this will be a question for Gerry – you’ve given guidance license fee and royalties of approximately $18 million. If I look at what you’ve done the first three quarters, if that’s the biggest variable, you can almost back into $25 million to even as high as the $30 million run rate for Q4 in GLUMETZA. I guess, Gerry, am I doing the math right?

Gerry Proehl

Yes, I’ll let Debbie address that question, Scott, since she is much better math than me.

Scott Henry – ROTH Capital

Excellent.

Debbie Crawford

Gerry is quite good. Let me say, Scott, we were just trying to give folks visibility to the fact that the terms of the new commercialization agreement are such that certainly we’re getting the benefit of booking the net product sales, but then we would have is we previously disclosed a 26.5% royalty to Depomed on those sales. So it’s just wanting to make sure people understand that the accounting is a little different than in the past where we really just booked the net amount of promotion revenue. So it is a substantial number.

Scott Henry – ROTH Capital

Okay. Yes, I guess to some extent, you can kind of just kind of back into it. But shifting gears or I guess not shifting gears, but any comments on the GLUMETZA 30-month stay coming to an end. Obviously, either when you’re adding reps, GLUMETZA is a big driver, so you want to make you’re not adding them with risk coming up. Any progress on that front, or just any comments that you may not have any at this point.

Gerry Proehl

Yes, Scott. This is Gerry. We don’t comment specifically on settlement discussions we maybe having with any of the generic filers. I would say that we feel like adding the reps at this point makes sense for us based on where we see the product, we have patents that go – the first patent expires 2016 and we have additional patents that go beyond 2016. So obviously, we feel confident in working with Depomed on the litigation. And we’re hopeful that down the road, we’ll be able to enter into settlement with [inaudible], we can’t predict that for sure. But we feel confident on the strengths of the patents and feel like this is the time to go ahead and start driving prescriptions of both GLUMETZA and CYCLOSET. And the eVoucher program certainly is starting off very well. And we think by increasing the number of reps, we can significantly increase the prescriptions of both CYLCOSET and GLUMETZA.

Scott Henry – ROTH Capital

Okay. Just final couple of questions here. ZEGERID’s $9.9 million looked a little light in the quarter. Any thoughts on that? Should we think about the Q3 run rate when we look to Q4, or was there any one-time noise there?

Debbie Crawford

Scott, I would say the third quarter is fairly representative, and really it was the second quarter that we had the benefit of some reduced accruals for rebates as we had cancelled contracts and reduced utilization. So I think third quarter is a good run rate. Keeping in mind, however, though we have continued to see a decline in the prescriptions for ZEGERID products given that we are not promoting. I believe was about a 14% decline third quarter versus second quarter, so just keeping that in mind. I think other than that, it’s a pretty good representation.

Scott Henry – ROTH Capital

Okay. Final question from me. I have heard that Merck has been kind of mentioning the over-the-counter ZEGERID. Any thoughts on that? Are you hearing – are you getting some positive feedback? I was just surprised to hear that that product is being highlighted from Merck.

Gerry Proehl

Yes. I guess, we think certainly ZEGERID OTC is a nice product, Scott, but it’s not a major value driver for us, and we don’t expect it will be in the future. It’s nice additional profit that drops our bottom-line, but it’s not going to be a significant driver for us in the future.

Scott Henry – ROTH Capital

Okay. Thank you for taking the question.

Gerry Proehl

Sure.

Operator

The next question will come from Frank Pinkerton with SunTrust.

Evan – SunTrust

Hi, this is Evan [ph] stepping in for Frank. Thanks for taking my questions. My first question is kind of just a modeling kind of question related to GLUMETZA. As we look at the one month since the new selling agreement that was put in place, is that kind of the right run rate to think of for $7.8 million net sales? And then, kind of adding on to that, is the gross to net kind of the 10% discount we’re seeing from the e-copays, is that kind of the right discounts to be thinking of, or does that kind of kind of change, do more prescriptions flow through that e-copay giving us higher gross to net – yes higher gross than the discount?

Debbie Crawford

First, to answer about the month of September, the $7.8 million net sales, I would just point out that that include just about $700,000 of gross to net discounts on the eVoucher that are really for prior period. So I would say you would want to adjust for that and thinking about some more current run rate. But once you’ve done that, the eVoucher program I think as we’ve mentioned affects about 25% of our prescriptions today. So as that grows, you would expect to see some incremental impact on the gross to net as well, but that will all be in our mind positive volume, because we wouldn’t necessarily have had the prescription had we not had the voucher program.

Evan – SunTrust

Okay, thanks. And then my second question is just on CYCLOSET. We’ve seen the refill rate picking up as a retract prescriptions. New prescription growth has been probably a little bit slower. I was just wondering if you could give us your perspective on how the selling effort is going there, how the key opinion leader strategy is going, and if there is any changes to that that we should be aware since the last quarter? Thanks.

Gerry Proehl

While Evan for one, we’re getting more traction than we have in the past. I think the main point, we’ve tried to focus and concentrate our efforts on a couple of thousand key physicians in order to increase the frequency that I talked about in my prepared comments, and I think we’re seeing the results of those efforts. So the 21% that I quoted in terms of growth for CYCLOSET is a key indicator that this increase in frequency that is better than once a month on key doctors results an increase in prescriptions. So going forward, we expect to expand that couple of thousand highly concentrate effort to a broader audience given the expansion. So I think we’re pretty encouraged by the last eight weeks or so.

Evan – SunTrust

Do you have any update on that? I think you had just a little more than 300 doctors prescribing at the end of last quarter, has that number changed at all?

Gerry Proehl

I think it’s around 400 docs.

Evan – SunTrust

Okay. All right, I’ll get back in queue. Thanks for taking my questions.

Operator

The next question will come from Annabel Samimy with Stifel Nicolaus.

Annabel Samimy – Stifel Nicolaus

Thanks for taking my questions. Just to continue on the GLUMETZA vein or rather it’s CYCLOSET. With regard to adoption among the physicians, what is the biggest hurdle right now that you’re having? Is it the new mechanism, because it’s not necessarily a first time that new mechanism has been introduced to diabetes? So do you think that there is something in the messaging that you need to be doing differently or better, or just – is it just constant pounding, increased frequency, et cetera?

Bill Denby

It’s the latter Annabel. I think the message is well received. It’s just not being remembered. And really, I talked about familiarity in my prepared comments. So familiarity is made up of people, peers, the specialists of what they hear in publications, what they hear from the reps. And we’re making positive strides on all those fronts. But it really is just continuing to increase the confidence in the physicians that they understand and can write the drug with confidence, and that’s happening increasingly. So we’re encouraged so far.

Annabel Samimy – Stifel Nicolaus

Okay. And on GLUMETZA, I think last quarter you talked specifically about reflow rate was – or the actual filling of the prescription at the pharmacy level was less than 50%. Has that metric improved with your new efforts and your eVouchers and having gaining more control over the products?

Bill Denby

Yes, it has quite significantly.

Annabel Samimy – Stifel Nicolaus

Do you have a number to that?

Bill Denby

I’m not going to have the numbers off of the top of my head. I’m not sure what we’ve disclosed in the past. But it really has improved quite a bit.

Annabel Samimy – Stifel Nicolaus

Okay. And then on the coverage of GLUMETZA, I know that you’ve spoken in the past that coverage of diabetes drives in general are not really looked at too rigidly, I guess. I don’t know, maybe I’m using all the wrong words. But has there been any kind of backlash or a response from payers specifically on the 6% price increase even though it’s still at part for GLUMETZA [ph]?

Wendell Wierenga

There hasn’t been any. And I think we’ve disclosed in the past that it’s in all of our best interest to have diabetes patients on these drugs. And so with insurance companies that’s what they advocate for is to get people under control because of the myriad of co-morbid conditions that encounters or come with this disease. So generally we’re at a tier three copay at about $40, $45 with GLUMETZA. And so it really doesn’t prevent in fact huge of a barrier, but to the extent that it has been the $10 copay takes that away. We haven’t, as I said, heard any sort of backlash on prices – pricing.

Annabel Samimy – Stifel Nicolaus

Okay. And how broad is the coverage right now? Is it 80% of covered lives, 90%? Can you just give us an idea there?

Wendell Wierenga

I think it’s beyond 80%. I mean it’s a rare case where the products are not available to patients.

Annabel Samimy – Stifel Nicolaus

Okay. And then one more question on UCERIS, almost forgot the new names. On UCERIS, you – I guess with the new Phase IIIb study as add-on therapy, can you just help us understand the percent of patients that receives steroids in general as the single [inaudible] induction versus the patients who receives steroids as an add-on therapy? Can you just give us an idea of how important what each market is in terms of your adoption?

David Ballard

Annabel, this is David. I think the majority of the market, I mean starting is 5-ASA, and I think almost all patients in the mild to moderate range are going to be started on 5-ASA. At that point of those patients who fail, a physician then has to make a decision of what do they do next, do they go to the immunomodulator drug like 6-MP or steroids.

And I think when you talk to clinicians, I mean you’ll find going up the steroids – in the literature it may be 20%, 30% of the time they’ll go with steroids. The big concern with the steroids is the safety profile. I think everyone agrees that the steroids are certainly more efficacious, but the concern is long-term safety. So they will hit somebody heavy and hard with the steroid initially and then back-off. For a person who has moderate to severe disease that’s not our current indication, they’re more likely to use steroids first line. But in the mild to moderate population, the best way to think about it is 5-ASA and then making the other decision points after that.

Gerry Proehl

Annabel, this is Gerry. Just to make sure that everybody is aware, when David is referring to steroids, he is talking about systemic steroids versus our UCERIS which is non-systemic with very low absorption. So that’s really the difference is when you move from a systemic steroid to a non-systemic like UCERIS, you’re going to have lower side effects.

David Ballard

Thank you.

Operator

(Operator Instructions). The next question will come from David Amsellem with Piper Jaffray.

Trevor Davis – Piper Jaffray

Hi guys. This is Trevor Davis [ph] on for David. Thanks for taking my questions. I just have a couple. If you could, can you just walk us through how we should think about your level of marketing spend if any at all on ZEGERID if you won the appeal and regain exclusivity of the product? And also what happens to your agreement with Prasco if you re-launch the brand? Thanks.

Gerry Proehl

Yes. So this is Gerry. As it relates to ZEGERID, if we were to win the appeal, we very likely would not actively promote ZEGERID. At this point in time, we don’t think it probably is in our best interest from a profitability standpoint. That being said, certainly launching UCERIS to gastroenterologists would open up an opportunity us for potentially dropping samples off to the gastroenterology audience and could help us continue to sell ZEGERID. As far as Prasco, we have the ability certainly on an appellate court win to negotiate with them on the terms of our agreement with them to distribute or authorize generic product.

Trevor Davis – Piper Jaffray

Okay, thanks. That’s helpful. And lastly, I think in your prepared remarks, you touched on this very briefly, but just I’ll ask my question in full. Regarding business development, so what are your latest thoughts on adding new products? And more specifically, would you potentially take on additional pipeline assets? Are you looking more at market ready products along the line with Depomed’s deal? And just how should we think about your therapeutic focus going forward?

Gerry Proehl

So, as I mentioned, for – our primary focus right now on the development side is, is to continue to focus on the products we have on our current portfolio. We’re certainly looking at opportunities with our current portfolio to potentially expand indications similar or doing with UCERIS add-on to 5-ASA, we are evaluating RHUCIN and other indications, and looking at rifamycin potentially for other indications. So that’s on our development side.

On the marketed side, mainly we’re looking for a product that would be complementary to our diabetes franchise. Most likely, it wouldn’t be another type 2 diabetes product, but it could be a product that’s complementary that would be treating a co morbid condition potentially patients with type 2 diabetes have high blood pressure, they have high cholesterol, high triglycerides, those types of products that wouldn’t be very complementary, we’d go to the same target audience that we’re currently calling on.

Trevor Davis – Piper Jaffray

Great, thanks. That’s very helpful. Thanks.

Gerry Proehl

Sure.

Operator

There are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Gerry Proehl

Great. Well, I would like to thank you for your interest in Santarus and for joining us on today’s call. If you have any further questions, feel free to contact me, Debbie, or Martha. Thank you and 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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