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Executives

Gerald Proehl – President and CEO

Debra Crawford – Senior Vice President and CFO

Analysts

Karen Koski - Lazard Capital Markets

Santarus, Inc. (SNTS) Lazard Capital Markets 8th Annual Healthcare Conference Call November 15, 2011 1:00 PM ET

Karen Koski

Okay. I think we already get started. My name is Karen Koski from Lazard Capital Markets and we are pleased to have Santarus here with us today. Presenting on behalf of the company is the President and CEO, Mr. Gerald Proehl; and Senior VP and CFO, Ms. Debra Crawford, and we invite you to ask questions at the end of the presentation. Mr. Proehl?

Gerald Proehl

Thanks Karen. I will be making some forward-looking statements, so please refer to our SEC filings. Santarus is a specialty biopharmaceutical company, we currently have two marketed products both in the type 2 diabetes space, GLUMETZA, which is the extended release metformin product and CYCLOSET, which is a dopamine antagonist. We estimate peak sales of those two products between $300 to $400 million.

We also have three products in late-stage development, UCERIS which is our new brand name for budesonide. We currently have completed two pivotal studies and an extension study, and we are in our final phases of working on the NDA, which we expect to file before the end of this year.

RHUCIN which is recombinant C1 inhibitor currently completed two pivotal studies and we are in the process of enrolling patients in one additional Phase III pivotal study.

And Rifamycin, which we are currently enrolling patients, we're about 70% enrolled in the first Phase III study for travelers’ diarrhea. There is an additional study ongoing with Dr. Falk, which is the European partner. They are currently enrolling patients in a Phase III study in Africa. We estimate peak sales of around $500 million for that those products and then we have an early-stage program in some anti-VLA-1 antibody program that’s currently enrolling patients in the Phase I program.

This gives you a very brief look at the overall portfolio, the only thing I’ll point out here is the third product now ZEGERID, some of you might be aware of. We did release a lower court decision last year on our patent to Par Pharmaceutical, they launched in generic product in July of last year. We appeal decision and oral arguments were heard in May of this year and we currently await the decision from the appellate court. Our analyses tell us the average is two to six months, we spent just a little over six months, so we’re outside the average now, but we look everyday at 8 o’clock in the morning.

As far as our focus, the way to think about us is we are really in the process of moving from what was predominantly a primary care/GI focus to much more of a specialty focus. We currently call on about 3000 endocrinologist and about another 8 to 10,000 primary care physicians for type 2 diabetes franchise. We have 110 reps currently. We are in the process of adding additional 40 reps or hire those reps beginning in the first month of 2012.

With budesonide we really focus on gastroenterologists and what we have down here is 80-rep equivalents. I think as we move throughout 2012, we will make an assessment of how well we are performing with the 150 reps for GLUMETZA and CYCLOSET in making determination whether or not we would add a fall additional 80 reps, 40 reps or something out of that. But we believe we need 80-rep equivalents to successfully launch budesonide.

For RHUCIN it’s about 20 to 25 reps calling on particularly allergists and some immunologists. And then alternatively with SAN-300, if we decide to go forward in rheumatology be about additional 30 reps. We think the antibody program could be effective not only in RA but also in inflammatory bowel disease and highly likely that we would look as we move through Phase II to look for a partner either an ex-U.S. partner or potential worldwide partner for that particular program, potentially we have no partner and we move forward with the RE indication, and thus focusing on GI indication.

As far as how we are trying to move the business forward and in moving from more of a primary care to a specialty focus is really trying to moving to those markets where we can increase sales per sales rep and we want the sales rep to be more efficient currently, we had about a $1 million for sales reps, we think we want to get into the $2, $3, $4 million per sales rep range where we can be much more efficient.

In doing that we will be able to decrease our overall SG&A as percentage of revenue and maintain our R&D as a percent of revenue. We then better allow us to continue to develop our portfolio fully but also increase overall profit and cash flow in the future.

Let’s me talk little bit about GLUMETZA, I mentioned it’s an extended release metformin product, very simple, metformin is a standard of care for treating type 2 diabetes almost every type 2 diabetic patient is going to be studied on metformin.

The biggest issues with metformin are GI side effects, particularly as doctors tolerate the dose, they fed at 500 milligrams and they tolerate up by 500 milligrams increments. When they get up to about 1000 milligrams is when they start to see the side effects from metformin.

And part of the issues when we release a lot of metformin very quickly, it cause more GI side effects, by extending the release over six to eight hour period reduce the peak blood levels and reduce the GI side effects. So it’s a really good way of treat these patients and allowing the doctor to add in order tolerate the dose all up to about 2000-milligram.

More recently we renegotiated our commercialization agreement with Depomed. GLUMETZA has become a more important product for us and with Depomed they have another product release they are focusing on launching. So we’ve taken over overall responsibility for manufacturing, we transferred the NDA, so we’ll take care of all the drug safety pharmaco vigilance. We are now booking sales and product we set price and we will deal with rebating and contracting.

With the new commercialization agreement we did take a fairly substantial price increase, was about 60% up to the price of fortamet. We think that it was the right thing to do. We think that when you compare our product to fortamet there is some real advantages of GLUMETZA over fortamet.

It allowed us to do a couple of things. Number one, allow us to add additional 40 sales representatives and that really increases our frequency of calls on our targeted physician, but it also allowed us to introduce this eVoucher program.

When we talk with physicians, prescribing physicians, what they told us is, they really thought GLUMETZA was a much better product from a GI safety standpoint and generic metformin, but they so compared to rate generic metformin first because of lower co-pay per patients and our co-pay was running more on the $50 to $60 range versus the typical maybe $10 for generic.

We estimate we could get our co-pay down to $10 generic co-pay with a prescribed in GLUMETZA and they came back clearly said, if you didn’t get the co-pay constitute generic co-pay, we would likely use your product more first line then we are now. So we think that there are some real opportunity there now, I’ll talk a little bit about that.

The co-pay that patients will be paying is about $10, it affects about 25% of our business, so it’s only affecting the commercial patients, it doesn’t affect Medicaid, Medicare or anybody that uses mail order but about 25% of our business.

Two things we think will really come of that, number one is, it will improve our abandonment rate, when we say abandonment rate, patients that get a prescription written, prescription actually goes to the pharmacy gets put into the system, but never actually gets picked up by the patients. Most likely because of the higher co-pay and we are already seeing the abandonment rate start to come down on GLUMETZA.

The other piece so is, we think it’s gives us the opportunity to get some the generic metformin business, and when you look at the generic metformin business, you’ll see that it’s a fairly substantial piece of the overall business.

You can see on the prescription both move in TRx’s with the introduction of eVoucher Program, you can see the increase in the overall trend line, that clearly has to do with the abandonment rate, we’re seeing that come down. We think longer term as we move into the first six months of program and beyond we can start to actually get some of the generic business.

GLUMETZA on the rolling 12 months basis generate about 240,000 prescriptions, in those same targeted doctors that we are calling on, generic metformin represented about 8 million prescriptions, so you can see that, if we just get a small percentage of the generic metformin business, we can substantially change our overall term lines as far as overall GLUMETZA business.

CYCLOSET I mentioned, its also for type 2 diabetes, it’s bromocriptine mesylate, it’s actually acting product, it’s effect the hypothalamus, it reset the hypothalamus and improve insulin sensitivity in patients.

It’s a very effective product as far as lowering A1c, which is what doctors typically measure when they’re measuring patients with type 2 diabetes. It also lowers postprandial glucose, but probably most important is that the GI profile, this is the first prac approved under the new guidance from the FDA where we had to demonstrate cardiovascular safety, not only the CYCLOSET demonstrate cardiovascular safety, actually showed in 2000 patients that uses product, about a 55% reduction in overall stroke, MI, cardiovascular death.

The first product really to show that type of cardiovascular reduction, that message is slowly starting to get through the physician and they’re starting to really figure out where they fit this into their treatment regiment.

If you look at the prescription trend, the green trend is new prescriptions, you can see from about March through about August, new prescriptions were fairly flat, we’re seeing some growth in total prescriptions in the red and then about at the beginning of September we really start to see a break in the new prescriptions, and we are starting to see some of the endocrinologist pick up this product and use it more frequently, Dr. Ralph DeFronzo, one of the thought leaders, wrote a review article that was really favorable for CYCLOSET and we think we’re just beginning to see the beginning of doctors including this in their treatment regiment.

As far as our pipeline, I mentioned, UCERIS the budesonide tablets, we very excited about this product we think have potential to be at $300 million product. We’ve completed two pivotal studies and induction of remission of patients with mild or moderate ulcerative colitis. We completed an extent -- 12 months extension study and we plan to submit the NDA at the end of this year. The patents actually expire in 2020. We did announced a Phase IIIb study that will initiate here in the end of December beginning January we start enrolling patients and I’ll talk about that in just a second.

The inflammatory bowel disease market is a very substantial market, you can see it’s about $2 billion divided between crohn’s and ulcerative colitis, a couple of products I’ll point out, Entocort EC is budesonide in a delivery system for crohn’s disease, they predominantly delivering to the small intestine over $350 million.

Lialda is the mesalamine product that uses the same MMX delivery technology to get the product to call in over $350 million and the biggest product is actually Asacol you can see over $700 million referral and I’ll show you some comparative data in our clinical results.

When you are talking about patients of ulcerative colitis, these patients are taking many, many pills, you can see, if you’re talking Asacol, you could be taking up to six pills three times a day, Pentasa eight pills over a four times a day. So our product is one pill once a day, the convenience will be appreciated by the patients.

As far as the clinical results you can see on the left is the U.S. trial and the right is the European trial, both of them highly statistically significant, the U.S. trial at 0.014 and the European trial 0.0047. In U.S. trial as a comparative product we offer Asacol which was not statistically different from placebo. In the European trial we had Entocort EC which rose the statistically significant at a 0.05 level, we were significant at a 0.025 level.

As far as safety profile the safety looks very good in this product, you can look at AE very similar across all of the products including placebo, we didn’t see anything that really stuck out as far as in the adverse events.

We did complete a 12-month extension study, again we look at the side effect profile, you can see between placebo and UCERIS very similar overall safety. We saw no issues with plasma cortisol levels. No we have indication of any corticosteroid type of side effect it might expect with the systemic steroid.

We did mention a Phase IIIb study that will be initiating here and start enrolling patients either late December, more likely probably early January. Our initial indication we’re pursuing a first line therapy, this would be add-on therapy on top of 5-ASA, many patients maintain on background 5-ASA typically about 2.4 grams a day. But they typically also advance layer and you have to bring this layer under control.

Right now, most physician would use systemic steroid or ASA-5 to bring this layer under control, when we went out to first thought leaders and secondly to practicing gastroenterologists we asked them what additional data they would like to see, they clearly said, they would like to see some additional data using UCERIS on top of 5-ASA. And so we begun this trial, the study is likely to run into 2013, but we wanted to have additional data to help accelerate the market acceptance of UCERIS when launched this product.

RHUCIN is our next Phase III study product. It’s currently enrolling patients in the third Phase III. Two pivotal studies have already been completed. The first was actually completed in -- I’ll show you the data, was completed in Europe, that’s in the bottom here. The second study was completed in North America. The European study was done at 100 units per kilogram dose, and then in U.S. study we use 100 kilograms, but also did a 50 kilogram dose.

What was obvious is that 50 kilogram dose was also very effective. When we met with the FDA, the FDA asked that we do an additional study of the 50 units per kilograms. So we are currently enrolling 75 patients in that particular study expect to finish it somewhere in the third quarter of 2012 and then we’ll go ahead and submit the VRA it would be for treatment of acute attacks of Hereditary Angioedema.

If you look at the marketplace there are number of products currently on the market, on the right it would be Cinryze of prophylactic treatment, this patients will be taking the product twice a week every week, typically it’s going to be patients that are getting attacks probably multiple kinds a week, the costs of treatment over a 12 months period is about $400,000 and some of those patients will still have very few attacks.

On the left side is the patients that typically have been treated with anabolic steroids and these patients have been treated for many years with anabolic steroids, many doctors are starting to reduce the dose of steroids and starting to move to these other treatments.

And then the middle what we think is going to be the biggest piece of the market are going to be acute treatment. These are patients that might be getting one attack a month. They are going to be treated either with a HC1 inhibitor, currently Berinert is on the market, it’s a plasma-derived C1 inhibitor as it Cinryze oral product like Kalbitor and Firazyr.

We will be the first combatant C1 inhibitor on the marketplace. We think it offer some safety advantages over plasma-derived products, and we also think that the doctors will see disputed onsite of process is very significant. So we are looking forward to entering this particular marketplace.

Our third Phase III program is Rifamycin, I mentioned we are currently about 70% involved in the Phase III program. Prominently we are in Mexico and then two sites in Guatemala. The trial has taken a little bit longer then expected, some of the violence down in Mexico was actually reduced the number of students that go down to Mexico for language work and that’s reduced our overall population of study, but we expect to finish this study in the second half of next year.

Cosmo’s partner in Europe is Dr. Falk Pharma. They are currently enrolling patients in Phase III study in Africa and they expect to finish in the similar type timeframe. So all going well we expect both our study and their study to finish some time in second half of 2012.

Our early-stage program, I mentioned, it’s an anti-VLA-1 antibody program. We purchased a small company by name of Covella for $1.8 million. Covella had licensed it technology out of Biogen Idec. Biogen Idec had done quite a bit of work on this program. They had done preclinical work in inflammatory arthritis, inflammatory bowel disease, psoriasis, corneal transplant, asthma with very good results. They had actually manufactured product getting ready to take it in the clinical studies, and decided to go in a different direction obviously they are focused a lot in the CNS area and MS.

Larry Fritz is one of the founders of Covella. He is a neurobiologist by training, have done the early work with athena neuroscience on Tysabri. Tysabri is an anti-VLA-4 antibody and so he had lot of experience into estrogen, look at all the preclinical data, look at all the biology and the biology of this product will indicate that it’s very less widely that we would cause an issue with PML with the JC virus, because we really affect circulating T cells in monocytes. We work little bit differently then the anti-VLA-4 antibody program.

So we think that this could be a very exciting program, as I mentioned, likely we are moving to RA to get proof-of-concept. RA is a better proof-of-concept area than crohn disease, but we probably would look to partner this program and as we move beyond Phase II before we measure UCERIS and probably keep the program in the GI space ourselves, very excited about this, if it works in RA, it’s likely work in some of the other disease areas also.

As far as our financial history, you can see here we are growing nicely, revenues we’ve got up to little over $170 million in revenues and then last year we lost the patent challenge. We downsize the organization. We end up taken a write-off about $7 million for restructuring charge. We also had a $15 million expense in the upfront payment to RHUCIN and you can see that in the loss side, we had a loss of about $19 million.

So if you take $15 million upfront from RHUCIN the $7 million restructuring charge we actually manage the business to close to breakeven last year. And if you look at this year in the first part of the year we’ve continue to move back into the profitable area, after nine months we’ve had net income of just under $3 million.

We believe it’s important to both our topline revenue, it is also important to drive bottom line net income, we are focused on continue to do that, continue to drive cash flow, that’s how we are managing the business. We have just under $60 million in cash. We feel like we are in very good position overall and we are excited about the future of the business.

In closing, our key things, number on, GLUMETZA, we want to continue to drive the overall growth of GLUMETZA, we think it has great growth potential, we’re just beginning to see the impact of the eVoucher Program and we think with addition of 40 reps we will be able to accelerate the prescription trends for GLUMETZA.

CYCLOSET as I mentioned, take us longer than we expected, I think the new mechanism of action, in fact that’s the first centrally acting product for type 2 diabetes was something new for physician. They are starting to get comfortable with it and starting to cooperating their prescribe.

We are working with some of the diabetes associations and they are evaluating CYCLOSET potentially and to put on their guidelines. And we think if they do put it on the guideline it could really accelerate the growth of CYCLOSET.

I mentioned UCERIS, it’s very exciting, a $300 million product focused just on gastroenterologists for us would be a real accelerator beyond GLUMETZA and CYCLOSET, and then RHUCIN and Rifamycin obviously could also accelerate our topline growth and our pipeline growth. So, very excited about those programs.

The antibody programs are little further behind, we entered that program mainly because all of our other products were late-stage product and our feeling was we wanted an early-stage product that would start to show some efficacy in Phase II as we were launching UCERIS, RHUCIN and Rifamycin. As I mentioned, we do take seriously our financial management. We try to manage our expenses closely and we’ll continue to do that in the future.

So, with that, I’ll go ahead and open up to any questions. Okay.

Question-and-Answer Session

Unidentified Analyst

Gerry, could you handicap for us the various outcome on GLUMETZA patent there challenging, I think, you will find framework about?

Gerald Proehl

So I don’t know, the question was, can I handicap the outcomes of the GLUMETZA patent challenge? I don’t know, that I can handicap, I can tell you that the obvious outcomes are, the first filing was Lupin, the 30 months stay ends May of 2012, we currently have a court date set for August, although both Lupin and Santarus/Depomed have asked the court to push that back slightly.

Obviously, if we could enter into a settlement with Lupin that was both beneficial to us and Lupin it will be something that we would look at. And we are certainly looking into that and most cases, generic settlements are the way to go. We would like to get there but has to make good sense for us also. So I don’t know that handicap but I can just tell you that something every company would look to do. Yeah.

Unidentified Analyst

(Inaudible)

Gerald Proehl

Sure. So CYCLOSET is covered through 2015, the patent expire in the first half of 2015. Our partner VeroScience is in the process of initiating the pediatric study and so there is some potential, if they get that completed in time that we could get additional six months of exclusivity based on the pediatric exclusivity. But likely we would be looking for some generic in 2015 timeframe. Other question?

Unidentified Analyst

(Inaudible)

Gerald Proehl

So, the question is, why do we have the planning of the additional 40 reps with the pending patent challenge. There are couple things, number one, what we’ve really seen is, the beginning of the acceleration of GLUMETZA both with the price increase and with the eVoucher Program. We think the additional 40 reps can very accelerate the growth of GLUMETZA and also accelerate the growth of CYCLOSET.

We have to work on the assumption that either one will go and the other will get a settlement with Lupin or number two, that either we’ll be able to get in junction the whole Lupin often till the court case takes place in the fall, or they just won’t launch until that period of time.

Under the, I call it a disaster scenario, where Lupin launch is at risk in May. We’ve got bigger problems with our organization then just a 40 reps. It’s part of the reason that we structure the agreement with incentives, it gives us ultimate flexibility there. But if that would happen, it wouldn’t be obviously just the 40 reps that would be effective would be much broader than that.

Unidentified Analyst

(Inaudible)

Gerald Proehl

I think, well, where we see it start to kick in honestly is the launch of UCERIS. I think that’s, I think 2012, we haven’t given guidance yet, but certainly we expect to continue to grow GLUMETZA and CYCLOSET. We are and we have made the decision to initiate a Phase IIIb study on UCERIS. We think it’s a right think to do to really accelerate the market acceptance of that product. There are expenses obviously when you initiate Phase IIIb program. And so those will hit predominantly in 2012.

But results we think will be real acceleration of the product that we launch in the 2013 and beyond, and if you add in the overall revenue of UCERIS on top of GLUMETZA and CYCLOSET, I think that’s where you start to see the real impact on the bottom line.

Karen Koski

Okay. We are out of time. Thank you very much.

Gerald Proehl

Yeah. Thank you.

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