Santarus Q3 2007 Earnings Call Transcript

Santarus, Inc. (SNTS)

Q3 2007 Earnings Call

November 1, 2007 5:00 pm ET

Executives

Martha Hough - Vice President of Finance and Investor Relations

Gerald Proehl - President and Chief Executive Officer

Debra Crawford - Senior Vice President and Chief Financial Officer, Treasurer, and Secretary

William Denby - Senior Vice President of Commercial Operations

Analysts

Annabel Samimy - UBS

Ian Sanderson - Cowen

Russell McAllister - Merriman Curhan Ford

Michael Higgins - Rodman & Renshaw

Slade- SIG

David Amsellem - Friedman Billings

John Sabo - Flintridge Capital

Presentation

Operator

Welcome to the Santarus third quarter 2007 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Hough.

Martha Hough

Thank you. Good afternoon. This is Martha Hough, Vice President of Finance and Investor Relations. Thank you for participating in today's call. Joining me today from Santarus are Gerald Proehl, President and Chief Executive Officer; Debra Crawford, Senior Vice President, Chief Financial Officer, Treasurer, and Secretary; and William Denby, Senior Vice President, Commercial Operations.

Earlier this afternoon, Santarus released 2007 third quarter financial results. If you have not received this news release or if you would like to be added to the company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with the Eleanor Tang. This call is also being broadcast live over the Internet at www.santarus.com and a replay of the call will be available on the company's website for the next two weeks.

I caution listeners that during this call, Santarus management will be making forward-looking statements. As you know, risks and uncertainties involved in the company's business may effect the matters referred to in forward-looking statements.

As a result, the company's performance may differ from those expressed in or indicated by such forward-looking statements. Further, these forward-looking statements are qualified in their entirety by the cautionary statements contained in the press release in 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 1st, 2007. Santarus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Gerald Proehl.

Gerald Proehl

Thank you, Martha, and my thanks to everyone for joining us today. During the 2007 third quarter, our total revenue increased 105%; our product sales grew 61%; and our net loss decreased 44%, all compared with third quarter of last year.

This quarterly financial performance reflects our ability to grow Zegerid prescriptions in a very competitive PPI market. In addition, we've lowered our estimated net loss guidance for 2007. Debra Crawford will discuss that in more detail in the review of the financial results.

Zegerid brand net product sales in 2007 third quarter grew by approximately 4% over the second quarter of this year compared with 12% prescription growth, a result of more prescriptions flowing through managed care plans where due to the competitive environment, our net pricing is lower than our wholesale acquisition costs or WAC price.

The percentage growth for total Zegerid prescriptions again outperformed that of the other delayed release branded PPI products during the third quarter and for the first nine months of this year.

As I mentioned Zegerid brand prescriptions grew approximately 12% in 2007 third quarter compared with second quarter of this year while the delayed released brands, Nexium, Prevacid, Protonix, and Aciphex, as a group had negative growth of more than 2%. Generic Omeprazole prescriptions grew approximately 9% during the comparative quarterly period.

For the nine months ended September 30, 2007 and 2006, prescriptions for Zegerid brand grew approximately 143% in contrast to 2% negative growth for prescriptions for the delayed release brands. Generic Omeprazole prescriptions grew approximately 54% during the same period. William Denby will review additional Zegerid prescription metrics for the quarter a bit later in the call.

Among our third quarter highlights, our sales team began promoting the Naprelan Controlled-Released Tablets, a non-steroidal, anti-inflammatory drug targeted primary care physicians in a second sales position under a co promotion-agreement.

Bill will provide some color on total Naprelan script growth during the quarter in his commercial overview. Due to the standard delay in obtaining physician level prescription data, we expect to provide additional information on our performance with Naprelan in our fourth quarter financial call.

We also signed an agreement with CB Fleet Company to co promote the Fleet Phospho-soda EZ-Prep bowel cleansing system in the second sales position. Under the agreement, we will receive co promotion fees based on a set fee per sales call to gastroenterologists and their medical staff of up to $3 million over the term of the one-year agreement.

Importantly, we paid no upfront fee in this agreement and do not expect to incur any material incremental expenses associated with our promotional effort. Our sales organization began promoting the EZ-Prep product in October.

In September we filed a patent infringement lawsuit in Delaware district court against Par Pharmaceutical in response to a paragraph four certification and an abbreviated new drug application or ANDA filed by Par for a generic version of our Zegerid capsules prescription product. The lawsuit asserts infringement of three patents listed in the Orange Book for Zegerid capsules. In October, Par filed its answer in the case, primarily asserting non-infringement and invalidity and unenforceability.

The filing of this lawsuit automatically results in a stay of FDA approval of the Par ANDA under the earlier of 30 months, which would be February 2010, or the date of district court decision that is adverse to Santarus. We expect that discovery will begin in the near future. A trial date has not yet been set. As we stated previously, we have confidence and are prepared to vigorously defend and enforce the patents covering our Zegerid products, which expire mid-2016.

With regard to our IP portfolio, we have an exclusive worldwide license agreement with the University of Missouri for impending patent applications relating to specific formulations of PPIs with antacids and other buffering agents.

Currently five U.S. patents have been issued and several U.S. patent applications are pending and are subject to this license. Five issued patents, which expire July 2016 generally cover pharmaceutical compositions combining PPIs with buffering agents such as antacids and methods of treating gastrointestinal disorder by administering solid or liquid forms of such compositions.

In mid-September the U.S. patent and trademark office or PTO formally concluded the reexamination proceedings for the 885 patents, which is one of the three issued U.S. patents that provide coverage for our capsule product. We are pleased that the PTO confirmed the patentability of the 885 patents as amended during the proceedings over the literature and other references raised during the reexamination process.

Our portfolio of licensed patents outside the U.S. includes patents recently issued within some countries in the European patent organization as well as patents issued in Australia, India, Mexico, New Zealand, Russia, Singapore, South Africa, and South Korea, and several pending international patent applications.

Turning to the business development front, we earned a $5 million development milestone from our license agreement with Schering Plough Healthcare Products. We believe that the receipt of this milestone indicates that Schering Plough is continuing to make progress under our OTC license agreement.

We are very pleased with the resources and efforts Schering Plough has devoted to this agreement and we consider it an important goal of Santarus to assist Schering Plough in its work to bring low dosage Zegerid product to the OTC heartburn market, estimated to be over $1 billion in the U.S.

As a reminder, in addition to the $15 million upfront licensing fee received in November 2006 and this $5 million milestone, we may earn up to an additional $60 million in milestone payments upon the achievement of additional regulatory and sales milestones.

We view these future milestones payments as an important potential source of non-diluted capital for Santarus. We will also be entitled to a low double-digit royalty subject to adjustments in certain circumstance on net sales of any Zegerid OTC products sold by Schering Plough under the license agreement. In turn, we will be obligated to pay royalties to the University of Missouri on net sales of any such OTC products.

With those remarks, I'll turn the call over to Debra Crawford.

Debra Crawford

Thank you, Gerry. And I would like to add my welcome to those joining us this afternoon. I will provide an overview of our third quarter 2007 statement of operations; our balance sheet highlights; and also discuss our outlets for 2007 and 2008. Additional financial information will be included in our Form 10-Q for the quarter ended September 30, 2007, which we expect to file this week.

Net product sales for the third quarter of 2007 were $19.5 million, representing 61% growth compared with net product sales of $12.2 million in the third quarter of 2006. Product sales included sales of Zegerid capsule and suspension products. We expect to begin reporting revenue from our co-promotion agreement in the fourth quarter.

Total revenues for the third quarter of 2007 were $26.5 million, growing 105% over the prior year period. Total revenues consisted of the $19.5 million in net product sales and approximately $7 million in contract revenue.

Contract revenue included the $5 million milestone payment from Schering Plough received in August as well as amortization of upfront payments received from Otsuka America Pharmaceutical in October 2004 and from Schering Plough in November 2006.

Total revenues for the third quarter of 2006 were $12.9 million consisting of the $12.2 million in net product sales and $714,000 in contract revenue from the amortization of the Otsuka America upfront payment.

We reported a third quarter 2007 net loss of $6.9 million or $0.13 per share, a 44% decrease compared with the net loss for the third quarter of 2006 of $12.4 million or $0.26 per share.

Our cost of sales was $1.8 million in the third quarter of 2007 compared with $1.1 million in the third quarter of 2006. Cost of sales represented approximately 9% of net product sales in each reporting period.

We reported license fees and royalties of $2.7 million in the third quarter of 2007 compared with $1.7 million in the third quarter of 2006, both of which consisted of royalties payable to the University of Missouri and to Otsuka America based on net sales of our Zegerid products.

These royalties total approximately 14% of net product sales in both quarters. Selling, general, and administrative expenses were $27.8 million for the third quarter of 2007 compared with $21.3 million for the third quarter of 2006. The increase in selling, general, and administrative expenses was primarily a result of costs associated with our sales force expansion in 2007 and increases in advertising and promotional activity.

For the nine months ended September 30, 2007 total revenues grew 130% to $66.1 million compared with total revenues of $28.8 million for the nine months ended September 30, 2006. In the current period, total revenues consisted of $55.3 million in net product sales and $10.8 million in contract revenue. Total revenues in the 2006 nine-month period consisted of $26.6 million in net product sales and $2.2 million in contract revenue.

For the first nine months of 2007, we reported a reduction in net loss of approximately 26% from the comparable prior year period. The net loss for the nine months ended September 30, 2007 were $36.3 million or $0.71 per share, compared with a net loss of $49 million or $1.06 per share for the nine months of 2006.

Moving on to some balance sheet highlights, as of September 30, 2007 we had cash, cash equivalents, and short-term investments of $48.6 million, compared with $75.5 million as of December 31, 2006. The decrease of $26.9 million resulted primarily from our net loss for the nine months ended September 30, 2007, adjusted for non-cash expenses and changes in operating assets and liabilities.

Our cash burn during the third quarter, which was positively impacted by the receipt of the $5 million milestone payments from Schering Plough was approximately $3.8 million. This quarter's cash burn is down from approximately $13.5 million in the first quarter and $9.6 million in the second quarter of this year.

We believe that our current cash, cash equivalents and short-term investments and potential proceeds from our existing equity financing facility and our line of credit will be sufficient to fund our operations for at least the next 12 months. However, our projected revenue may decrease or our expenses may increase and that would lead to our cash resources being consumed earlier than we'd expect.

In the next 12 months and until we can generate sufficient cash from our operations, we likely will finance future cash needs through strategic collaborations or licensing agreements or through equity or debt financing if necessary.

With regards to our financial outlook for 2007 and 2008, we are affirming our expectation to report total revenues of $90 million to $95 million in 2007 representing 83% to 93% growth over 2006 total revenues. Total revenues for 2007 include net product sales plus contract revenue.

We are lowering our net loss outlook and now expect to report a net loss in 2007 at or below $55 million. This net loss estimate includes additional estimated stock-based compensation expense in the fourth quarter of 2007 associated with planned equity compensation programs for employees below the Vice President level, including approximately $5.5 million related to accelerated vesting of stock options priced at or above $5 per share. These programs were approved by our Board of Directors in October with the intent of positively impacting employee morale.

We previously expected to report a net loss in 2007 of $55 million to $60 million. We continue to expect to achieve breakeven in the second half of 2008 including contributions from existing contract revenue sources the components of which may include milestones or other payments.

With those comments, I'd like to turn the call over to William Denby.

William Denby

Thanks, Deb, and good afternoon. During the third quarter our sales organization continued to grow Zegerid product sales. We also completed training activities for our two new co promote products and we are now promoting these products in the second sales position. Zegerid continues to be promoted in the primary sales position by all of our sales representatives.

In reviewing our third quarter Zegerid prescription metrics, we produced strong growth compared with the third quarter results of last year. Zegerid brand total prescriptions were approximately 230,000, up 99% over the approximately 115,000 total prescriptions in the third quarter of 2006. Zegerid capsule prescriptions total approximately 199,000, growing about 152% compared with the third quarter of 2006.

As discussed in our August conference call, prescription growth typically slows in the third quarter compared to prior quarters. We believe this is partially due to seasonal factors in the PPI market. We expect higher prescription growth in the fourth quarter versus the third quarter, compared with the 12% growth in the third quarter versus the second quarter of this year.

We believe in part the seasonal trends, Zegerid new prescriptions in the third quarter of 2007 reached 101,000, up approximately 6% compared with the 96,000 new prescriptions in the second quarter 2007.

New prescriptions for Zegerid capsules increased 8% compared with the second quarter of this year. The number of physicians prescribing Zegerid weekly continue to increase and was up about 9% from late June of this year to approximately 8,700 physicians at the end of September.

Moving to our co-promotion activities, following sales training early in the third quarter we began promoting Naprelan to our targeted primary care physicians in the second sales position in August. Initial anecdotal feedback from field is positive with many physicians pleased to have Naprelan available as a prescribing alternative for the treatment of mild to moderate pain.

We believe IMS script numbers for Naprelan in August and September are encouraging. According to IMS data, total prescriptions for Naprelan were up approximately 21% in August and new prescriptions increased 25% compared with July. In September total and new prescriptions were down 8% and 9% respectively from August levels, reflecting the Labor Day holiday impact; however, in comparing September to July, total prescriptions for Naprelan were up approximately 11% and new prescriptions increased 14%.

In September, we commenced sales training for the Fleet Phospho-soda EZ-Prep bowel cleansing system and began promoting this product in the second sales position to our targeted GI doctors last month.

The market for bowel cleansing products is comprised of oral sodium phosphate products in both tablet and solution forms as well as other products including polyethylene glycol or PEG products. This market is divided into prescription products sold by others and Fleet's products that are available over the counter.

Fleet's OTC bowel cleansing products are well known by gastroenterologists. According to June 2007 A.C. Nielsen and IMS data, Fleet products captured about 13% of total market sales although they represented 43% of physician recommendations or prescriptions, reflecting the lower average cost of the Fleet products to patients.

Fleet believes it's important for physicians to be educated about the features of the new Fleet Phospho-soda EZ-Prep product, as well as about safe and effective product use, with emphasis on patient selection, dosing, hydration and other important information.

We are being paid a set fee per sales call to our targeted GI doctors and their medical staff and we have the opportunity to earn bonus payments if unit sales exceed pre-determined baselines.

We believe having products like Naprelan and EZ-Prep in our portfolio complements our sales detailing efforts with Zegerid in the primary sales position. These co-promotion agreements provide our sales representatives with additional products to discuss with their called upon physicians that are of clinical interest and provide good alternatives for patients that they treat.

We continue to make progress in managed care contracting and we believe we have established Zegerid competitively in the PPI market. The PacifiCare contract that we mentioned in our August call took effect in July and we anticipate an increase in the number of Zegerid prescriptions flowing through that plan going forward.

We also have recently gained formulary coverage in some significant Medicare Part B plans and have experienced increased Zegerid utilization in those plans in the third quarter.

In summary, we believe that our commercial organization was very productive in the third quarter. We continue to grow Zegerid prescriptions. We began promoting Naprelan to our primary care physicians and commenced the training activities to allow us to begin promoting the Fleet Phospho-soda EZ-Prep bowel cleansing system to our GI physicians in the current quarter.

And with that update, I'll now turn the call back over to Gerry.

Gerald Proehl

Thanks, Bill. In closing, I want to emphasize that we are focused on executing our strategy to build value in our business as we address the competitive challenges we're currently facing. To accomplish this, I will briefly outline our strategy.

We will continue to build the Zegerid brand. We believe it is important to derive the maximum potential from our investment in Zegerid brand in the U.S. prescription market. Our commercial organization is focused on increasing sales of Zegerid through field sales promotion, marketing programs and managed care contracting.

We will work to diversity our Zegerid revenue through strategic relationship. As discussed earlier, our work with Schering-Plough to support their activities in the development of a low dosage Zegerid product for the OTC product is a Santarus priority.

We are also continuing to evaluate potential licensing opportunity for Zegerid in markets outside of North America with pharmaceutical companies that have international commercialization capabilities.

Our goal is to maximize the value of Zegerid with milestone and royalty payments flowing into the company from our agreement with Schering-Plough for OTC Zegerid and from one or more agreements in markets outside of the U.S. We believe these potential future revenue sources will add significant value to Santarus.

We will work to expand our product portfolio. We are pleased to have the opportunity to co-promote the Fleet Phospho-soda EZ-Prep and Naprelan products and we are also continuing to evaluate other products that we could then license, co-promote, or acquire.

In assessing new product opportunities, we look at many factors including unmet medical need, product differentiation, market dynamics, target audience and financial return on investment.

We will continue to focus on managing our business. We plan to control costs, while focusing on our growth initiatives, seeking non-dilutive sources of financing through business development activities and working diligently to preserve our capital.

With that all reviewed, I'd like to now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Gerald Proehl

While we're waiting for the questions to queue up, I'd like to inform everyone that on November 6 we'll be presenting at the Acumen BioFin Rodman and Renshaw Ninth Annual Healthcare Conference at the New York Palace Hotel, on November 27 at Lazard Capital Markets Fourth Annual Healthcare Conference, which is also taking place at the Palace, and at the RBC Capital Markets 2007 Healthcare Conference taking place December 12 to 13 at the Westin New York at Times Square.

Should you be attending any of these conferences, we invite you to meet with us in person. If you're unable to attend, a webcast of our corporate presentation will be available on the Santarus website.

Operator

Our first question comes from the line of Annabel Samimy with UBS.

Annabel Samimy - UBS

I'm going to state something kind of obvious here, but we all recognize your prescription growth. It's been looking incrementally better for some time now, but your top-line revenue product sales has not changed since fourth quarter.

So, can you please help us understand how much rebating is going on or are there other inventory issues going on? Can you just help us get a little bit more comfort around this because your prescription is not really translating into revenue growth?

Debra Crawford

Maybe I can address your question. Certainly we recognize that the prescription growth has been ahead of the net sales growth and there's a couple of factors and you've mentioned those that we've talked about before that are still present today and likely will continue to be impacting our net sales in the future quarters.

But generally speaking, what you have is the dynamic, one of mix, that we're continuing to see more and more of our sales move to our capsule products versus the products for suspension, which does have a lower average price and average WAC price.

We also do see fluctuations in inventory levels in the channel. This quarter we think the activity was fairly consistent with prescription activity. So, we don't think there was a lot going on there in terms of changes in inventory levels.

So the primary dynamic that you have is that we're in about just past the first year of having our primary product available, we're seeing more and more utilization of that product by the large, high control managed care plans that we've contracted with.

So, I think it's important to distinguish, it isn't that we are providing lower and lower prices; it's really a function of getting the volume moving through these managed care plans that do have high control, relative to that mix of our total business.

So, I think as Bill mentioned in his remarks, we're continuing to see activity in that way and while those brands continue to grow their business and until they get to a steady state or something a little more steady, I think we will continue to see some impact on that net ASP that we reported to you.

Annabel Samimy - UBS

Are some of these impacts on ASP related to initial contracting with these companies? At some point does it wash out and you can potentially see better translation in your ASP?

Gerald Proehl

One of the things, I would say, Annabel is certainly, when you're a new product going into a fairly mature market, you have very little to no volume with many of these plans. And the only way to get into a competitive formulary position with these plans is to give them a better price than what the current competitors are giving. And that's not just the case for Zegerid. Its most markets are going to be the same if you're new entering the market.

Certainly, as you gain volume, you gain a little more leverage as you move forward and we recognize that and certainly will look to continue to manage the rebate as we move forward and make decisions as we come up to points where we're renegotiating contracts and whether or not we would keep the price the same, whether we would increase the price or whether we would exit a contract. And we do that on a regular basis.

Annabel Samimy - UBS

Okay. Are you seeing still a lot of pressure from generic entry?

Gerald Proehl

I wouldn't say directly we're seeing pressure from generics. The way I would state it is--and we've mentioned this before--with the introduction of Medicare Part D we've seen a pretty significant shift of many patients to generic and that's just not the case in PPI. It's happened in many of the categories out there.

That's the initial shift that's taken place. The result is there are less patients available for the branded PPIs. What that certainly has done is made the market certainly probably more competitive from a pricing standpoint because there's less business to be had for the branded products.

That being said, one of the things we're starting to see is some of those patients that initially got pushed over to the generic product at 20 milligram are starting to come back into the physician, many of those patients are not being completely satisfied and many plans the way they have their programs established is patients must fail the generic before they can move on to a branded product.

We're now seeing patients start to cycle back into the market and think that's going to be a positive for us as we move forward.

Annabel Samimy - UBS

Okay. And then on Naprelan I think you launched that in the third quarter. How come we didn't see any sales?  Obviously the prescription's picked up. So how come we didn't see any kind of benefit on your top line at all?

Debra Crawford

The way the Naprelan contract works is we will receive a little more than half of the value of those scripts that are written by our target physicians. But in the contract we do have an initial credit where we're acknowledging the sales that have already been built if you will by Victory.

So we have two factors here in the third quarter. One is just a lag and a delay in getting that physician level detail for our specific target and then, two, there is an initial credit that we have to apply against our efforts in this first part of the contract. So we do expect that we'll be able to give you another update, a more specific update on our progress with Naprelan in the fourth quarter.

Annabel Samimy - UBS

Okay. And then one last question if I may. I noticed the SG&A had dipped since the second quarter and I think with a sales force filled and promotional expense related to new products, how could that be going down? And should we expect that going forward, some kind of stay at the level?

Debra Crawford

The SG&A expenses are going to fluctuate a little bit period-by-period depending on the specific programs or activities that are underway. For example, in second quarter you would've had a large medical meeting in DDW.

As we moved through third quarter there isn't a similar large medical meeting. But just generally, we are going to manage our expenses, as we feel appropriate, really working to have the most cost effective spend.

And I would just mention that in the third quarter you would have some litigation expenses associated with the prior matter but again, overall, as an organization, we're very conscious about our spending, and are going to be making what we believe are the right choices in terms of those promotional activities and other expenses generally.

Operator

Our next question comes from Ian Sanderson with Cowen.

Ian Sanderson - Cowen

I had a question about the patents that are currently pending for Zegerid and where those stand in the prosecution and what type of coverage those might provide?

Gerald Proehl

We have three patents that are currently pending and they’re going through the process, I can't tell you exactly where they are in the process because there's not a timeframe that the patent office necessarily has to make a decision on the patent.

So we're going through that process and when we hear from them, we hear from them. There's not specific time frame I can provide you on that.

Ian Sanderson - Cowen

Can you characterize just roughly what type of claims you might be seeking with these patents?

Gerald Proehl

Again, they're basically method of use claims and in some cases what we've tried to do and is the case with many patents, you start out with fairly broad patents and you narrow it down based on what you're learning about your product, everything from what you're learning about different formulation things to what you're learning about clinical information and how the product acts and performs.

And so as you learn those things you file patents and that would be part of the patent overall that we filed on the product.

Operator

Our next question is from Russell McAllister with Merriman Curhan Ford.

Russell McAllister - Merriman Curhan Ford

Good afternoon and thanks for taking the questions. I had three specific questions.

First, there was an announcement out by Perrigo this morning, a settlement with AstraZeneca over 20-milligram Omeprazole. I was wondering, what strategic implications that might have, particularly on the OTC side of the market.

Second question probably for Bill, feedback from the sales force on competitive dynamics in the PPI market? And if you could possibly repeat the formulary wins that you mentioned earlier.

And third question, any plans for additional Phase IV studies, particularly head to head studies against the existing products in the space? Thank you.

Gerald Proehl

I'll address the first question and the last question. I'll let Bill address the second one. As it relates to Perrigo, I haven't yet seen that particular press release. So I have to go back and read the release to see exactly what they said.

Our expectation is that and certainly the 30-month stay would end in December of next year. I think that was the expectation of when they would likely come on to the market. I don't know what it said. I'd have to wait, Russ, and see.

But certainly, every indication we've gotten from Schering Plough is that they're diligently moving forward with their development. They plan on continuing to do that and launch Zegerid and establish Zegerid as a brand name.

Regardless of whether or not it's a Prilosec OTC or it's Perrigo's product, we believe that Zegerid offers some significant advantages over the delayed release PPI that's on the market. We think once that Schering has it on the market that consumers will see the advantages and we'll be able to establish the product.

I'll turn it over to Bill for the second question.

William Denby

I think it was related, Russ, to competition. I guess this would be more anecdotal.

Russell McAllister - Merriman Curhan Ford

Correct.

William Denby

I think if you just think about markets in general and the slowing growth of the major brands, it makes some sense that the advertising promotion and so forth would moderate. I think we've seen some anecdotal evidence of that.

That's about as far as I can go. The growth is slowing in this category and so some of the companies have been de-emphasizing their efforts in some instances. That's it from the competition.

From a formulary standpoint, I think we've restated that the PacifiCare contract went into effect in July and that should have a positive impact in California as they represent about 3 million pharmacy lives.

And then from a Medicare Part D standpoint we've had some significant wins in that segment of the business and we've seen an up tick in terms of volume through those particular plans.

So we continue to make progress in managed care.

Gerald Proehl

And, Russ, the last question was Phase IV studies. We're on a regular basis evaluating various Phase IV studies. We have been involved with some. We haven't yet publicly announced what those studies are but certainly, we continue to evaluate our product relative to competitors in the marketplace and as we move forward I think we'll potentially have more information to announce.

Russell McAllister - Merriman Curhan Ford

Thanks, Gerry. That's very useful. Just on that first question about the Perrigo settlement, my read is just a somewhat earlier generic entry into the market. With generic Omeprazoles in the OTC space, do you see significant price erosion from the current levels? Any thoughts there?

Gerald Proehl

What I would say is that one of the reasons we chose Schering Plough as our partner is they have quite a bit of experience in the OTC market and even experience with store brand products.

At the time they launched Claritin they had no patent protection and they launched right alongside a store brand of Loratadine and did extremely well with Claritin, establishing the product and the brand name.

Again, from our standpoint, we think Zegerid offers some real advantages over Prilosec OTC and that would be the same advantages over the Perrigo product. So in the OTC market it really becomes a matter of, number one, brand name awareness and establishing your brand name and, number two, trial usage.

We believe that when patients go and use Zegerid, the results they get from Zegerid are going to be different than what they would get from Prilosec OTC or from a Perrigo product. I think once they try the product, I don't think they'll want to go back to the delayed release product.

Operator

Our next question comes from Michael Higgins with Rodman & Renshaw.

Michael Higgins - Rodman & Renshaw

Thanks for taking my call. First, hope you've escaped the fires with minimal harm out there guys.

Gerald Proehl

Yes.

Michael Higgins - Rodman & Renshaw

I know it was close by. First question is on the comment that on the fourth quarter growth rate would be higher for Zegerid scripts than the third quarter. Is that really a reflection of the Medicare Part D plan that you've discussed?

And also if you could kind of give us some insights into the greater leverage you have now for providing as big of a discount or how you can kind of compare that to say United and Covenant?

Gerald Proehl

Number one, we continue to see nice growth in prescriptions as we mentioned, through the plans that we've been on but then some of the other plans, as Bill mentioned, whether that's PacifiCare or some of the Medicare Part D plans that we're involved with in driving prescriptions. That's number one; that will help the growth.

But even with that I think, one of the things that we've seen historically over the past three to four years in the PPI market, is that the fourth quarter tends to be a higher prescription quarter than the second or third quarter and I think that just has to do with the third quarter tends to be one where people are on vacation, doctors are on vacation, and so you don't see a lot of prescribing, at least new prescriptions taking place then.

When they get back, kids get back to school, people get back from vacation, they start into the process usually in maybe mid-September. So October, November, December usually are the strongest quarter of the year and that's been the case over the last three to four years in the PPI market.

Michael Higgins - Rodman & Renshaw

Kind of a holiday effect, I guess.

Gerald Proehl

A little bit. Maybe a little bit of Thanksgiving and Christmas overeating.

Michael Higgins - Rodman & Renshaw

And my second question, in your guidance for breakeven second half of '08 as you've maintained for some time, I just want to clarify, does that include Schering milestone payments that are amortized or not amortized and also kind of a follow up on the SG&A front.

I mean, if you look back from early ‘06, every quarter seems to be dipping a little bit lower. Obviously, there's a spike up with the addition of the reps but is that a trend to expect or where does this kind of plateau?

Debra Crawford

In terms of the guidance for breakeven, yes, certainly we're looking at our potential sources of revenue and contribution to that bottom line, which would certainly include our contract with Schering Plough.

So an element of that, in that timeframe will be amortization but there's also a potential for us to earn milestones. So that's why we try to make that pretty clear to folks that we're looking at our total business in addition to Zegerid U.S. prescriptions. Our contract revenue certainly will assist us in achieving that breakeven guidance that we've given.

Michael Higgins - Rodman & Renshaw

What you're getting from Schering in 2008, maybe amortized as well as recognized in the time period it's received? A little of both?

Debra Crawford

Certainly it could. Just like the milestone we earned here in the third quarter, a development type of milestone. That was recognized in full upon achievement of that milestone. We still have ongoing that initial upfront amortization.

Michael Higgins - Rodman & Renshaw

And then, Gerry, if you could provide us with any insight on the European front? I know you've been talking with partners. If you could characterize your discussions? Any term sheets signed? Any winnowing of partners to a couple? Any help you can provide there?

Gerald Proehl

What I would say, Michael, on the rest of the world, we're talking with a number of companies on opportunities for the rest of the world. We're fairly far along in the discussions and we've been talking with companies for some period of time as I've mentioned on previous calls.

That being said, you can get all the way to where you think you're near the end of the discussions and ready to sign an agreement and something can come up. So, we continue to push forward with a number of companies. We have very strong interests.

But I can't give you a timeframe of when we think we'll get that done. We certainly believe that it's important for us to get the deal done as soon as possible and we think the folks we're talking to are pretty interested in trying to move things forward.

That being said, we're going to move it as fast as we can but still be diligent in everything we need to do.

Operator

Our next question is from Angela Larson with SIG.

Slade - SIG

This is Slade on behalf of Angela. I had a quick question. What percentage of the co-promoted products do you believe will be contributing to the 2008 sales?

Debra Crawford

In terms of guidance that we provide, we don't provide any details with respect to the particular sources of revenue contributions of the bottom line.

Slade- SIG

Okay. And my second question is, could you please give us some color on any R&D and pipeline activities beyond the Phase IV studies?

Gerald Proehl

Currently we're focused on Phase IV studies on Zegerid. As, we mentioned, we're also talking with companies about potentially in licensing other products, whether those would be marketed or development stage products.

Operator

(Operator Instructions) Our next question comes from Jacob Rasmussen with Friedman Billings.

David Amsellem - Friedman Billings

Actually, this is David Amsellem. How would you characterize the performance of the inVentive reps and do you find the performance satisfactory? Are there any plans to revisit the arrangement anytime in the near future?

Gerald Proehl

I think we're very happy with the overall performance on the inVentive side; in fact one of the things that we've been doing is we have people occasionally leave the organization on the Santarus sales rep side. In many cases, we're evaluating the inVentive rep and their performance at such a good level that we're moving those reps over into Santarus full-time positions. So we've certainly been happy with their performance to date.

They've been performing now for about ten months or so, eleven months, and we think they're really becoming much more productive. Our sales managers have provided us with feedback; they really feel like they're starting to hit their stride as far as their ability to really understand the market and the product and really being able to convince a physician to write more prescriptions.

William Denby

Just to echo, what Gerry said in terms of they have really helped us to get closer to our frequency goals. We've increased our overall calls by 35% as we added the inVentive reps. Calls to targets are up, so we're very happy with how it's going with inVentive thus far.

David Amsellem - Friedman Billings

Okay. And then just along the lines of the sales force. Do you envision any expansion of the sales force, either through your partners or internally to reach more physicians and drive more prescription growth? Are you happy with the current headcount?

Gerald Proehl

So we're on a regular basis, we talk with various companies about potentially getting to more physicians, whether that would be a broader group of primary care physicians, hospital based physicians, etcetera.

I think from our perspective of our current organization, we feel like we're sized appropriately for the number of physicians we're calling on. We believe that we still have lots of potential with the 26,000 doctors we're calling on. Certainly if we had a much higher market share penetration, then you would need to start to think about broadening your target list. But we have a long way to go before we feel that we've really maximized the overall market share among our current targets.

David Amsellem - Friedman Billings

Okay. And then just a quick question on the OTC product and I jumped on late so this may have already been addressed. But can you provide any color or any visibility on when you think the filing or a launch may happen?

And I know you haven't characterized the milestone payment related to progress but can you say in terms of future milestones, future near-term milestones, what the nature of the progress would be?

Gerald Proehl

Unfortunately I can't give you that information. It's part of our agreement with Schering Plough and for competitive reasons we really can't give out that type of information. What I will say is they recognize that this market is significant. It's growing. They believe for some period of time that Zegerid OTC can be one of the biggest products that they have as an OTC product.

So, they're putting significant resource behind it, moving the product and the development along as fast as they can. That being said, obviously there are a lot of things that come into play, everything from completing studies to negotiating things with the FDA.

And so, they would prefer at this time that we don't specifically say where they are in development. And as we move forward and they get to the point where they're submitting NDAs and stuff and at that point I'm sure we'll be able to give more updates.

David Amsellem - Friedman Billings

All right and then just one last question, shifting gears to Naprelan, can you say what portion of Naprelan scripts do you expect to generate through your internal reps relative to the total mass of prescriptions written?

Gerald Proehl

I don't know that we have an exact amount of percentage. Somewhat is going to depend on Victory on what they're doing. And the reason it's hard to say percentage is Victory earlier in the year had somewhere around 75 reps. They've gone up to about 150 to 170 reps now and they continue to add reps calling on other specialties. So, we're working very closely with them to really focus on driving business.

We're focused on our target group of primary care physicians. They're focused on other primary care docs plus specialists. And together we think this can be a pretty significant product. But I'm not sure I can give you percentages because they continue to add resources behind the product.

Operator

Our next question comes from John Sabo with Flintridge Capital.

John Sabo - Flintridge Capital

Thanks for taking the question. Just to clarify, I know you said that the 2008 guidance included contract revenue, but as you look for the 2007 number of $90 million to $95 million, would that include some potential contract revenue in the fourth quarter?

Debra Crawford

Just to clarify, we don't give change specific quarterly guidance for the components within the line items of revenue. So, I think if you look at where we are today, you can see our year-to-date total revenue number and put that in perspective …

John Sabo - Flintridge Capital

It's not hard, right? I mean it's $66 million year-to-date, which means to get to $90 million you need to have $24 million; to get to $95 million, you need to have $29 million. And you did $21.5 million excluding the Schering payment. So, I guess my question is, are you expecting a payment from Schering in the $24 to $29?

Debra Crawford

Really, I'm not able to give you any additional specific detail on the guidance other than what we have stated and I think then as we are able to provide more information, we will in our future calls.

John Sabo - Flintridge Capital

Why couldn't you tell us that? I mean you've laid it out. I think one of the issues with the stock would be have some transparency so that the analysts can get the numbers right and you're not doing it.

Debra Crawford

I think Gerry tried to share with folks that we have certain confidentiality provisions as they relate to our license agreements with Schering-Plough and the OTC. So, we need to honor those confidentiality provisions.

Operator

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

Gerald Proehl

Let me close by saying again that we appreciate your interest and support and we look forward to keeping you apprised of our progress. If you have any further questions, please feel free to contact me, Debra Crawford, or Martha Hough. Thank you and have a great day.

Copyright policy: All transcripts on this site arethe copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES INTHE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!