Expert Financial Analysis and Reporting

Management was quite optimistic about prospects for 2009 as both Zegerid and Glumetza are doing well. The company is looking for a 24% gain in product revenues.

Summary of Key Points

1. The Santarus analyst meeting was very encouraging in regards to the new product outlook.

2. The company could end the year with $65 to $68 million of cash and operations should be profitable in 2010.

3. The analyst meeting bolstered my enthusiasm for the two new products Santarus has licensed in. I think they provide enormous potential in the 2012 to 2020 time frame and will transform the company.

4. Meanwhile, Zegerid and Glumetza are doing very well. SNTS is guiding to a 24% product revenue gain in 2009.

5. The company is expecting roughly breakeven net income in 2009 despite a nearly 300% increase in R&D spending to $20 to $23 million.

6. I believe that Zegerid OTC will be approved toward yearend and bring in a $20 million milestone payment. In 2010, I think that Zegerid OTC royalties could add anywhere from $10 to $20 million of royalty income.

7.The yearend cash balance is expected to be $65 to $68 million with the $20 million milestone payment from SGP.

8.It is not immediately clear why SNTS would need a new CEFF with its cash position and operations that are emerging into profitability.

9.The critical issue for Santarus is the patent litigation with Par over Zegerid. The trial is scheduled to start in June. Results of this trial will likely be known in late 2009. If SNTS wins or if there is a settlement with Par before the conclusion of the trial, I think the stock moves sharply higher to $5 to $8.

10.However, if SNTS does not prevail, Par could launch a Zegerid generic in February of 2010 or at the end of the trial, whichever is earlier. This would have a devastating effect on Zegerid and the company might have to dramatically downsize.

Meeting Highlights

We attended the Santarus analyst meeting on May 14, 2009. The intention of this meeting was to highlight the two new drugs that have been in-licensed from Cosmo Pharmaceuticals. There were four principal speakers: a representative from Cosmo who spoke about the MMX delivery system that is the basis of the two Cosmo drugs, a European physician who is leading the European trial of budesonide MMX, an expert in treating traveler’s diarrhea and Santarus’ Chief Medical Officer.

In March, Santarus announced a strategic collaboration with Cosmo Pharmaceuticals of Italy which grants Santarus exclusive rights to develop and commercialize Budesonide MMX and rifamycin SV MMX for the U.S. market. budesonide MMX is an oral corticosteroid currently being investigated in two multi-center Phase III clinical trials involving more than 800 patients in North America and Europe for the induction of remission of mild-to-moderate ulcerative colitis. Topline results on the European trial will be announced in 2H, 2009, the US in 2010.

If successfully developed, budesonide MMX could record several hundreds of millions of dollars in sales. It is a major opportunity for Santarus. Corticosteroids like budesonide are tremendously effective agents, but systemic absorption causes dangerous side effects. Budesonide MMX is designed to retain the effectiveness of corticosteroids, but with reduced side effects due to its targeted controlled release in the colon that results in minimal systemic absorption.

Santarus will be responsible for overseeing the Phase III U.S. registration clinical trial, and Cosmo and its partner in Europe, Ferring Pharmaceuticals, are overseeing the European Phase III clinical trial. The protocols for both Phase III clinical trials have been reviewed and approved by the FDA, under special protocol assessments, and have been reviewed and approved by two European agencies. Assuming successful completion of the Phase III clinical program and an extended use safety trial, an NDA submission is planned for the second half of 2010.

Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic that also has targeted release characteristics when taken orally. The application of MMX technology to Rifamycin SV allows the antibiotic to be delivered directly to the colon, with the goal of minimizing unwanted effects on the bacterial flora in the small intestine. Cosmo has completed a Phase II clinical program in traveler's diarrhea. Santarus will be responsible for the design and execution of a Phase III U.S. registration clinical trial for traveler's diarrhea, while the European Phase III clinical trial in the same indication will be conducted by Cosmo's European partner, Dr. Falk Pharma GmbH.

Outlook For 2009

The company has issued guidance that it expects product related revenues to increase 24% in 2009 to approximately $145 million. It will be spending $20 to $23 million on research and development in 2009 which compares to $8 million in 2008. Despite this huge increase in R&D spending, the company still expects to report net income somewhere between a loss of $3million and breakeven. Without this big increase in R&D, the company might have reported net income of around $10 million or $0.20 per share.

Cash Position

The company ended 1Q, 2009 with $48 million of cash. Based on the company’s guidance, cash at the end of 2009 should approximate $45 to $48 million with no additional cash infusion. However, there could be a milestone payment of $20 million from Schering-Plough upon approval of Zegerid OTC. Schering received a complete response letter from the FDA in January. It will refile the NDA soon and Santarus expects a Class II response that would give the FDA six months to review the NDA. It is likely that Santarus will receive this $20 million around the end of 2009 bringing its cash balance to $65 to $68 million.

Santarus appears to be able to fund operations out of operating cash flow. Hence, if they were to implement a CEFF, it would be for some other reason.