##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the year ended December 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from       to
 Commission File Number: 000-50651
 SANTARUS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    33-0734433(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)3721 Valley Centre Drive, Suite 400
    
    92130San Diego, California
    
    (Zip Code)(Address of Principal Executive Offices)
 (858) 314-5700  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.0001 per share
    
    Nasdaq Global MarketSeries A Junior Participating Preferred Stock  Purchase Rights
    
    Nasdaq Global Market
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  *
    
    Excludes the common stock held by executive officers, directors and stockholders whose
ownership exceeded 10% of the registrants common stock outstanding at June 30, 2009. This
calculation does not reflect a determination that such persons are affiliates for any other
purposes.




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##### 



SANTARUS, INC.
 FORM 10-K  ANNUAL REPORT
For the Year Ended December 31, 2009
 Table of Contents
 PagePART IItem 1
    
    Business
    
    
    2Item 1A
    
    Risk Factors
    
    
    24Item 1B
    
    Unresolved Staff Comments
    
    
    47Item 2
    
    Properties
    
    
    47Item 3
    
    Legal Proceedings
    
    
    47Item 4
    
    Reserved
    
    
    48PART IIItem 5
    
    Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    49Item 6
    
    Selected Financial Data
    
    
    51Item 7
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    52Item 7A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    64Item 8
    
    Financial Statements and Supplementary Data
    
    
    65Item 9
    
    Changes in and Disagreements
 with Accountants on Accounting and Financial Disclosure
    
    
    65Item 9A
    
    Controls and Procedures
    
    
    65Item 9B
    
    Other Information
    
    
    68PART IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    69Item 11
    
    Executive Compensation
    
    
    69Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    69Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    69Item 14
    
    Principal Accountant Fees and Services
    
    
    69PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    70Signatures
    
    
    
    
    
    
    75EX-10.9EX-10.10EX-23.1EX-31.1EX-31.2EX-32.1
  i




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PART I
 Forward-Looking Statements
 ® ® ®
  Corporate Information
  ® ®
 1




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##### Table of Contents



Item 1. Business
 Overview
  Santarus Product Portfolio
 Drug
    
    Status
    
    CommentsMarketed and Approved ProductsZegerid® Capsules and Powder for
Oral Suspension
(Rx  U.S.)
    
    Marketed
    
    For upper GI conditions, including GERDGlumetza® Extended Release Tablets

(Rx  U.S.)
    
    Marketed
    
    For glycemic control in adults with type 2 diabetesImmediate-release Omeprazole Tablets

(Rx  U.S.)
    
    Approved
    
    For upper GI conditions, including GERD; NDA
supplement for approval of trade name under FDA
reviewDevelopment Product CandidatesBudesonide MMX®
(Rx  U.S.)
    
    Phase III
    
    For ulcerative colitis; enrollment completed in
European phase III clinical study; U.S. phase III
clinical study ongoingRifamycin SV MMX®
(Rx  U.S.)
    
    Phase III
    
    Initiation of phase III program in travelers
diarrhea planned for second quarter of 2010Additional Strategic AlliancesSchering-Plough HealthCare Products, Inc.Zegerid OTC

(OTC  U.S.)
    
    Approved
    
    For treatment of frequent heartburn; commercial
launch expected in April 2010GlaxoSmithKlineImmediate-release Omeprazole products

(Rx and OTC  Specified Ex-U.S. countries)*
    
    Regulatory
Submissions Ongoing
    
    Submissions made in certain Latin American,
African and Asian countries; preparation of
additional regulatory filings ongoingNorgine B.V.Immediate-release Omeprazole products

(Rx  Specified European countries and
Israel)
    
    In Development
    
    License signed in October 2009
 
 *
    
    GSK is also currently distributing and promoting Zegerid prescription products in Puerto Rico
and the U.S. Virgin Islands.  2




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Currently Marketed and Approved Products
    Development Product Candidates
  Additional Strategic Alliances
  3




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Strategy
  
    
    Increasing Sales of Zegerid and Glumetza Brand Prescription Products.Our commercial
resources are focused on increasing market demand for, and sales of, Zegerid and Glumetza
brand prescription products. Our field sales organization currently promotes Zegerid and
Glumetza products to selected gastroenterologists, endocrinologists and primary care
physicians. We believe that both the Zegerid and Glumetza brand products offer
differentiated treatment options for physicians and their patients and continue to
represent an attractive market opportunity.
    
    Advancing Our Lower GI Development-Stage Products.We are also focused on advancing the
development of the budesonide MMX and rifamycin SV MMX product candidates. Budesonide MMX
is currently being investigated in a phase III clinical program for the induction of
remission of mild or moderate active ulcerative colitis. In addition, we plan to initiate
a phase III clinical study evaluating rifamycin SV MMX in patients with travelers diarrhea
in the second quarter of 2010. The MMX technology is designed to deliver a drug substance
directly to the colon. We believe the utilization of the MMX technology with these product
candidates may result in enhanced clinical efficacy, while also limiting side effects
typically associated with systemic absorption.
    
    Maximizing the Value of Our Proprietary PPI Technology.In addition to our efforts
related to our Zegerid prescription products in the U.S., we are focused on maximizing the
value of our proprietary PPI technology in other pharmaceutical markets. We licensed
exclusive rights to our technology to Schering-Plough (for OTC products in the U.S. and
Canada), GSK (for prescription and OTC products in markets within Africa, Asia, the
Middle-East, and Central and South America) and Norgine (for prescription products in
markets within Western, Central and Eastern Europe and in Israel). We believe these
arrangements and revenue sources have the potential to add significant value to our
company.
    
    Expanding our Product Portfolio.In the future, we also plan to expand our product
portfolio through internal development or through co-promotion, in-licensing or acquisition
of products or companies to further leverage our development and commercial capabilities.
We will concentrate our efforts on proprietary products that could be complementary to our
existing products or that otherwise have attractive commercial potential.
 Currently Marketed and Approved Products
 Zegerid Capsules and Zegerid Powder for Oral Suspension
  4




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Upper GI Diseases and Disorders
  ® ® ®
 Glumetza Extended Release Tablets
   Type 2 Diabetes
  5




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® ® ®
 Promotion Agreement with Depomed
     ®
  6




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Immediate-release Omeprazole Tablets
  Development Product Candidates
 Budesonide MMX
    ® ®
 7




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Inflammatory Bowel Disease and Ulcerative Colitis
  ®
  Rifamycin SV MMX
 in vitro
 8




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Infections of the Intestine and Travelers Diarrhea
 ® ® ®
  Strategic Collaboration with Cosmo
  9




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License Agreement
        Stock Issuance Agreement/Registration Rights Agreement
  10




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Additional Strategic Alliances
  OTC License Agreement with Schering-Plough
     11




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License Agreement and Distribution Agreement with GSK
  License Agreement
   th
   12




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Distribution Agreement
  th
    License Agreement with Norgine
    13




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Sales and Marketing
      Contract Sales Organization Agreement with inVentiv
  14




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Manufacturing and Distribution
   Zegerid Prescription Products
    15




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Glumetza Extended Release Tablets
  Budesonide MMX and Rifamycin SV MMX
  Distribution
   Intellectual Property
   16




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Zegerid Products and Related PPI Technology
   Litigation with Par Pharmaceutical, Inc.
    17




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Exclusive License Agreement with the University of Missouri
   18




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Glumetza Extended Release Tablets
    Budesonide MMX and Rifamycin SV MMX Product Candidates
   Trademarks
 ® ®
  ®
 ® ®
 19




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Competition
   
    
    branded PPI prescription products (such as Nexium, Aciphex and Kapidex);
    
    generic PPI prescription products (such as delayed-release omeprazole, delayed-release
lansoprazole and delayed-release pantoprazole);
    
    OTC PPI products (such as Prilosec OTC®, and Prevacid® 24HR and
store-brand versions); and
    
    other prescription and/or OTC acid-reducing agents (such as histamine-2 receptor
antagonists and antacids).
    
    
    other branded immediate-release and extended-release metformin products (such as
Fortamet®, Glucophage® and Glucophage XR®);
    
    generic immediate-release and extended-release metformin products; and
    
    other prescription diabetes treatments.
 ®
   Research and Development
  20




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Government Regulation
   Clinical Testing and the FDA Approval Process
    21




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Section 505(b)(2) NDAs
    Other Regulatory Requirements
  22




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23




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Employees
  Available Information
 www.sec.gov
 
 Item 1A. Risk Factors
   
    
    whether we are able to maintain and increase market demand for, and sales of, our
currently marketed prescription products   Zegerid® (omeprazole/sodium
bicarbonate) Capsules and Powder for Oral Suspension and Glumetza® (metformin
hydrochloride extended release tablets);
    
    whether we are able to maintain patent protection for our products, including whether
favorable outcomes are obtained in the pending patent infringement lawsuits relating to our
Zegerid and Glumetza prescription products;
    
    whether we are successful in progressing the development (including successful
completion of the ongoing and planned phase III clinical studies), obtaining regulatory
approval for and advancing the commercialization of our development product candidates,
budesonide MMX® and rifamycin SV MMX; and
    
    whether we are successful in generating revenue under our strategic alliances, including
our over-the-counter, or OTC, license agreement with Schering-Plough HealthCare Products,
Inc., or Schering-Plough, a subsidiary of Merck & Co., Inc., our license and distribution
agreements with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, or GSK, and our
license agreement with Norgine B.V., or Norgine.
  24




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Risks Related to Our Business and Industry
 We depend on the commercial success of the Zegerid and Glumetza prescription products, and we
cannot be certain that we will be able to continue to maintain and increase sales of these
products.
  
    
    successfully maintain and increase market demand for, and sales of, these products
through the promotional efforts of our own sales force, the contract sales representatives
under our agreement with inVentiv Commercial Services, LLC, or inVentiv, and any other
promotional arrangements that we may later establish;
    
    successfully maintain patent protection for these products, including whether favorable
outcomes are obtained in the pending patent infringement lawsuits relating to these
products;
    
    obtain greater acceptance of the products by physicians and patients and obtain and
maintain distribution at the retail level;
    
    maintain adequate levels of reimbursement coverage for our products from third-party
payors, particularly in light of the availability of other branded and generic competitive
prescription and OTC products;
    
    establish and maintain agreements with wholesalers and distributors on commercially
reasonable terms; and
    
    maintain commercial manufacturing arrangements with third-party manufacturers as
necessary to meet commercial demand for the products.
   We may not continue to generate adequate revenues under our promotion agreement for Glumetza
products to justify our level of promotional effort and expense under the agreement.
  25




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Our budesonide MMX and rifamycin SV MMX product candidates will require significant development
activities and ultimately may not be approved by the U.S. Food and Drug Administration, or FDA, and
any failure or delays associated with these activities or the FDAs approval of such products would
increase our costs and time to market.
      26




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Our reliance on third-party clinical investigators and clinical research organizations may result
in delays in completing, or a failure to complete, clinical studies or we may be unable to use the
clinical data gathered if they fail to comply with our patient enrollment criteria, our clinical
protocols or regulatory requirements, or otherwise fail to perform under our agreements with them.
  27




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Our ability to generate revenues also depends on the success of our strategic alliances with GSK,
Schering-Plough and Norgine, many aspects of which are out of our control.
      Our pending NDA supplement relating to the brand name for our recently approved immediate-release
omeprazole tablet product may not be approved by the FDA in a timely manner, or at all, which would
adversely impact our ability to commercialize this product.
  28




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The markets in which we compete are intensely competitive and many of our competitors have
significantly more resources and experience, which may limit our commercial opportunity.
   
    
    developing prescription and OTC drugs;
    
    undertaking preclinical testing and human clinical studies;
    
    formulating and manufacturing drugs;
    
    obtaining FDA and other regulatory approvals of drugs; and
    
    launching, marketing, distributing and selling drugs.
    Our currently marketed products compete with many other drug products, which could put downward
pressure on pricing and market share and limit our ability to generate revenues.
  
    
    branded PPI prescription products (such as Nexium®, Aciphex®and Kapidex);
    
    generic PPI prescription products (such as delayed-release omeprazole,
delayed-release lansoprazole and delayed-release pantoprazole);
    
    OTC PPI products (such as Prilosec OTC®, Prevacid® 24HR and
store-brand versions); and
    
    other prescription and/or OTC acid-reducing agents (such as histamine-2 receptor
antagonists and antacids).
  29




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
    
    other branded immediate-release and extended-release metformin products (such as
Fortamet®, Glucophage® and Glucophage XR®);
    
    generic immediate-release and extended-release metformin products; and
    
    other prescription diabetes treatments.
 ®
   If we are unable to maintain adequate levels of reimbursement for our products on reasonable
pricing terms, the commercial success of our products may be severely hindered.
    30




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We depend on a limited number of wholesaler customers for retail distribution of our Zegerid
products, and if we lose any of our significant wholesaler customers, our business could be harmed.
  We do not currently have any manufacturing facilities and instead rely on third-party
manufacturers.
   .
 31




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Our reporting and payment obligations under governmental purchasing and rebate programs are complex
and may involve subjective decisions, and any failure to comply with those obligations could
subject us to penalties and sanctions, which in turn could have a material adverse effect on our
business and financial condition.
  Regulatory approval for our currently marketed products is limited by the FDA to those specific
indications and conditions for which clinical safety and efficacy have been demonstrated.
   32




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We are subject to ongoing regulatory review of our currently marketed products.
     33




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We are subject to new legislation, regulatory proposals and managed care initiatives that may
increase our costs of compliance and adversely affect our ability to market our products, obtain
collaborators and raise capital.
   We face a risk of product liability claims and may not be able to obtain adequate insurance.
  34




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® ®
  We rely on third parties to perform many necessary services for our commercial products, including
services related to the distribution, storage and transportation of our products.
  If we are unable to attract and retain key personnel, our business will suffer.
  35




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Risks Related to Our Intellectual Property
 The protection of our intellectual property rights is critical to our success and any failure on
our part to adequately maintain such rights would materially affect our business.
  Patents
   Zegerid Products and Related PPI Technology
  36




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Glumetza Extended Release Tablets
    37




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Budesonide MMX and Rifamycin SV MMX
   Trade Secrets and Proprietary Know-how
  Trademarks
 ® ®
  38




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The timing and any potential negative outcome in the ongoing patent litigation with Par
Pharmaceutical, Inc. could adversely affect our financial condition and results of operations as it
could result in the introduction of generic products prior to the expiration of the patents for
Zegerid Capsules and Zegerid Powder for Oral Suspension, as well as in significant legal expenses
and diversion of management time.
       Third parties may choose to file patent infringement claims against us, which litigation would be
costly, time-consuming and distracting to management and could be materially adverse to our
business.
  39




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Our Zegerid products depend on technology licensed from the University of Missouri and any loss of
our license rights would harm our business and seriously affect our ability to market our products.
   Risks Related to Our Financial Results and Need for Financing
 We may incur operating losses in the future and may not be able to sustain profitability.
   40




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Our quarterly financial results are likely to fluctuate significantly due to uncertainties about
future sales levels for our currently marketed products and future costs associated with our
development-stage products.
  
    
    commercial success of the Zegerid and Glumetza prescription products;
    
    the outcomes of the pending patent infringement lawsuits relating to our Zegerid and
Glumetza prescription products;
    
    results of clinical studies and other development programs, including the ongoing and
planned clinical studies for the budesonide MMX and rifamycin SV MMX product candidates;
    
    progress under the strategic alliances with GSK, Schering-Plough and Norgine;
    
    our ability to obtain regulatory approval for any future products we develop or
in-license;
    
    interruption in the manufacturing or distribution of our products;
    
    timing of new product offerings, acquisitions, licenses or other significant events by
us, our strategic partners or our competitors;
    
    legislative changes, including healthcare reform, affecting the products we may offer or
those of our competitors; and
    
    the effect of competing technological and market developments.
  To the extent we need to raise additional funds in connection with the licensing or acquisition of
new products or to continue our operations, we may be unable to raise capital when needed.
    41




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Our current and any future indebtedness under our loan agreement with Comerica could adversely
affect our financial health.
  
    
    impair our ability to obtain additional financing in the future for working capital
needs, capital expenditures and general corporate purposes;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    make it more difficult for us to satisfy other debt obligations we may incur in the
future;
    
    require us to dedicate a substantial portion of our cash flows from operations to the
payment of principal and interest on our indebtedness, thereby reducing the availability of
our cash flows to fund working capital needs, capital expenditures and other general
corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
    
    place us at a disadvantage compared to our competitors that have less indebtedness; and
    
    expose us to higher interest expense in the event of increases in interest rates because
our indebtedness under the loan agreement with Comerica bears interest at a variable rate.
  Covenants in our loan agreement with Comerica may limit our ability to operate our business.
  42




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Our ability to use our net operating losses to offset taxes that would otherwise be due could be
limited or lost entirely if we do not continue to generate taxable income in a timely manner or if
we trigger an ownership change pursuant to Section 382 of the Internal Revenue Code which, if we
continue to generate taxable income, could materially and adversely affect our business, financial
condition, and results of operations.
  Our results of operations and liquidity needs could be materially negatively affected by market
fluctuations and economic downturn.
   Negative conditions in the global credit markets may impair the liquidity of a portion of our
investment portfolio.
  43




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In connection with the reporting of our financial condition and results of operations, we are
required to make estimates and judgments which involve uncertainties, and any significant
differences between our estimates and actual results could have an adverse impact on our financial
position, results of operations and cash flows.
  Risks Related to the Securities Markets and Ownership of Our Common Stock
 Our stock price has been and may continue to be volatile, and our stockholders may not be able to
sell their shares at attractive prices.
   
    
    announcements concerning our commercial progress and activities, including sales and
revenue trends;
    
    the outcomes of the pending patent infringement lawsuits relating to our Zegerid and
Glumetza prescription products;
 44




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
    
    announcements concerning our product development programs, results of our clinical
studies or status of our regulatory submissions;
    
    regulatory developments and related announcements in the U.S., including announcements
by the FDA, and foreign countries;
    
    developments, including progress or delays, pursuant to our strategic alliances with
GSK, Schering-Plough and Norgine;
    
    other disputes or developments concerning proprietary rights, including patents and
trade secrets, litigation matters, and our ability to patent or otherwise protect our
products and technologies;
    
    conditions or trends in the pharmaceutical and biotechnology industries;
    
    fluctuations in stock market prices and trading volumes of similar companies or of the
markets generally;
    
    changes in, or our failure to meet or exceed, investors and securities analysts
expectations;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    actual or anticipated fluctuations in our or our competitors quarterly or annual
operating results;
    
    announcements concerning borrowings under our loan agreement, takedowns under our
existing universal shelf registration statement or other developments relating to the loan
agreement, universal shelf registration statement or our other financing activities;
    
    our entering into licenses, strategic partnerships and similar arrangements, or the
termination of such arrangements;
    
    acquisition of products or businesses by us or our competitors;
    
    announcements made by, or events affecting, our strategic partners, our contract sales
force provider, our suppliers or other third parties that provide services to us;
    
    litigation and government inquiries; or
    
    economic and political factors, including healthcare reform, wars, terrorism and
political unrest.
 Our stock price could decline and our stockholders may suffer dilution in connection with future
issuances of equity or debt securities.
   45




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Future sales of our common stock by our stockholders may depress our stock price.
  We may become involved in securities or other class action litigation that could divert
managements attention and harm our business.
  Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent
a change in control, even if an acquisition would be beneficial to our stockholders, which could
adversely affect our stock price and prevent attempts by our stockholders to replace or remove our
current management.
   
    
    dividing our board of directors into three classes serving staggered three-year terms;
    
    prohibiting our stockholders from calling a special meeting of stockholders;
    
    permitting the issuance of additional shares of our common stock or preferred stock
without stockholder approval;
    
    prohibiting our stockholders from making certain changes to our certificate of
incorporation or bylaws except with 66 2/3% stockholder approval; and
    
    requiring advance notice for raising business matters or nominating directors at
stockholders meetings.
  46




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
      47




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® ®
    
 Item 4. Reserved
 48




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 Market Information
  High
    
    LowYear Ended December 31, 2008First Quarter
    
    $
    3.14
    
    
    $
    1.78Second Quarter
    
    $
    3.24
    
    
    $
    1.98Third Quarter
    
    $
    2.93
    
    
    $
    1.91Fourth Quarter
    
    $
    2.68
    
    
    $
    1.23Year Ended December 31, 2009First Quarter
    
    $
    2.03
    
    
    $
    1.05Second Quarter
    
    $
    3.20
    
    
    $
    1.53Third Quarter
    
    $
    3.57
    
    
    $
    2.56Fourth Quarter
    
    $
    5.82
    
    
    $
    3.05
  Dividend Policy
  Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  49




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Performance Graph
  Comparison of Cumulative Total Return on Investment Since December 31, 2004
 
 12/31/04
    
    
    12/30/05
    
    
    12/29/06
    
    
    12/31/07
    
    
    12/31/08
    
    
    12/31/09Santarus, Inc.
    
    
    $
    100.00
    
    
    
    $
    58.62
    
    
    
    $
    86.60
    
    
    
    $
    30.42
    
    
    
    $
    17.37
    
    
    
    $
    51.10Nasdaq Composite
Index, U.S.
Companies
    
    
    $
    100.00
    
    
    
    $
    102.13
    
    
    
    $
    112.18
    
    
    
    $
    121.67
    
    
    
    $
    58.64
    
    
    
    $
    79.70Nasdaq
Pharmaceuticals
Index
    
    
    $
    100.00
    
    
    
    $
    110.13
    
    
    
    $
    107.79
    
    
    
    $
    113.36
    
    
    
    $
    105.46
    
    
    
    $
    114.83
 50




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Item 6. Selected Financial Data
  Years Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands, except per share amounts)Statement of Operations Data:Revenues:Product sales, net
    
    $
    119,242
    
    
    $
    101,220
    
    
    $
    79,403
    
    
    $
    45,980
    
    
    $
    13,667Promotion revenue
    
    
    23,631
    
    
    
    9,837
    
    
    
    1,803
    
    
    
    
    
    
    
    License and royalty revenue
    
    
    29,620
    
    
    
    19,144
    
    
    
    13,222
    
    
    
    3,263
    
    
    
    12,857Total revenues
    
    
    172,493
    
    
    
    130,201
    
    
    
    94,428
    
    
    
    49,243
    
    
    
    26,524Costs and expenses:Cost of product sales
    
    
    8,294
    
    
    
    7,345
    
    
    
    7,301
    
    
    
    4,927
    
    
    
    2,129License fees and royalties
    
    
    7,976
    
    
    
    22,257
    
    
    
    11,117
    
    
    
    6,437
    
    
    
    3,414Research and development
    
    
    16,244
    
    
    
    11,760
    
    
    
    6,849
    
    
    
    7,572
    
    
    
    11,292Selling, general and administrative
    
    
    105,838
    
    
    
    108,012
    
    
    
    116,503
    
    
    
    89,828
    
    
    
    79,391Total costs and expenses
    
    
    138,352
    
    
    
    149,374
    
    
    
    141,770
    
    
    
    108,764
    
    
    
    96,226Income (loss) from operations
    
    
    34,141
    
    
    
    (19,173
    )
    
    
    (47,342
    )
    
    
    (59,521
    )
    
    
    (69,702
    )Other income (expense):Interest income
    
    
    194
    
    
    
    1,285
    
    
    
    3,088
    
    
    
    3,069
    
    
    
    4,737Interest expense
    
    
    (460
    )
    
    
    (95
    )
    
    
    (11
    )
    
    
    (14
    )
    
    
    (21
    )Total other income (expense)
    
    
    (266
    )
    
    
    1,190
    
    
    
    3,077
    
    
    
    3,055
    
    
    
    4,716Income (loss) before income taxes
    
    
    33,875
    
    
    
    (17,983
    )
    
    
    (44,265
    )
    
    
    (56,466
    )
    
    
    (64,986
    )Income tax expense
    
    
    1,760
    
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    32,115
    
    
    $
    (18,517
    )
    
    $
    (44,265
    )
    
    $
    (56,466
    )
    
    $
    (64,986
    )Net income (loss) per share:Basic
    
    $
    0.55
    
    
    $
    (0.36
    )
    
    $
    (0.87
    )
    
    $
    (1.19
    )
    
    $
    (1.66
    )Diluted
    
    $
    0.54
    
    
    $
    (0.36
    )
    
    $
    (0.87
    )
    
    $
    (1.19
    )
    
    $
    (1.66
    )Weighted average shares outstanding
used to calculate net income (loss)
per share:Basic
    
    
    57,995
    
    
    
    51,835
    
    
    
    51,061
    
    
    
    47,355
    
    
    
    39,188Diluted
    
    
    59,674
    
    
    
    51,835
    
    
    
    51,061
    
    
    
    47,355
    
    
    
    39,188As of December 31,2009
    
    2008
    
    2007
    
    2006
    
    2005(in thousands)Balance Sheet Data:Cash, cash equivalents and short-term
investments
    
    $
    93,944
    
    
    $
    52,037
    
    
    $
    64,678
    
    
    $
    75,534
    
    
    $
    69,367Working capital
    
    
    47,563
    
    
    
    3,734
    
    
    
    25,582
    
    
    
    59,010
    
    
    
    59,572Total assets
    
    
    131,361
    
    
    
    92,484
    
    
    
    85,344
    
    
    
    93,628
    
    
    
    79,935Deferred revenue, less current portion
    
    
    2,678
    
    
    
    2,436
    
    
    
    12,722
    
    
    
    15,444
    
    
    
    8,571Long-term debt, less current portion
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    46,916
    
    
    
    9,323
    
    
    
    15,348
    
    
    
    46,305
    
    
    
    54,520
 51




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First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(in thousands, except per share amounts)Selected Quarterly Financial Data (unaudited):2009:Product sales, net
    
    $
    27,555
    
    
    $
    27,989
    
    
    $
    31,488
    
    
    $
    32,210Total revenues
    
    
    34,810
    
    
    
    35,847
    
    
    
    39,453
    
    
    
    62,383Cost of product sales
    
    
    1,880
    
    
    
    2,104
    
    
    
    2,009
    
    
    
    2,301Total costs and expenses
    
    
    33,536
    
    
    
    34,551
    
    
    
    33,798
    
    
    
    36,467Net income
    
    
    1,153
    
    
    
    1,121
    
    
    
    5,340
    
    
    
    24,501Net income per share:Basic
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.09
    
    
    
    0.42Diluted
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.09
    
    
    
    0.402008:Product sales, net
    
    $
    19,415
    
    
    $
    23,954
    
    
    $
    28,106
    
    
    $
    29,745Total revenues
    
    
    24,466
    
    
    
    36,005
    
    
    
    32,209
    
    
    
    37,521Cost of product sales
    
    
    1,695
    
    
    
    1,701
    
    
    
    1,924
    
    
    
    2,025Total costs and expenses
    
    
    32,646
    
    
    
    33,062
    
    
    
    36,338
    
    
    
    47,328Net income (loss)
    
    
    (7,619
    )
    
    
    3,205
    
    
    
    (3,952
    )
    
    
    (10,151
    )Basic and diluted net income (loss) per share
    
    
    (0.15
    )
    
    
    0.06
    
    
    
    (0.08
    )
    
    
    (0.19
    )
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis together with Selected Financial Data
and the financial statements and related notes included elsewhere in this Form 10-K . This
discussion may contain forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in any forward-looking statements as a
result of many factors, including those set forth in our filings with the Securities and Exchange
Commission.
 Overview
  ®
 ®
 52




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®
  Critical Accounting Policies
  Revenue Recognition
  Product Sales, Net.
 53




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
    
    the number of and specific contractual terms of agreements with customers;
    
    estimated levels of inventory in the distribution channel;
    
    estimated remaining shelf life of products;
    
    analysis of prescription data gathered by a third-party prescription data provider;
    
    direct communication with customers;
    
    historical product returns, rebates and chargebacks;
    
    anticipated introduction of competitive products or generics;
    
    anticipated pricing strategy changes by us and/or our competitors; and
    
    the impact of state and federal regulations.
     54




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Promotion Revenue and License and Royalty Revenue.
 Inventories and Related Reserves
  Stock-Based Compensation
    55




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Years Ended December 31,2009
    
    
    2008
    
    
    2007Cost of product sales
    
    $
    101
    
    
    $
    95
    
    
    $
    207Research and development
    
    
    598
    
    
    
    478
    
    
    
    899Selling, general and administrative
    
    
    3,870
    
    
    
    3,638
    
    
    
    10,644Total
    
    $
    4,569
    
    
    $
    4,211
    
    
    $
    11,750
  Income Taxes
    Results of Operations
 Comparison of Years Ended December 31, 2009, 2008 and 2007
 Product Sales, Net.
 Promotion Revenue. ® ® ® 
 56




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##### Table of Contents



License and Royalty Revenue.
 
    
    In December 2009, we received a $20.0 million one-time nonrefundable milestone payment
from Schering-Plough following the approval of the NDA submitted by Schering-Plough for
Zegerid OTC (omeprazole 20 mg/sodium bicarbonate 1100 mg capsules). In June 2008, we
received a $2.5 million nonrefundable milestone payment from Schering-Plough relating to
FDA acceptance for filing of the NDA submitted by Schering-Plough for Zegerid OTC. In
August 2007, we received a nonrefundable $5.0 million milestone payment from
Schering-Plough relating to progress on clinical development strategy. We recognized the
milestone payments of $20.0 million, $2.5 million and $5.0 million in license and royalty
revenue in 2009, 2008 and 2007, respectively, due to the substantive nature of the
milestones achieved. In November 2006, we received a nonrefundable $15.0 million upfront
license fee in connection with our license agreement with Schering-Plough. The
$15.0 million upfront payment was amortized to revenue on a straight-line basis over a
37-month period through the end of 2009, which represented the period during which we had
significant responsibilities under the agreement.
    
    In December 2007, we received a nonrefundable $11.5 million upfront payment in
connection with our license and distribution agreements with GSK. To support GSKs initial
launch costs, we agreed to waive the first $2.5 million of aggregate royalties payable
under the agreements. Of the total $11.5 million upfront payment, the $2.5 million in
waived royalty obligations was recorded as deferred revenue and is being recognized as
revenue as the royalties are earned. The remaining $9.0 million was also recorded as
deferred revenue and was amortized to revenue on a straight-line basis over an 18-month
period through May 2009, which represented the period we were obligated to supply Zegerid
products to GSK for sale in Puerto Rico and the U.S. Virgin Islands under the distribution
agreement.
    
    In October 2009, we received a nonrefundable $2.5 million upfront payment in connection
with our license agreement with Norgine. The $2.5 million upfront payment is being
amortized over a three-month period through early January 2010, which represents the period
during which we have significant responsibilities under the agreement.
    
    In October 2004, we received a nonrefundable $15.0 million upfront payment in connection
with our non-exclusive agreement with Otsuka America Pharmaceutical Inc., or Otsuka
America, under which Otsuka America had been co-promoting Zegerid Capsules and Zegerid
Powder for Oral Suspension. The $15.0 million upfront payment initially was being
amortized to revenue on a straight-line basis over the 63-month contractual term through
the end of 2009. On May 28, 2008, we agreed to terminate the co-promotion agreement
effective as of June 30, 2008 and amortized the remaining balance of the $15.0 million
up-front payment. We recognized license and royalty revenue associated with this
amortization of $5.7 million in 2008 and $2.8 million in 2007.
 Cost of Product Sales.
 57




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License Fees and Royalties.
  Research and Development.
 ® ®
  58




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Selling, General and Administrative.
 Interest Income.
 Interest Expense.
 Income Tax Expense.
 Liquidity and Capital Resources
  59




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60




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Payments Due by PeriodLess than
    
    
    One to
    
    
    Four toContractual Obligations
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Thereafter(in thousands)Operating leases
    
    $
    4,718
    
    
    $
    1,970
    
    
    $
    2,748
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    10,575
    
    
    
    375
    
    
    
    10,200Other long-term contractual obligations
    
    
    3,540
    
    
    
    1,131
    
    
    
    2,409
    
    
    
    
    
    
    
    Total
    
    $
    18,833
    
    
    $
    3,476
    
    
    $
    15,357
    
    
    $
    
    
    
    $
    
      61




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62




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Accounting Pronouncements
 Adoption of Recent Accounting Pronouncements
    63




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Pending Adoption of Recent Accounting Pronouncements
  
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    64




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Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  65




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Managements Report on Internal Control Over Financial Reporting
     66




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Report of Independent Registered Public Accounting Firm
 
        
 67




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Item 9B. Other Information
  68




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  69




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Documents filed as part of this report.
            Exhibits.
 ExhibitNumber
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation3.2(2)
    
    Amended and Restated Bylaws3.3(3)
    
    Certificate of Designations for Series A Junior Participating Preferred Stock4.1(3)
    
    Form of Common Stock Certificate4.2(4)
    
    Amended and Restated Investors Rights Agreement, dated April 30, 2003, among us and
the parties named therein4.3(4)
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated May 19,
2003, among us and the parties named therein4.4(4)
    
    Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between
us and The Curators of the University of Missouri4.5(4)
    
    Form of Common Stock Purchase Warrant4.6(3)
    
    Rights Agreement, dated November 12, 2004, between us and American Stock Transfer &
Trust Company, which includes the form of Certificate of Designations of the Series A
Junior Participating Preferred Stock of Santarus, Inc. as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as
Exhibit C4.7(5)
    
    First Amendment to Rights Agreement, dated April 19, 2006, between us and American
Stock Transfer & Trust Company4.8(6)
    
    Second Amendment to Rights Agreement, dated December 10, 2008, between us and American
Stock Transfer and Trust Company
 70




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##### Table of Contents



ExhibitNumber
    
    Description4.9(7)
    
    Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to
Kingsbridge Capital Limited4.10(7)
    
    Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited4.11(8)
    
    Registration Rights Agreement, dated December 10, 2008, between us and Cosmo
Technologies Limited4.12(8)
    
    Amendment No. 1 to Registration Rights Agreement, dated April 23, 2009, between us and
Cosmo Technologies Limited10.1(4)
    
    Stock Purchase Agreement, dated January 26, 2001, between us and The Curators of the
University of Missouri10.2(4)
    
    Exclusive License Agreement, dated January 26, 2001, between us and The Curators of
the University of Missouri10.3(4)
    
    Amendment No. 1 to Exclusive License Agreement, dated February 21, 2003, between us
and The Curators of the University of Missouri10.4(9) 
    
    Amendment No. 2 to Exclusive License Agreement, dated August 20, 2007, between us and
The Curators of the University of Missouri10.5(4)
    
    Omeprazole Supply Agreement, dated September 25, 2003, among us, InterChem Trading
Corporation and Union Quimico Farmaceutica, S.A.10.6(10) 
    
    Amendment No. 1 to Omeprazole Supply Agreement, dated November 1, 2004, among us,
InterChem Trading Corporation and Union Quimico Farmaceutica, S.A.10.7(10) 
    
    Amendment No. 2 to Omeprazole Supply Agreement, dated July 11, 2007, among us,
InterChem Trading Corporation and Union Quimico Farmaceutica, S.A.10.8(11) 
    
    Amendment No. 3 to Omeprazole Supply Agreement, dated December 17, 2008, among us,
InterChem Trading Corporation and Union Quimico Farmaceutica, S.A.10.9+
    
    Amendment No. 4 to Omeprazole Supply Agreement, dated October 30, 2009, among us,
InterChem Trading Corporation and Union Quimico Farmaceutica, S.A.10.10+
    
    Second Amended and Restated Manufacturing and Supply Agreement, dated October 20,
2009, between us and Patheon Inc.10.11(12)
    
    Manufacturing and Supply Agreement, dated September 27, 2004, between us and OSG
Norwich Pharmaceuticals, Inc.10.12(12)
    
    Co-Promotion Agreement, dated October 4, 2004, between us and Otsuka America
Pharmaceutical, Inc.10.13(13)
    
    Amendment No. 1 to Co-Promotion Agreement, dated January 6, 2006, between us and
Otsuka America Pharmaceutical, Inc.10.14(7)
    
    Common Stock Purchase Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited10.15(14)
    
    Amended and Restated Loan and Security Agreement, dated July 11, 2008, between us and
Comerica Bank10.16(14)
    
    Amended and Restated LIBOR Addendum to Loan and Security Agreement, dated July 11,
2008, between us and Comerica Bank10.17(15)
    
    OTC License Agreement, dated October 17, 2006, between us and Schering-Plough
Healthcare Products, Inc.10.18(16)
    
    Amendment No. 1 to OTC License Agreement, dated July 24, 2009, between us and
Schering-Plough Healthcare Products, Inc.10.19(17)
    
    Service Agreement, dated November 3, 2006, between us and Ventiv Commercial Services,
LLC (d/b/a inVentiv Commercial Services, LLC)10.20(10)
    
    Amendment No. 1 to Service Agreement, dated June 15, 2007, between us and Ventiv
Commercial Services, LLC (d/b/a inVentiv Commercial Services, LLC)10.21(18)
    
    Amendment No. 2 to Service Agreement, dated October 6, 2008, between us and Ventiv
Commercial Services, LLC (d/b/a inVentiv Commercial Services, LLC)10.22(19)
    
    Co-Promotion Agreement, dated June 28, 2007, by and between us and Victory Pharma, Inc.
 71




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##### Table of Contents



ExhibitNumber
    
    Description10.23(9) 
    
    Co-Promotion Agreement, dated August 24, 2007, between us and C.B. Fleet Company,
Incorporated10.24(20)
    
    Amendment No. 1 to Co-Promotion Agreement, dated May 6, 2008, between us and C.B.
Fleet Company, Incorporated10.25(21)
    
    License Agreement, dated November 30, 2007, between us and Glaxo Group Limited, an
affiliate of GlaxoSmithKline plc10.26(21)
    
    Distribution Agreement, dated November 30, 2007, between us and Glaxo Group Limited,
an affiliate of GlaxoSmithKline plc10.27(11)
    
    License Agreement, dated December 10, 2008, between us and Cosmo Technologies Limited10.28(11)
    
    Stock Issuance Agreement, dated December 10, 2008, between us and Cosmo Technologies
Limited10.29(22)
    
    Promotion Agreement, dated July 21, 2008, between us and Depomed, Inc.10.30(16)
    
    License Agreement, dated October 9, 2009, between us and Norgine B.V.10.31(4)
    
    Office Building Lease, dated August 24, 2001, between us and Torrey View Associates LP10.32(4)
    
    Irrevocable Stand-by Letter of Credit, dated August 24, 2001, issued by UBS Paine
Webber Inc.10.33(23)
    
    Sublease, dated December 11, 2007, between us and Avnet, Inc.10.34(4)#
    
    Form of Indemnification Agreement between us and each of our directors and officers10.35(4)#
    
    1998 Stock Option Plan10.36(24)#
    
    Amendment to 1998 Stock Option Plan10.37(25)#
    
    Amended and Restated 2004 Equity Incentive Award Plan10.38(24)#
    
    Amendment No. 1 to Amended and Restated 2004 Equity Incentive Award Plan10.39(26)#
    
    Amendment No. 2 to Amended and Restated 2004 Equity Incentive Award Plan10.40(27)#
    
    Form of Stock Option Agreement under Amended and Restated 2004 Equity Incentive Award
Plan10.41(28)#
    
    Form of Immediately Exerciseable Stock Option Agreement under Amended and Restated
2004 Equity Incentive Award Plan10.42(29)#
    
    Amended and Restated Employee Stock Purchase Plan10.43(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Gerald T. Proehl10.44(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Debra P. Crawford10.45(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Julie A. DeMeules10.46(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
William C. Denby, III10.47(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Warren E. Hall10.48(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Michael D. Step10.49(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and E.
David Ballard, II, M.D.10.50(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Maria Bedoya-Toro10.51(21)#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Carey J. Fox10.52(30)#
    
    2008 Bonus Plan10.53(31)#
    
    2009 Bonus Plan10.54(32)#
    
    2010 Bonus Plan23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 1934
 72




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ExhibitNumber
    
    Description31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 193432.1*
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
 (1)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended March 31, 2004, filed
with the Securities and
Exchange Commission on
May 13, 2004.(2)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on December 5,
2008.(3)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on November 17,
2004.(4)
    
    Incorporated by reference to
our Registration Statement on
Form S-1, filed with the
Securities and Exchange
Commission on December 23,
2003, as amended (File
No. 333-111515).(5)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on April 21, 2006.(6)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on December 15,
2008.(7)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 3,
2006.(8)
    
    Incorporated by reference to
our Registration Statement on
Form S-3, filed with the
Securities and Exchange
Commission on January 20,
2009, as amended (File
No. 333-156806).(9)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended September 30, 2007,
filed with the Securities and
Exchange Commission on
November 2, 2007.(10)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended June 30, 2007, filed
with the Securities and
Exchange Commission on August
6, 2007.(11)
    
    Incorporated by reference to
our Annual Report on
Form 10-K for the year ended
December 31, 2008, filed with
the Securities and Exchange
Commission on March 6, 2009.(12)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended September 30, 2004,
filed with the Securities and
Exchange Commission on
November 12, 2004.(13)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on January 6,
2006.(14)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on July 14, 2008.(15)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on October 18,
2006.(16)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended September 30, 2009,
filed with the Securities and
Exchange Commission on
November 5, 2009.(17)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on November 7,
2006. 73




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(18)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on October 7,
2008.(19)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on June 28, 2007.(20)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on May 7, 2008.(21)
    
    Incorporated by reference to
our Annual Report on
Form 10-K for the year ended
December 31, 2007, filed with
the Securities and Exchange
Commission on March 4, 2008.(22)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended June 30, 2008, filed
with the Securities and
Exchange Commission on August
5, 2008.(23)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on December 13,
2007.(24)
    
    Incorporated by reference to
our Annual Report on
Form 10-K for the year ended
December 31, 2005, filed with
the Securities and Exchange
Commission on March 7, 2006.(25)
    
    Incorporated by reference to
our Quarterly Report on
Form 10-Q for the quarter
ended June 30, 2004, filed
with the Securities and
Exchange Commission on August
13, 2004.(26)
    
    Incorporated by reference to
our Registration Statement on
Form S-8, filed with the
Securities and Exchange
Commission on December 21,
2006.(27)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 8,
2005.(28)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 16,
2005.(29)
    
    Incorporated by reference to
our Registration Statement on
Form S-8, filed with the
Securities and Exchange
Commission on December 18,
2007.(30)
    
    Incorporated by reference to
our applicable Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 22,
2008.(31)
    
    Incorporated by reference to
our applicable Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 24,
2009.(32)
    
    Incorporated by reference to
our applicable Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 19,
2010.
    
    Confidential treatment has been granted as to certain
portions, which portions have been omitted and filed
separately with the Securities and Exchange Commission.+
    
    Application has been made to the Securities and Exchange
Commission to seek confidential treatment of certain
provisions. Omitted material for which confidential treatment
has been requested has been filed separately with the
Securities and Exchange Commission.#
    
    Indicates management contract or compensatory plan.*
    
    These certifications are being furnished solely to accompany
this annual report pursuant to 18 U.S.C. Section 1350, and
are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be
incorporated by reference into any filing of Santarus, Inc.,
whether made before or after the date hereof, regardless of
any general incorporation language in such filing. Financial Statement Schedule.
  74




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##### Table of Contents



SIGNATURES
  Dated: March 3, 2010
    SANTARUS, INC.By:
    /s/ GERALD T. PROEHLGerald T. ProehlPresident and Chief Executive Officer  Name
    
    Title
    
    Date/s/ GERALD T. PROEHL
    
    President, Chief Executive
    
    March 3, 2010Gerald T. Proehl
    
    Officer and Director
(Principal Executive
Officer)/s/ DEBRA P. CRAWFORD
    
    Senior Vice President and
    
    March 3, 2010Debra P. Crawford
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)/s/ DAVID F. HALE
    
    DirectorDavid F. Hale
    
    (Chairman of the Board of
Directors)
    
    March 3, 2010/s/ DANIEL D. BURGESS
    
    Director
    
    March 3, 2010Daniel D. Burgess/s/ MICHAEL G. CARTER, M.B., CH.B., F.R.C.P.
(U.K.)
    
    Director
    
    March 3, 2010Michael G. Carter, M.B., Ch.B., F.R.C.P. (U.K.)/s/ MICHAEL E. HERMAN
    
    Director
    
    March 3, 2010Michael E. Herman/s/ TED W. LOVE, M.D.
    
    Director
    
    March 3, 2010Ted W. Love, M.D./s/ KENT SNYDER
    
    Director
    
    March 3, 2010Kent Snyder
 75




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##### Table of Contents



SANTARUS, INC.
 INDEX TO FINANCIAL STATEMENTS
 PageAUDITED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm
    
    F-2Balance Sheets as of December 31, 2009 and 2008
    
    F-3Statements of Operations for each of the years ended December 31, 2009, 2008 and 2007
    
    F-4Statements of Stockholders Equity for each of the years ended December 31, 2009, 2008 and 2007
    
    F-5Statements of Cash Flows for each of the years ended December 31, 2009, 2008 and 2007
    
    F-7Notes to Financial Statements
    
    F-8FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    F-31
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 F-2




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##### Table of Contents



Santarus, Inc.
 
 Balance Sheets
 (in thousands, except share and per share amounts)
 December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    86,129
    
    
    $
    49,886Short-term investments
    
    
    7,815
    
    
    
    2,151Accounts receivable, net
    
    
    16,253
    
    
    
    13,366Inventories, net
    
    
    5,336
    
    
    
    5,230Prepaid expenses and other current assets
    
    
    3,797
    
    
    
    3,826Total current assets
    
    
    119,330
    
    
    
    74,459Long-term restricted cash
    
    
    1,400
    
    
    
    1,400Long-term investments
    
    
    
    
    
    
    4,250Property and equipment, net
    
    
    875
    
    
    
    988Intangible assets, net
    
    
    9,750
    
    
    
    11,250Other assets
    
    
    6
    
    
    
    137Total assets
    
    $
    131,361
    
    
    $
    92,484Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    58,676
    
    
    $
    53,109Allowance for product returns
    
    
    12,846
    
    
    
    10,251Current portion of deferred revenue
    
    
    245
    
    
    
    7,365Total current liabilities
    
    
    71,767
    
    
    
    70,725Deferred revenue, less current portion
    
    
    2,678
    
    
    
    2,436Long-term debt
    
    
    10,000
    
    
    
    10,000Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value; 10,000,000 shares authorized at
December 31, 2009 and 2008; no shares issued and
outstanding at
December 31, 2009 and 2008
    
    
    
    
    
    
    Common stock, $0.0001 par value; 100,000,000 shares authorized at
December 31, 2009 and 2008; 58,344,932 and
57,799,588 shares
issued
and outstanding at December 31, 2009 and 2008, respectively
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    337,312
    
    
    
    331,831Accumulated other comprehensive income (loss)
    
    
    (1
    )
    
    
    2Accumulated deficit
    
    
    (290,401
    )
    
    
    (322,516
    )Total stockholders equity
    
    
    46,916
    
    
    
    9,323Total liabilities and stockholders equity
    
    $
    131,361
    
    
    $
    92,484
 See accompanying notes.
 F-3




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##### Table of Contents



Santarus, Inc.
 
 Statements of Operations
 (in thousands, except share and per share amounts)
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Revenues:Product sales, net
    
    $
    119,242
    
    
    $
    101,220
    
    
    $
    79,403Promotion revenue
    
    
    23,631
    
    
    
    9,837
    
    
    
    1,803License and royalty revenue
    
    
    29,620
    
    
    
    19,144
    
    
    
    13,222Total revenues
    
    
    172,493
    
    
    
    130,201
    
    
    
    94,428Costs and expenses:Cost of product sales
    
    
    8,294
    
    
    
    7,345
    
    
    
    7,301License fees and royalties
    
    
    7,976
    
    
    
    22,257
    
    
    
    11,117Research and development
    
    
    16,244
    
    
    
    11,760
    
    
    
    6,849Selling, general and administrative
    
    
    105,838
    
    
    
    108,012
    
    
    
    116,503Total costs and expenses
    
    
    138,352
    
    
    
    149,374
    
    
    
    141,770Income (loss) from operations
    
    
    34,141
    
    
    
    (19,173
    )
    
    
    (47,342
    )Other income (expense):Interest income
    
    
    194
    
    
    
    1,285
    
    
    
    3,088Interest expense
    
    
    (460
    )
    
    
    (95
    )
    
    
    (11
    )Total other income (expense)
    
    
    (266
    )
    
    
    1,190
    
    
    
    3,077Income (loss) before income taxes
    
    
    33,875
    
    
    
    (17,983
    )
    
    
    (44,265
    )Income tax expense
    
    
    1,760
    
    
    
    534
    
    
    
    Net income (loss)
    
    $
    32,115
    
    
    $
    (18,517
    )
    
    $
    (44,265
    )Net income (loss) per share:Basic
    
    $
    0.55
    
    
    $
    (0.36
    )
    
    $
    (0.87
    )Diluted
    
    $
    0.54
    
    
    $
    (0.36
    )
    
    $
    (0.87
    )Weighted average shares outstanding used to calculate net
income (loss) per
share:Basic
    
    
    57,994,506
    
    
    
    51,835,482
    
    
    
    51,060,650Diluted
    
    
    59,673,866
    
    
    
    51,835,482
    
    
    
    51,060,650
 See accompanying notes.
 F-4




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##### Table of Contents



Santarus, Inc.
 
 Statements of Stockholders Equity
 (in thousands, except share amounts)
 AccumulatedotherAdditional
    
    
    comprehensive
    
    
    
    
    
    
    TotalCommon stock
    
    
    paid-in
    
    
    income
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    (loss)
    
    
    deficit
    
    
    equityBalance at December 31, 2006
    
    
    50,730,622
    
    
    $
    5
    
    
    $
    306,034
    
    
    $
    
    
    
    $
    (259,734
    )
    
    $
    46,305Issuance of common stock upon exercise of
stock options, net of
12,001 unvested shares
repurchased
    
    
    84,851
    
    
    
    
    
    
    
    265
    
    
    
    
    
    
    
    
    
    
    
    265Issuance of common stock under employee stock purchase plan
    
    
    500,012
    
    
    
    
    
    
    
    1,293
    
    
    
    
    
    
    
    
    
    
    
    1,293Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    11,750
    
    
    
    
    
    
    
    
    
    
    
    11,750Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,265
    )
    
    
    (44,265
    )Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,265
    )Balance at December 31, 2007
    
    
    51,315,485
    
    
    
    5
    
    
    
    319,342
    
    
    
    
    
    
    
    (303,999
    )
    
    
    15,348Issuance of common stock upon exercise of
stock options
    
    
    101,158
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Issuance of common stock under employee
stock purchase plan
    
    
    382,945
    
    
    
    
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    762Issuance of common stock at $1.24 per share
for technology license agreement
    
    
    6,000,000
    
    
    
    1
    
    
    
    7,439
    
    
    
    
    
    
    
    
    
    
    
    7,440Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,211
    
    
    
    
    
    
    
    
    
    
    
    4,211Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,517
    )
    
    
    (18,517
    )Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,515
    )Balance at December 31, 2008
    
    
    57,799,588
    
    
    
    6
    
    
    
    331,831
    
    
    
    2
    
    
    
    (322,516
    )
    
    
    9,323
 F-5




---



##### Table of Contents



AccumulatedotherAdditional
    
    
    comprehensive
    
    
    
    
    
    
    TotalCommon stock
    
    
    paid-in
    
    
    income
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    (loss)
    
    
    deficit
    
    
    equityBalance at December 31, 2008
    
    
    57,799,588
    
    
    
    6
    
    
    
    331,831
    
    
    
    2
    
    
    
    (322,516
    )
    
    
    9,323Issuance of common stock upon exercise of
stock options
    
    
    162,767
    
    
    
    
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    258Issuance of common stock under employee
stock purchase plan
    
    
    381,293
    
    
    
    
    
    
    
    652
    
    
    
    
    
    
    
    
    
    
    
    652Issuance of common stock upon exercise of
warrants
    
    
    1,284
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,569
    
    
    
    
    
    
    
    
    
    
    
    4,569Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,115
    
    
    
    32,115Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,112Balance at December 31, 2009
    
    
    58,344,932
    
    
    $
    6
    
    
    $
    337,312
    
    
    $
    (1
    )
    
    $
    (290,401
    )
    
    $
    46,916
 See accompanying notes.
 F-6




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##### Table of Contents



Santarus, Inc.
 
 Statements of Cash Flows
 (in thousands)
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Operating activitiesNet income (loss)
    
    $
    32,115
    
    
    $
    (18,517
    )
    
    $
    (44,265
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    2,049
    
    
    
    1,355
    
    
    
    587Recognition of auction rate securities rights
    
    
    
    
    
    
    (1,457
    )
    
    
    Unrealized (gain) loss on trading securities
    
    
    (48
    )
    
    
    1,507
    
    
    
    Stock-based compensation
    
    
    4,569
    
    
    
    4,211
    
    
    
    11,750Issuance of common stock for technology license agreement
    
    
    
    
    
    
    7,440
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (2,887
    )
    
    
    (3,686
    )
    
    
    (2,547
    )Inventories, net
    
    
    (106
    )
    
    
    928
    
    
    
    822Prepaid expenses and other current assets
    
    
    29
    
    
    
    (1,486
    )
    
    
    (1,096
    )Other assets
    
    
    
    
    
    
    61
    
    
    
    (4
    )Accounts payable and accrued liabilities
    
    
    5,566
    
    
    
    15,754
    
    
    
    14,820Allowance for product returns
    
    
    2,595
    
    
    
    4,304
    
    
    
    4,324Deferred revenue
    
    
    (6,878
    )
    
    
    (16,894
    )
    
    
    3,528Net cash provided by (used in) operating activities
    
    
    37,004
    
    
    
    (6,480
    )
    
    
    (12,081
    )Investing activitiesPurchases of short-term investments
    
    
    (11,877
    )
    
    
    (4,488
    )
    
    
    (4,723
    )Maturities of short-term investments
    
    
    10,028
    
    
    
    2,929
    
    
    
    3,095Redemption of investments
    
    
    450
    
    
    
    
    
    
    
    Long-term restricted cash
    
    
    
    
    
    
    1,400
    
    
    
    300Purchases of property and equipment
    
    
    (274
    )
    
    
    (696
    )
    
    
    (651
    )Acquisition of intangible assets
    
    
    
    
    
    
    (12,000
    )
    
    
    Net cash used in investing activities
    
    
    (1,673
    )
    
    
    (12,855
    )
    
    
    (1,979
    )Financing activitiesProceeds from draw down on credit facility
    
    
    
    
    
    
    10,000
    
    
    
    Exercise of stock options and warrants
    
    
    260
    
    
    
    77
    
    
    
    265Issuance of common stock, net
    
    
    652
    
    
    
    762
    
    
    
    1,293Net cash provided by financing activities
    
    
    912
    
    
    
    10,839
    
    
    
    1,558Increase (decrease) in cash and cash equivalents
    
    
    36,243
    
    
    
    (8,496
    )
    
    
    (12,502
    )Cash and cash equivalents at beginning of the year
    
    
    49,886
    
    
    
    58,382
    
    
    
    70,884Cash and cash equivalents at end of the year
    
    $
    86,129
    
    
    $
    49,886
    
    
    $
    58,382Supplemental disclosure of cash flow information:Interest paid
    
    $
    460
    
    
    $
    95
    
    
    $
    11Income taxes paid
    
    $
    969
    
    
    $
    91
    
    
    $
    1
 See accompanying notes.
 F-7




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##### Table of Contents



SANTARUS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 1. Organization and Summary of Significant Accounting Policies
 Organization and Business
  Use of Estimates in the Preparation of Financial Statements
  Cash and Cash Equivalents
  Short-Term Investments
   Amortized
    
    
    Market
    
    
    UnrealizedCost
    
    
    Value
    
    
    Gain (Loss)December 31, 2009:U.S. government sponsored enterprise securities
    
    $
    3,852
    
    
    $
    3,852
    
    
    $
    U.S. Treasury securities
    
    
    1,516
    
    
    
    1,515
    
    
    
    (1
    )$
    5,368
    
    
    $
    5,367
    
    
    $
    (1
    )December 31, 2008:U.S. government sponsored enterprise securities
    
    $
    3,549
    
    
    $
    3,551
    
    
    $
    2
 F-8




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##### Table of Contents



December 31,2009
    
    
    2008Short-term investments
    
    $
    3,967
    
    
    $
    2,151Restricted cash
    
    
    1,400
    
    
    
    1,400$
    5,367
    
    
    $
    3,551
  Fair Value Measurements
    Fair Value Measurements at Reporting Date UsingQuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMoney market funds
    
    $
    60,663
    
    
    $
    
    
    
    $
    
    
    
    $
    60,663U.S. Treasury securities
    
    
    1,515
    
    
    
    
    
    
    
    
    
    
    
    1,515U.S. government sponsored
enterprise
securities
    
    
    
    
    
    
    29,318
    
    
    
    
    
    
    
    29,318Municipal debt obligations 
auction rate securities
    
    
    
    
    
    
    
    
    
    
    3,370
    
    
    
    3,370Auction rate securities rights
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    478$
    62,178
    
    
    $
    29,318
    
    
    $
    3,848
    
    
    $
    95,344
  F-9




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##### Table of Contents



Years Ended December 31,2009
    
    
    2008Auction Rate Securities and Rights:Beginning balance
    
    $
    4,250
    
    
    $
    Transfers in
    
    
    
    
    
    
    4,300Recognition of auction rate securities
rights
    
    
    
    
    
    
    1,457Redemptions at par
    
    
    (450
    )
    
    
    Net unrealized loss included in net loss
    
    
    
    
    
    
    (1,507
    )Net unrealized gain included in net
income
    
    
    48
    
    
    
    Ending balance
    
    $
    3,848
    
    
    $
    4,250
 Concentration of Credit Risk and Sources of Supply
  F-10




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##### Table of Contents



®
 ® ® ®
 Inventories, Net
  Property and Equipment
  Intangible Assets, Net
   Revenue Recognition
  F-11




---



##### Table of Contents



Product Sales, Net.
   
    
    the number of and specific contractual terms of agreements with customers;
    
    estimated levels of inventory in the distribution channel;
    
    estimated remaining shelf life of products;
    
    analysis of prescription data gathered by a third-party prescription data provider;
    
    direct communication with customers;
    
    historical product returns, rebates and chargebacks;
    
    anticipated introduction of competitive products or generics;
    
    anticipated pricing strategy changes by the Company and/or its competitors; and
    
    the impact of state and federal regulations.
    F-12




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##### Table of Contents



Promotion Revenue and License and Royalty Revenue.
 Research and Development Expenses and License Fees
    F-13




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##### Table of Contents



Patent Costs
  Shipping and Handling Costs
  Advertising Expense
  Stock-Based Compensation
    Years Ended December 31,2009
    
    2008
    
    2007Stock Options:Risk-free interest rate
    
    
    1.6%  3.1%
    
    
    
    1.5%  3.4%
    
    
    
    3.6%  4.9%Expected volatility
    
    
    68%  72%
    
    
    
    64%  68%
    
    
    
    60%Expected life of options (years)
    
    
    5.27  6.08
    
    
    
    5.27  6.58
    
    
    
    5.27  6.08Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase Plan:Risk-free interest rate
    
    
    0.1%  0.3%
    
    
    
    0.1%  2.0%
    
    
    
    3.3%  5.0%Expected volatility
    
    
    71%  72%
    
    
    
    64%  68%
    
    
    
    60%Expected life of options (years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50  2.00Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
 F-14




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##### Table of Contents



Risk-Free Interest Rate.
 Expected Volatility.
 Expected Life of Options.
 Expected Dividend Yield.
  Comprehensive Income (Loss)
  Years Ended December 31,2009
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    32,115
    
    
    $
    (18,517
    )
    
    $
    (44,265
    )Unrealized gain (loss) on investments
    
    
    (3
    )
    
    
    2
    
    
    
    Comprehensive income (loss)
    
    $
    32,112
    
    
    $
    (18,515
    )
    
    $
    (44,265
    )
 Net Income (Loss) Per Share
  F-15




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##### Table of Contents



Years Ended December 31,2009
    
    
    2008
    
    
    2007Numerator:Net income (loss) (in thousands)
    
    $
    32,115
    
    
    $
    (18,517
    )
    
    $
    (44,265
    )Denominator:Weighted average common shares outstanding
    
    
    57,994,506
    
    
    
    51,836,524
    
    
    
    51,064,953Weighted average unvested common shares
subject to repurchase
    
    
    
    
    
    
    (1,042
    )
    
    
    (4,303
    )Denominator for basic net income (loss) per
share
    
    
    57,994,506
    
    
    
    51,835,482
    
    
    
    51,060,650Net effect of dilutive common stock equivalents
    
    
    1,679,360
    
    
    
    
    
    
    
    Denominator for diluted net income (loss) per
share
    
    
    59,673,866
    
    
    
    51,835,482
    
    
    
    51,060,650Net income (loss) per shareBasic
    
    $
    0.55
    
    
    $
    (0.36
    )
    
    $
    (0.87
    )Diluted
    
    $
    0.54
    
    
    $
    (0.36
    )
    
    $
    (0.87
    )
 Segment Reporting
  Recent Accounting Pronouncements
 Adoption of Recent Accounting Pronouncements
   F-16




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##### Table of Contents



Pending Adoption of Recent Accounting Pronouncements
  2. Balance Sheet Details
  December 31,2009
    
    
    2008Raw materials
    
    $
    1,071
    
    
    $
    977Finished goods
    
    
    4,269
    
    
    
    4,5615,340
    
    
    
    5,538Allowance for excess and obsolete inventory
    
    
    (4
    )
    
    
    (308
    )$
    5,336
    
    
    $
    5,230
  December 31,2009
    
    
    2008Computer equipment and software
    
    $
    1,344
    
    
    $
    1,258Office equipment and furniture
    
    
    1,219
    
    
    
    1,154Leasehold improvements
    
    
    468
    
    
    
    4463,031
    
    
    
    2,858Less: accumulated depreciation and amortization
    
    
    (2,156
    )
    
    
    (1,870
    )$
    875
    
    
    $
    988
  F-17




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##### Table of Contents



December 31,2009
    
    
    2008Accounts payable
    
    $
    8,782
    
    
    $
    6,102Accrued compensation and benefits
    
    
    7,525
    
    
    
    6,862Accrued rebates
    
    
    31,268
    
    
    
    26,034Accrued license fees and royalties
    
    
    1,831
    
    
    
    4,038Accrued contract sales organization expenses
    
    
    1,573
    
    
    
    1,774Accrued research and development expenses
    
    
    3,421
    
    
    
    4,126Income taxes payable
    
    
    1,267
    
    
    
    483Other accrued liabilities
    
    
    3,009
    
    
    
    3,690$
    58,676
    
    
    $
    53,109
 3. License Agreements
 University of Missouri
  Schering-Plough HealthCare Products, Inc.
  F-18




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##### Table of Contents



Glaxo Group Limited
   th
  F-19




---



##### Table of Contents



Norgine B.V.
  Cosmo Technologies Limited
     F-20




---



##### Table of Contents



4. Promotion Agreement with Depomed, Inc.
    F-21




---



##### Table of Contents



5. Long-Term Debt
   F-22




---



##### Table of Contents



6. Commitments and Contingencies
 Leases
    2010
    
    $
    1,9702011
    
    
    1,5212012
    
    
    1,1472013
    
    
    802014
    
    
    Thereafter
    
    
    Total minimum lease payments
    
    $
    4,718
  Other Long-Term Commitments
    F-23




---



##### Table of Contents



Legal Proceedings
        F-24




---



##### Table of Contents



7. Stockholders Equity
 Authorized Shares
 ,
 Common Stock Offerings
  F-25




---



##### Table of Contents



Stockholder Rights Plan
  Warrants
  Stock Option Plans
   F-26




---



##### Table of Contents



WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    Value (inOptions
    
    Shares
    
    
    Price
    
    
    Term (years)
    
    
    thousands)Outstanding at January 1, 2009
    
    
    11,915,568
    
    
    $
    4.82Granted
    
    
    3,078,370
    
    
    
    1.30Exercised
    
    
    (162,767
    )
    
    
    1.59Forfeited
    
    
    (99,153
    )
    
    
    2.01Expired
    
    
    (204,604
    )
    
    
    7.14Outstanding at December 31, 2009
    
    
    14,527,414
    
    
    $
    4.09
    
    
    
    7.04
    
    
    $
    23,294Exercisable at December 31, 2009
    
    
    10,193,799
    
    
    $
    4.93
    
    
    
    6.38
    
    
    $
    11,837
  Employee Stock Purchase Plan
  F-27




---



##### Table of Contents



Shares Reserved for Future Issuance
  December 31,2009
    
    
    2008Stock options issued and outstanding
    
    
    14,527,414
    
    
    
    11,915,568Authorized for future issuance under equity compensation plans
    
    
    2,763,242
    
    
    
    2,919,148Stock warrants outstanding
    
    
    365,000
    
    
    
    366,28417,655,656
    
    
    
    15,201,000
 
 8. 401(k) Plan
  9. Income Taxes
     Years Ended December 31,2009
    
    
    2008
    
    
    2007Unrecognized tax benefits  January 1
    
    $
    1,728
    
    
    $
    
    
    
    $
    Gross decreases related to prior year tax positions
    
    
    (35
    )
    
    
    
    
    
    
    Gross increases related to current year tax positions
    
    
    110
    
    
    
    1,728
    
    
    
    Settlements
    
    
    
    
    
    
    
    
    
    
    Lapse of statute of limitations
    
    
    
    
    
    
    
    
    
    
    Unrecognized tax benefits  December 31
    
    $
    1,803
    
    
    $
    1,728
    
    
    $
    
  F-28




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##### Table of Contents



December 31,2009
    
    
    2008Deferred tax assets:Net operating loss carryforwards
    
    $
    62,298
    
    
    $
    77,052Research and development credits
    
    
    2,534
    
    
    
    3,510Capitalized research and development
    
    
    108
    
    
    
    162Depreciation and amortization
    
    
    5,260
    
    
    
    5,285Accrued rebates
    
    
    11,919
    
    
    
    9,842Deferred revenue
    
    
    1,458
    
    
    
    4,101Allowance for product returns
    
    
    4,897
    
    
    
    3,876Other
    
    
    8,801
    
    
    
    6,662Total deferred tax assets
    
    
    97,275
    
    
    
    110,490Valuation allowance
    
    
    (97,275
    )
    
    
    (110,490
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  Years Ended December 31,2009
    
    
    2008
    
    
    2007Federal income taxes
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income tax, net of Federal benefit
    
    
    4.1
    %
    
    
    3.8
    %
    
    
    3.8
    %Tax effect on non-deductible expenses
    
    
    4.3
    %
    
    
    (8.9
    )%
    
    
    (10.7
    )%Removal of net operating losses and R&D credits
    
    
    
    %
    
    
    
    %
    
    
    (198.3
    )%Change in valuation allowance
    
    
    (39.0
    )%
    
    
    (23.4
    )%
    
    
    172.4
    %Other
    
    
    1.8
    %
    
    
    (8.5
    )%
    
    
    (1.2
    )%5.2
    %
    
    
    (3.0
    )%
    
    
    0.0
    %
 F-29




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##### Table of Contents



10. Quarterly Financial Information (unaudited)
  First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(in thousands, except per share amounts)2009:Product sales, net
    
    $
    27,555
    
    
    $
    27,989
    
    
    $
    31,488
    
    
    $
    32,210Total revenues
    
    
    34,810
    
    
    
    35,847
    
    
    
    39,453
    
    
    
    62,383Cost of product sales
    
    
    1,880
    
    
    
    2,104
    
    
    
    2,009
    
    
    
    2,301Total costs and expenses
    
    
    33,536
    
    
    
    34,551
    
    
    
    33,798
    
    
    
    36,467Net income
    
    
    1,153
    
    
    
    1,121
    
    
    
    5,340
    
    
    
    24,501Net income per share:Basic
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.09
    
    
    
    0.42Diluted
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.09
    
    
    
    0.402008:Product sales, net
    
    $
    19,415
    
    
    $
    23,954
    
    
    $
    28,106
    
    
    $
    29,745Total revenues
    
    
    24,466
    
    
    
    36,005
    
    
    
    32,209
    
    
    
    37,521Cost of product sales
    
    
    1,695
    
    
    
    1,701
    
    
    
    1,924
    
    
    
    2,025Total costs and expenses
    
    
    32,646
    
    
    
    33,062
    
    
    
    36,338
    
    
    
    47,328Net income (loss)
    
    
    (7,619
    )
    
    
    3,205
    
    
    
    (3,952
    )
    
    
    (10,151
    )Basic and diluted net income (loss) per share
    
    
    (0.15
    )
    
    
    0.06
    
    
    
    (0.08
    )
    
    
    (0.19
    )
 F-30




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##### Table of Contents



Schedule II  Valuation and Qualifying Accounts
 (in thousands)
 Additions
    
    DeductionsActual Cash
    
    Actual CashDiscounts,
    
    Discounts,Provision
    
    Chargebacks, and
    
    Chargebacks, andBalance at
    
    Related
    
    Other Discounts
    
    Other Discounts
    
    Balance atBeginning of
    
    to Current
    
    Related to Current
    
    Related to Prior
    
    End ofPeriod
    
    Period Sales
    
    Period Sales
    
    Period Sales
    
    PeriodAllowance for cash discounts,
chargebacks, and other sales
discounts:For the year ended December 31, 2009
    
    $
    (3,248
    )
    
    $
    (16,873
    )
    
    $
    13,598
    
    
    $
    3,096
    
    
    $
    (3,427
    )For the year ended December 31, 2008
    
    
    (1,527
    )
    
    
    (14,051
    )
    
    
    11,484
    
    
    
    846
    
    
    
    (3,248
    )For the year ended December 31, 2007
    
    
    (687
    )
    
    
    (7,153
    )
    
    
    5,876
    
    
    
    437
    
    
    
    (1,527
    )
 AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    
    
    
    
    End ofPeriod
    
    Expenses
    
    Deductions
    
    PeriodAllowance for excess and obsolete
inventory:For the year ended December 31, 2009
    
    $
    (308
    )
    
    $
    (47
    )
    
    $
    351
    (1)
    
    $
    (4
    )For the year ended December 31, 2008
    
    
    (166
    )
    
    
    (178
    )
    
    
    36
    (1)
    
    
    (308
    )For the year ended December 31, 2007
    
    
    (409
    )
    
    
    (195
    )
    
    
    438
    (1)
    
    
    (166
    )
 Additions
    
    
    DeductionsProvision
    
    
    Provision
    
    
    Actual Returns
    
    
    Actual ReturnsBalance at
    
    
    Related
    
    
    Related
    
    
    or Credits
    
    
    or Credits
    
    
    Balance atBeginning of
    
    
    to Current
    
    
    to Prior
    
    
    Related to
    
    
    Related to
    
    
    End ofPeriod
    
    
    Period Sales
    
    
    Period Sales
    
    
    Current Period
    
    
    Prior Period
    
    
    PeriodAllowance for product returns:For the year ended December 31, 2009
    
    $
    (10,251
    )
    
    $
    (4,634
    )
    
    $
    
    
    
    $
    26
    
    
    $
    2,013
    
    
    $
    (12,846
    )For the year ended December 31, 2008
    
    
    (5,947
    )
    
    
    (6,080
    )
    
    
    
    
    
    
    39
    
    
    
    1,737
    
    
    
    (10,251
    )For the year ended December 31, 2007
    
    
    (1,623
    )
    
    
    (4,495
    )
    
    
    (1,895
    )
    
    
    43
    
    
    
    2,023
    
    
    
    (5,947
    )
 
 (1)
    
    Deductions in allowance for excess and obsolete inventory represent physical disposition of
inventory. F-31