##### 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, 2005
 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)10590 West Ocean Air Drive, Suite 200
    
    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 RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act:
 Common Stock, par value $0.0001 per share
 Series A Junior Participating Preferred Stock Purchase Rights
 o þ
 o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



SANTARUS, INC.
 FORM 10-K  ANNUAL REPORT
For the Year Ended December 31, 2005
 Table of Contents
 PagePART IItem 1
    
    Business
    
    
    2Item 1A
    
    Risk Factors
    
    
    17Item 1B
    
    Unresolved Staff Comments
    
    
    37Item 2
    
    Properties
    
    
    37Item 3
    
    Legal Proceedings
    
    
    37Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    38PART IIItem 5
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    39Item 6
    
    Selected Financial Data
    
    
    40Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    41Item 7A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    50Item 8
    
    Financial Statements and Supplementary Data
    
    
    51Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    51Item 9A
    
    Controls and Procedures
    
    
    51Item 9B
    
    Other Information
    
    
    54PART IIIItem 10
    
    Directors and Executive Officers of the Registrant
    
    
    55Item 11
    
    Executive Compensation
    
    
    55Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    55Item 13
    
    Certain Relationships and Related Transactions
    
    
    55Item 14
    
    Principal Accountant Fees and Services
    
    
    55PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    56Signatures
    
    
    60EXHIBIT 10.16EXHIBIT 10.18EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  i




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PART I
 Forward-Looking Statements
   Corporate Information
  ® ®
 1




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Item 1. Business
 Overview
  ®
 Immediate-Release
    
    OmeprazolePPI Products
    
    Dose
    
    Indications
    
    StatusFDA ApprovedZegerid
(omeprazole/sodium
bicarbonate) Capsules
    
    20 mg/40 mg
    
    Heartburn/GERD,
Erosive
Esophagitis,
Duodenal Ulcers,
Gastric Ulcers
    
    NDA approved in
February 2006;
anticipated launch
in March or April
2006Zegerid
(omeprazole/sodium
bicarbonate) Powder
for Oral Suspension
    
    20 mg/40 mg
    
    Heartburn/GERD,
Erosive
Esophagitis,
Duodenal Ulcers,
Gastric Ulcers,
Reduction of Risk
of Upper GI
Bleeding in
Critically Ill
Patients
    
    NDAs approved in
2004; currently
being marketedUnder Regulatory ReviewZegerid
(omeprazole/sodium
bicarbonate/magnesium
hydroxide) Chewable
Tablets
    
    20 mg/40 mg
    
    Heartburn/GERD,
Erosive
Esophagitis,
Duodenal Ulcers,
Gastric Ulcers
    
    NDA submitted in
May 2005, with
March 2006 PDUFA
date
     2




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
    
    explore additional strategic arrangements with one or more pharmaceutical companies to
expand the promotion of our Zegerid family of products in the U.S.;
    
    out-license development, distribution and marketing rights for our Zegerid family of
products to one or more pharmaceutical companies outside the U.S.; and
    
    enhance our product portfolio through internal development, in-licensing or co-promotion
arrangements.
 Targeted Upper Gastrointestinal Diseases and Disorders and Limitations of Current Treatments
  Heartburn and Gastroesophageal Reflux Disease (GERD)
  3




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Erosive Esophagitis
 Gastric and Duodenal Ulcers
 Upper GI Bleeding
 Our Products
 Zegerid Product Differentiation
   4




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
    
    Immediate Release Our Zegerid products utilize one or more antacids, instead of
delayed-release, enteric coatings, to protect the omeprazole from acid degradation,
providing for rapid absorption of the omeprazole into the bloodstream. The antacids
neutralize gastric acid, protect the omeprazole from acid degradation and enable rapid
absorption of the omeprazole, which, in turn, allows the omeprazole to begin to inhibit
acid production. For example, in our pivotal pharmacokinetic/pharmacodynamic, or PK/PD,
clinical trials evaluating each of Zegerid Capsules and Zegerid Powder for Oral Suspension,
the products produced maximal plasma levels in approximately 30 minutes.
    
    Duration of Acid Control Our Zegerid products are designed to provide a duration of
acid control similar to delayed-release PPIs and, thus, allow for once-a-day dosing. For
example, in our pivotal PK/PD clinical trials evaluating Zegerid Capsules and Zegerid
Powder for Oral Suspension, those products maintained a median gastric pH above 4 ranging
from 12.2 to 18.6 hours per day, depending on the dosage strength and formulation, after
repeated once-daily dosing. This duration of acid control is similar to the data available
for the delayed-release PPIs.
    
    Nocturnal Acid Control Zegerid Powder for Oral Suspension has demonstrated effective
acid control during the night when dosed at bedtime. For example, in a clinical trial
evaluating the effects of Zegerid Powder for Oral Suspension and Protonix®
delayed-release pantoprazole tablets on nocturnal gastric acidity, the percent time that
gastric pH was greater than 4 was higher for patients receiving Zegerid than for patients
receiving Protonix (55% as compared to 27%, p<0.001), after receiving repeated
once-daily dosing of the products in the evening.
    
    Variety of Formulations Our Zegerid products are currently approved in capsule and
powder for oral suspension dosage forms, and we have also developed a chewable tablet
formulation, which is currently being reviewed by the FDA. In addition to providing
alternative formulations for use in the general adult population, one or more of our
formulations may address the needs of specific patient populations such as pediatric,
elderly and hospitalized patients.
    
    Potential for Expanded Indications We plan to pursue expanded indications and uses for
our products based on their specific features and benefits. For example, following
completion of a pivotal Phase III clinical trial, Zegerid Powder for Oral Suspension was
approved for reduction of risk of upper GI bleeding in critically ill patients. There is
currently no other PPI product approved for this indication.
 Zegerid Product Family  Approved Products
 Zegerid (omeprazole/sodium bicarbonate) Capsules
  5




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Zegerid (omeprazole/sodium bicarbonate) Powder for Oral Suspension
    6




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7




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Zegerid Product Family  Product Under Regulatory Review
 Zegerid (omeprazole/sodium bicarbonate/magnesium hydroxide) Chewable Tablets
      Strategy
  8




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
    
    Explore Additional Strategic Arrangements to Expand the Promotion of Our Products in the
U.S.We plan to explore additional strategic arrangements with one or more pharmaceutical
companies to expand the promotion of our Zegerid family of products in the U.S. To support
our current efforts, we have entered into a co-promotion agreement with Otsuka America,
under which Otsuka America is co-promoting Zegerid Powder for Oral Suspension and will
co-promote Zegerid Capsules to our targeted physicians. We will continue to evaluate
additional strategies to expand the promotion of our Zegerid products in the U.S., which
may include prescription or over-the-counter, or OTC, arrangements, as well as arrangements
focused on pediatric indications.
    
    Out-License International Development, Distribution and Marketing Rights.Outside of the
U.S., we intend to out-license development, distribution and marketing rights for our
Zegerid family of products to one or more pharmaceutical companies with established
commercialization capabilities outside the U.S. We have filed several patent applications
outside the U.S., and likely will more actively pursue commercialization in particular
territories if and when we obtain issued patents in such territories.
    
    Enhance Our Product Portfolio through Internal Development, In-Licensing and
Co-Promotion Arrangements.We intend to internally develop and license and acquire
additional development and marketed products targeting upper and lower GI diseases and
disorders. We also plan to explore co-promotion arrangements for marketed products that are
relevant to our targeted gastroenterologists or primary care physicians.
 Sales and Marketing
     9




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Co-Promotion Agreement with Otsuka America Pharmaceutical, Inc.
    Manufacturing and Distribution
   10




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Research and Development
   11




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Intellectual Property
    ® ®
 License Rights from the University of Missouri
   12




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Competition
   Prescription Products:
 
    
    PPIs: AstraZeneca plcs Prilosec and Nexium®, TAP Pharmaceutical Products
Inc.s Prevacid®, Wyeths and Altanas Protonix, Johnson & Johnsons and Eisai
Co., Ltd.s Aciphex®, and generic omeprazole, among others; and
    
    H2-receptor antagonists: Merck & Co., Inc.s Pepcid®, GlaxoSmithKline plcs
Zantac® and Tagamet® and Braintree Laboratories, Inc.s
Axid®, among others.
 13




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Over-the-Counter Products:
 
    
    PPIs: The Procter & Gamble Companys Prilosec OTC®;
    
    H2-receptor antagonists: Pfizer Inc.s Zantac, GlaxoSmithKline plcs Tagamet, and
Johnson & Johnsons and Merck & Co., Inc.s Pepcid® AC and Pepcid®
Complete, among others; and
    
    Antacids: Johnson & Johnsons and Merck and Co., Inc.s Mylanta®, Novartis
AGs Maalox®, Pfizer Inc.s Rolaids® and GlaxoSmithKline plcs
Gaviscon® and Tums®, among others.
    Government Regulation
   FDA Approval Process
  14




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Section 505(b)(2) New Drug Applications
   15




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Other Regulatory Requirements
    16




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Employees
  Available Information
 www.santarus.com
 
 Item 1A. Risk Factors
   
    
    whether we are able to successfully launch and drive market demand for Zegerid Capsules,
as well as continue to generate commercial sales of Zegerid Powder for Oral Suspension;
 17




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
    
    whether the U.S. Food and Drug Administration, or FDA, approves our pending new drug
application, or NDA, for Zegerid Chewable Tablets for one or more of the desired
indications in a timely manner or at all; and
    
    whether we will be able to obtain additional financing to fund our operations.
  Risks Related to Our Business and Industry
 At this time, we are largely dependent on the commercial success of our Zegerid products, and we
cannot be certain that we will be able to successfully commercialize these products.
  
    
    successfully launch Zegerid Capsules and drive market demand for the product, as well as
continue to generate commercial sales of Zegerid Powder for Oral Suspension, through our
own sales force and our co-promotion arrangement with Otsuka America Pharmaceutical, Inc.,
or Otsuka America, or any other collaboration with pharmaceutical companies or contract
sales organizations that we may later establish;
    
    establish effective marketing programs and build brand identity;
    
    obtain greater acceptance of the products by physicians, patients and third-party payors
and obtain and maintain distribution at the retail level;
    
    establish and maintain our agreements with wholesalers and distributors on commercially
reasonable terms; and
    
    demonstrate commercial manufacturing capabilities as necessary to meet commercial demand
for the products and maintain commercial manufacturing arrangements with third-party
manufacturers.
   18




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Failure of our Zegerid products to achieve and maintain market acceptance would seriously impair
our ability to reach profitability.
  
    
    the efficacy and safety of our products and our ability to differentiate our products
from products offered by our competitors;
    
    effectiveness of our and any collaborators sales and marketing efforts, as compared to
the significantly greater resources of our competitors;
    
    our ability to obtain sufficient third-party insurance coverage or reimbursement;
    
    pricing and cost effectiveness;
    
    the prevalence and severity of any adverse side effects;
    
    availability of alternative treatments;
    
    relative convenience and ease of administration; and
    
    taste and other sensory characteristics of our products.
  If we are unable to obtain and maintain favorable reimbursement for our products, their commercial
success may be severely hindered.
    19




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The market for the GI pharmaceutical industry is intensely competitive and many of our competitors
have significantly more resources and experience, which may limit our commercial opportunity.
    
    
    developing drugs;
    
    undertaking preclinical testing and human clinical trials;
    
    formulating and manufacturing drugs;
    
    obtaining FDA and other regulatory approvals of drugs; and
    
    launching, marketing, distributing and selling drugs.
 20




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Our Zegerid products will compete with many other drug products focused on upper GI diseases and
disorders which could put downward pressure on pricing and market share and limit our ability to
generate revenues.
  Prescription Products:
 
    
    PPIs: AstraZeneca plcs Prilosec and Nexium, TAP Pharmaceutical Products Inc.s
Prevacid, Wyeths and Altanas Protonix, Johnson & Johnsons and Eisai Co., Ltd.s
Aciphex, and generic omeprazole, among others; and
    
    H2-receptor antagonists: Merck & Co., Inc.s Pepcid, GlaxoSmithKline plcs Zantac
and Tagamet and Braintree Laboratories, Inc.s Axid, among others.
 Over-the-Counter Products:
 
    
    PPIs: The Procter & Gamble Companys Prilosec OTC;
    
    H2-receptor antagonists: Pfizer Inc.s Zantac, GlaxoSmithKline plcs Tagamet, and
Johnson & Johnsons and Merck & Co., Inc.s Pepcid AC and Pepcid Complete, among
others; and
    
    Antacids: Johnson & Johnsons and Merck and Co., Inc.s Mylanta, Novartis AGs
Maalox, Pfizer Inc.s Rolaids and GlaxoSmithKline plcs Gaviscon and Tums, among
others.
   21




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We have only recently established our sales and marketing capabilities and we will need to retain
qualified sales and marketing personnel and collaborate successfully with our co-promotion partner,
Otsuka America, to successfully commercialize our Zegerid products and any other products that we
develop, acquire or license.
   We depend on a limited number of customers, and if we lose any of our significant customers, our
business could be harmed.
  If we are unable to manufacture our products on a commercial basis, our commercialization efforts
will be materially harmed.
  22




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We do not currently have any manufacturing facilities and instead rely on third-party
manufacturers.
     Our pending NDA for Zegerid Chewable Tablets may not be approved by the FDA for one or more of the
desired indications in a timely manner or at all, which would adversely impact our ability to
commercialize this product.
  23




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Regulatory approval to market Zegerid Capsules and Zegerid Powder for Oral Suspension is limited by
the FDA to those specific indications and conditions for which we are able to support clinical
safety and efficacy, and any approval we may receive for our products under development will be
similarly limited.
   We are subject to ongoing regulatory review of Zegerid Capsules and Zegerid Powder for Oral
Suspension, and we will be subject to ongoing regulatory review of any of our other products that
may be approved in the future.
   24




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Our resources are currently dedicated to our Zegerid family of products, and we may be unable to
expand our product portfolio or integrate new products successfully.
    25




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Any products we develop in the future likely will require significant product and clinical
development activities and ultimately may not be approved by the 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.
   
    
    our ability to select key components, establish a stable formulation and optimize taste
and other sensory characteristics;
    
    our ability to develop a product that demonstrates our intended safety and efficacy
profile; and
    
    our ability to transfer from development stage to commercial-scale operations and the
costs associated with commercial manufacturing.
    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.
  26




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We face a risk of product liability claims and may not be able to obtain adequate insurance.
  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.
  Our reliance on third-party clinical investigators and clinical research organizations may result
in delays in completing, or a failure to complete, clinical trials or we may be unable to use the
clinical data gathered if they fail to comply with regulatory requirements or perform under our
agreements with them.
  27




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If we are unable to attract and retain key personnel, our business will suffer.
   Risks Related to Our Financial Results and Need for Financing
 We have incurred significant operating losses since our inception, and we expect to incur
significant additional operating losses and may not achieve profitability.
  We will need to raise additional funds to continue our operations and we may be unable to raise
capital when needed.
   28




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The Committed Equity Financing Facility that we entered into with Kingsbridge may not be available
to us if we elect to make a draw down, may require us to make additional blackout or other
payments to Kingsbridge, and may result in dilution to our stockholders.
   29




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Our quarterly financial results are likely to fluctuate significantly because our sales prospects
are uncertain.
  
    
    commercial success of Zegerid Capsules and Zegerid Powder for Oral Suspension;
    
    our ability to maintain a productive sales force;
    
    demand and pricing of products we may offer;
    
    physician and patient acceptance of our products;
    
    levels of third-party reimbursement for our products;
    
    interruption in the manufacturing or distribution of our products;
    
    our ability to obtain regulatory approval for Zegerid Chewable Tablets and any other
products we develop;
    
    results of our clinical trials;
    
    timing of new product offerings, acquisitions, licenses or other significant events by
us or our competitors;
    
    legislative changes affecting the products we may offer or those of our competitors; and
    
    the effect of competing technological and market developments.
  Our short operating history makes it difficult to evaluate our business and prospects.
  30




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Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock
options, could result in unfavorable accounting charges or require us to change our compensation
policies.
   Risks Related to Our Intellectual Property and Potential Litigation
 The protection of our intellectual property rights is critical to our success and any failure on
our part to adequately secure such rights would materially affect our business.
  Patents
  31




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Trade Secrets and Proprietary Know-how
 Trademarks ® ®
  32




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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.
    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.
   33




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We may be subject to damages resulting from claims that we or our employees have wrongfully used or
disclosed alleged trade secrets of their former employers or otherwise breached the terms of
agreements with former employers.
  Risks Related to the Securities Markets and Ownership of Our Common Stock
 Our stock price may be volatile and you may not be able to sell your shares at an attractive price.
   
    
    announcements concerning our commercial activities, product development programs,
results of our clinical trials or status of our regulatory submissions;
    
    the publication of prescription trend data concerning our products or competitive
products;
    
    regulatory developments and related announcements in the U.S., including announcements
by the FDA, and foreign countries;
    
    disputes or other 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;
 34




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
    
    sales of large blocks of our common stock, including sales by Kingsbridge under the
CEFF, our executive officers, directors or venture capital investors;
    
    announcements concerning draw downs under the CEFF, takedowns under our existing
universal shelf registration statement or other developments relating to the CEFF,
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 co-promotion partner, our suppliers or
other third parties that provide services to us;
    
    litigation and government inquiries; or
    
    economic and political factors, including 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.
    Future sales of our common stock by our stockholders may depress our stock price.
  35




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We may become involved in securities class action litigation that could divert managements
attention and harm our business.
  We are exposed to increased costs and risks related to complying with recently enacted and proposed
changes in laws and regulations.
  Our executive officers and directors and their affiliates may exercise influence over stockholder
voting matters in a manner that may not be in the best interests of all of our stockholders.
  36




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
    
    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 amended and restated
certificate of incorporation or amended and restated bylaws except with 66 2/3% stockholder
approval; and
    
    requiring advance notice for raising business matters or nominating directors at
stockholders meetings.
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  37




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Item 4. Submission of Matters to a Vote of Security Holders
  38




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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, 2004Second Quarter
    
    $
    15.88
    
    
    $
    8.67Third Quarter
    
    $
    14.99
    
    
    $
    8.69Fourth Quarter
    
    $
    10.80
    
    
    $
    8.36Year Ended December 31, 2005First Quarter
    
    $
    9.19
    
    
    $
    4.34Second Quarter
    
    $
    4.99
    
    
    $
    2.80Third Quarter
    
    $
    6.55
    
    
    $
    3.85Fourth Quarter
    
    $
    6.91
    
    
    $
    4.97
  Dividend Policy
  Issuer Purchases of Equity Securities
  Maximum NumberTotal
    
    
    (or ApproximateNumber of Shares
    
    
    Dollar Value)Total Number
    
    
    
    
    
    
    Purchased as Part
    
    
    of Shares That Mayof
    
    
    Average
    
    
    of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Price Paid Per
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    ProgramsOctober 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    November 2005
    
    
    596
    
    
    
    1.75
    
    
    
    
    
    
    
    December 2005
    
    
    774
    
    
    
    5.25
    
    
    
    
    
    
    
    Total
    
    
    1,370
 39




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Item 6. Selected Financial Data
  Year Ended December 31,2005
    
    
 
    2004
    
    

    2003
    
    

    2002
    
    

    2001(in thousands, except per share data)Statement of Operations Data:Revenues:Product sales, net
    
    $
    13,667
    
    
    $
    634
    
    
    $
    
    
    
    $
    
    
    
    $
    Sublicense and co-promotion revenue
    
    
    12,857
    
    
    
    714
    
    
    
    
    
    
    
    8,000
    
    
    
    Total revenues
    
    
    26,524
    
    
    
    1,348
    
    
    
    
    
    
    
    8,000
    
    
    
    Costs and expenses:Cost of sales
    
    
    2,129
    
    
    
    1,968
    
    
    
    
    
    
    
    
    
    
    
    License fees and royalties
    
    
    3,414
    
    
    
    5,089
    
    
    
    1,000
    
    
    
    1,400
    
    
    
    1,294Research and development
    
    
    10,402
    
    
    
    23,199
    
    
    
    13,176
    
    
    
    15,398
    
    
    
    5,672Selling, general and administrative
    
    
    77,653
    
    
    
    48,306
    
    
    
    6,548
    
    
    
    6,034
    
    
    
    3,241Stock-based compensation
    
    
    2,628
    
    
    
    5,672
    
    
    
    2,252
    
    
    
    277
    
    
    
    87Total costs and expenses
    
    
    96,226
    
    
    
    84,234
    
    
    
    22,976
    
    
    
    23,109
    
    
    
    10,294Loss from operations
    
    
    (69,702
    )
    
    
    (82,886
    )
    
    
    (22,976
    )
    
    
    (15,109
    )
    
    
    (10,294
    )Interest and other income, net
    
    
    4,716
    
    
    
    1,391
    
    
    
    465
    
    
    
    414
    
    
    
    726Net loss
    
    
    (64,986
    )
    
    
    (81,495
    )
    
    
    (22,511
    )
    
    
    (14,695
    )
    
    
    (9,568
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    (1,124
    )
    
    
    (2,940
    )
    
    
    
    
    
    
    Beneficial conversion of short-term notes
payable to related parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135
    )Net loss attributable to common stockholders
    
    $
    (64,986
    )
    
    $
    (82,619
    )
    
    $
    (25,451
    )
    
    $
    (14,695
    )
    
    $
    (9,703
    )Basic and diluted net loss per share
    
    $
    (1.66
    )
    
    $
    (3.30
    )
    
    $
    (13.71
    )
    
    $
    (9.13
    )
    
    $
    (7.08
    )Weighted average shares outstanding to
calculate basic and diluted net loss per
share
    
    
    39,188
    
    
    
    25,017
    
    
    
    1,857
    
    
    
    1,610
    
    
    
    1,371
 As of December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(in thousands)Balance Sheet Data:Cash, cash equivalents and short-term investments
    
    $
    69,367
    
    
    $
    114,008
    
    
    $
    45,648
    
    
    $
    11,804
    
    
    $
    22,281Working capital
    
    
    59,572
    
    
    
    94,346
    
    
    
    42,376
    
    
    
    7,697
    
    
    
    21,526Total assets
    
    
    79,935
    
    
    
    122,216
    
    
    
    48,188
    
    
    
    14,207
    
    
    
    24,332Deferred revenue, less current portion
    
    
    8,571
    
    
    
    11,429
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt, less current portion
    
    
    
    
    
    
    38
    
    
    
    224
    
    
    
    479
    
    
    
    Redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    57,625
    
    
    
    
    
    
    
    Total stockholders equity (deficit)
    
    
    54,520
    
    
    
    85,843
    
    
    
    (13,751
    )
    
    
    9,074
    
    
    
    23,288
 40




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##### Table of Contents



First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(in thousands, except per share data)Selected Quarterly Financial Data:2005:Product sales, net
    
    $
    1,449
    
    
    $
    3,085
    
    
    $
    4,164
    
    
    $
    4,969Total revenues
    
    
    12,163
    
    
    
    3,800
    
    
    
    4,878
    
    
    
    5,683Cost of sales
    
    
    258
    
    
    
    506
    
    
    
    612
    
    
    
    753Total costs and expenses
    
    
    28,490
    
    
    
    23,892
    
    
    
    21,600
    
    
    
    22,244Net loss
    
    
    (13,567
    )
    
    
    (19,543
    )
    
    
    (16,086
    )
    
    
    (15,790
    )Net loss attributable to common stockholders
    
    
    (13,567
    )
    
    
    (19,543
    )
    
    
    (16,086
    )
    
    
    (15,790
    )Basic and diluted net loss per share
    
    
    (0.37
    )
    
    
    (0.54
    )
    
    
    (0.40
    )
    
    
    (0.35
    )2004:Product sales, net
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    634Total revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,348Cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,968Total costs and expenses
    
    
    10,301
    
    
    
    17,109
    
    
    
    21,640
    
    
    
    35,184Net loss
    
    
    (10,187
    )
    
    
    (16,856
    )
    
    
    (21,192
    )
    
    
    (33,260
    )Net loss attributable to common stockholders
    
    
    (11,311
    )
    
    
    (16,856
    )
    
    
    (21,192
    )
    
    
    (33,260
    )Basic and diluted net loss per share
    
    
    (4.94
    )
    
    
    (0.61
    )
    
    
    (0.62
    )
    
    
    (0.92
    )
 
 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
     41




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42




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Critical Accounting Policies
  Revenue Recognition
 Product Sales, Net. Revenue Recognition When Right of Return Exists,
  43




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Sublicense and Co-promotion Revenue. Revenue Recognition,
 Reporting Revenue Gross as a Principal Versus Net as an Agent
 Inventories and Related Reserves
  Clinical Trial Expenses
 
  Stock-Based Compensation
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans
 44




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Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services
 Income Taxes
   Results of Operations
 Comparison of Years Ended December 31, 2005, 2004 and 2003
 Product Sales, Net.
 Sublicense and Co-Promotion Revenue.
 Cost of Sales.
 License Fees and Royalties.
 45




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Research and Development.
   ®
 46




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##### Table of Contents



Selling, General and Administrative.
  Stock-Based Compensation.
 Interest and Other Income, Net.
 47




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##### Table of Contents



Income Taxes.
 Liquidity and Capital Resources
       48




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##### Table of Contents



Payments Due by PeriodLess than
    
    
    One to
    
    
    Four toContractual Obligations
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Thereafter(in thousands)Operating leases
    
    $
    5,066
    
    
    $
    2,445
    
    
    $
    2,621
    
    
    $
    
    
    
    $
    Equipment financing
    
    
    38
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    Sponsored research agreements
    
    
    113
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    Other long-term contractual obligations
    
    
    590
    
    
    
    589
    
    
    
    1
    
    
    
    
    
    
    
    Total
    
    $
    5,807
    
    
    $
    3,185
    
    
    $
    2,622
    
    
    $
    
    
    
    $
    
       49




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##### Table of Contents



Recent Accounting Pronouncements
 Share-Based Payment Accounting for
Stock-Based Compensation Statement of Cash Flows
   
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  50




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##### Table of Contents



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
   Managements Report on Internal Control Over Financial Reporting
   51




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52




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Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
 
     .
   
 53




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Item 9B. Other Information
  54




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PART III
 
 Item 10. Directors and Executive Officers of the Registrant
   
 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
  
 Item 14. Principal Accountant Fees and Services
  55




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##### Table of Contents



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(1)
    
    Amended and Restated Bylaws3.3(2)
    
    Certificate of Designations for Series A Junior Participating Preferred Stock4.1(2)
    
    Form of Common Stock Certificate4.2(3)
    
    Amended and Restated Investors Rights Agreement, dated April 30, 2003, among us and
the parties named therein4.3(3)
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated May 19,
2003, among us and the parties named therein4.4(3)
    
    Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between
us and The Curators of the University of Missouri4.5(3)
    
    Form of Series C Preferred Stock Purchase Warrant4.6(3)
    
    Form of Common Stock Purchase Warrant4.7(3)
    
    Warrant to Purchase Shares of Common Stock, dated April 30, 2003, issued to Rockport
Venture Securities, LLC4.8(2)
    
    Rights Agreement, dated as of 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 C
 56




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##### Table of Contents



ExhibitNumber
    
    Description4.9(4)
    
    Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to
Kingsbridge Capital Limited4.10(4)
    
    Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited10.1(3)
    
    Stock Purchase Agreement, dated January 26, 2001, between us and The Curators of the
University of Missouri10.2(3)
    
    Exclusive License Agreement, dated January 26, 2001, between us and The Curators of
the University of Missouri10.3(3)
    
    Amendment No. 1 to Exclusive License Agreement, dated February 21, 2003, between us
and The Curators of the University of Missouri10.4(3)
    
    License Agreement, dated June 27, 2002, among us, TAP Pharmaceutical Products Inc.
and Takeda Chemical Industries, Ltd.10.5(3)
    
    Omeprazole Supply Agreement, dated September 25, 2003, among us, InterChem Trading
Corporation and Union Quimico Farmaceutica, S.A.10.6(3)
    
    Manufacturing and Supply Agreement, dated December 19, 2003, between us and Patheon
Inc.10.7(3)
    
    Capital Reimbursement Agreement, dated December 19, 2003, between us and Patheon Inc.10.8(5) 
    
    Manufacturing and Supply Agreement, dated September 27, 2004, between us and OSG
Norwich Pharmaceuticals, Inc.10.9(5) 
    
    Co-Promotion Agreement, dated October 4, 2004, between us and Otsuka America
Pharmaceutical, Inc.10.10(6)+
    
    Amendment No. 1 to Co-Promotion Agreement, dated January 6, 2006, between us and
Otsuka America Pharmaceutical, Inc.10.11(3)
    
    Office Building Lease, dated August 24, 2001, between us and Torrey View Associates LP10.12(3)
    
    Irrevocable Stand-by Letter of Credit, dated August 24, 2001, issued by UBS Paine
Webber Inc.10.13(4)
    
    Common Stock Purchase Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited10.14(3)#
    
    Form of Indemnification Agreement between us and each of our directors and officers10.15(3)#
    
    1998 Stock Option Plan10.16#
    
    Amendment to 1998 Stock Option Plan10.17(7)#
    
    Amended and Restated 2004 Equity Incentive Award Plan10.18#
    
    Amendment No. 1 to Amended and Restated 2004 Equity Incentive Award Plan10.19(8)#
    
    Form of Stock Option Agreement under Amended and Restated 2004 Equity Incentive Award
Plan10.20(9)#
    
    Form of Immediately Exerciseable Stock Option Agreement under Amended and Restated
2004 Equity Incentive Award Plan10.21(7)#
    
    Amended and Restated Employee Stock Purchase Plan10.22(10)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and Gerald
T. Proehl10.23(10)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and Debra
P. Crawford10.24(10)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and
William C. Denby, III10.25(10)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and
Warren E. Hall10.26(3)#
    
    Employment Agreement, dated March 31, 2004, between us and Bonnie Hepburn, M.D.10.27(10)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and Julie
A. DeMeules10.28(7)#
    
    Employment Agreement, dated July 27, 2004, between us and C. Christine Simmons,
Pharm.D.
 57




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##### Table of Contents



ExhibitNumber
    
    Description10.29(10)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and
Michael D. Step10.30(10)#
    
    Employment Agreement, dated March 1, 2006, between us and E. David Ballard, II, M.D.10.31(10)#
    
    Employment Agreement, dated March 1, 2006, between us and Carey J. Fox10.32(11)#
    
    2004 Bonus Plan10.33(11)#
    
    2005 Bonus Plan10.34(12)#
    
    2006 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 193431.2
    
    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
the Companys 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
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on November 17,
2004.(3)
    
    Incorporated by reference to
the Companys Registration
Statement on Form S-1, filed
with the Securities and
Exchange Commission on
December 23, 2003, as amended
(File No. 333-111515).(4)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 3,
2006.(5)
    
    Incorporated by reference to
the Companys Quarterly
Report on Form 10-Q for the
quarter ended September 30,
2004, filed with the
Securities and Exchange
Commission on November 12,
2004.(6)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on January 6,
2006.(7)
    
    Incorporated by reference to
the Companys Quarterly
Report on Form 10-Q for the
quarter ended June 30, 2004,
filed with the Securities and
Exchange Commission on August
13, 2004.(8)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 8,
2005.(9)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 16,
2005.(10)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on March 2, 2006.(11)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 22,
2005.(12)
    
    Incorporated by reference to
the Companys Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 13,
2006.
    
    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. 58




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##### Table of Contents



#
    
    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.
  59




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SIGNATURES
  SANTARUS, INC.Dated: March 7, 2006By:
    
    /s/ GERALD T. PROEHL

Gerald T. ProehlPresident and Chief Executive Officer
  Name
    
    Title
    
    Date/s/ GERALD T. PROEHL

    Gerald T. Proehl
    
    President, Chief Executive
Officer and Director(Principal Executive
Officer)
    
    March 7, 2006/s/ DEBRA P. CRAWFORD

    Debra P. Crawford
    
    Senior Vice President and Chief
Financial Officer(Principal Financial and
Accounting Officer)
    
    March 7, 2006/s/ DAVID F. HALE

   David F. Hale
    
    Director(Chairman of the Board of
Directors)
    
    March 7, 2006/s/ DANIEL D. BURGESS

    Daniel D. Burgess
    
    Director
    
    March 7, 2006/s/ MICHAEL G. CARTER, M.B., CH.B., F.R.C.P. (U.K.)

    Michael G. Carter, M.B., Ch.B., F.R.C.P. (U.K.)
    
    Director
    
    March 7, 2006/s/ RODNEY A. FERGUSON, J.D., PH.D.

    Rodney A. Ferguson, J.D., Ph.D.
    
    Director
    
    March 7, 2006/s/ MICHAEL E. HERMAN

    Michael E. Herman
    
    Director
    
    March 7, 2006/s/ TED W. LOVE, M.D.

    Ted W. Love, M.D.
    
    Director
    
    March 7, 2006/s/ KENT SNYDER

    Kent Snyder
    
    Director
    
    March 7, 2006
 60




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SANTARUS, INC.
 INDEX TO FINANCIAL STATEMENTS
 PageAUDITED FINANCIAL STATEMENTSReport
of Independent Registered Public Accounting Firm on Financial
Statements
    
    
    F-2Balance Sheets as of December 31, 2005 and 2004
    
    
    F-3Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    F-4Statements of Stockholders Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003
    
    
    F-5Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    F-7Notes to Financial Statements
    
    
    F-8FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    
    F-22
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON FINANCIAL STATEMENTS
 
      
 F-2




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##### Table of Contents



Santarus, Inc.
 Balance Sheets
 December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    59,916,226
    
    
    $
    19,052,352Short-term investments
    
    
    9,450,280
    
    
    
    94,955,745Accounts receivable, net
    
    
    2,663,483
    
    
    
    800,719Inventories, net
    
    
    3,133,241
    
    
    
    1,961,789Other current assets
    
    
    1,252,923
    
    
    
    2,481,414Total current assets
    
    
    76,416,153
    
    
    
    119,252,019Long-term restricted cash
    
    
    1,950,000
    
    
    
    950,000Property and equipment, net
    
    
    617,522
    
    
    
    948,745Other assets
    
    
    951,708
    
    
    
    1,065,006Total assets
    
    $
    79,935,383
    
    
    $
    122,215,770Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    9,485,278
    
    
    $
    14,805,809Allowance for product returns
    
    
    4,463,616
    
    
    
    7,057,208Current portion of deferred revenue
    
    
    2,857,143
    
    
    
    2,857,143Current portion of long-term debt
    
    
    38,019
    
    
    
    185,980Total current liabilities
    
    
    16,844,056
    
    
    
    24,906,140Deferred revenue, less current portion
    
    
    8,571,428
    
    
    
    11,428,571Long-term debt, less current portion
    
    
    
    
    
    
    38,019Commitments and contingenciesStockholders equity:Preferred stock, $.0001 par value; 10,000,000 shares authorized at
December 31, 2005 and 2004; no shares issued and outstanding at
December 31, 2005 and 2004
    
    
    
    
    
    
    Common stock, $.0001 par value; 100,000,000 shares authorized atDecember 31, 2005 and 2004; 44,467,087 and 36,328,461 shares issued
and outstanding at December 31, 2005 and 2004, respectively
    
    
    4,447
    
    
    
    3,633Additional paid-in capital
    
    
    259,486,970
    
    
    
    228,881,141Deferred compensation
    
    
    (1,699,932
    )
    
    
    (4,572,598
    )Accumulated other comprehensive loss
    
    
    (4,120
    )
    
    
    (187,538
    )Accumulated deficit
    
    
    (203,267,466
    )
    
    
    (138,281,598
    )Total stockholders equity
    
    
    54,519,899
    
    
    
    85,843,040Total liabilities and stockholders equity
    
    $
    79,935,383
    
    
    $
    122,215,770
 See accompanying notes.
 F-3




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Santarus, Inc.
Statements of Operations
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenues:Product sales, net
    
    $
    13,666,556
    
    
    $
    633,468
    
    
    $
    Sublicense and co-promotion revenue
    
    
    12,857,143
    
    
    
    714,286
    
    
    
    Total revenues
    
    
    26,523,699
    
    
    
    1,347,754
    
    
    
    Costs and expenses:Cost of sales
    
    
    2,129,110
    
    
    
    1,968,388
    
    
    
    License fees and royalties
    
    
    3,413,317
    
    
    
    5,088,686
    
    
    
    1,000,000Research and development
    
    
    10,401,780
    
    
    
    23,198,637
    
    
    
    13,175,952Selling, general and administrative
    
    
    77,653,022
    
    
    
    48,306,599
    
    
    
    6,548,123Stock-based compensation
    
    
    2,628,183
    
    
    
    5,671,588
    
    
    
    2,252,268Total costs and expenses
    
    
    96,225,412
    
    
    
    84,233,898
    
    
    
    22,976,343Loss from operations
    
    
    (69,701,713
    )
    
    
    (82,886,144
    )
    
    
    (22,976,343
    )Interest and other income, net
    
    
    4,715,845
    
    
    
    1,390,837
    
    
    
    465,306Net loss
    
    
    (64,985,868
    )
    
    
    (81,495,307
    )
    
    
    (22,511,037
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    (1,124,510
    )
    
    
    (2,940,163
    )Net loss attributable to common stockholders
    
    $
    (64,985,868
    )
    
    $
    (82,619,817
    )
    
    $
    (25,451,200
    )Basic and diluted net loss per share
    
    $
    (1.66
    )
    
    $
    (3.30
    )
    
    $
    (13.71
    )Weighted average shares outstanding to calculate
basic and diluted net loss per share
    
    
    39,187,537
    
    
    
    25,016,720
    
    
    
    1,856,879The composition of stock-based
compensation is as follows:Research and development
    
    $
    889,920
    
    
    $
    1,623,846
    
    
    $
    487,936Selling, general and administrative
    
    
    1,738,263
    
    
    
    4,047,742
    
    
    
    1,764,332$
    2,628,183
    
    
    $
    5,671,588
    
    
    $
    2,252,268
 See accompanying notes.
 F-4




---



##### Table of Contents



Santarus, Inc.
Statements of Stockholders Equity (Deficit)
 AccumulatedotherConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    comprehensivepreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    Stockholder
    
    
    Deferred
    
    
    income
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    receivables
    
    
    compensation
    
    
    (loss)
    
    
    deficit
    
    
    TotalBalance at
December 31, 2002
    
    
    19,597,208
    
    
    $
    1,960
    
    
    
    1,981,949
    
    
    $
    198
    
    
    $
    39,298,778
    
    
    $
    (25,000
    )
    
    $
    
    
    
    $
    9,016
    
    
    $
    (30,210,581
    )
    
    $
    9,074,371Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    416,491
    
    
    
    42
    
    
    
    370,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371,037Forgiveness of stockholder note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,940,163
    )
    
    
    (2,940,163
    )Deferred compensation related to issuance of
stock options to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,512,825
    
    
    
    
    
    
    
    (10,512,825
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,865,980
    
    
    
    
    
    
    
    
    
    
    
    1,865,980Compensation related to non-employee stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386,288Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,511,037
    )
    
    
    (22,511,037
    )Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,130
    )
    
    
    
    
    
    
    (22,130
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,533,167
    )Balance at December 31, 2003
    
    
    19,597,208
    
    
    
    1,960
    
    
    
    2,398,440
    
    
    
    240
    
    
    
    50,568,886
    
    
    
    
    
    
    
    (8,646,845
    )
    
    
    (13,114
    )
    
    
    (55,661,781
    )
    
    
    (13,750,654
    )Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    309,420
    
    
    
    31
    
    
    
    620,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    620,888Issuance of common stock under employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    64,611
    
    
    
    6
    
    
    
    494,268
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494,274Issuance of common stock upon exercise of
warrants
    
    
    
    
    
    
    
    
    
    
    15,231
    
    
    
    2
    
    
    
    1,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,397Accretion to redemption value of redeemableconvertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,124,510
    )
    
    
    (1,124,510
    )Issuance of common stock in public offerings,
net of issuance costs
    
    
    
    
    
    
    
    
    
    
    13,800,000
    
    
    
    1,380
    
    
    
    116,848,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,850,000Conversion of redeemable convertible preferred
stock into common stock
    
    
    
    
    
    
    
    
    
    
    12,542,697
    
    
    
    1,254
    
    
    
    58,748,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,749,788Conversion of convertible preferred stock into
common stock
    
    
    (19,597,208
    )
    
    
    (1,960
    )
    
    
    7,198,062
    
    
    
    720
    
    
    
    1,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred compensation related to issuance of
stock options to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,392,895
    
    
    
    
    
    
    
    (1,392,895
    )
    
    
    
    
    
    
    
    
    
    
    Unamortized deferred compensation on
cancelled stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (290,340
    )
    
    
    
    
    
    
    290,340
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,176,802
    
    
    
    
    
    
    
    
    
    
    
    5,176,802Compensation related to non-employee stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494,786
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494,786Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81,495,307
    )
    
    
    (81,495,307
    )Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174,424
    )
    
    
    
    
    
    
    (174,424
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81,669,731
    )Balance at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    36,328,461
    
    
    
    3,633
    
    
    
    228,881,141
    
    
    
    
    
    
    
    (4,572,598
    )
    
    
    (187,538
    )
    
    
    (138,281,598
    )
    
    
    85,843,040
 F-5




---



##### Table of Contents



AccumulatedotherConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    comprehensivepreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    Stockholder
    
    
    Deferred
    
    
    income
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    receivables
    
    
    compensation
    
    
    (loss)
    
    
    deficit
    
    
    TotalBalance at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    36,328,461
    
    
    
    3,633
    
    
    
    228,881,141
    
    
    
    
    
    
    
    (4,572,598
    )
    
    
    (187,538
    )
    
    
    (138,281,598
    )
    
    
    85,843,040Issuance of common stock upon exercise of
stock options, net of 19,485 unvested shares
repurchased
    
    
    
    
    
    
    
    
    
    
    81,147
    
    
    
    8
    
    
    
    113,535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,543Issuance of common stock under employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    698,522
    
    
    
    70
    
    
    
    1,769,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,769,333Issuance of common stock as stock bonus
    
    
    
    
    
    
    
    
    
    
    8,957
    
    
    
    1
    
    
    
    38,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,000Issuance of common stock in registered direct
offering, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    7,350,000
    
    
    
    735
    
    
    
    28,967,515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,968,250Deferred compensation related to issuance of
stock options to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,806
    
    
    
    
    
    
    
    (115,806
    )
    
    
    
    
    
    
    
    
    
    
    Unamortized deferred compensation on
cancelled stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (513,334
    )
    
    
    
    
    
    
    513,334
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,475,138
    
    
    
    
    
    
    
    
    
    
    
    2,475,138Compensation related to non-employee stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,045Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,985,868
    )
    
    
    (64,985,868
    )Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183,418
    
    
    
    
    
    
    
    183,418Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,802,450
    )Balance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    44,467,087
    
    
    $
    4,447
    
    
    $
    259,486,970
    
    
    $
    
    
    
    $
    (1,699,932
    )
    
    $
    (4,120
    )
    
    $
    (203,267,466
    )
    
    $
    54,519,899
 See accompanying notes.
 F-6




---



##### Table of Contents



Santarus, Inc.
Statements of Cash Flows
 Years ended December 31,2005
    
    
    2004
    
    
    2003Operating activitiesNet loss
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )
    
    $
    (22,511,037
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    624,672
    
    
    
    446,311
    
    
    
    312,386Stock-based compensation
    
    
    2,628,183
    
    
    
    5,671,588
    
    
    
    2,252,268Forgiveness of stockholder note
    
    
    
    
    
    
    
    
    
    
    25,000Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (1,862,764
    )
    
    
    (800,719
    )
    
    
    Inventories, net
    
    
    (1,171,452
    )
    
    
    (1,961,789
    )
    
    
    Other current assets
    
    
    1,228,491
    
    
    
    (1,664,198
    )
    
    
    (270,569
    )Other assets
    
    
    
    
    
    
    93,274
    
    
    
    (93,562
    )Accounts payable and accrued liabilities
    
    
    (5,320,531
    )
    
    
    10,971,552
    
    
    
    (586,371
    )Allowance for product returns
    
    
    (2,593,592
    )
    
    
    7,057,208
    
    
    
    Deferred revenue
    
    
    (2,857,143
    )
    
    
    14,285,714
    
    
    
    Net cash used in operating activities
    
    
    (74,310,004
    )
    
    
    (47,396,366
    )
    
    
    (20,871,885
    )Investing activitiesPurchase of short-term investments
    
    
    (36,147,117
    )
    
    
    (162,098,301
    )
    
    
    (71,002,660
    )Sales and maturities of short-term investments
    
    
    121,836,000
    
    
    
    109,753,220
    
    
    
    39,019,000Long-term restricted cash
    
    
    (1,000,000
    )
    
    
    
    
    
    
    Purchases of property and equipment
    
    
    (65,216
    )
    
    
    (733,525
    )
    
    
    (84,769
    )Deposits on manufacturing equipment
    
    
    (114,935
    )
    
    
    (1,047,172
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    84,508,732
    
    
    
    (54,125,778
    )
    
    
    (32,068,429
    )Financing activitiesExercise of stock options
    
    
    113,543
    
    
    
    620,888
    
    
    
    371,037Issuance of common stock, net
    
    
    30,737,583
    
    
    
    117,345,671
    
    
    
    Issuance of Series D redeemable convertible preferred stock, net
    
    
    
    
    
    
    
    
    
    
    54,685,116Payments on equipment notes payable
    
    
    (185,980
    )
    
    
    (255,274
    )
    
    
    (232,936
    )Net cash provided by financing activities
    
    
    30,665,146
    
    
    
    117,711,285
    
    
    
    54,823,217Increase in cash and cash equivalents
    
    
    40,863,874
    
    
    
    16,189,141
    
    
    
    1,882,903Cash and cash equivalents at beginning of the year
    
    
    19,052,352
    
    
    
    2,863,211
    
    
    
    980,308Cash and cash equivalents at end of the year
    
    $
    59,916,226
    
    
    $
    19,052,352
    
    
    $
    2,863,211Supplemental disclosure of cash flow information:Interest paid
    
    $
    21,203
    
    
    $
    33,626
    
    
    $
    55,964Supplemental schedule of noncash investing
and financing activities:Accretion to redemption value of redeemable convertible
preferred stock
    
    $
    
    
    
    $
    1,124,510
    
    
    $
    2,940,163Conversion of redeemable convertible preferred stock to common
stock upon closing of initial public offering
    
    $
    
    
    
    $
    58,749,788
    
    
    $
    
 See accompanying notes.
 F-7




---



##### 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
  Reclassification
  Cash and Cash Equivalents
  Investments
  Concentration of Credit Risk and Sources of Supply
  F-8




---



##### Table of Contents



Inventories, Net
  Property and Equipment
  Fair Value of Financial Instruments
  Impairment of Long-Lived Assets
 Accounting
for the Impairment or Disposal of Long-Lived Assets
 Revenue Recognition
 Product sales, net. Revenue Recognition When Right of Return Exists,
 F-9




---



##### Table of Contents



Sublicense and co-promotion revenue. Revenue Recognition,
 Reporting Revenue Gross as a Principal Versus Net as an Agent
 Patent Costs
  License Fees and Research and Development Expenses
   F-10




---



##### Table of Contents



Shipping and Handling Costs
  Advertising Expense
  Stock-Based Compensation
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Net loss attributable to common stockholders as reported
    
    $
    (64,985,868
    )
    
    $
    (82,619,817
    )
    
    $
    (25,451,200
    )Add: Stock-based employee compensation expense included in
net loss
    
    
    2,514,138
    
    
    
    5,176,802
    
    
    
    1,865,980Deduct: Stock-based employee compensation expense determined
under fair value method
    
    
    (11,220,174
    )
    
    
    (9,748,804
    )
    
    
    (2,497,906
    )Pro forma net loss attributable to common stockholders
    
    $
    (73,691,904
    )
    
    $
    (87,191,819
    )
    
    $
    (26,083,126
    )Basic and diluted net loss per share as reported
    
    $
    (1.66
    )
    
    $
    (3.30
    )
    
    $
    (13.71
    )Basic and diluted pro forma net loss per share
    
    $
    (1.88
    )
    
    $
    (3.49
    )
    
    $
    (14.05
    )
  F-11




---



##### Table of Contents



Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or
in Conjunction with Selling Goods or Services
 Comprehensive Income (Loss)
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Net loss
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )
    
    $
    (22,511,037
    )Unrealized gain (loss) on investments
    
    
    183,418
    
    
    
    (174,424
    )
    
    
    (22,130
    )Comprehensive loss
    
    $
    (64,802,450
    )
    
    $
    (81,669,731
    )
    
    $
    (22,533,167
    )
 Net Loss Per Share
 Earnings Per Share
  F-12




---



##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Historical:Numerator:Net loss
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )
    
    $
    (22,511,037
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    (1,124,510
    )
    
    
    (2,940,163
    )Net loss attributable to common stockholders
    
    $
    (64,985,868
    )
    
    $
    (82,619,817
    )
    
    $
    (25,451,200
    )Denominator:Weighted average common shares
    
    
    39,281,837
    
    
    
    25,230,528
    
    
    
    2,023,077Weighted average unvested common shares subject to
repurchase
    
    
    (94,300
    )
    
    
    (213,808
    )
    
    
    (166,198
    )Denominator for basic and diluted net loss per share
    
    
    39,187,537
    
    
    
    25,016,720
    
    
    
    1,856,879Basic and diluted net loss per share
    
    $
    (1.66
    )
    
    $
    (3.30
    )
    
    $
    (13.71
    )Pro forma:Pro forma net loss
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )
    
    $
    (22,511,037
    )Basic and diluted pro forma net loss per share
(unaudited)
    
    $
    (1.66
    )
    
    $
    (2.70
    )
    
    $
    (1.30
    )Pro forma adjustments to reflect assumed weighted
average effect of conversion of preferred stock
(unaudited)
    
    
    
    
    
    
    5,177,904
    
    
    
    15,478,178Weighted average shares outstanding to calculate
basic and diluted pro forma net loss per share
(unaudited)
    
    
    39,187,537
    
    
    
    30,194,624
    
    
    
    17,335,057Historical outstanding antidilutive securities not
included in diluted net loss per share calculation:Redeemable convertible and convertible preferred
stock
    
    
    
    
    
    
    
    
    
    
    63,497,208Common stock subject to repurchase
    
    
    64,840
    
    
    
    117,095
    
    
    
    237,963Options to purchase common stock
    
    
    5,794,610
    
    
    
    3,890,914
    
    
    
    2,362,757Stock warrants
    
    
    59,405
    
    
    
    59,405
    
    
    
    167,0575,918,855
    
    
    
    4,067,414
    
    
    
    66,264,985
 Segment Reporting
  Income Taxes
 Accounting for Income Taxes
 New Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based
Compensation Statement of Cash Flows
  F-13




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##### Table of Contents



2. Investments
  Amortized
    
    
    
    
    
    
    UnrealizedCost
    
    
    Market Value
    
    
    LossDecember 31, 2005:U.S. government and state agencies
    
    $
    8,949,629
    
    
    $
    8,947,110
    
    
    $
    (2,519
    )Corporate debt securities
    
    
    54,114,749
    
    
    
    54,113,148
    
    
    
    (1,601
    )Money market funds
    
    
    8,256,248
    
    
    
    8,256,248
    
    
    
    Total
    
    $
    71,320,626
    
    
    $
    71,316,506
    
    
    $
    (4,120
    )December 31, 2004:U.S. government and state agencies
    
    $
    56,759,412
    
    
    $
    56,664,289
    
    
    $
    (95,123
    )Corporate debt securities
    
    
    51,167,138
    
    
    
    51,074,723
    
    
    
    (92,415
    )Money market funds
    
    
    7,219,085
    
    
    
    7,219,085
    
    
    
    Total
    
    $
    115,145,635
    
    
    $
    114,958,097
    
    
    $
    (187,538
    )
  3. Balance Sheet Details
  December 31,2005
    
    
    2004Raw materials
    
    $
    1,361,461
    
    
    $
    2,563,767Finished goods
    
    
    1,978,925
    
    
    
    1,126,6023,340,386
    
    
    
    3,690,369Allowance for excess and obsolete inventory
    
    
    (207,145
    )
    
    
    (1,728,580
    )$
    3,133,241
    
    
    $
    1,961,789
 F-14




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##### Table of Contents



December 31,2005
    
    
    2004Computer equipment and software
    
    $
    936,722
    
    
    $
    917,767Office equipment and furniture
    
    
    760,063
    
    
    
    757,106Leasehold improvements
    
    
    345,724
    
    
    
    345,7242,042,509
    
    
    
    2,020,597Less accumulated depreciation and amortization
    
    
    (1,424,987
    )
    
    
    (1,071,852
    )$
    617,522
    
    
    $
    948,745
   December 31,2005
    
    
    2004Accounts payable
    
    $
    1,647,492
    
    
    $
    3,045,659Accrued compensation and benefits
    
    
    3,697,174
    
    
    
    4,940,634Accrued rebates
    
    
    1,371,754
    
    
    
    Accrued research and development expenses
    
    
    121,201
    
    
    
    3,583,739Other accrued liabilities
    
    
    2,647,657
    
    
    
    3,235,777$
    9,485,278
    
    
    $
    14,805,809
 4. Co-Promotion and Technology License Agreements
   F-15




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##### Table of Contents



5. Long-Term Debt
  6. Commitments
 Leases
    2006
    
    
    2,445,0002007
    
    
    2,243,0002008
    
    
    369,0002009
    
    
    9,000Total minimum lease payments
    
    $
    5,066,000
 F-16




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##### Table of Contents



Commercial Supply Agreement
  Other Long-Term Obligations and Commitments
   7. Stockholders Equity
 Authorized Shares
 ,
 Reverse Stock Split
  Common Stock Offerings
  F-17




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##### Table of Contents



Stockholder Rights Plan
  Warrants
  Stock Option Plans
   F-18




---



##### Table of Contents



Weighted-Average ExerciseShares
    
    
    PriceOutstanding at December 31, 2002
    
    
    687,626
    
    
    $
    0.96Granted
    
    
    2,130,645
    
    
    
    1.59Exercised
    
    
    (416,491
    )
    
    
    0.89Cancelled
    
    
    (39,023
    )
    
    
    1.81Outstanding at December 31, 2003
    
    
    2,362,757
    
    
    
    1.52Granted
    
    
    1,962,075
    
    
    
    9.56Exercised
    
    
    (309,423
    )
    
    
    2.01Cancelled
    
    
    (124,495
    )
    
    
    5.23Outstanding at December 31, 2004
    
    
    3,890,914
    
    
    
    5.42Granted
    
    
    2,410,387
    
    
    
    6.62Exercised
    
    
    (100,632
    )
    
    
    1.37Cancelled
    
    
    (406,059
    )
    
    
    6.81Outstanding at December 31, 2005
    
    
    5,794,610
    
    
    
    5.89
  Options Outstanding
    
    
    Options ExercisableWeighted-
    
    
    Weighted-
    
    
    
    
    
    Weighted-Options
    
    
    Average Remaining
    
    
    Average Exercise
    
    
    Number
    
    Average ExerciseExercise Prices
    
    Outstanding
    
    
    Life in Years
    
    
    Price
    
    
    Exercisable
    
    Price$0.70-$1.05
    
    
    1,283,560
    
    
    
    7.1
    
    
    $
    0.89
    
    
    
    1,283,560
    
    
    $
    0.89$1.225-$1.75
    
    
    46,580
    
    
    
    7.9
    
    
    
    1.64
    
    
    
    46,580
    
    
    
    1.64$2.10-$3.14
    
    
    158,878
    
    
    
    9.0
    
    
    
    2.87
    
    
    
    150,378
    
    
    
    2.86$3.25-$4.86
    
    
    505,078
    
    
    
    8.1
    
    
    
    3.55
    
    
    
    461,619
    
    
    
    3.50$5.06-$7.20
    
    
    2,265,732
    
    
    
    9.2
    
    
    
    6.62
    
    
    
    621,612
    
    
    
    6.17$7.73-$11.50
    
    
    1,305,991
    
    
    
    8.6
    
    
    
    9.70
    
    
    
    639,029
    
    
    
    9.83$11.90-$14.75
    
    
    228,791
    
    
    
    8.4
    
    
    
    13.08
    
    
    
    91,467
    
    
    
    13.035,794,610
    
    
    
    8.5
    
    
    
    5.89
    
    
    
    3,294,245
    
    
    
    4.42
   F-19




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##### Table of Contents



Employee Stock Purchase Plan
  Shares Reserved for Future Issuance
  December 31,2005
    
    
    2004Stock options issued and outstanding
    
    
    5,794,610
    
    
    
    3,890,914Authorized for future issuance under equity compensation plans
    
    
    2,287,964
    
    
    
    2,800,579Stock warrants outstanding
    
    
    59,405
    
    
    
    59,4058,141,979
    
    
    
    6,750,898
 11. 401(k) Plan
  12. Income Taxes
  F-20




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##### Table of Contents



December 31,2005
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    63,816,000
    
    
    $
    41,765,000Research and development credits
    
    
    4,331,000
    
    
    
    4,011,000Capitalized research and development
    
    
    1,011,000
    
    
    
    3,145,000Depreciation and amortization
    
    
    40,000
    
    
    
    1,952,000Accrued liabilities and other
    
    
    7,452,000
    
    
    
    3,207,000Total deferred tax assets
    
    
    76,650,000
    
    
    
    54,080,000Valuation allowance
    
    
    (76,650,000
    )
    
    
    (54,080,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    
   13. Subsequent Event
  F-21




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##### Table of Contents



Schedule II  Valuation and Qualifying Accounts
 AdditionsChargedBalance at
    
    Charged
    
    Charged to
    
    Against
    
    
    
    
    
    Balance atBeginning of
    
    Against
    
    Costs and
    
    Balance Sheet
    
    
    
    
    
    End ofPeriod
    
    Revenues
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodAllowance for cash discounts, chargebacks
and other sales discounts:For the year ended December 31, 2005
    
    $
    (259,901
    )
    
    $
    (532,141
    )
    
    $
    
    
    
    $
    
    
    
    $
    547,194
    (1)
    
    $
    (244,848
    )For the year ended December 31, 2004
    
    
    
    
    
    
    (737,935
    )
    
    
    
    
    
    
    
    
    
    
    478,034
    (1)
    
    
    (259,901
    )Allowance for excess and obsolete
inventory:For the year ended December 31, 2005
    
    
    (1,728,580
    )
    
    
    
    
    
    
    (141,096
    )
    
    
    (619,747
    )
    
    
    2,282,278
    (2)
    
    
    (207,145
    )For the year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    (1,420,425
    )
    
    
    (308,155
    )
    
    
    
    
    
    
    (1,728,580
    )Allowance for product returns:For the year ended December 31, 2005
    
    
    (7,057,208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,593,592
    (3)
    
    
    (4,463,616
    )For the year ended December 31, 2004
    
    
    
    
    
    
    (7,057,208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,057,208
    )
 
 (1)
    
    Deductions in allowance for cash discounts, chargebacks and other sales discounts represent actual cash discounts, chargebacks and other sales discounts taken.(2)
    
    Deductions in allowance for excess and obsolete inventory represent physical disposition of inventory.(3)
    
    Deductions in allowance for product returns represent actual product returns of approximately $881,000 and a reduction in the allowance based upon an analysis of
prescription demand in excess of product shipments to wholesaler distributors. F-22