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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, 2007
 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 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)10590 West Ocean Air Drive, Suite 200
San Diego, California
    
    92130(Address of Principal Executive Offices)
    
    (Zip Code)
 (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
 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 29, 2007. 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, 2007
 Table of Contents
 PagePART IItem 1
    
    Business
    
    
    2Item 1A
    
    Risk Factors
    
    
    22Item 1B
    
    Unresolved Staff Comments
    
    
    45Item 2
    
    Properties
    
    
    45Item 3
    
    Legal Proceedings
    
    
    45Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    47PART IIItem 5
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    48Item 6
    
    Selected Financial Data
    
    
    49Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    51Item 7A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    64Item 8
    
    Financial Statements and Supplementary Data
    
    
    64Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    64Item 9A
    
    Controls and Procedures
    
    
    64Item 9B
    
    Other Information
    
    
    67PART IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    68Item 11
    
    Executive Compensation
    
    
    68Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    68Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    68Item 14
    
    Principal Accountant Fees and Services
    
    
    68PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    69Signatures
    
    
    
    
    74EXHIBIT 10.20EXHIBIT 10.21EXHIBIT 10.34EXHIBIT 10.35EXHIBIT 10.36EXHIBIT 10.37EXHIBIT 10.38EXHIBIT 10.39EXHIBIT 10.40EXHIBIT 10.41EXHIBIT 10.42EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  i




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##### Table of Contents



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




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Item 1. Business
 Overview
 ®
     2




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® ® ® 
 Strategy
  
    
    Increasing Sales of Our Zegerid Brand Prescription Products.Our commercial resources
are primarily focused on increasing market demand for, and sales of, our Zegerid brand
prescription products. Our field sales organization currently promotes Zegerid Capsules
and Zegerid Powder for Oral Suspension in the primary detail position. This field sales
organization includes our own representatives, as well as additional support under our
contract sales organization agreement with inVentiv and our co-promotion agreement with
Otsuka America. According to IMS Health, an independent market research firm, the U.S.
market for prescription PPI products had total sales of more than $14 billion during 2007.
We believe our Zegerid prescription products offer a differentiated treatment option for
physicians and their patients and represent an attractive market opportunity.
    
    Maximizing the Value of Our Immediate-Release 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 patented PPI technology in other pharmaceutical markets. In
October 2006, we licensed exclusive rights to Schering-Plough under our PPI technology to
develop, manufacture and sell Zegerid brand OTC products with the lower dosage strength of
20 mg of omeprazole in the U.S. and Canada. In November 2007, we granted exclusive rights
to GSK under our PPI technology to commercialize prescription and OTC products in up to 114
specified countries within Africa, Asia, the Middle-East, and Central and South America and
to
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distribute Zegerid brand prescription products in Puerto Rico and the U.S. Virgin Islands.
We believe these arrangements and potential revenue sources have the potential to add
significant value to our company, and we plan to continue to evaluate additional strategies
to expand the commercialization of our PPI technology both within and outside the U.S.
    
    Diversify our Product Portfolio and Further Leverage our Commercial Capabilities through
Co-promotion, In-licensing or Acquisition of Additional Marketed or Late Stage Proprietary
Products.We also intend to further diversify our product portfolio with additional
marketed or late stage proprietary product opportunities. In 2007, we entered into two
co-promotion arrangements to leverage our existing commercial capabilities. While our
field sales representatives continue to promote our Zegerid products in the primary detail
position, they also promote Naprelan Controlled Release Tablets and the Fleet Phospho-soda
EZ-Prep Bowel Cleansing System to our targeted physicians. These co-promotion arrangements
provide a source of potential additional revenue, while allowing our field sales
representatives to maintain their primary focus on our Zegerid products. In the future, we
plan to explore additional co-promotion, in-licensing and acquisition arrangements for
marketed or late stage products. We plan to concentrate our efforts on proprietary
products that would be complementary to our existing products and that have attractive
commercial potential, as well as, in the case of development products, the potential for
reduced development and regulatory risk. We believe that enhancing our product portfolio
will contribute to the continued growth and value of our company over the longer term.
 Zegerid Product Family
  Currently Marketed
    
    OmeprazoleZegerid Prescription Products
    
    Dose
    
    Indications
    
    StatusZegerid (omeprazole/sodium 
bicarbonate) Capsules
    
    20 mg/40 mg
    
    Heartburn/GERD,
Erosive Esophagitis,
Duodenal Ulcers,
Gastric Ulcers
    
    Launched in March
2006 (20 mg and 40
mg)Zegerid (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
    
    Launched in October
2004 (20 mg) and
February 2005(40
mg)
  Upper Gastrointestinal Diseases and Disorders and Limitations of Current Treatments
  4




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Heartburn and Gastroesophageal Reflux Disease (GERD)
     Erosive Esophagitis
 Gastric and Duodenal Ulcers
 5




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Upper GI Bleeding
 Zegerid Product Differentiation
  
    
    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 Zegerid Capsules and Zegerid Powder for Oral Suspension, maximal
plasma levels of omeprazole were attained in approximately 30 minutes, as compared with 1.5
hours or longer to reach peak plasma levels for delayed-release omeprazole in the same
trials.
    
    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, the 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 comparable 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 Zegerid Powder for Oral Suspension and delayed-release PPI brands,
Nexium® and Prevacid®, significantly fewer patients treated with
Zegerid experienced nocturnal acid breakthrough than when treated with the comparator
drugs. Nocturnal acid breakthrough was defined as gastric pH less than 4 for more than one
continuous hour between 10:00 pm and 6:00 am with once-daily PPI therapy.
    
    Variety of Formulations Our Zegerid products are currently marketed in capsule and
powder for oral suspension dosage forms. 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.
We are also continuing to develop other improved formulations of our Zegerid products,
utilizing our immediate-release PPI technology.
    
    Potential for Expanded Indications We may 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.
 Currently Marketed Zegerid Prescription Products
 Zegerid (omeprazole/sodium bicarbonate) Capsules
  6




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®
  Zegerid (omeprazole/sodium bicarbonate) Powder for Oral Suspension
     7




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Strategic Alliances
  8




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OTC License Agreement with Schering-Plough
     License Agreement and Distribution Agreement with GSK
  License Agreement
   9




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th
   Distribution Agreement
  th
    10




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Co-Promotion Arrangements
  Co-Promotion Agreement for Naprelan Controlled Release Tablets
 
   
 Co-Promotion Agreement for Fleet Phospho-soda EZ-Prep Bowel Cleaning System
   11




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Sales and Marketing
     12




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Contract Sales Organization Agreement with inVentiv
    Co-Promotion Agreement with Otsuka America
    13




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Manufacturing and Distribution
       14




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Intellectual Property
    License Rights from the University of Missouri
   15




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16




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Pending Patent Infringement Litigation Filed Against Par Pharmaceutical, Inc.
    Trademarks
  Research and Development
  17




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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 delayed-release omeprazole
and pantoprazole, among others; and
 
    
    Histamine-2 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®and store brand delayed-release
omeprazole product;
 
    
    Histamine-2 receptor antagonists: Boehringer Ingelheim GmbH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®and
Rolaids®, Novartis AGs Maalox®and GlaxoSmithKline plcs
Gaviscon®and Tums®, among others.
   18




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Government Regulation
   FDA Approval Process
     19




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Section 505(b)(2) New Drug Applications
     Other Regulatory Requirements
  20




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Employees
  21




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Available Information
 www.santarus.com
 
 Item 1A. Risk Factors
   
    
    whether we are able to increase market demand for, and sales of, our Zegerid®
(omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension prescription
products, including our ability to:
 
    
    achieve greater market acceptance of our products by our targeted
primary care physicians and gastroenterologists;
    
    maintain adequate levels of reimbursement coverage for our products
from third-party payors; and
    
    compete effectively within the gastrointestinal, or GI, and primary
care fields, where many other products are well-established and successful and are
marketed by competitors with significantly more experience and resources;
 
    
    whether we are able to maintain patent protection for our products, including whether we
are successful in the lawsuits we filed against Par Pharmaceutical, Inc., or Par, for
infringement of patents covering our Zegerid Capsules and Zegerid Powder for Oral
Suspension products; and
 
    
    whether we will be able to further diversify our sources of revenue and product
portfolio, including our ability to obtain additional financing to support the licensing or
acquisition of new products.
  Risks Related to Our Business and Industry
 At this time, we are largely dependent on the commercial success of our Zegerid products and proton
pump inhibitor, or PPI, technology, and we cannot be certain that we will be able to achieve
commercial success with these products and technology.
  
    
    successfully increase market demand for, and sales of, Zegerid Capsules and Zegerid
Powder for Oral Suspension, through our own sales force, our contract sales agreement with inVentiv
Commercial Services, LLC, or inVentiv, our co-promotion arrangement with Otsuka America
Pharmaceutical, Inc., or Otsuka America, and any other arrangements that we may later
establish;
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
    
    successfully maintain patent protection for our Zegerid family of products, including
whether we are successful in the lawsuits we filed against Par for infringement of patents
covering our Zegerid Capsules and Zegerid Powder for Oral Suspension products;
    
    establish and maintain effective marketing programs and continue to 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 agreements with wholesalers and distributors on commercially
reasonable terms; and
    
    maintain commercial manufacturing capabilities as necessary to meet commercial demand
for the products, as well as maintain commercial manufacturing arrangements with
third-party manufacturers.
     If we are unable to maintain adequate levels of reimbursement for our Zegerid products on
reasonable pricing terms, their commercial success may be severely hindered.
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Our strategic partners, GSK and Schering-Plough, may not successfully commercialize products using
our patented PPI technology.
  24




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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 prescription and OTC 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.
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Our Zegerid products 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 delayed-release omeprazole and pantoprazole, among others; and
    
    Histamine-2 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® and store brand
delayed-release omeprazole OTC products;
    
    Histamine-2 receptor antagonists: Boehringer Ingelheim GmbH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®and
Rolaids®, Novartis AGs Maalox® and GlaxoSmithKline plcs
Gaviscon® and Tums®, among others.
  ,
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The promotional efforts of inVentiv, under our contract sales organization agreement, and Otsuka
America, under our co-promotion agreement, may not be successful in increasing market demand for,
and sales of, our Zegerid prescription products.
    We depend on a limited number of wholesaler customers for retail distribution of our products, and
if we lose any of our significant wholesaler customers, our business could be harmed.
  If we are unable to continue to manufacture our products on a commercial basis, our
commercialization efforts will be materially harmed.
  We do not currently have any manufacturing facilities and instead rely on third-party
manufacturers.
  27




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Our resources have been primarily focused on commercializing our Zegerid products, and we may be
unable to expand our product portfolio or integrate new products successfully.
  28




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We may not generate adequate revenues under our co-promotion agreements for Naprelan ® Controlled Release Tablets and the Fleet ® Phospho-soda ® EZ-Prep  Bowel Cleansing System to justify our level of promotional effort and expense under the agreements.
    
    
    our ability to increase market demand and sales of the Naprelan and Fleet products;
    
    adverse side effects or inadequate therapeutic efficacy of the Naprelan or Fleet
products and any resulting product liability claims or product recalls; and
    
    the potential for termination of the co-promotion arrangements.
    29




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Our reporting and payment obligations under the Medicaid rebate program and other 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 we are able to support clinical safety and efficacy.
   We are subject to ongoing regulatory review of our Zegerid products and any other products that we
market.
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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.
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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.
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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.
     If we are unable to attract and retain key personnel, our business will suffer.
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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
   34




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Trade Secrets and Proprietary Know-how
 Trademarks ® ®
  Pars Paragraph IV certifications under the Hatch-Waxman Act related to Zegerid Capsules and
Zegerid Powder for Oral Suspension and the related patent infringement litigation 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.
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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.
    36




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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.
   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 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.
  37




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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.
      38




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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 and any
products which may be commercialized by GSK or Schering-Plough pursuant to our strategic
alliances;
    
    the outcome of, or other developments related to, our patent infringement suits against
Par involving Zegerid Capsules and Zegerid Powder for Oral Suspension;
    
    interruption in the manufacturing or distribution of our products;
    
    our ability to generate revenues under our co-promotion agreements with Victory and
Fleet;
    
    our ability to obtain regulatory approval for any future products we develop;
    
    results of our clinical trials and safety and efficacy of our products;
    
    timing of new product offerings, acquisitions, licenses or other significant events by
us, GSK, Schering-Plough 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.
  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.
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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 potential indebtedness under the loan agreement with Comerica may bear interest at a
variable rate.
  40




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Covenants in our loan agreement with Comerica may limit our ability to operate our business.
   To service any future indebtedness and fund our working capital and capital expenditures, we will
require a significant amount of cash. Our ability to generate cash depends on many factors beyond
our control.
  Rises in interest rates could adversely affect our financial condition.
  Negative conditions in the global credit markets may impair the liquidity of a portion of our
investment portfolio.
  41




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Our short operating history makes it difficult to evaluate our business and prospects.
  Changes in, or interpretations of, accounting rules and regulations could result in unfavorable
accounting charges or require us to change our compensation policies.
  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 may be volatile and you may not be able to sell your shares at an attractive price.
   
    
    announcements concerning our commercial progress and activities, including sales trends,
or concerning our product development programs, results of our clinical trials or status of
our regulatory submissions;
    
    developments in our pending patent infringement suits against Par involving Zegerid
Capsules and Zegerid Powder for Oral Suspension;
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
    
    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;
    
    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;
    
    sales of large blocks of our common stock, including sales by Kingsbridge under the
CEFF, our executive officers, directors or institutional investors;
    
    announcements concerning borrowings under the loan agreement, draw downs under the CEFF,
takedowns under our existing universal shelf registration statement or other developments
relating to the loan agreement, 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 strategic partners, our co-promotion
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 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.
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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.
  We are exposed to increased costs and risks related to complying with recently enacted and proposed
changes in laws and regulations, including costs and risks associated with compliance with Section
404 of the Sarbanes-Oxley Act of 2002.
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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 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
  45




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46




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  47




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##### Table of Contents



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, 2006First Quarter
    
    $
    8.50
    
    
    $
    4.76Second Quarter
    
    $
    8.42
    
    
    $
    5.77Third Quarter
    
    $
    8.70
    
    
    $
    4.91Fourth Quarter
    
    $
    9.70
    
    
    $
    7.14Year Ended December 31, 2007First Quarter
    
    $
    8.15
    
    
    $
    6.11Second Quarter
    
    $
    7.96
    
    
    $
    4.82Third Quarter
    
    $
    5.83
    
    
    $
    1.93Fourth Quarter
    
    $
    2.80
    
    
    $
    1.90
  Dividend Policy
  Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  48




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##### Table of Contents



Performance Graph
  Comparison of Cumulative Total Return on Investment
Since April 1, 2004
 
 4/1/04
    
    6/30/04
    
    12/31/04
    
    6/30/05
    
    12/30/05
    
    6/30/06
    
    12/29/06
    
    6/29/07
    
    12/31/07Santarus,
Inc.
    
    $
    100.00
    
    
    $
    146.00
    
    
    $
    89.50
    
    
    $
    40.60
    
    
    $
    52.48
    
    
    $
    65.84
    
    
    $
    77.53
    
    
    $
    51.19
    
    
    $
    27.23Nasdaq Composite
Index, U.S.
Companies
    
    $
    100.00
    
    
    $
    101.90
    
    
    $
    108.50
    
    
    $
    103.02
    
    
    $
    110.77
    
    
    $
    109.54
    
    
    $
    121.70
    
    
    $
    130.57
    
    
    $
    131.97Nasdaq
Pharmaceuticals
Index
    
    $
    100.00
    
    
    $
    97.80
    
    
    $
    100.90
    
    
    $
    92.79
    
    
    $
    111.11
    
    
    $
    102.09
    
    
    $
    108.76
    
    
    $
    111.11
    
    
    $
    114.36
 
 Item 6. Selected Financial Data
  49




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##### Table of Contents



Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(in thousands, except per share amounts)Statement of Operations Data:Revenues:Product sales, net
    
    $
    79,403
    
    
    $
    45,980
    
    
    $
    13,667
    
    
    $
    634
    
    
    $
    Contract revenue
    
    
    15,025
    
    
    
    3,263
    
    
    
    12,857
    
    
    
    714
    
    
    
    Total revenues
    
    
    94,428
    
    
    
    49,243
    
    
    
    26,524
    
    
    
    1,348
    
    
    
    Costs and expenses:Cost of sales
    
    
    7,301
    
    
    
    4,927
    
    
    
    2,129
    
    
    
    1,968
    
    
    
    License fees and royalties
    
    
    11,117
    
    
    
    6,437
    
    
    
    3,414
    
    
    
    5,089
    
    
    
    1,000Research and development
    
    
    6,849
    
    
    
    7,572
    
    
    
    11,292
    
    
    
    24,823
    
    
    
    13,664Selling, general and administrative
    
    
    116,503
    
    
    
    89,828
    
    
    
    79,391
    
    
    
    52,354
    
    
    
    8,312Total costs and expenses
    
    
    141,770
    
    
    
    108,764
    
    
    
    96,226
    
    
    
    84,234
    
    
    
    22,976Loss from operations
    
    
    (47,342
    )
    
    
    (59,521
    )
    
    
    (69,702
    )
    
    
    (82,886
    )
    
    
    (22,976
    )Interest and other income, net
    
    
    3,077
    
    
    
    3,055
    
    
    
    4,716
    
    
    
    1,391
    
    
    
    465Net loss
    
    
    (44,265
    )
    
    
    (56,466
    )
    
    
    (64,986
    )
    
    
    (81,495
    )
    
    
    (22,511
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,124
    )
    
    
    (2,940
    )Net loss attributable to common stockholders
    
    $
    (44,265
    )
    
    $
    (56,466
    )
    
    $
    (64,986
    )
    
    $
    (82,619
    )
    
    $
    (25,451
    )Basic and diluted net loss per share
    
    $
    (0.87
    )
    
    $
    (1.19
    )
    
    $
    (1.66
    )
    
    $
    (3.30
    )
    
    $
    (13.71
    )Weighted average shares outstanding to
calculate basic and diluted net loss per
share
    
    
    51,061
    
    
    
    47,355
    
    
    
    39,188
    
    
    
    25,017
    
    
    
    1,857
 As of December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(in thousands)Balance Sheet Data:Cash, cash equivalents and short-term investments
    
    $
    64,678
    
    
    $
    75,534
    
    
    $
    69,367
    
    
    $
    114,008
    
    
    $
    45,648Working capital
    
    
    25,582
    
    
    
    59,010
    
    
    
    59,572
    
    
    
    94,346
    
    
    
    42,376Total assets
    
    
    85,344
    
    
    
    93,628
    
    
    
    79,935
    
    
    
    122,216
    
    
    
    48,188Deferred revenue, less current portion
    
    
    12,722
    
    
    
    15,444
    
    
    
    8,571
    
    
    
    11,429
    
    
    
    Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    224Redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,625Total stockholders equity (deficit)
    
    
    15,348
    
    
    
    46,305
    
    
    
    54,520
    
    
    
    85,843
    
    
    
    (13,751
    )
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(in thousands, except per share amounts)Selected Quarterly Financial Data (unaudited):2007:Product sales, net
    
    $
    17,027
    
    
    $
    18,800
    
    
    $
    19,527
    
    
    $
    24,049Total revenues
    
    
    18,958
    
    
    
    20,730
    
    
    
    26,458
    
    
    
    28,282Cost of sales
    
    
    1,647
    
    
    
    1,663
    
    
    
    1,782
    
    
    
    2,209Total costs and expenses
    
    
    36,312
    
    
    
    34,427
    
    
    
    34,065
    
    
    
    36,966Net loss
    
    
    (16,436
    )
    
    
    (12,936
    )
    
    
    (6,902
    )
    
    
    (7,991
    )Basic and diluted net loss per share
    
    
    (0.32
    )
    
    
    (0.25
    )
    
    
    (0.13
    )
    
    
    (0.16
    )2006:Product sales, net
    
    $
    5,790
    
    
    $
    8,678
    
    
    $
    12,164
    
    
    $
    19,348Total revenues
    
    
    6,504
    
    
    
    9,393
    
    
    
    12,878
    
    
    
    20,468Cost of sales
    
    
    931
    
    
    
    1,421
    
    
    
    1,103
    
    
    
    1,472Total costs and expenses
    
    
    27,141
    
    
    
    26,777
    
    
    
    25,973
    
    
    
    28,873Net loss
    
    
    (19,925
    )
    
    
    (16,673
    )
    
    
    (12,398
    )
    
    
    (7,470
    )Basic and diluted net loss per share
    
    
    (0.45
    )
    
    
    (0.36
    )
    
    
    (0.26
    )
    
    
    (0.15
    )
 50




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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
 ®
    51




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®
 52




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® ® 
     53




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Critical Accounting Policies
  Revenue Recognition
 Revenue Recognition
 Product Sales, Net.
 Revenue Recognition When Right of Return Exists.
 54




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##### Table of Contents




    
    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.
 
   55




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##### Table of Contents



Contract Revenue. Revenue Arrangements with Multiple
Deliverables
 
    
    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 will be recognized as
revenue when the royalties are earned. The remaining $9.0 million is being amortized to
revenue on a straight-line basis over an 18-month period, which represents the estimated
period we are obligated to supply Zegerid products to GSK for sale in Puerto Rico and the
USVI under the distribution agreement.
 
    
    In August 2007, we received a nonrefundable $5.0 million milestone payment relating to
progress on clinical product development strategy under our license agreement with
Schering-Plough. The $5.0 million milestone payment was recognized as contract revenue in
2007 due to the substantive nature of the milestone achieved and since we have no ongoing
obligations associated with the milestone.
 56




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##### Table of Contents




    
    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 is being amortized to revenue on a straight-line basis over a 37-month period
through the end of 2009, which represents the estimated period during which we have
significant responsibilities under the agreement.
    
    In February 2005, we received a $10.0 million milestone payment in connection with our
sublicense agreement with TAP Pharmaceutical Products Inc., or TAP. We received the
milestone payment after we prevailed in an alternative dispute resolution proceeding in
which we alleged that TAP had achieved a development milestone. Pursuant to our license
agreement with the University of Missouri, we paid 15% of the February 2005 milestone to
the University of Missouri. In addition to the provisions of SAB No. 104 and EITF Issue
No. 00-21, we evaluated the criteria outlined in EITF Issue No. 99-19, Reporting Revenue
Gross as a Principal Versus Net as an Agent, in determining whether it was appropriate to
record the gross amount of sublicense revenues and related costs or the net amount earned
under the arrangement. Upon receipt of the milestone, we recognized the gross amount of
sublicense revenue and related costs as we had no future obligations pursuant to the
arrangement, we were the primary obligor in the arrangement, we had latitude in
establishing the amounts received under the arrangement, and we were involved in the
determination of the scope of technology sublicensed under the agreement. TAP exercised
its rights to terminate the sublicense agreement effective March 7, 2006.
    
    In October 2004, we received a nonrefundable $15.0 million upfront payment in connection
with our co-promotion agreement with Otsuka America. The $15.0 million upfront payment is
being amortized to revenue on a straight-line basis over the 63-month contractual term
through the end of 2009.
 Inventories and Related Reserves
  Stock-Based Compensation
 Share-Based Payment Accounting for
Stock-Based Compensation,
   57




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##### Table of Contents



Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services
    Results of Operations
 Comparison of Years Ended December 31, 2007, 2006 and 2005
 Product Sales, Net.
 Contract Revenue.
 58




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##### Table of Contents



Cost of Sales.
 License Fees and Royalties.
 Research and Development. ® ®
  Selling, General and Administrative.
 59




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##### Table of Contents



Interest and Other Income, Net.
 Liquidity and Capital Resources
      60




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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
    
    $
    5,549
    
    
    $
    1,052
    
    
    $
    3,460
    
    
    $
    1,037
    
    
    $
    Other long-term contractual obligations
    
    
    1,258
    
    
    
    1,030
    
    
    
    174
    
    
    
    54
    
    
    
    Total
    
    $
    6,807
    
    
    $
    2,082
    
    
    $
    3,634
    
    
    $
    1,091
    
    
    $
    
     61




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##### Table of Contents



Recent Accounting Pronouncements
 Fair Value Measurements
 62




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment to FASB Statement No. 115
 Accounting for Nonrefundable Advance
Payments for Goods or Services to be Used in Future Research and Development Activities
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property.
 Business Combinations
 Non-controlling Interests in Consolidated
Financial Statements (an amendment of Accounting Research Bulletin No. 51)
 63




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
   
 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
  64




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##### Table of Contents



Managements Report on Internal Control Over Financial Reporting
     65




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Report of Independent Registered Public Accounting Firm
 
       /s/ Ernst & Young LLPSan Diego, CaliforniaFebruary 21, 2008 66




---



##### Table of Contents



Item 9B. Other Information
  67




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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
  68




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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(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 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 C4.7(5)
    
    First Amendment to Rights Agreement, dated April 19, 2006, between us and American
Stock Transfer & Trust Company4.8(6)
    
    Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to
Kingsbridge Capital Limited
 69




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##### Table of Contents



ExhibitNumber
    
    Description10.1(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(7)+
    
    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(8)+
    
    Amendment No. 1 to Omeprazole Supply Agreement, dated November 1, 2004, among us,
InterChem Trading Corporation and Union Quimico Farmaceutica, S.A.10.7(8)+
    
    Amendment No. 2 to Omeprazole Supply Agreement, dated July 11, 2007, among us,
InterChem Trading Corporation and Union Quimico Farmaceutica, S.A.10.8(9)
    
    Amended and Restated Manufacturing and Supply Agreement, dated December 19, 2006,
between us and Patheon Inc.10.9(10)
    
    Manufacturing and Supply Agreement, dated September 27, 2004, between us and OSG
Norwich Pharmaceuticals, Inc.10.10(10)
    
    Co-Promotion Agreement, dated October 4, 2004, between us and Otsuka America
Pharmaceutical, Inc.10.11(11)
    
    Amendment No. 1 to Co-Promotion Agreement, dated January 6, 2006, between us and
Otsuka America Pharmaceutical, Inc.10.12(6)
    
    Common Stock Purchase Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited10.13(12)
    
    Loan and Security Agreement, dated July 28, 2006, between us and Comerica Bank10.14(12)
    
    LIBOR Addendum to Loan and Security Agreement, dated July 28, 2006, between us and
Comerica Bank10.15(13)
    
    OTC License Agreement, dated October 17, 2006, between us and Schering-Plough
Healthcare Products, Inc.10.16(14)
    
    Service Agreement, dated November 3, 2006, between us and Ventiv Commercial Services,
LLC (d/b/a inVentiv Commercial Services, LLC)10.17(8)+
    
    Amendment No. 1 to Service Agreement, dated June 15, 2007, between us and Ventiv
Commercial Services, LLC (d/b/a inVentiv Commercial Services, LLC)10.18(15)
    
    Co-Promotion Agreement, dated as of June 28, 2007, by and between us and Victory
Pharma, Inc.10.19(7)+
    
    Co-Promotion Agreement, dated August 24, 2007, between us and C.B. Fleet Company,
Incorporated10.20+
    
    License Agreement, dated November 30, 2007, between us and Glaxo Group Limited, an
affiliate of GlaxoSmithKline plc10.21+
    
    Distribution Agreement, dated November 30, 2007, between us and Glaxo Group Limited,
an affiliate of GlaxoSmithKline plc10.22(4)
    
    Office Building Lease, dated August 24, 2001, between us and Torrey View Associates LP10.23(4)
    
    Irrevocable Stand-by Letter of Credit, dated August 24, 2001, issued by UBS Paine
Webber Inc.10.24(16)
    
    Sublease, dated December 11, 2007, between us and Avnet, Inc.10.25(4)#
    
    Form of Indemnification Agreement between us and each of our directors and officers10.26(4)#
    
    1998 Stock Option Plan10.27(17)#
    
    Amendment to 1998 Stock Option Plan10.28(18)#
    
    Amended and Restated 2004 Equity Incentive Award Plan10.29(17)#
    
    Amendment No. 1 to Amended and Restated 2004 Equity Incentive Award Plan10.30(19)#
    
    Amendment No. 2 to Amended and Restated 2004 Equity Incentive Award Plan10.31(20)#
    
    Form of Stock Option Agreement under Amended and Restated 2004 Equity Incentive Award
Plan
 70




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##### Table of Contents



ExhibitNumber
    
    Description10.32(21)#
    
    Form of Immediately Exerciseable Stock Option Agreement under Amended and Restated
2004 Equity Incentive Award Plan10.33(22)#
    
    Amended and Restated Employee Stock Purchase Plan10.34#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Gerald T. Proehl10.35#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Debra P. Crawford10.36#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Julie A. DeMeules10.37#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
William C. Denby, III10.38#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Warren E. Hall10.39#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Michael D. Step10.40#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and E.
David Ballard, II, M.D.10.41#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Maria Bedoya-Toro10.42#
    
    Amended and Restated Employment Agreement, dated December 5, 2007, between us and
Carey J. Fox10.43(23)#
    
    2006 Bonus Plan10.44(24)#
    
    2007 Bonus Plan10.45(25)#
    
    2008 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
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 7,
2007.(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 February 3,
2006.(7)
    
    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. 71




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(8)
    
    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.(9)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on December 21,
2006.(10)
    
    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.(11)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on January 6,
2006.(12)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on August 1, 2006.(13)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on October 18,
2006.(14)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on November 7,
2006.(15)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on June 28, 2007.(16)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on December 13,
2007.(17)
    
    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.(18)
    
    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.(19)
    
    Incorporated by reference to
our Registration Statement on
Form S-8, filed with the
Securities and Exchange
Commission on December 21,
2006.(20)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 8,
2005.(21)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 16,
2005.(22)
    
    Incorporated by reference to
our Registration Statement on
Form S-8, filed with the
Securities and Exchange
Commission on December 18,
2007.(23)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 13,
2006.(24)
    
    Incorporated by reference to
our applicable Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on December 21,
2006.(25)
    
    Incorporated by reference to
our applicable Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on February 22,
2008. 72




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##### Table of Contents




    
    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.
  73




---



##### Table of Contents



SIGNATURES
  SANTARUS, INC.Dated: March 3, 2008
    By:
    /s/ GERALD T. PROEHLGerald T. ProehlPresident and Chief Executive
Officer  Name
    
    Title
    
    Date/s/ GERALD T. PROEHL
    
    President, Chief Executive
    
    March 3, 2008Gerald T. Proehl
    
    Officer and Director(Principal Executive
Officer)/s/ DEBRA P. CRAWFORD

Debra P. Crawford
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial and
    
    March 3, 2008Accounting Officer)/s/ DAVID F. HALE
    
    DirectorDavid F. Hale
    
    (Chairman of the Board of
Directors)
    
    March 3, 2008/s/ DANIEL D. BURGESS
    
    Director
    
    March 3, 2008Daniel D. Burgess/s/ MICHAEL G. CARTER, M.B., CH.B., F.R.C.P.
(U.K.)
    
    Director
    
    March 3, 2008Michael G. Carter, M.B., Ch.B., F.R.C.P. (U.K.)/s/ MICHAEL E. HERMAN
    
    Director
    
    March 3, 2008Michael E. Herman/s/ TED W. LOVE, M.D.
    
    Director
    
    March 3, 2008Ted W. Love, M.D./s/ KENT SNYDER
    
    Director
    
    March 3, 2008Kent Snyder
 74




---



##### 



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, 2007 and 2006
    
    F-3Statements of Operations for the years ended December 31, 2007, 2006 and 2005
    
    F-4Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
    
    F-5Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    F-7Notes to Financial Statements
    
    F-8FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    F-28
  F-1




---



##### Table of Contents



Report
of Independent Registered Public Accounting Firm
 
      
  
 F-2




---



##### Table of Contents



SANTARUS, INC.
 
 Santarus, Inc.
Balance Sheets
 December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    58,382,366
    
    
    $
    70,883,641Short-term investments
    
    
    6,295,380
    
    
    
    4,650,000Accounts receivable, net
    
    
    9,680,667
    
    
    
    7,133,799Inventories, net
    
    
    6,157,383
    
    
    
    6,979,269Other current assets
    
    
    2,339,742
    
    
    
    1,243,333Total current assets
    
    
    82,855,538
    
    
    
    90,890,042Long-term restricted cash
    
    
    1,400,000
    
    
    
    1,700,000Property and equipment, net
    
    
    667,594
    
    
    
    334,402Other assets
    
    
    421,115
    
    
    
    703,777Total assets
    
    $
    85,344,247
    
    
    $
    93,628,221Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    37,354,912
    
    
    $
    22,534,518Allowance for product returns
    
    
    5,946,917
    
    
    
    1,623,023Current portion of deferred revenue
    
    
    13,972,008
    
    
    
    7,722,008Total current liabilities
    
    
    57,273,837
    
    
    
    31,879,549Deferred revenue, less current portion
    
    
    12,722,007
    
    
    
    15,444,015Commitments and contingenciesStockholders equity:Preferred stock, $.0001 par value; 10,000,000 shares authorized at
December 31, 2007 and 2006; no shares issued and outstanding at
December 31, 2007 and 2006
    
    
    
    
    
    
    Common stock, $.0001 par value; 100,000,000 shares authorized at
December 31, 2007 and 2006; 51,315,485 and 50,730,622 shares
issued and outstanding at December 31,
2007 and 2006, respectively
    
    
    5,132
    
    
    
    5,073Additional paid-in capital
    
    
    319,342,022
    
    
    
    306,033,378Accumulated other comprehensive income
    
    
    52
    
    
    
    Accumulated deficit
    
    
    (303,998,803
    )
    
    
    (259,733,794
    )Total stockholders equity
    
    
    15,348,403
    
    
    
    46,304,657Total liabilities and stockholders equity
    
    $
    85,344,247
    
    
    $
    93,628,221
 See accompanying notes.
 F-3




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##### Table of Contents



Santarus, Inc.
Statements of Operations
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenues:Product sales, net
    
    $
    79,403,592
    
    
    $
    45,979,504
    
    
    $
    13,666,556Contract revenue
    
    
    15,024,751
    
    
    
    3,262,548
    
    
    
    12,857,143Total revenues
    
    
    94,428,343
    
    
    
    49,242,052
    
    
    
    26,523,699Costs and expenses:Cost of sales
    
    
    7,300,921
    
    
    
    4,927,017
    
    
    
    2,129,110License fees and royalties
    
    
    11,116,504
    
    
    
    6,437,133
    
    
    
    3,413,317Research and development
    
    
    6,849,474
    
    
    
    7,572,072
    
    
    
    11,291,700Selling, general and
administrative
    
    
    116,503,279
    
    
    
    89,828,051
    
    
    
    79,391,285Total costs and expenses
    
    
    141,770,178
    
    
    
    108,764,273
    
    
    
    96,225,412Loss from operations
    
    
    (47,341,835
    )
    
    
    (59,522,221
    )
    
    
    (69,701,713
    )Interest and other income, net
    
    
    3,076,826
    
    
    
    3,055,893
    
    
    
    4,715,845Net loss
    
    $
    (44,265,009
    )
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )Basic and diluted net loss per share
    
    $
    (0.87
    )
    
    $
    (1.19
    )
    
    $
    (1.66
    )Weighted average shares outstanding to calculate
basic and diluted net
loss per share
    
    
    51,060,650
    
    
    
    47,355,050
    
    
    
    39,187,537
 See accompanying notes.
 F-4




---



##### Table of Contents



Santarus, Inc.
Statements of Stockholders Equity
 AccumulatedotherAdditional
    
    
    
    
    
    
    comprehensiveCommon stock
    
    
    paid-in
    
    
    Deferred
    
    
    income
    
    
    AccumulatedShares
    
    
    Amount
    
    
    capital
    
    
    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
 F-5




---



##### Table of Contents



AccumulatedotherAdditional
    
    
    
    
    
    
    comprehensiveCommon stock
    
    
    paid-in
    
    
    Deferred
    
    
    income
    
    
    AccumulatedShares
    
    
    Amount
    
    
    capital
    
    
    compensation
    
    
    (loss)
    
    
    deficit
    
    
    TotalBalance at December 31, 2005
    
    
    44,467,087
    
    
    
    4,447
    
    
    
    259,486,970
    
    
    
    (1,699,932
    )
    
    
    (4,120
    )
    
    
    (203,267,466
    )
    
    
    54,519,899Issuance of common stock upon exercise of
stock options, net of 10,187 unvested shares
repurchased
    
    
    402,221
    
    
    
    41
    
    
    
    1,523,123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,523,164Issuance of common stock under Committed
Equity Financing Facility, net of issuance
costs
    
    
    5,401,787
    
    
    
    540
    
    
    
    36,259,734
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,260,274Financing cost of warrant issued in connection
with Committed Equity Financing Facility
    
    
    
    
    
    
    
    
    
    
    (1,282,318
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,282,318
    )Issuance of warrant in connection with
Committed Equity Financing Facility
    
    
    
    
    
    
    
    
    
    
    1,282,318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,282,318Issuance of common stock upon exercise of
warrants
    
    
    14,832
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock under employee
stock purchase plan
    
    
    444,695
    
    
    
    44
    
    
    
    1,138,817
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,138,861Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    9,324,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,324,667Reclassification of deferred compensation due to
adoption of SFAS No. 123(R)
    
    
    
    
    
    
    
    
    
    
    (1,699,932
    )
    
    
    1,699,932
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,466,328
    )
    
    
    (56,466,328
    )Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,120
    
    
    
    
    
    
    
    4,120Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,462,208
    )Balance at December 31, 2006
    
    
    50,730,622
    
    
    
    5,073
    
    
    
    306,033,378
    
    
    
    
    
    
    
    
    
    
    
    (259,733,794
    )
    
    
    46,304,657Issuance of common stock upon exercise of
stock options, net of 12,001 unvested shares
repurchased
    
    
    84,851
    
    
    
    9
    
    
    
    265,735
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,744Issuance of common stock under employee
stock purchase plan
    
    
    500,012
    
    
    
    50
    
    
    
    1,293,204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,293,254Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    11,749,705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,749,705Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,265,009
    )
    
    
    (44,265,009
    )Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    52Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,264,957
    )Balance at December 31, 2007
    
    
    51,315,485
    
    
    $
    5,132
    
    
    $
    319,342,022
    
    
    $
    
    
    
    $
    52
    
    
    $
    (303,998,803
    )
    
    $
    15,348,403
 See accompanying notes.
 F-6




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##### Table of Contents



Santarus, Inc.
Statements of Cash Flows
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Operating activitiesNet loss
    
    $
    (44,265,009
    )
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    587,426
    
    
    
    591,678
    
    
    
    624,672Stock-based compensation
    
    
    11,749,705
    
    
    
    9,324,667
    
    
    
    2,628,183Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (2,546,868
    )
    
    
    (4,470,316
    )
    
    
    (1,862,764
    )Inventories, net
    
    
    821,886
    
    
    
    (3,846,028
    )
    
    
    (1,171,452
    )Other current assets
    
    
    (1,096,409
    )
    
    
    9,590
    
    
    
    1,228,491Other assets
    
    
    (4,255
    )
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    14,820,394
    
    
    
    13,049,240
    
    
    
    (5,320,531
    )Allowance for product returns
    
    
    4,323,894
    
    
    
    (2,840,593
    )
    
    
    (2,593,592
    )Deferred revenue
    
    
    3,527,992
    
    
    
    11,737,452
    
    
    
    (2,857,143
    )Net cash used in operating activities
    
    
    (12,081,244
    )
    
    
    (32,910,638
    )
    
    
    (74,310,004
    )Investing activitiesPurchase of short-term investments
    
    
    (4,723,191
    )
    
    
    (4,384,600
    )
    
    
    (36,147,117
    )Sales and maturities of short-term investments
    
    
    3,094,658
    
    
    
    9,189,000
    
    
    
    121,836,000Long-term restricted cash
    
    
    300,000
    
    
    
    250,000
    
    
    
    (1,000,000
    )Purchases of property and equipment
    
    
    (650,496
    )
    
    
    (60,627
    )
    
    
    (65,216
    )Deposits on manufacturing equipment
    
    
    
    
    
    
    
    
    
    
    (114,935
    )Net cash (used in) provided by investing activities
    
    
    (1,979,029
    )
    
    
    4,993,773
    
    
    
    84,508,732Financing activitiesExercise of stock options
    
    
    265,744
    
    
    
    1,523,164
    
    
    
    113,543Issuance of common stock, net
    
    
    1,293,254
    
    
    
    37,399,135
    
    
    
    30,737,583Payments on equipment notes payable
    
    
    
    
    
    
    (38,019
    )
    
    
    (185,980
    )Net cash provided by financing activities
    
    
    1,558,998
    
    
    
    38,884,280
    
    
    
    30,665,146(Decrease) increase in cash and cash equivalents
    
    
    (12,501,275
    )
    
    
    10,967,415
    
    
    
    40,863,874Cash and cash equivalents at beginning of the year
    
    
    70,883,641
    
    
    
    59,916,226
    
    
    
    19,052,352Cash and cash equivalents at end of the year
    
    $
    58,382,366
    
    
    $
    70,883,641
    
    
    $
    59,916,226Supplemental disclosure of cash flow information:Interest paid
    
    $
    11,360
    
    
    $
    14,179
    
    
    $
    21,203Supplemental schedule of noncash investing
and financing activities:Issuance of warrant in connection with Committed Equity
Financing Facility
    
    $
    
    
    
    $
    1,282,318
    
    
    $
    
 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
  Concentration of Credit Risk and Sources of Supply
  F-8




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##### 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
 Revenue Recognition
 F-9




---



##### Table of Contents



Product Sales, Net.
 Revenue Recognition When Right of Return Exists.
  
    
    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-10




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##### Table of Contents



Contract Revenue. Revenue Arrangements with
Multiple Deliverables
 F-11




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##### Table of Contents



Patent Costs
  License Fees and Research and Development Expenses
    Shipping and Handling Costs
  Advertising Expense
  Stock-Based Compensation
 Accounting for Stock-Based
Compensation Accounting for Stock Issued to
Employees Share-Based Payment Accounting for
Stock-Based Compensation
  F-12




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##### Table of Contents



Years Ended December 31,2007
    
    
    2006
    
    
    2005Stock Options:Risk-free interest rate
    
    
    3.6%  4.9%
    
    
    
    4.6%  5.0%
    
    
    
    3.7%  4.4%Expected volatility
    
    
    60%
    
    
    
    60%
    
    
    
    70%Expected life of options (years)
    
    
    5.27  6.08
    
    
    
    5.27  6.08
    
    
    
    4.75  8.00Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase Plan:Risk-free interest rate
    
    
    3.3%  5.0%
    
    
    
    4.8%  5.1%
    
    
    
    3.2%  4.4%Expected volatility
    
    
    60%
    
    
    
    60%
    
    
    
    70%Expected life of options (years)
    
    
    0.50  2.00
    
    
    
    0.50  2.00
    
    
    
    0.50  2.00Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
 Risk-Free Interest Rate.
 Expected Volatility.
 Expected Life of Options.
 Expected Dividend Yield.
 
  F-13




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##### Table of Contents



Year EndedDecember 31,2005Net lossNet loss as reported
    
    $
    (64,985,868
    )Add: Stock-based employee compensation included in
reported net loss
    
    
    2,514,138Deduct: Stock-based employee compensation determined
under fair value method
    
    
    (11,220,174
    )Net loss including stock-based compensation
    
    $
    (73,691,904
    )Net loss per shareBasic and diluted  as reported
    
    $
    (1.66
    )Basic and diluted  including stock-based employee compensation
    
    $
    (1.88
    )
 Comprehensive Income (Loss)
  Years Ended December 31,2007
    
    
    2006
    
    
    2005Net loss
    
    $
    (44,265,009
    )
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )Unrealized gain on investments
    
    
    52
    
    
    
    4,120
    
    
    
    183,418Comprehensive loss
    
    $
    (44,264,957
    )
    
    $
    (56,462,208
    )
    
    $
    (64,802,450
    )
 Net Loss Per Share
 Earnings Per Share
 F-14




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##### Table of Contents



Years Ended December 31,2007
    
    
    2006
    
    
    2005Historical:Numerator:Net loss
    
    $
    (44,265,009
    )
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )Denominator:Weighted average common shares
    
    
    51,064,953
    
    
    
    47,399,739
    
    
    
    39,281,837Weighted average unvested common shares subject to
repurchase
    
    
    (4,303
    )
    
    
    (44,689
    )
    
    
    (94,300
    )Denominator for basic and diluted net loss per share
    
    
    51,060,650
    
    
    
    47,355,050
    
    
    
    39,187,537Basic and diluted net loss per share
    
    $
    (0.87
    )
    
    $
    (1.19
    )
    
    $
    (1.66
    )Historical outstanding antidilutive securities not
included in diluted net loss per share calculation:Common stock subject to repurchase
    
    
    3,939
    
    
    
    29,208
    
    
    
    64,840Options to purchase common stock
    
    
    9,948,464
    
    
    
    6,543,006
    
    
    
    5,794,610Stock warrants
    
    
    366,284
    
    
    
    366,284
    
    
    
    59,40510,318,687
    
    
    
    6,938,498
    
    
    
    5,918,855
 Segment Reporting
  Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment to FASB Statement No. 115
 Accounting for Nonrefundable Advance
Payments for Goods or Services to be Used in Future Research and Development Activities
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property.
 F-15




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##### Table of Contents



Business Combinations
 Non-controlling Interests in Consolidated
Financial Statements (an amendment of Accounting Research Bulletin No. 51)
 2. Short-Term Investments
  Amortized
    
    
    
    
    
    
    UnrealizedCost
    
    
    Market Value
    
    
    GainDecember 31, 2007:Municipal debt obligations
    
    $
    4,300,000
    
    
    $
    4,300,000
    
    
    $
    Corporate debt securities
    
    
    1,995,328
    
    
    
    1,995,380
    
    
    
    52Total
    
    $
    6,295,328
    
    
    $
    6,295,380
    
    
    $
    52December 31, 2006:Municipal debt obligations
    
    $
    4,650,000
    
    
    $
    4,650,000
    
    
    $
    
  F-16




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##### Table of Contents



3. Balance Sheet Details
  December 31,2007
    
    
    2006Raw materials
    
    $
    1,511,220
    
    
    $
    1,854,492Finished goods
    
    
    4,811,852
    
    
    
    5,534,1416,323,072
    
    
    
    7,388,633Allowance for excess and obsolete inventory
    
    
    (165,689
    )
    
    
    (409,364
    )$
    6,157,383
    
    
    $
    6,979,269
  December 31,2007
    
    
    2006Computer equipment and software
    
    $
    1,295,436
    
    
    $
    974,442Office equipment and furniture
    
    
    1,074,407
    
    
    
    766,822Leasehold improvements
    
    
    345,724
    
    
    
    345,7242,715,567
    
    
    
    2,086,988Less accumulated depreciation and amortization
    
    
    (2,047,973
    )
    
    
    (1,752,586
    )$
    667,594
    
    
    $
    334,402
   December 31,2007
    
    
    2006Accounts payable
    
    $
    5,179,954
    
    
    $
    3,386,497Accrued compensation and benefits
    
    
    5,359,756
    
    
    
    5,587,290Accrued rebates
    
    
    19,478,658
    
    
    
    7,130,887Accrued royalties
    
    
    3,363,914
    
    
    
    2,708,623Other accrued liabilities
    
    
    3,972,630
    
    
    
    3,721,221$
    37,354,912
    
    
    $
    22,534,518
 4. License Agreements
 University of Missouri
  F-17




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##### Table of Contents



Schering-Plough Healthcare Products, Inc.
    Glaxo Group Limited
    F-18




---



##### Table of Contents



5. Co-Promotion Agreements
 Otsuka America Pharmaceutical, Inc.
  Victory Pharma, Inc.
 ®
  C.B. Fleet Company, Incorporated
 ® ® TM
 F-19




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##### Table of Contents



6. Long-Term Debt
   7. Commitments and Contingencies
 Leases
   F-20




---



##### Table of Contents



2008
    
    $
    1,052,0002009
    
    
    1,442,0002010
    
    
    1,094,0002011
    
    
    924,0002012
    
    
    957,000Thereafter
    
    
    80,000Total minimum lease payments
    
    $
    5,549,000
  Other Long-Term Commitments
    Legal Proceedings
  F-21




---



##### Table of Contents



F-22




---



##### Table of Contents



8. Stockholders Equity
 Authorized Shares
 ,
 Common Stock Offerings
    Stockholder Rights Plan
  F-23




---



##### Table of Contents



Warrants
  Stock Option Plans
     F-24




---



##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term (years)
    
    
    ValueOutstanding at January 1, 2007
    
    
    6,541,684
    
    
    $
    6.10Granted
    
    
    4,044,491
    
    
    
    4.92Exercised
    
    
    (96,852
    )
    
    
    2.85Forfeited/expired
    
    
    (540,859
    )
    
    
    7.55Outstanding at December 31, 2007
    
    
    9,948,464
    
    
    $
    5.57
    
    
    
    7.90
    
    
    $
    2,378,928Exercisable at December 31, 2007
    
    
    6,949,979
    
    
    $
    6.04
    
    
    
    7.29
    
    
    $
    2,070,828
  Accounting for Equity Investments that are Issued to Other than Employees for Acquiring
or in Conjunction with Selling Goods or Services
  Employee Stock Purchase Plan
  F-25




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##### Table of Contents



Shares Reserved for Future Issuance
  December 31,2007
    
    
    2006Stock options issued and outstanding
    
    
    9,948,464
    
    
    
    6,543,006Authorized for future issuance under equity compensation plans
    
    
    2,370,355
    
    
    
    3,360,676Stock warrants outstanding
    
    
    366,284
    
    
    
    366,28412,685,103
    
    
    
    10,269,966
 9. 401(k) Plan
  10. Income Taxes
 Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 Accounting for Income Taxes,
      F-26




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##### Table of Contents



December 31,2007
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    
    
    
    $
    81,100,000Research and development credits
    
    
    
    
    
    
    4,637,000Capitalized research and development
    
    
    177,000
    
    
    
    410,000Depreciation and amortization
    
    
    139,000
    
    
    
    107,000Accrued rebates
    
    
    7,367,000
    
    
    
    2,733,000Deferred revenue
    
    
    6,098,000
    
    
    
    3,380,000Other
    
    
    4,812,000
    
    
    
    2,443,000Total deferred tax assets
    
    
    18,593,000
    
    
    
    94,810,000Valuation allowance
    
    
    (18,593,000
    )
    
    
    (94,810,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 F-27




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##### Table of Contents



Schedule II  Valuation and Qualifying Accounts
 Additions
    
    DeductionsActual Cash
    
    Actual CashDiscounts,
    
    Discounts,Provision
    
    Charged
    
    Chargebacks, and
    
    Chargebacks, andBalance at
    
    Related
    
    Against
    
    Other Discounts
    
    Other Discounts
    
    Balance atBeginning of
    
    to Current
    
    Balance Sheet
    
    Related to Current
    
    Related to Prior
    
    End ofPeriod
    
    Period Sales
    
    Accounts
    
    Period Sales
    
    Period Sales
    
    PeriodAllowance for cash discounts,
chargebacks, and other sales
discounts:For the year
ended December 31, 2007
    
    $
    (686,868
    )
    
    $
    (7,152,990
    )
    
    $
    
    
    
    $
    5,876,088
    
    
    $
    436,938
    
    
    $
    (1,526,832
    )For the year
ended December 31, 2006
    
    
    (244,848
    )
    
    
    (3,175,074
    )
    
    
    99,543
    
    
    
    2,486,399
    
    
    
    147,112
    
    
    
    (686,868
    )For the year
ended December 31, 2005
    
    
    (259,901
    )
    
    
    (999,915
    )
    
    
    467,774
    
    
    
    547,194
    
    
    
    
    
    
    
    (244,848
    )
 Additions
    
    DeductionsBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    Against Balance
    
    
    
    
    
    End ofPeriod
    
    Expenses
    
    Sheet Accounts
    
    Other
    
    PeriodAllowance for excess and obsolete
inventory:For the year ended December 31, 2007
    
    $
    (409,364
    )
    
    $
    (194,921
    )
    
    $
    
    
    
    $
    438,596
    (1)
    
    $
    (165,689
    )For the year ended December 31, 2006
    
    
    (207,145
    )
    
    
    (396,841
    )
    
    
    
    
    
    
    194,622
    (1)
    
    
    (409,364
    )For the year ended December 31, 2005
    
    
    (1,728,580
    )
    
    
    (141,096
    )
    
    
    (619,747
    )
    
    
    2,282,278
    (1)
    
    
    (207,145
    )
 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
    
    Other
    
    PeriodAllowance for product returns:For the year ended December 31, 2007
    
    $
    (1,623,023
    )
    
    $
    (4,495,339
    )
    
    $
    (1,894,617
    )
    
    $
    42,963
    
    
    $
    2,023,099
    
    
    $
    
    (2)
    
    $
    (5,946,917
    )For the year ended December 31, 2006
    
    
    (4,463,616
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,840,593
    (3)
    
    
    (1,623,023
    )For the year ended December 31, 2005
    
    
    (7,057,208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,593,592
    (4)
    
    
    (4,463,616
    )
 
 (1)
    
    Deductions in allowance for excess and obsolete inventory represent physical disposition of
inventory.(2)
    
    Deductions in allowance for product returns represent actual product returns.(3)
    
    Deductions in allowance for product returns represent actual product returns of
approximately $1.9 million and a reduction in the allowance due to the determination
that the Company could reasonably estimate future product returns.(4)
    
    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 wholesale distributors. F-28