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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, 2006
 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(State or other jurisdiction of
    
    33-0734433(I.R.S. Employer Identification No.)incorporation or organization)10590 West Ocean Air Drive, Suite 200
San Diego, California
    
    92130(Zip Code)(Address of Principal Executive Offices)
 (858) 314-5700  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.0001 per share
    
    Nasdaq Global MarketSeries A Junior Participating Preferred Stock Purchase Rights
    
    Nasdaq Global Market
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



SANTARUS, INC.
 FORM 10-K  ANNUAL REPORT
For the Year Ended December 31, 2006
 Table of Contents
  
 PagePART IItem 1
    
    Business
    
    
    2Item 1A
    
    Risk Factors
    
    
    18Item 1B
    
    Unresolved Staff Comments
    
    
    41Item 2
    
    Properties
    
    
    41Item 3
    
    Legal Proceedings
    
    
    41Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    41PART IIItem 5
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    42Item 6
    
    Selected Financial Data
    
    
    44Item 7
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    45Item 7A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    55Item 8
    
    Financial Statements and Supplementary Data
    
    
    55Item 9
    
    Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    55Item 9A
    
    Controls and Procedures
    
    
    55Item 9B
    
    Other Information
    
    
    58PART IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    59Item 11
    
    Executive Compensation
    
    
    59Item 12
    
    Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    59Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    59Item 14
    
    Principal Accountant Fees and Services
    
    
    59PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    60Signatures
    
    
    
    
    64EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  i




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




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##### Table of Contents



Item 1. Business
 Overview
  ®
 Immediate-Release
    
    OmeprazolePPI Products
    
    Dose
    
    Indications
    
    StatusCurrently MarketedZegerid (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)FDA ApprovedZegerid with
Magnesium Hydroxide
(omeprazole/sodium
bicarbonate/magnesium
hydroxide)
Chewable Tablets
    
    20 mg/40 mg
    
    Heartburn/GERD,
Erosive
Esophagitis,
Duodenal Ulcers,
Gastric Ulcers
    
    NDA approved in
March 2006
   2




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
    
    continuing our primary focus on increasing market demand for, and sales of, our Zegerid
brand prescription products in the U.S. pharmaceutical market, as well as seeking to
maximize the overall value of our patented PPI technology through our OTC license with
Schering-Plough and additional strategic relationships;
    
    further leveraging our existing commercial capabilities through in-licensing or
co-promotion arrangements for marketed or approved products that we believe will be
attractive to our targeted physicians and the patients they serve; and
    
    pursuing the development of acquired or internally developed proprietary products to
further enhance our product portfolio.
 Upper Gastrointestinal Diseases and Disorders and Limitations of Current Treatments
  3




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Heartburn and Gastroesophageal Reflux Disease (GERD)
     Erosive Esophagitis
 Gastric and Duodenal Ulcers
 Upper GI Bleeding
 4




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Our Products
 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 PPI products 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, both 20 mg and 40 mg strengths, those products maintained a
median gastric pH above 4 ranging from 12.2 to 18.6 hours per day, depending on the dosage
strength and formulation, after repeated once-daily dosing. This duration of acid control
is 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, or NAB, was defined as gastric pH less than 4 for more
than one continuous hour during once-daily PPI therapy between 10:00 pm and 6:00 am.
    
    Variety of Formulations Our Zegerid products are currently marketed in capsule and
powder for oral suspension dosage forms, and we have also received FDA approval to market a
chewable tablet formulation. In addition to providing alternative formulations for use in
the general adult population, one or more of our formulations may address the needs of
specific patient populations such as pediatric, elderly and hospitalized patients.
    
    Potential for Expanded Indications We 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.
 5




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




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®
 ® ®
  Zegerid with Magnesium Hydroxide (omeprazole/sodium bicarbonate/magnesium hydroxide) Chewable
Tablets
  7




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Strategy
  
    
    Focus on Maximizing Sales of Our Zegerid Brand Prescription Products and the Overall
Value of Our Immediate-Release PPI Technology.Our commercial resources are focused on
increasing market demand for, and sales of, our Zegerid brand prescription products, and we
plan to continue to explore additional strategic arrangements to maximize the overall value
of these products and our immediate-release PPI technology. As a result of a recent
expansion of our commercial presence, Zegerid Capsules and Zegerid Powder for Oral
Suspension are now supported by more than 500 field sales representatives, which include
our own representatives, as well as representatives under our co-promotion agreement with
Otsuka America and our contract sales organization agreement with inVentiv. In addition to
our efforts related to our Zegerid prescription products, we have licensed exclusive rights
to Schering-Plough under our patented PPI technology to develop, manufacture and sell OTC
products with the lower dosage strength of 20 mg of omeprazole in the U.S. and Canada. We
will continue to evaluate additional strategies to expand the promotion of our Zegerid
products in the U.S. Outside of the U.S., we intend to out-license development,
distribution and marketing rights for our Zegerid products to one or more pharmaceutical
companies with established commercialization capabilities outside the U.S. We believe that
our Zegerid brand prescription products and our immediate-release PPI technology offer a
differentiated treatment option for physicians and their patients and represent an
attractive market opportunity.
    
    Further Leverage our Existing Commercial Capabilities Through In-Licensing or
Co-Promotion Arrangements for Marketed or Approved Products.We also plan to explore
co-promotion or other in-licensing arrangements for marketed or approved products that we
believe will be attractive to our targeted physicians and the patients they serve and which
may be products in the GI or other relevant fields. To date, our commercial organization
has been focused on promoting our Zegerid brand products. Although our Zegerid brand
products will remain a primary focus, we believe that adding one or more marketed or
approved products to our portfolio will further leverage our commercial capabilities. We
also believe that the size, experience and qualifications of our commercial organization
may make us an attractive strategic partner for companies looking to license co-promotion
or marketing rights for their products.
    
    Pursue the Development of Acquired or Internally Developed Proprietary Products to
Further Enhance Our Product Portfolio.We also intend to further enhance our product
portfolio by developing additional products that we either acquire or develop internally.
We plan to concentrate our efforts on proprietary products that would be complementary to
our existing products and that have commercial potential, as well as the potential for
reduced development and regulatory risk. For our Zegerid products, which are
immediate-release formulations of the PPI omeprazole, we received FDA approval of each of
our four NDAs within the initial 10-month period under the policies of the Prescription
Drug User Fee Act, or PDUFA. We believe that adding one or more proprietary development
products to our product portfolio will contribute to the continued growth and value of our
company over the longer term.
 Sales and Marketing
  8




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Co-Promotion Agreement with Otsuka America
    9




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Services Agreement with inVentiv
    OTC License Agreement with Schering-Plough
     10




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Manufacturing and Distribution
       11




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Research and Development
   Intellectual Property
    12




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##### Table of Contents



® ®
 License Rights from the University of Missouri
     13




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Competition
   Prescription Products:
 
    
    PPIs: AstraZeneca plcs Prilosec®and Nexium®, TAP Pharmaceutical Products Inc.s
Prevacid®, Wyeths and Altanas Protonix®, Johnson & Johnsons and Eisai Co., Ltd.s
Aciphex®, and generic omeprazole, among others; and
    
    H2-receptor antagonists: Merck & Co., Inc.s Pepcid®, GlaxoSmithKline plcs Zantac®and
Tagamet®and Braintree Laboratories, Inc.s Axid®, among others.
 Over-the-Counter Products:
 
    
    PPIs: The Procter & Gamble Companys Prilosec OTC®;
    
    H2-receptor antagonists: Pfizer Inc.s Zantac®, GlaxoSmithKline plcs Tagamet®, and Johnson
& Johnsons and Merck & Co., Inc.s Pepcid AC®and Pepcid Complete®, among others; and
    
    Antacids: Johnson & Johnsons and Merck and Co., Inc.s Mylanta®and Rolaids®, Novartis
AGs Maalox®and GlaxoSmithKline plcs Gaviscon®and Tums®, among others.
  14




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Government Regulation
   FDA Approval Process
     15




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Section 505(b)(2) New Drug Applications
     16




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Other Regulatory Requirements
       17




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Employees
  Available Information
 www.santarus.com.
 
 Item 1A. Risk Factors
   
    
    whether we are able to increase market demand for, and sales of, Zegerid®
(omeprazole/sodium bicarbonate) Capsules and Zegerid (omeprazole/sodium bicarbonate) Powder
for Oral Suspension, including our ability to:
 o
    
    achieve market acceptance of our products by our targeted primary care
physicians and gastroenterologists;o
    
    maintain adequate levels of reimbursement coverage for our products
from third-party payors; ando
    
    compete effectively within the gastrointestinal, or GI, field, where
many other products are well-established and successful and are marketed by
competitors with significantly more experience and resources;
 
    
    whether we will be able to obtain additional financing to fund our operations; and
    
    whether we are able to maintain patent protection for our products and to commercialize
our products without infringing the patent rights of others.
  18




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Risks Related to Our Business and Industry
 At this time, we are largely dependent on the commercial success of our Zegerid products, and we
cannot be certain that we will be able to achieve commercial success with these products.
  
    
    successfully increase market demand for, and sales of, Zegerid Capsules and Zegerid
Powder for Oral Suspension, through our own sales force, our co-promotion arrangement with
Otsuka America Pharmaceutical, Inc., or Otsuka America, our contract sales agreement with
inVentiv Commercial Services, LLC, or inVentiv, and any other collaboration with
pharmaceutical companies or other contract sales organizations that we may later establish;
    
    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
    
    demonstrate commercial manufacturing capabilities as necessary to meet commercial demand
for the products and maintain commercial manufacturing arrangements with third-party
manufacturers.
    19




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Failure of our Zegerid products to achieve and maintain market acceptance would seriously impair
our growth prospects and our ability to reach profitability.
  
    
    the efficacy and safety of our products and our ability to differentiate our products
from products offered by our competitors;
    
    effectiveness of our, Otsuka Americas, inVentivs and any other collaborators sales
and marketing efforts, as compared to the significantly greater resources of our
competitors;
    
    our ability to obtain sufficient third-party insurance coverage or reimbursement;
    
    pricing and cost effectiveness, as compared to competitive products, including any
available generic products;
    
    the prevalence and severity of any adverse side effects; and
    
    availability of alternative treatments.
  If we are unable to maintain adequate levels of reimbursement for our products, their commercial
success may be severely hindered.
    20




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Our strategic partner, Schering-Plough, may not successfully develop or commercialize omeprazole
products using our patented PPI technology for the OTC market.
  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.
  21




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
    
    developing drugs, including 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.
   Our Zegerid products will compete with many other drug products focused on upper GI diseases and
disorders which could put downward pressure on pricing and market share and limit our ability to
generate revenues.
  Prescription Products:
 
    
    PPIs: AstraZeneca plcs Prilosec® and Nexium®, TAP
Pharmaceutical Products Inc.s Prevacid®, Wyeths and Altanas
Protonix®, Johnson & Johnsons and Eisai Co., Ltd.s Aciphex®,
and generic omeprazole, among others; and
    
    H2-receptor antagonists: Merck & Co., Inc.s Pepcid®,
GlaxoSmithKline plcs Zantac® and Tagamet® and Braintree
Laboratories, Inc.s Axid®, among others.
 22




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Over-the-Counter Products:
 
    
    PPIs: The Procter & Gamble Companys Prilosec OTC®;
    
    H2-receptor antagonists: Pfizer Inc.s Zantac, GlaxoSmithKline plcs
Tagamet, and Johnson & Johnsons and Merck & Co., Inc.s Pepcid AC® and
Pepcid Complete®, among others; and
    
    Antacids: Johnson & Johnsons and Merck and Co., Inc.s Mylanta®and
Rolaids®, Novartis AGs Maalox® and GlaxoSmithKline plcs
Gaviscon® and Tums®, among others.
    We have recently expanded our sales and marketing capabilities through a contract sales agreement
with inVentiv, and we, inVentiv and our co-promotion partner, Otsuka America, will need to retain
qualified sales and marketing personnel and collaborate in order to successfully commercialize our
Zegerid products.
   23




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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.
   24




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Our resources are currently focused on commercializing our Zegerid products, which products are
vulnerable to various risks and uncertainties, and we may be unable to expand our product portfolio
or integrate new products successfully.
  25




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Regulatory approval for our currently marketed products, Zegerid Capsules and Zegerid Powder for
Oral Suspension, is limited by the FDA to those specific indications and conditions for which we
are able to support clinical safety and efficacy.
   We are subject to ongoing regulatory review of Zegerid Capsules and Zegerid Powder for Oral
Suspension and any other products that we may market in the future.
  26




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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.
  27




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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.
  28




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Any products we develop in the future likely will require significant product and clinical
development activities and ultimately may not be approved by the FDA, and any failure or delays
associated with these activities or the FDAs approval of such products would increase our costs
and time to market.
   
    
    our ability to select key components, establish a stable formulation and optimize taste
and other sensory characteristics;
    
    our ability to develop a product that demonstrates our intended safety and efficacy
profile; and
    
    our ability to transfer from development stage to commercial-scale operations and the
costs associated with commercial manufacturing.
    If we are unable to attract and retain key personnel, our business will suffer.
  29




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Risks Related to Our Financial Results and Need for Financing
 We have incurred significant operating losses since our inception, and we expect to incur
significant additional operating losses and may not achieve profitability.
  We will need to raise additional funds to continue our operations and we may be unable to raise
capital when needed.
    30




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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
OTC products which may be developed and commercialized by Schering-Plough under our OTC
license agreement;
    
    demand and pricing of products we may offer;
    
    physician and patient acceptance of our products;
    
    levels of third-party reimbursement for our products;
    
    interruption in the manufacturing or distribution of our products;
    
    our ability to maintain a productive sales force;
    
    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, 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.
 31




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The Committed Equity Financing Facility that we entered into with Kingsbridge may not be available
to us if we elect to make a draw down, may require us to make additional blackout or other
payments to Kingsbridge, and may result in dilution to our stockholders.
     Our indebtedness 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;
 32




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
    
    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.
  Covenants in the Loan Agreement 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.
  33




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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, such as expensing of stock
options, could result in unfavorable accounting charges or require us to change our compensation
policies.
  Share-Based Payment Accounting for Stock-Based Compensation,
 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 secure such rights would materially affect our business.
  Patents
  34




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35




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Trade Secrets and Proprietary Know-how
 Trademarks ® ®
  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.
  37




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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, product development
programs, results of our clinical trials or status of our regulatory submissions;
    
    the publication of prescription trend data concerning our products or competitive
products;
    
    regulatory developments and related announcements in the U.S., including announcements
by the FDA, and foreign countries;
    
    disputes or other developments concerning proprietary rights, including patents and
trade secrets, litigation matters, and our ability to patent or otherwise protect our
products and technologies;
    
    conditions or trends in the pharmaceutical and biotechnology industries;
    
    fluctuations in stock market prices and trading volumes of similar companies or of the
markets generally;
    
    changes in, or our failure to meet or exceed, investors and securities analysts expectations;
    
    announcements of technological innovations or new commercial products by us or our competitors;
    
    actual or anticipated fluctuations in our or our competitors quarterly or annual operating results;
    
    sales of large blocks of our common stock, including sales by Kingsbridge under the
CEFF, our executive officers, directors or venture capital investors;
    
    announcements concerning 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 OTC collaborator, our co-promotion
partner, 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.
 38




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Our stock price could decline and our stockholders may suffer dilution in connection with future
issuances of equity or debt securities.
   Future sales of our common stock by our stockholders may depress our stock price.
   We may become involved in securities or other class action litigation that could divert
managements attention and harm our business.
  39




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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.
  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.
   40




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  41




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 Market Information
  High
    
    LowYear Ended December 31, 2005First Quarter
    
    $
    9.19
    
    
    $
    4.34Second Quarter
    
    $
    4.99
    
    
    $
    2.80Third Quarter
    
    $
    6.55
    
    
    $
    3.85Fourth Quarter
    
    $
    6.91
    
    
    $
    4.97Year Ended December 31, 2006First Quarter
    
    $
    8.50
    
    
    $
    4.76Second Quarter
    
    $
    8.42
    
    
    $
    5.77Third Quarter
    
    $
    8.70
    
    
    $
    4.91Fourth Quarter
    
    $
    9.70
    
    
    $
    7.14
  Dividend Policy
  Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  42




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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
    
    
    12/29/06Santarus, Inc.
    
    $
    100.00
    
    
    $
    146.00
    
    
    $
    89.50
    
    
    $
    40.60
    
    
    $
    52.48
    
    
    $
    65.84
    
    
    $
    77.53Nasdaq Composite
Index, U.S.
Companies
    
    $
    100.00
    
    
    $
    101.90
    
    
    $
    108.50
    
    
    $
    103.02
    
    
    $
    110.77
    
    
    $
    109.54
    
    
    $
    121.70Nasdaq
Pharmaceuticals
Index
    
    $
    100.00
    
    
    $
    97.80
    
    
    $
    100.90
    
    
    $
    92.79
    
    
    $
    111.11
    
    
    $
    102.09
    
    
    $
    108.76
 43




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##### Table of Contents



Item 6. Selected Financial Data
  Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands, except per share amounts)Statement of Operations Data:Revenues:Product sales, net
    
    $
    45,980
    
    
    $
    13,667
    
    
    $
    634
    
    
    $
    
    
    
    $
    Contract revenue
    
    
    3,263
    
    
    
    12,857
    
    
    
    714
    
    
    
    
    
    
    
    8,000Total revenues
    
    
    49,243
    
    
    
    26,524
    
    
    
    1,348
    
    
    
    
    
    
    
    8,000Costs and expenses:Cost of sales
    
    
    4,927
    
    
    
    2,129
    
    
    
    1,968
    
    
    
    
    
    
    
    License fees and royalties
    
    
    6,437
    
    
    
    3,414
    
    
    
    5,089
    
    
    
    1,000
    
    
    
    1,400Research and development
    
    
    7,572
    
    
    
    11,292
    
    
    
    24,823
    
    
    
    13,664
    
    
    
    15,398Selling, general and administrative
    
    
    89,828
    
    
    
    79,391
    
    
    
    52,354
    
    
    
    8,312
    
    
    
    6,311Total costs and expenses
    
    
    108,764
    
    
    
    96,226
    
    
    
    84,234
    
    
    
    22,976
    
    
    
    23,109Loss from operations
    
    
    (59,521
    )
    
    
    (69,702
    )
    
    
    (82,886
    )
    
    
    (22,976
    )
    
    
    (15,109
    )Interest and other income, net
    
    
    3,055
    
    
    
    4,716
    
    
    
    1,391
    
    
    
    465
    
    
    
    414Net loss
    
    
    (56,466
    )
    
    
    (64,986
    )
    
    
    (81,495
    )
    
    
    (22,511
    )
    
    
    (14,695
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,124
    )
    
    
    (2,940
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (56,466
    )
    
    $
    (64,986
    )
    
    $
    (82,619
    )
    
    $
    (25,451
    )
    
    $
    (14,695
    )Basic and diluted net loss per share
    
    $
    (1.19
    )
    
    $
    (1.66
    )
    
    $
    (3.30
    )
    
    $
    (13.71
    )
    
    $
    (9.13
    )Weighted average shares outstanding to
calculate basic and diluted net loss per
share
    
    
    47,355
    
    
    
    39,188
    
    
    
    25,017
    
    
    
    1,857
    
    
    
    1,610
 As of December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands)Balance Sheet Data:Cash, cash equivalents and short-term
investments
    
    $
    75,534
    
    
    $
    69,367
    
    
    $
    114,008
    
    
    $
    45,648
    
    
    $
    11,804Working capital
    
    
    59,010
    
    
    
    59,572
    
    
    
    94,346
    
    
    
    42,376
    
    
    
    7,697Total assets
    
    
    93,628
    
    
    
    79,935
    
    
    
    122,216
    
    
    
    48,188
    
    
    
    14,207Deferred revenue, less current portion
    
    
    15,444
    
    
    
    8,571
    
    
    
    11,429
    
    
    
    
    
    
    
    Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    224
    
    
    
    479Redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,625
    
    
    
    Total stockholders equity (deficit)
    
    
    46,305
    
    
    
    54,520
    
    
    
    85,843
    
    
    
    (13,751
    )
    
    
    9,074
 44




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##### Table of Contents



First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(in thousands, except per share amounts)Selected Quarterly Financial Data (unaudited):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
    )2005:Product sales, net
    
    $
    1,449
    
    
    $
    3,085
    
    
    $
    4,164
    
    
    $
    4,969Total revenues
    
    
    12,163
    
    
    
    3,800
    
    
    
    4,878
    
    
    
    5,683Cost of sales
    
    
    258
    
    
    
    506
    
    
    
    612
    
    
    
    753Total costs and expenses
    
    
    28,490
    
    
    
    23,892
    
    
    
    21,600
    
    
    
    22,244Net loss
    
    
    (13,567
    )
    
    
    (19,543
    )
    
    
    (16,086
    )
    
    
    (15,790
    )Basic and diluted net loss per share
    
    
    (0.37
    )
    
    
    (0.54
    )
    
    
    (0.40
    )
    
    
    (0.36
    )
 
 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
  ®
   45




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46




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Critical Accounting Policies
  Revenue Recognition
 Revenue Recognition
 47




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##### Table of Contents



Product Sales, Net.
 Revenue Recognition When Right of Return Exists.
  Contract Revenue. Revenue Arrangements with Multiple
Deliverables
 
    
    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
 48




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##### Table of Contents




    
    In February 2005, we received a $10.0 million milestone payment in connection with our
sublicense agreement with 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.
    
    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
 Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees Share-Based Payment Accounting for
Stock-Based Compensation,
   49




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Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services
   Results of Operations
 Comparison of Years Ended December 31, 2006, 2005 and 2004
 Product Sales, Net.
 Contract Revenue.
 Cost of Sales.
 50




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##### Table of Contents



License Fees and Royalties.
 Research and Development. ®
  Selling, General and Administrative.
 51




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##### Table of Contents



Interest and Other Income, Net.
 Liquidity and Capital Resources
       52




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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
    
    $
    2,595
    
    
    $
    1,932
    
    
    $
    663
    
    
    $
    
    
    
    $
    Other long-term contractual obligations
    
    
    299
    
    
    
    280
    
    
    
    19
    
    
    
    
    
    
    
    Total
    
    $
    2,894
    
    
    
    2,212
    
    
    $
    682
    
    
    $
    
    
    
    $
    
     53




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes.
 54




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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
   Managements Report on Internal Control Over Financial Reporting
  55




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56




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
 
     .
  /s/ ERNST & YOUNG LLP 
 57




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Item 9B. Other Information
  58




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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
  59




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Documents filed as part of this report.
            Exhibits.
 ExhibitNumber
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation3.2(1)
    
    Amended and Restated Bylaws3.3(2)
    
    Certificate of Designations for Series A Junior Participating Preferred Stock4.1(2)
    
    Form of Common Stock Certificate4.2(3)
    
    Amended and Restated Investors Rights Agreement, dated April 30, 2003, among us and
the parties named therein4.3(3)
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated May 19,
2003, among us and the parties named therein4.4(3)
    
    Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between
us and The Curators of the University of Missouri4.5(3)
    
    Form of Common Stock Purchase Warrant4.6(2)
    
    Rights Agreement, dated as of November 12, 2004, between us and American Stock
Transfer & Trust Company, which includes the form of Certificate of Designations of
the Series A Junior Participating Preferred Stock of Santarus, Inc. as Exhibit A, the
form of Right Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C4.7(4)
    
    First Amendment to Rights Agreement, dated April 19, 2006, between us and American
Stock Transfer & Trust Company4.8(5)
    
    Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to
Kingsbridge Capital Limited
 60




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##### Table of Contents



ExhibitNumber
    
    Description4.9(5)
    
    Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited10.1(3)
    
    Stock Purchase Agreement, dated January 26, 2001, between us and The Curators of the
University of Missouri10.2(3)
    
    Exclusive License Agreement, dated January 26, 2001, between us and The Curators of
the University of Missouri10.3(3)
    
    Amendment No. 1 to Exclusive License Agreement, dated February 21, 2003, between us
and The Curators of the University of Missouri10.4(3)
    
    Omeprazole Supply Agreement, dated September 25, 2003, among us, InterChem Trading
Corporation and Union Quimico Farmaceutica, S.A.10.5(3)
    
    Manufacturing and Supply Agreement, dated December 19, 2003, between us and Patheon
Inc.10.6(6)+
    
    Amended and Restated Manufacturing and Supply Agreement, dated December 19, 2006,
between us and Patheon Inc.10.7(3)
    
    Capital Reimbursement Agreement, dated December 19, 2003, between us and Patheon Inc.10.8(7) 
    
    Manufacturing and Supply Agreement, dated September 27, 2004, between us and OSG
Norwich Pharmaceuticals, Inc.10.9(7) 
    
    Co-Promotion Agreement, dated October 4, 2004, between us and Otsuka America
Pharmaceutical, Inc.10.10(8) 
    
    Amendment No. 1 to Co-Promotion Agreement, dated January 6, 2006, between us and
Otsuka America Pharmaceutical, Inc.10.11(5)
    
    Common Stock Purchase Agreement, dated February 3, 2006, between us and Kingsbridge
Capital Limited10.12(9)
    
    Loan and Security Agreement, dated July 28, 2006, between us and Comerica Bank10.13(9)
    
    LIBOR Addendum to Loan and Security Agreement, dated July 28, 2006, between us and
Comerica Bank10.14(10)+
    
    OTC License Agreement, dated October 17, 2006, between us and Schering-Plough
Healthcare Products, Inc.10.15(11)+
    
    Service Agreement, dated November 3, 2006, between us and Ventiv Commercial Services,
LLC (d/b/a inVentiv Commercial Services, LLC)10.16(3)
    
    Office Building Lease, dated August 24, 2001, between us and Torrey View Associates LP10.17(3)
    
    Irrevocable Stand-by Letter of Credit, dated August 24, 2001, issued by UBS Paine
Webber Inc.10.18(3)#
    
    Form of Indemnification Agreement between us and each of our directors and officers10.19(3)#
    
    1998 Stock Option Plan10.20(12)#
    
    Amendment to 1998 Stock Option Plan10.21(13)#
    
    Amended and Restated 2004 Equity Incentive Award Plan10.22(12)#
    
    Amendment No. 1 to Amended and Restated 2004 Equity Incentive Award Plan10.23(14)#
    
    Amendment No. 2 to Amended and Restated 2004 Equity Incentive Award Plan10.24(15)#
    
    Form of Stock Option Agreement under Amended and Restated 2004 Equity Incentive Award
Plan10.25(16)#
    
    Form of Immediately Exerciseable Stock Option Agreement under Amended and Restated
2004 Equity Incentive Award Plan10.26(13)#
    
    Amended and Restated Employee Stock Purchase Plan10.27(17)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and Gerald
T. Proehl10.28(17)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and Debra
P. Crawford10.29(17)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and
William C. Denby, III10.30(17)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and
Warren E. Hall10.31(17)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and Julie
A. DeMeules
 61




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##### Table of Contents



ExhibitNumber
    
    Description10.32(17)#
    
    Amended and Restated Employment Agreement, dated March 1, 2006, between us and
Michael D. Step10.33(17)#
    
    Employment Agreement, dated March 1, 2006, between us and E. David Ballard, II, M.D.10.34(17)#
    
    Employment Agreement, dated March 1, 2006, between us and Carey J. Fox10.35(18)#
    
    2005 Bonus Plan10.36(19)#
    
    2006 Bonus Plan10.37(20)#
    
    2007 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 November 17,
2004.(3)
    
    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).(4)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on April 21, 2006.(5)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 3,
2006.(6)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on December 21,
2006.(7)
    
    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.(8)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on January 6,
2006.(9)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on August 1, 2006.(10)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on October 18,
2006.(11)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on November 7,
2006.(12)
    
    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. 62




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##### Table of Contents



(13)
    
    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.(14)
    
    Incorporated by reference to
our Registration Statement on
Form S-8, filed with the
Securities and Exchange
Commission on December 21,
2006.(15)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 8,
2005.(16)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 16,
2005.(17)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on March 2, 2006.(18)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 22,
2005.(19)
    
    Incorporated by reference to
our Current Report on Form
8-K, filed with the
Securities and Exchange
Commission on February 13,
2006.(20)
    
    Incorporated by reference to
our applicable Current Report
on Form 8-K, filed with the
Securities and Exchange
Commission on December 21,
2006.
    
    Confidential treatment has been granted as to certain
portions, which portions have been omitted and filed
separately with the Securities and Exchange Commission.+
    
    Application has been made to the Securities and Exchange
Commission to seek confidential treatment of certain
provisions. Omitted material for which confidential treatment
has been requested has been filed separately with the
Securities and Exchange Commission.#
    
    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.
  63




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SIGNATURES
  SANTARUS, INC.Dated: March 5, 2007By:
    
    /s/ GERALD T. PROEHLGerald T. ProehlPresident and Chief Executive Officer
  Name
    
    Title
    
    Date/s/ GERALD T. PROEHL
    
    President, Chief Executive
    
    March 5, 2007Gerald T. Proehl
    
    Officer and Director(Principal Executive
Officer)/s/ DEBRA P. CRAWFORD
    
    Senior Vice President and Chief
    
    March 5, 2007Debra P. Crawford
    
    Financial Officer(Principal Financial and
Accounting Officer)/s/ DAVID F. HALE
    
    Director
    
    March 5, 2007David F. Hale
    
    (Chairman of the Board of
Directors)/s/ DANIEL D. BURGESS
    
    Director
    
    March 5, 2007Daniel D. Burgess/s/ MICHAEL G. CARTER, M.B., CH.B., F.R.C.P.(U.K.)
    
    Director
    
    March 5, 2007Michael G. Carter, M.B., Ch.B., F.R.C.P. (U.K.)/s/ MICHAEL E. HERMAN
    
    Director
    
    March 5, 2007Michael E. Herman/s/ TED W. LOVE, M.D.
    
    Director
    
    March 5, 2007Ted W. Love, M.D./s/ KENT SNYDER
    
    Director
    
    March 5, 2007Kent Snyder
 64




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SANTARUS, INC.
 INDEX TO FINANCIAL STATEMENTS
 PageAUDITED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm on Financial Statements
    
    F-2Balance Sheets as of December 31, 2006 and 2005
    
    F-3Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    F-4Statements of Stockholders Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004
    
    F-5Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    F-7Notes to Financial Statements
    
    F-8FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    F-25
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      /s/ Ernst & Young LLPSan Diego, California
February 28, 2007
 F-2




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Santarus, Inc.
 
 Balance Sheets
 December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    70,883,641
    
    
    $
    59,916,226Short-term investments
    
    
    4,650,000
    
    
    
    9,450,280Accounts receivable, net
    
    
    7,133,799
    
    
    
    2,663,483Inventories, net
    
    
    6,979,269
    
    
    
    3,133,241Other current assets
    
    
    1,243,333
    
    
    
    1,252,923Total current assets
    
    
    90,890,042
    
    
    
    76,416,153Long-term restricted cash
    
    
    1,700,000
    
    
    
    1,950,000Property and equipment, net
    
    
    334,402
    
    
    
    617,522Other assets
    
    
    703,777
    
    
    
    951,708Total assets
    
    $
    93,628,221
    
    
    $
    79,935,383Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    22,534,518
    
    
    $
    9,485,278Allowance for product returns
    
    
    1,623,023
    
    
    
    4,463,616Current portion of deferred revenue
    
    
    7,722,008
    
    
    
    2,895,162Total current liabilities
    
    
    31,879,549
    
    
    
    16,844,056Deferred revenue, less current portion
    
    
    15,444,015
    
    
    
    8,571,428Commitments and contingenciesStockholders equity:Preferred stock, $.0001 par value; 10,000,000 shares authorized at
December 31, 2006 and 2005; no shares issued and outstanding at
December 31, 2006 and 2005
    
    
    
    
    
    
    Common stock, $.0001 par value; 100,000,000 shares authorized at
December 31, 2006 and 2005; 50,730,622 and 44,467,087 shares issued
and outstanding at December 31, 2006 and 2005, respectively
    
    
    5,073
    
    
    
    4,447Additional paid-in capital
    
    
    306,033,378
    
    
    
    259,486,970Deferred compensation
    
    
    
    
    
    
    (1,699,932
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (4,120
    )Accumulated deficit
    
    
    (259,733,794
    )
    
    
    (203,267,466
    )Total stockholders equity
    
    
    46,304,657
    
    
    
    54,519,899Total liabilities and stockholders equity
    
    $
    93,628,221
    
    
    $
    79,935,383
 See accompanying notes.
 F-3




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##### Table of Contents



Santarus, Inc.
 
 Statements of Operations
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Product sales, net
    
    $
    45,979,504
    
    
    $
    13,666,556
    
    
    $
    633,468Contract revenue
    
    
    3,262,548
    
    
    
    12,857,143
    
    
    
    714,286Total revenues
    
    
    49,242,052
    
    
    
    26,523,699
    
    
    
    1,347,754Costs and expenses:Cost of sales
    
    
    4,927,017
    
    
    
    2,129,110
    
    
    
    1,968,388License fees and royalties
    
    
    6,437,133
    
    
    
    3,413,317
    
    
    
    5,088,686Research and development
    
    
    7,572,072
    
    
    
    11,291,700
    
    
    
    24,822,483Selling, general and administrative
    
    
    89,828,051
    
    
    
    79,391,285
    
    
    
    52,354,341Total costs and expenses
    
    
    108,764,273
    
    
    
    96,225,412
    
    
    
    84,233,898Loss from operations
    
    
    (59,522,221
    )
    
    
    (69,701,713
    )
    
    
    (82,886,144
    )Interest and other income, net
    
    
    3,055,893
    
    
    
    4,715,845
    
    
    
    1,390,837Net loss
    
    
    (56,466,328
    )
    
    
    (64,985,868
    )
    
    
    (81,495,307
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,124,510
    )Net loss attributable to common stockholders
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )
    
    $
    (82,619,817
    )Basic and diluted net loss per share
    
    $
    (1.19
    )
    
    $
    (1.66
    )
    
    $
    (3.30
    )Weighted average shares outstanding to calculate
basic and diluted net loss per share
    
    
    47,355,050
    
    
    
    39,187,537
    
    
    
    25,016,720
 See accompanying notes.
 F-4




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##### Table of Contents



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




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##### Table of Contents



AccumulatedotherConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    comprehensivepreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    income
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    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
    )
    
    
    54,519,899Issuance 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
    )
    
    $
    46,304,657
 See accompanying notes.
 F-6




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##### Table of Contents



Santarus, Inc.
 
 Statements of Cash Flows
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Operating activitiesNet loss
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    591,678
    
    
    
    624,672
    
    
    
    446,311Stock-based compensation
    
    
    9,324,667
    
    
    
    2,628,183
    
    
    
    5,671,588Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (4,470,316
    )
    
    
    (1,862,764
    )
    
    
    (800,719
    )Inventories, net
    
    
    (3,846,028
    )
    
    
    (1,171,452
    )
    
    
    (1,961,789
    )Other current assets
    
    
    9,590
    
    
    
    1,228,491
    
    
    
    (1,664,198
    )Other assets
    
    
    
    
    
    
    
    
    
    
    93,274Accounts payable and accrued liabilities
    
    
    13,049,240
    
    
    
    (5,320,531
    )
    
    
    10,971,552Allowance for product returns
    
    
    (2,840,593
    )
    
    
    (2,593,592
    )
    
    
    7,057,208Deferred revenue
    
    
    11,737,452
    
    
    
    (2,857,143
    )
    
    
    14,285,714Net cash used in operating activities
    
    
    (32,910,638
    )
    
    
    (74,310,004
    )
    
    
    (47,396,366
    )Investing activitiesPurchase of short-term investments
    
    
    (4,384,600
    )
    
    
    (36,147,117
    )
    
    
    (162,098,301
    )Sales and maturities of short-term investments
    
    
    9,189,000
    
    
    
    121,836,000
    
    
    
    109,753,220Long-term restricted cash
    
    
    250,000
    
    
    
    (1,000,000
    )
    
    
    Purchases of property and equipment
    
    
    (60,627
    )
    
    
    (65,216
    )
    
    
    (733,525
    )Deposits on manufacturing equipment
    
    
    
    
    
    
    (114,935
    )
    
    
    (1,047,172
    )Net cash provided by (used in) investing activities
    
    
    4,993,773
    
    
    
    84,508,732
    
    
    
    (54,125,778
    )Financing activitiesExercise of stock options
    
    
    1,523,164
    
    
    
    113,543
    
    
    
    620,888Issuance of common stock, net
    
    
    37,399,135
    
    
    
    30,737,583
    
    
    
    117,345,671Payments on equipment notes payable
    
    
    (38,019
    )
    
    
    (185,980
    )
    
    
    (255,274
    )Net cash provided by financing activities
    
    
    38,884,280
    
    
    
    30,665,146
    
    
    
    117,711,285Increase in cash and cash equivalents
    
    
    10,967,415
    
    
    
    40,863,874
    
    
    
    16,189,141Cash and cash equivalents at beginning of the year
    
    
    59,916,226
    
    
    
    19,052,352
    
    
    
    2,863,211Cash and cash equivalents at end of the year
    
    $
    70,883,641
    
    
    $
    59,916,226
    
    
    $
    19,052,352Supplemental disclosure of cash flow information:Interest paid
    
    $
    14,179
    
    
    $
    21,203
    
    
    $
    33,626Supplemental schedule of noncash investing
and financing activities:Issuance of warrant in connection with Committed Equity
Financing Facility
    
    $
    1,282,318
    
    
    $
    
    
    
    $
    Accretion to redemption value of redeemable convertible
preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    1,124,510Conversion of redeemable convertible preferred stock to common
stock upon closing of initial public offering
    
    $
    
    
    
    $
    
    
    
    $
    58,749,788
 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
  Reclassification
  Cash and Cash Equivalents
  Investments
  F-8




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##### Table of Contents



Concentration of Credit Risk and Sources of Supply
    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
 F-9




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##### Table of Contents



Revenue Recognition
 Revenue
Recognition
 Product Sales, Net.
 Revenue Recognition When Right of Return Exists.
  Contract Revenue. Revenue Arrangements with
Multiple Deliverables
 F-10




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##### Table of Contents




    
    In November 2006, the Company received a nonrefundable $15.0 million upfront license fee
in connection with its license agreement with Schering-Plough Healthcare Products, Inc.
(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 over which the Company has significant responsibilities under the
agreement.
    
    In February 2005, the Company received a $10.0 million milestone payment in connection
with its sublicense agreement with TAP Pharmaceutical Products Inc. (TAP). The Company
received the milestone payment after prevailing in an alternative dispute resolution
proceeding in which the Company alleged that TAP had achieved a development milestone.
Pursuant to its license agreement with the University of Missouri, the Company 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, the Company 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, the Company recognized the gross amount of sublicense revenue and related costs
as the Company had no future obligations pursuant to the arrangement, was the primary
obligor in the arrangement, had latitude in establishing the amounts received under the
arrangement, and was involved in the determination of the scope of technology sublicensed
under the agreement.
 
    
    In October 2004, the Company received a nonrefundable $15.0 million upfront payment in
connection with its co-promotion agreement with Otsuka America Pharmaceutical, Inc.
(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.
 Patent Costs
  License Fees and Research and Development Expenses
    F-11




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##### Table of Contents



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 31,2006
    
    
    2005
    
    
    2004Stock Options:Risk-free interest rate
    
    
    4.6%  5.0
    %
    
    
    3.7%  4.4
    %
    
    
    2.7%  3.6
    %Expected volatility
    
    
    60%
    
    
    
    70%
    
    
    
    70%Expected life of options (years)
    
    
    5.27  6.08
    
    
    
    4.75  8.00
    
    
    
    4.00  8.06Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase Plan:Risk-free interest rate
    
    
    4.8%  5.1
    %
    
    
    3.2%  4.4
    %
    
    
    2.5%  3.1
    %Expected volatility
    
    
    60%
    
    
    
    70%
    
    
    
    70%Expected life of options (years)
    
    
    0.50  2.00
    
    
    
    0.50  2.00
    
    
    
    0.50  2.16Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
 Risk-Free Interest Rate.
 Expected Volatility.
 Expected Life of Options.
 Expected Dividend Yield.
 
  F-13




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004Net lossNet loss as reported
    
    $
    (64,985,868
    )
    
    $
    (82,619,817
    )Add: Stock-based employee compensation included in
reported net loss
    
    
    2,514,138
    
    
    
    5,176,802Deduct: Stock-based employee compensation determined
under fair value method
    
    
    (11,220,174
    )
    
    
    (9,748,804
    )Net loss including stock-based compensation
    
    $
    (73,691,904
    )
    
    $
    (87,191,819
    )Net loss per shareBasic and diluted  as reported in prior year
    
    $
    (1.66
    )
    
    $
    (3.30
    )Basic and diluted  including stock-based employee
compensation
    
    $
    (1.88
    )
    
    $
    (3.49
    )
 Comprehensive Income (Loss)
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Net loss
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )Unrealized gain (loss) on investments
    
    
    4,120
    
    
    
    183,418
    
    
    
    (174,424
    )Comprehensive loss
    
    $
    (56,462,208
    )
    
    $
    (64,802,450
    )
    
    $
    (81,669,731
    )
 Net Loss Per Share
 Earnings Per Share
  F-14




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##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004Historical:Numerator:Net loss
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )
    
    $
    (81,495,307
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,124,510
    )Net loss attributable to common stockholders
    
    $
    (56,466,328
    )
    
    $
    (64,985,868
    )
    
    $
    (82,619,817
    )Denominator:Weighted average common shares
    
    
    47,399,739
    
    
    
    39,281,837
    
    
    
    25,230,528Weighted average unvested common shares subject to
repurchase
    
    
    (44,689
    )
    
    
    (94,300
    )
    
    
    (213,808
    )Denominator for basic and diluted net loss per share
    
    
    47,355,050
    
    
    
    39,187,537
    
    
    
    25,016,720Basic and diluted net loss per share
    
    $
    (1.19
    )
    
    $
    (1.66
    )
    
    $
    (3.30
    )Pro forma:Pro forma net loss
    
    
    
    
    
    
    
    
    
    $
    (81,495,307
    )Basic and diluted pro forma net loss per share
(unaudited)
    
    
    
    
    
    
    
    
    
    $
    (2.70
    )Pro forma adjustments to reflect assumed weighted
average effect of conversion of preferred stock
(unaudited)
    
    
    
    
    
    
    
    
    
    
    5,177,904Weighted average shares outstanding to calculate
basic and diluted pro forma net loss per share
(unaudited)
    
    
    
    
    
    
    
    
    
    
    30,194,624Historical outstanding antidilutive securities not
included in diluted net loss per share calculation:Common stock subject to repurchase
    
    
    29,208
    
    
    
    64,840
    
    
    
    117,095Options to purchase common stock
    
    
    6,543,006
    
    
    
    5,794,610
    
    
    
    3,890,914Stock warrants
    
    
    366,284
    
    
    
    59,405
    
    
    
    59,4056,938,498
    
    
    
    5,918,855
    
    
    
    4,067,414
 Segment Reporting
  Income Taxes
 Accounting for Income Taxes
 New Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes.
 F-15




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##### Table of Contents



2. Investments
  Amortized
    
    
    
    
    
    
    UnrealizedCost
    
    
    Market Value
    
    
    LossDecember 31, 2006:U.S. government and state agencies
    
    $
    4,650,000
    
    
    $
    4,650,000
    
    
    $
    Corporate debt securities
    
    
    63,601,035
    
    
    
    63,601,035
    
    
    
    Money market funds
    
    
    8,982,606
    
    
    
    8,982,606
    
    
    
    Total
    
    $
    77,233,641
    
    
    $
    77,233,641
    
    
    $
    December 31, 2005:U.S. government and state agencies
    
    $
    8,949,629
    
    
    $
    8,947,110
    
    
    $
    (2,519
    )Corporate debt securities
    
    
    54,114,749
    
    
    
    54,113,148
    
    
    
    (1,601
    )Money market funds
    
    
    8,256,248
    
    
    
    8,256,248
    
    
    
    Total
    
    $
    71,320,626
    
    
    $
    71,316,506
    
    
    $
    (4,120
    )
  3. Balance Sheet Details
  December 31,2006
    
    
    2005Raw materials
    
    $
    1,854,492
    
    
    $
    1,361,461Finished goods
    
    
    5,534,141
    
    
    
    1,978,9257,388,633
    
    
    
    3,340,386Allowance for excess and obsolete inventory
    
    
    (409,364
    )
    
    
    (207,145
    )$
    6,979,269
    
    
    $
    3,133,241
  December 31,2006
    
    
    2005Computer equipment and software
    
    $
    974,442
    
    
    $
    936,722Office equipment and furniture
    
    
    766,822
    
    
    
    760,063Leasehold improvements
    
    
    345,724
    
    
    
    345,7242,086,988
    
    
    
    2,042,509Less accumulated depreciation and amortization
    
    
    (1,752,586
    )
    
    
    (1,424,987
    )$
    334,402
    
    
    $
    617,522
   December 31,2006
    
    
    2005Accounts payable
    
    $
    3,386,497
    
    
    $
    1,647,492Accrued compensation and benefits
    
    
    5,587,290
    
    
    
    3,697,174Accrued rebates
    
    
    7,130,887
    
    
    
    1,371,754Accrued royalties
    
    
    2,708,623
    
    
    
    695,529Other accrued liabilities
    
    
    3,721,221
    
    
    
    2,073,329$
    22,534,518
    
    
    $
    9,485,278
 F-16




---



##### Table of Contents



4. License Agreements
      F-17




---



##### Table of Contents



5. Co-Promotion Agreement
  6. Long-Term Debt
    7. Commitments and Contingencies
 Leases
  F-18




---



##### Table of Contents



2007
    
    $
    1,932,0002008
    
    
    487,0002009
    
    
    160,0002010
    
    
    16,000Total minimum lease payments
    
    $
    2,595,000
  Commercial Supply Agreement
  Other Long-Term Commitments and Contingencies
    F-19




---



##### Table of Contents



8. Stockholders Equity
 Authorized Shares
 ,
 Reverse Stock Split
  Common Stock Offerings
    F-20




---



##### Table of Contents



Stockholder Rights Plan
  Warrants
  F-21




---



##### Table of Contents



Stock Option Plans
     WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term (years)
    
    
    ValueOutstanding at January 1, 2006
    
    
    5,794,610
    
    
    $
    5.89Granted
    
    
    1,709,975
    
    
    
    6.83Exercised
    
    
    (412,408
    )
    
    
    3.72Forfeited/expired
    
    
    (549,171
    )
    
    
    7.97Outstanding at December 31, 2006
    
    
    6,543,006
    
    
    $
    6.10
    
    
    
    7.87
    
    
    $
    14,489,799Exercisable at December 31, 2006
    
    
    4,369,142
    
    
    $
    5.39
    
    
    
    7.49
    
    
    $
    12,787,727
  Accounting for Equity Investments that are Issued to Other than Employees for Acquiring
or in Conjunction with Selling Goods or Services
 F-22




---



##### Table of Contents



Employee Stock Purchase Plan
  Shares Reserved for Future Issuance
  December 31,2006
    
    
    2005Stock options issued and outstanding
    
    
    6,543,006
    
    
    
    5,794,610Authorized for future issuance under equity compensation plans
    
    
    3,360,676
    
    
    
    2,287,964Stock warrants outstanding
    
    
    366,284
    
    
    
    59,40510,269,966
    
    
    
    8,141,979
 9. 401(k) Plan
  10. Income Taxes
  December 31,2006
    
    
    2005Deferred tax assets:Net operating loss carryforwards
    
    $
    81,100,000
    
    
    $
    63,816,000Research and development credits
    
    
    4,637,000
    
    
    
    4,331,000Capitalized research and development
    
    
    410,000
    
    
    
    1,011,000Depreciation and amortization
    
    
    107,000
    
    
    
    40,000Accrued liabilities and other
    
    
    8,556,000
    
    
    
    7,452,000Total deferred tax assets
    
    
    94,810,000
    
    
    
    76,650,000Valuation allowance
    
    
    (94,810,000
    )
    
    
    (76,650,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 F-23




---



##### Table of Contents



F-24




---



##### Table of Contents



Schedule II  Valuation and Qualifying Accounts
 AdditionsChargedBalance at
    
    
    Charged
    
    
    Charged to
    
    
    Against
    
    
    
    
    
    
    Balance atBeginning of
    
    
    Against
    
    
    Costs and
    
    
    Balance Sheet
    
    
    
    
    
    
    End ofPeriod
    
    
    Revenues
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    PeriodAllowance for cash discounts,
 chargebacks
and other sales discounts:For the year ended December 31, 2006
    
    $
    (244,848
    )
    
    $
    (3,075,531
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,633,511
    (1)
    
    $
    (686,868
    )For the year ended December 31, 2005
    
    
    (259,901
    )
    
    
    (532,141
    )
    
    
    
    
    
    
    
    
    
    
    547,194
    (1)
    
    
    (244,848
    )For the year ended December 31, 2004
    
    
    
    
    
    
    (737,935
    )
    
    
    
    
    
    
    
    
    
    
    478,034
    (1)
    
    
    (259,901
    )Allowance for excess and obsolete
inventory:For the year ended December 31, 2006
    
    
    (207,145
    )
    
    
    
    
    
    
    (396,841
    )
    
    
    
    
    
    
    194,622
    (2)
    
    
    (409,364
    )For the year ended December 31, 2005
    
    
    (1,728,580
    )
    
    
    
    
    
    
    (141,096
    )
    
    
    (619,747
    )
    
    
    2,282,278
    (2)
    
    
    (207,145
    )For the year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    (1,420,425
    )
    
    
    (308,155
    )
    
    
    
    
    
    
    (1,728,580
    )Allowance for product returns:For the year ended December 31, 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
    )For the year ended December 31, 2004
    
    
    
    
    
    
    (7,057,208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,057,208
    )
 
 (1)
    
    Deductions in allowance for cash discounts, chargebacks and other sales discounts represent actual cash discounts, chargebacks and other sales discounts taken.(2)
    
    Deductions in allowance for excess and obsolete inventory represent physical disposition of inventory.(3)
    
    Deductions in allowance for product returns represent actual product returns of approximately $1.9 million and a reduction in the allowance due to the Companys reasonable
estimate of 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 wholesaler distributors. F-25