UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

---

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the year ended December 31, 2004

or

Commission file number: 000-50651

Santarus, Inc.

(858) 314-5700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of June 30, 2004, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $280.7 million, based on the closing price of the registrant’s common stock on the Nasdaq National Market on June 30, 2004 of $14.75 per share.*

     The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of March 15, 2005 was 36,338,484.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after registrant’s fiscal year end December 31, 2004 are incorporated by reference into Part III of this report.

     *Excludes the common stock held by executive officers, directors and stockholders whose ownership exceeded 10% of the common stock outstanding at June 30, 2004. This calculation does not reflect a determination that such persons are affiliates for any other purposes.

 

SANTARUS, INC.

FORM 10-K — ANNUAL REPORT
For the Year Ended December 31, 2004

Table of Contents

i

PART I

Forward-Looking Statements

     Any statements in this report and the information incorporated herein by reference about our expectations, beliefs, plans, objectives, assumptions or future events or performance that are not historical facts are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” or “would.” Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation, statements about difficulties or delays in development, testing, obtaining regulatory approvals, manufacturing and marketing our products; our ability to create market demand for and generate revenues from our products; the progress and timing of our clinical trials; unexpected adverse side effects or inadequate therapeutic efficacy of our products that could delay or prevent product development or commercialization, or that could result in product recalls or product liability claims; the scope and validity of patent protection for our products and our ability to commercialize our products without infringing the patent rights of others; competition from other pharmaceutical or biotechnology companies; our ability to obtain additional financing to support our operations; and other risks detailed below under the caption “Business — Risk Factors.”

     Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Corporate Information

     Unless the context requires otherwise, in this report the terms “Santarus,” “we,” “us” and “our” refer to Santarus, Inc., a Delaware corporation.

     We have received U.S. and European Union, or EU, trademark registration for our corporate name, Santarus^®. We also have received U.S. trademark registration and have applied for EU trademark registration for our brand name, Zegerid^®, and have applied for trademark registration for various other names. All other trademarks, service marks or trade names appearing in this report are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners.

1

Item 1.	Business

Overview

     We are a specialty pharmaceutical company focused on acquiring, developing and commercializing proprietary products to enhance the quality of life for patients with gastrointestinal diseases and disorders. The primary focus of our current efforts is the development and commercialization of next generation proton pump inhibitor, or PPI, products — the most frequently prescribed drugs for the treatment of many upper gastrointestinal, or GI, diseases and disorders.

     Our Zegerid products are proprietary immediate-release formulations of the PPI omeprazole in powder for oral suspension, capsule and chewable tablet formulations and are intended to treat or reduce the risk of a variety of upper GI diseases and disorders.

     Our Zegerid products are the first immediate-release oral PPIs to be developed for the U.S. market. The formulations are based on patented technology and utilize antacids to protect the omeprazole from acid degradation in the stomach, allowing the omeprazole to be quickly absorbed into the blood stream. Although other marketed oral PPIs enjoy widespread use due to their potent acid suppression, favorable safety profile and once-a-day dosing, they are available only in delayed-release, enteric-coated formulations. While the enteric coating protects the PPI from acid degradation, it also delays absorption until the PPI reaches the less acidic small intestine. Our immediate-release Zegerid products do not have enteric coatings and are designed to be absorbed rapidly, while providing a duration of effect similar to delayed-release PPIs.

     We received approval from the U.S. Food and Drug Administration, or FDA, to market Zegerid Powder for Oral Suspension 20 mg in June 2004 for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease, or GERD, treatment and maintenance of healing of erosive esophagitis and treatment of duodenal ulcers. We received FDA approval to market the 40 mg dose in December 2004 for the treatment of gastric ulcers and the reduction of risk of upper GI bleeding in critically ill patients. There is currently no other PPI product approved for the reduction of risk of upper GI bleeding indication.

     Zegerid Powder for Oral Suspension is currently being marketed through a field sales force of approximately 400 representatives, which includes approximately 230 of our sales representatives in addition to approximately 170 sales representatives from our co-promotion partner, Otsuka America Pharmaceutical, Inc., or Otsuka America. Our sales representatives have an average of five years of pharmaceutical sales experience, with many also having prior PPI selling experience. The combined commercial sales organizations are targeting the highest PPI-prescribing physicians in the U.S., with a focus on approximately 10,000 gastroenterologists and 26,000 primary care physicians, who we estimate were responsible for writing approximately $5.6 billion of

2

PPI prescriptions in 2004. We believe this concentration of high-volume PPI prescribers will enable us to effectively promote our products with a relatively small and focused sales and marketing organization.

     We are also developing immediate-release capsule and chewable tablet formulations of our Zegerid product. We believe these products will provide many of the same features as our powder for oral suspension product, with the convenience of a capsule or chewable tablet. We completed pivotal pharmacokinetic/pharmacodynamic, or PK/PD, clinical trials evaluating these products in 20 mg and 40 mg doses in late 2004 and early 2005. These trials measured blood levels of omeprazole, as well as acid control. We intend to submit new drug applications, or NDAs, for these products to the FDA during the second half of 2005, seeking approval for the treatment of GERD, erosive esophagitis and gastric and duodenal ulcers.

     Our business strategy is to develop and market proprietary pharmaceutical products for the prevention and treatment of GI diseases and disorders with new formulations, enhanced drug delivery systems or expanded indications that are based on currently marketed or late stage products or compounds that have clinically demonstrated safety and efficacy. We believe this business strategy will potentially reduce development and regulatory risks and enhance market acceptance of our products. In order to continue to execute our business strategy, we plan to:

	•	explore additional strategic arrangements with one or more pharmaceutical companies to expand the promotion of our Zegerid family of products in the U.S.;
	•	out-license development, distribution and marketing rights for our Zegerid family of products to one or more pharmaceutical companies outside the U.S.; and
	•	enhance our product portfolio through internal development, in-licensing or co-promotion arrangements.

     To date, in addition to developing our immediate-release omeprazole products, we have sublicensed our proprietary immediate-release PPI technology to TAP Pharmaceutical Products Inc., or TAP. Under the terms of the sublicense, TAP has the North American rights to develop, manufacture and sell products resulting from the use of our technology with lansoprazole and derivatives of lansoprazole. We have also entered into a co-promotion agreement with Otsuka America in October 2004, under which Otsuka America is co-promoting Zegerid Powder for Oral Suspension and has options to co-promote our capsule and chewable tablet products in the future.

Targeted Upper Gastrointestinal Diseases and Disorders and Limitations of Current Treatments

     Gastrointestinal diseases and disorders affect the digestive tract with varying degrees of severity. Upper GI diseases and disorders, such as heartburn, GERD, erosive esophagitis and upper GI bleeding, are generally caused by or aggravated by acid in the stomach or gastric acid that refluxes into the esophagus. Prolonged exposure to excess acid may result in ulcers or other serious damage to the tissue of the esophagus, stomach or small intestine.

     Heartburn and Gastroesophageal Reflux Disease (GERD). Heartburn is pain or a burning sensation in the throat or chest area resulting from the reflux of acid from the stomach into the swallowing tube, or esophagus. An individual consistently experiencing heartburn at least twice per week is generally diagnosed as having GERD. According to the American Gastroenterological Association, an estimated 25 million American adults suffer from GERD. A significant number of children also suffer from GERD, and studies have indicated that as many as 2% to 8% of infants and older children experience symptoms related to GERD. In addition, GERD symptoms frequently occur during the nighttime hours, and a recent independent survey estimates that as many as 79% of GERD patients experience nighttime heartburn.

     Physicians have many choices in treating GERD. A physician will usually first attempt to have patients alter their diet in order to reduce the frequency of heartburn symptoms. However, most patients with GERD will eventually require treatment with drugs or surgery. Antacids were introduced in the early 1900s and are still a frequent over-the-counter treatment option. Although antacids work quickly, they only neutralize acid in the esophagus and stomach for approximately 30 minutes to one hour after dosing and so provide only short-term relief.

     Introduced in the 1970s, H2-receptor antagonists are compounds that reduce the production of stomach acid resulting from stimulation of histamine receptors. In 2000, antacids were combined with H2-receptor antagonists for over-the-counter treatment of heartburn. However, because the histamine receptors are only one of three potential sources of acid stimulation, H2-receptor antagonists generally provide only a partial reduction of acid production. In addition, H2-receptor antagonists generally work for a

3

shorter period of time than PPIs.

     PPIs were introduced in the late 1980s and are currently the most common prescription treatment option for upper GI diseases including GERD. PPIs are compounds which reduce the production of stomach acid. Once a PPI is absorbed into the bloodstream, it irreversibly binds to the active acid-producing pumps in parietal cells located in the stomach walls and inhibits acid production. Once a PPI irreversibly binds to a pump, that pump will no longer produce acid. As a result, PPIs are more effective in reducing acid production as compared with H2-receptor antagonists and generally need only to be taken once a day. Because new pumps and parietal cells are generated continuously, however, dosing with PPIs generally needs to be repeated once daily if continuous acid suppression is desired.

     Since PPIs rapidly degrade in the presence of stomach acid, current oral PPI products, other than Zegerid, have an enteric coating to protect the drug from acid degradation. The enteric coating is designed to remain intact in the highly acidic stomach. Once the stomach empties its contents into the less acidic small intestine, the enteric coating begins to dissolve, allowing the PPI to be absorbed into the bloodstream. This results in a delay in the absorption of the PPI, resulting in average peak absorption time of up to two to six hours after the initial dose for enteric coated PPIs.

     Erosive Esophagitis. Erosive esophagitis is characterized by erosions and ulcers from the repeated exposure of the esophagus to acid and develops in as many as 10 million patients in the U.S. Erosive esophagitis may or may not be accompanied by heartburn, and is typically diagnosed by a gastroenterologist through a procedure known as endoscopy. An eight-week course of therapy with PPIs will generally be effective in healing erosions associated with erosive esophagitis. Surgery may be required if the esophagus becomes extremely damaged.

     Gastric and Duodenal Ulcers. Gastric and duodenal ulcers are ulcers or erosions in the stomach or duodenum, respectively. These ulcers may be caused by a combination of gastric acid and bacterial infection or may result from the use of other medications such as nonsteroidal anti-inflammatory drugs. There are approximately 5 million patients who suffer from gastric and duodenal ulcers in the U.S. Most patients with these ulcers are referred to a gastroenterologist who will perform an endoscopy to determine the extent and severity of the ulcers. Based on the assessment, the gastroenterologist will prescribe a course of treatment, usually a PPI, to be taken daily for up to eight weeks and an antibiotic, if appropriate.

     Upper GI Bleeding. Critically ill ventilated patients are at high risk for developing erosions and upper GI bleeding that occur when the gastric mucosa, already compromised by stress, is continuously exposed to significant amounts of acid. Many hospitals treat these patients prophylactically to reduce acid and the risk of upper GI bleeding. Patients who develop upper GI bleeding may require blood transfusions or in some cases may require surgery with a high mortality rate. It is estimated that as many as 4 million critically ill patients are treated annually in the U.S., with approximately 1.5 million mechanically ventilated patients at highest risk for upper GI bleeding.

Our Products

Zegerid Product Differentiation

     Our Zegerid approved product and products under development are proprietary immediate-release formulations of the PPI omeprazole in powder for oral suspension, capsule and chewable tablet formulations. These products are intended to treat or reduce the risk of a variety of upper GI diseases and disorders, including heartburn and other symptoms associated with GERD, erosive esophagitis, upper GI bleeding and gastric and duodenal ulcers.

     PPIs enjoy widespread use due to their potent acid suppression, favorable safety profile and once-a-day dosing. However, all currently marketed PPIs, other than Zegerid, are available for oral use only in delayed-release, enteric-coated formulations. While the enteric coating protects the PPI from acid degradation, it also delays absorption until the PPI reaches the less acidic small intestine. Our immediate-release Zegerid products do not have enteric coatings and are designed to be absorbed rapidly, while providing a duration of effect similar to delayed-release PPIs.

     We have developed our Zegerid family of products to provide the following distinct features:

•

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 more 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,

4

		which, in turn, allows the omeprazole to begin to inhibit acid production. For example, Zegerid Powder for Oral Suspension reaches peak plasma levels in approximately 30 minutes after dosing. This compares to average peak absorption time of up to two to six hours after the initial dose for enteric-coated PPIs.
	•	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, data from our pivotal PK/PD clinical trial evaluating Zegerid Powder for Oral Suspension 40 mg demonstrated that the product maintained a median gastric pH above 4.0 for 18.6 hours per day with repeated once-daily dosing. This duration of acid control is competitive with the data available for the delayed-release PPIs.
	•	Variety of Formulations — Our Zegerid products are currently available in a powder for oral suspension formulation and are being developed in capsule and chewable tablet formulations. In addition to providing alternative formulations for use in the general adult population, one or more of our formulations may address the needs of specific patient populations such as pediatric, elderly and hospitalized patients.
	•	Potential for Expanded Indications — We plan to pursue expanded indications and uses for our products based on their specific features and benefits. For example, we completed a pivotal Phase III clinical trial evaluating Zegerid Powder for Oral Suspension 40 mg in critically ill patients and recently received approval to market the 40 mg dose for reduction of risk of upper GI bleeding in those patients. There is currently no other PPI product approved for this indication.

Zegerid Product Family — Approved Product

     Zegerid (omeprazole) Powder for Oral Suspension

     Our first product, Zegerid (omeprazole) Powder for Oral Suspension, is immediate-release omeprazole in a powder for oral suspension formulation and is available in 20 mg and 40 mg dose strengths. We received approval from the FDA to market the 20 mg dose in June 2004 for the treatment of heartburn and other symptoms associated with GERD, treatment and maintenance of healing of erosive esophagitis, and treatment of duodenal ulcers. In December 2004, we received approval from the FDA to market the 40 mg dose for the treatment of gastric ulcers and the reduction of risk of upper GI bleeding in critically ill patients. In addition, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, we have committed to evaluate the product in pediatric populations, including in PK/PD and safety studies which we plan to initiate during the second half of 2005.

     Zegerid Powder for Oral Suspension utilizes sodium bicarbonate, an antacid, instead of an enteric coating to protect the omeprazole from acid degradation and enable rapid absorption of the omeprazole into the bloodstream. When constituted with water to form a uniform suspension and then administered, the antacid neutralizes acid in the stomach, protects the omeprazole from degradation and allows for rapid absorption of the omeprazole into the bloodstream, with peak plasma levels in approximately 30 minutes after dosing. In addition to use in the general adult population, our suspension formulation, which is administered in a liquid, titratable dosage form, is designed to be easily administered to critically ill patients via a nasogastric tube and may also be appropriate for patients who have difficulty swallowing a capsule or a tablet, such as pediatric or elderly patients.

     To support our NDA submissions, we completed two pivotal PK/PD clinical trials in 2002 comparing the 20 mg and 40 mg doses of our powder for oral suspension product to 20 mg and 40 mg delayed-release omeprazole capsules given prior to a meal for seven days. The PK portion of these studies measured various aspects of blood levels of omeprazole. The PD portion of these studies measured acid control over a 24-hour period. Each study was conducted by a third party in at least 24 subjects. The results indicated that both the 20 mg and 40 mg doses of Zegerid Powder for Oral Suspension produced peak blood levels of omeprazole in approximately 30 minutes after dosing, as compared with peak blood levels of omeprazole in approximately one and one-half to two hours for the delayed-release omeprazole, due to the immediate-release profile of our formulations. While achieving more rapid absorption of omeprazole, the immediate-release Zegerid products also maintained a similar duration of effect on acid concentration in the stomach as compared to delayed-release omeprazole. For example, the 40 mg dose maintained a median gastric pH above 4.0 for 18.6 hours per day with repeated once-daily dosing. The amount of time that pH is greater than 4.0 is a parameter that is frequently used to evaluate the clinical effects of treatment with PPIs in patients with acid-related diseases. Studies suggest that healing rates and relief of symptoms associated with acid-related diseases can be correlated with the duration for which pH is maintained above 4.0.

     In addition, in June 2003, we completed a multi-center Phase III clinical trial evaluating the 40 mg dose of Zegerid Powder for Oral Suspension for the reduction of risk of upper GI bleeding in critically ill patients. Critically ill patients who have experienced trauma are generally at higher risk for developing significant bleeding from ulcers or erosions, and many physicians choose to

5

prophylactically treat these patients with an acid reducing medication. Given the serious condition of the patient population, the blinded clinical trial compared Zegerid Powder for Oral Suspension, administered through a nasogastric tube, with intravenous, or IV, cimetidine, a H2-receptor antagonist, rather than a placebo. At the time of the trial, IV cimetidine was the only drug approved by the FDA for the studied indication.

     A total of 359 mechanically-ventilated, critically ill patients at approximately 50 clinical sites participated in this trial. The primary endpoint of the study, the occurrence of clinically significant bleeding, was the same as that used in the IV cimetidine trial which led to its approval. In the trial, 10 patients treated with IV cimetidine experienced clinically significant bleeding, compared to 7 patients treated with Zegerid Powder for Oral Suspension 40 mg, demonstrating that our powder for oral suspension product was not inferior to IV cimetidine in reducing the risk of upper GI bleeding in critically ill patients. In addition, in the trial, Zegerid Powder for Oral Suspension 40 mg achieved a median gastric pH of greater than 4.0 within 1 to 2.5 hours after the first dose in 99% of patients treated and sustained a median daily gastric pH of greater than 4.0 throughout the 14-day trial in 95% of the patients treated.

     As additional support for the approval of Zegerid Powder for Oral Suspension 40 mg, we conducted an open-label clinical trial in 243 patients, including approximately 95 patients with gastric ulcers, to collect safety data related to this product over an eight-week treatment period, including any potential side effects or other adverse events. We conducted this clinical trial at the FDA’s request because the maximum omeprazole blood concentration for our 40 mg product was higher than that for delayed-release omeprazole 40 mg, although similar to maximum blood concentrations resulting from approved higher doses of delayed-release omeprazole. The data from this trial demonstrated that the safety profile of our 40 mg product is similar to the safety profile described for delayed-release omeprazole, and the FDA reviewed this data in connection with its approval of our NDA.

     During 2004, we also conducted a clinical trial comparing the effects of Zegerid Powder for Oral Suspension and Protonix^® delayed-release pantoprazole tablets on nocturnal gastric acidity. In this trial, 36 patients with nocturnal symptoms of GERD were enrolled in an open-label crossover trial, and data from 32 patients were available for analysis. The patients were randomized to be treated with repeated evening doses of either Zegerid Powder for Oral Suspension 40 mg or Protonix delayed-release tablets 40 mg for one week. After a washout period of one week, patients were treated with the alternate drug, following the same schedule. After repeated once-daily dosing, Zegerid Powder for Oral Suspension produced statistically significantly better nocturnal gastric acid control than Protonix. The patients receiving Zegerid had a median gastric pH of 4.7, as compared to a median gastric pH of 2.0 for the patients receiving Protonix, and the percent time that gastric pH was greater than 4.0 was higher for patients receiving Zegerid than for patients receiving Protonix (55% as compared to 27%). In addition, the percentage of patients experiencing nocturnal acid breakthrough was lower for patients receiving Zegerid than for patients receiving Protonix (53% as compared to 78%).

     We intend to conduct other clinical trials which may help to further differentiate our powder for oral suspension product from the currently marketed delayed-release PPIs or otherwise expand its use.

Zegerid Product Family — Products Under Development

     Zegerid (omeprazole) Capsules

     We are also developing Zegerid (omeprazole) Capsules, which is immediate-release omeprazole in a capsule formulation, in 20 mg and 40 mg dose strengths. Similarly to Zegerid Powder for Oral Suspension, Zegerid Capsules utilize an antacid (sodium bicarbonate), instead of an enteric coating to protect the omeprazole from acid degradation. When the capsule is swallowed, the antacid neutralizes acid in the stomach, protects the omeprazole from degradation and allows for rapid absorption of the omeprazole into the bloodstream. We expect the capsule product to provide a convenient and familiar dosage alternative for many patients.

     In November 2004, we completed two pivotal PK/PD clinical trials evaluating Zegerid Capsules 20 mg and 40 mg. The trials were open-label, randomized, crossover trials, each conducted at a single site. Each trial evaluated the pharmacokinetics and pharmacodynamics of single doses and seven consecutive daily doses of Zegerid Capsules compared to delayed-release omeprazole capsules in 36 healthy subjects. The primary objective of the trials was to evaluate whether the immediate-release Zegerid Capsules were pharmacokinetically equivalent to delayed-release omeprazole capsules with respect to total systemic bioavailability (AUC) on Day 7. The trials also assessed whether Zegerid Capsules and the delayed-release omeprazole capsules had similar ability to suppress gastric acidity over 24 hours. The preliminary trial results demonstrated that Zegerid Capsules and the delayed-release omeprazole capsules were statistically equivalent with respect to AUC and percent decrease from baseline for integrated gastric acidity on Day 7.

     As expected for an immediate-release product, the maximum plasma concentration (Cmax) was greater and the time to maximum plasma concentration (Tmax) was shorter on Day 7 for Zegerid Capsules than for the delayed-release omeprazole capsules. These

6

results were similar to those obtained in the pivotal PK/PD trials that were conducted for Zegerid Powder for Oral Suspension 20 mg and 40 mg.

     Following final analysis of the pivotal trial data and collection and analysis of sufficient stability data, we plan to submit a Section 505(b)(2) NDA to the FDA during the third quarter of 2005, seeking approval for the capsule product for the treatment of heartburn and other symptoms associated with GERD, treatment and maintenance of healing of erosive esophagitis and treatment of duodenal and gastric ulcers.

     We also intend to conduct other clinical trials which may help to further differentiate our capsule product from the currently marketed delayed-release PPIs or otherwise expand its future use.

     Zegerid (omeprazole) Chewable Tablets

     We are also developing Zegerid (omeprazole) Chewable Tablets, which is immediate-release omeprazole in a chewable tablet formulation, in 20 mg and 40 mg dose strengths. Like our capsule product, Zegerid Chewable Tablets utilizes antacids (sodium bicarbonate and magnesium hydroxide) instead of an enteric coating to protect the omeprazole from acid degradation. When the tablet is chewed and swallowed, the antacid formulation neutralizes acid in the stomach, protects the omeprazole from degradation and allows for the rapid absorption of the omeprazole into the bloodstream. We expect the chewable tablet product to provide yet another convenient dosage form for many patients, including patients who have difficulty swallowing a capsule or a tablet, such as pediatric and elderly patients.

     In February 2005, we completed two pivotal PK/PD clinical trials evaluating Zegerid Chewable Tablets 20 mg and 40 mg. The trials were open-label, randomized, crossover trials, each conducted at a single site. Each trial evaluated the pharmacokinetics and pharmacodynamics of single doses and seven consecutive daily doses of Zegerid Chewable Tablets compared to delayed-release omeprazole capsules in 36 healthy subjects. The primary objective of the trials was to evaluate whether the immediate-release Zegerid Chewable Tablets were pharmacokinetically equivalent to delayed-release omeprazole capsules with respect to total systemic bioavailability (AUC) on Day 7. The trials also assessed whether Zegerid Chewable Tablets and the delayed-release omeprazole capsules had similar ability to suppress gastric acidity over 24 hours. The preliminary trial results demonstrated that Zegerid Chewable Tablets and the delayed-release omeprazole capsules were statistically equivalent with respect to AUC and percent decrease from baseline for integrated gastric acidity on Day 7.

     As expected for an immediate-release product, the maximum plasma concentration (Cmax) was greater and the time to maximum plasma concentration (Tmax) was shorter on Day 7 for Zegerid Chewable Tablets than for the delayed-release omeprazole capsules. These results were similar to those obtained in the pivotal PK/PD trials that were conducted for Zegerid Powder for Oral Suspension 20 mg and 40 mg and Zegerid Capsules 20 mg and 40 mg.

     Following final analysis of the pivotal trial data and collection and analysis of sufficient stability data, we plan to submit a Section 505(b)(2) NDA to the FDA during the second half of 2005, seeking approval for the chewable tablet product for the treatment of heartburn and other symptoms associated with GERD, treatment and maintenance of healing of erosive esophagitis and treatment of duodenal and gastric ulcers.

     We also intend to conduct other clinical trials which may help to further differentiate our chewable tablet product from the currently marketed delayed-release PPIs or otherwise expand its future use.

Strategy

     Our goal is to become a leading specialty pharmaceutical company that acquires, develops and commercializes proprietary products to enhance the quality of life for patients with GI diseases and disorders. Our business strategy is to develop and market proprietary pharmaceutical products with new formulations, enhanced delivery systems and expanded indications that are based on currently marketed or late stage products or compounds, which otherwise have clinically demonstrated safety and efficacy. We believe this strategy will allow us to more rapidly commercialize our products with potentially reduced development risk and cost as compared with the development of early stage new chemical entities.

     Our Zegerid family of products are new immediate-release formulations of omeprazole, a well-established compound which has been approved by the FDA and marketed for over 15 years. For Zegerid Powder for Oral Suspension, we were able to move relatively quickly from product concept to NDA submission by conducting PK/PD studies comparing this product to delayed-release

7

omeprazole, without the need to conduct preclinical or other early stage clinical testing. Moreover, we were also able to move directly into a Phase III clinical study to further differentiate this product from existing products.

     In order to continue to execute our business strategy, we intend to:

	•	Explore Additional Strategic Arrangements to Expand the Promotion of Our Products in the U.S. We plan to explore additional strategic arrangements with one or more pharmaceutical companies to expand the promotion of our Zegerid family of products in the U.S. To date, we have sublicensed our proprietary immediate-release PPI technology to TAP, granting to TAP the North American rights to develop, manufacture and sell products resulting from the use of our technology with lansoprazole and derivatives of lansoprazole. We have also entered into a co-promotion agreement with Otsuka America in October 2004, under which Otsuka America is co-promoting Zegerid Powder for Oral Suspension and has options to co-promote our capsule and chewable tablet products in the future. We will continue to evaluate strategies to expand the promotion of our Zegerid products in the U.S. For example, in connection with the approval of Zegerid Powder for Oral Suspension 40 mg for reduction of risk of upper GI bleeding in critically ill patients, we are evaluating strategies to expand the promotion of Zegerid to the hospital market, including teaching hospitals and other influential institutions that serve this patient population, in order to create greater awareness of the Zegerid brand over time.
	•	Out-License International Development, Distribution and Marketing Rights. Outside of the U.S., we intend to out-license development, distribution and marketing rights for our Zegerid family of products to one or more pharmaceutical companies with established commercialization capabilities outside the U.S. We have filed several patent applications outside the U.S., and likely will more actively pursue commercialization in particular territories if and when we obtain issued patents in such territories.
	•	Enhance Our Product Portfolio through Internal Development, In-Licensing and Co-Promotion Arrangements. We intend to internally develop and license and acquire additional products and marketed products targeting upper and lower GI diseases and disorders. We also plan to explore co-promotion arrangements for marketed products that are relevant to our target gastroenterologists or primary care physicians. Our management team has substantial experience in product development, manufacturing, clinical development, regulatory affairs and sales and marketing through their participation at other companies in the successful development and commercialization of GI and other products. We believe this experience will allow us to successfully build our business organization and distinguish us from specialty pharmaceutical companies that focus solely on the distribution of products. We also believe that this experience and expanded focus will help us identify attractive licensing and acquisition opportunities with pharmaceutical companies, biotechnology companies and universities.

Sales and Marketing

     We have established a commercial sales organization to focus on the highest PPI-prescribing physicians in the U.S. with a focus on approximately 10,000 gastroenterologists and 26,000 primary care physicians. We estimate that this group collectively wrote approximately $5.6 billion of PPI prescriptions in 2004, representing nearly one-half of the total U.S. PPI market. We believe this concentration of high-volume PPI prescribers will enable us to effectively promote our products with a relatively small and focused sales and marketing organization.

     In preparation for the launch of Zegerid Powder for Oral Suspension 20 mg in October 2004, we built a field sales organization comprised of approximately 230 sales representatives. In addition to the field sales representatives, we employ approximately 25 district sales managers, 4 regional sales directors and 18 account managers. Our account managers are seeking formulary acceptance from managed care organizations similar to that for branded delayed-release PPIs. To complement our commercial sales organization, we also entered into a co-promotion agreement with Otsuka America in October 2004, under which Otsuka America’s approximately 170 field sales representatives are co-promoting Zegerid Powder for Oral Suspension in the first selling position. Additionally, we use a variety of marketing programs to promote our products, including sales promotional materials, speaker programs, journal advertising, industry publications, electronic media and product sampling.

     Our field sales representatives are positioned in major metropolitan areas across the U.S. and have an average of five years of pharmaceutical sales experience. Many of the representatives have prior experience with GI products, including PPIs. Each member of our sales team undergoes a rigorous training program focused on our product offerings, disease background, competitive products and our sales techniques. Our program includes significant field-based learning to provide a comprehensive understanding and perspective as to the upper GI market and the needs of both physicians and patients. The field sales representatives are compensated in part in accordance with an incentive bonus program based on performance.

8

Co-Promotion Agreement with Otsuka America Pharmaceutical, Inc.

     In October 2004, we entered into a non-exclusive co-promotion agreement with Otsuka America to co-promote Zegerid Powder for Oral Suspension to U.S. physicians. Otsuka America’s sales representatives began promoting Zegerid Powder for Oral Suspension 20 mg in early November 2004.

     Under the terms of the co-promotion agreement, we received a $15.0 million upfront payment from Otsuka America, and will pay Otsuka America a royalty on total U.S. net sales of Zegerid Powder for Oral Suspension. Initially, the royalty rate is in the high single digits, presuming a minimum number of first position sales calls to target physicians. We provide all marketing materials, and Otsuka America covers all costs related to its sales force. In addition, we have granted Otsuka America options to extend the co-promotion arrangement under the agreement to Zegerid Capsules and Zegerid Chewable Tablets, subject to receipt of marketing approval of these products, with additional milestone payments should those options be exercised.

     In order to compete effectively, we and Otsuka America may desire to further expand our sales forces beyond our current combined total of approximately 400 sales representatives. We plan to evaluate further expansion of our sales force based on the market demand for Zegerid Powder for Oral Suspension and the status of our planned regulatory submissions for Zegerid Capsules and Zegerid Chewable Tablets. Under the terms of our co-promotion agreement with Otsuka America, Otsuka America may increase the size of its sales force up to 400 sales representatives to match any expansion of our sales force in exchange for an increased royalty rate in the low double digits.

     The agreement will terminate automatically on December 31, 2009, unless terminated sooner. Either party may terminate the agreement if the other party fails to perform any material term of the agreement and fails to cure such breach, subject to prior written notice within a specified time period. In addition, either party may terminate the agreement if the other party becomes insolvent, files or consents to the filing of a petition under any bankruptcy or insolvency law or has any such petition filed against it, and within a specified time period, such filing has not been stayed. We may also terminate the agreement under certain additional conditions, subject to prior written notice to Otsuka America within a specified time period.

TAP Pharmaceutical Products Agreement

     In June 2002, we entered into a strategic sublicense agreement with TAP. Under the agreement, we granted TAP the North American rights to develop, manufacture and sell products resulting from the use of our immediate-release PPI technology with lansoprazole, its patented PPI marketed under the name Prevacid^®, and derivatives of lansoprazole. TAP had sales of Prevacid in North America of approximately $3.8 billion in 2004, according to IMS Health. Under the agreement, TAP is required to pay a combination of fees for the licensed rights, including an upfront payment and milestone payments that may exceed $100 million. In addition, we are entitled to royalties on any future sales of products utilizing our proprietary technology that are commercialized by TAP. The sublicense is exclusive with respect to lansoprazole and non-exclusive with respect to derivatives of lansoprazole. We believe that if TAP successfully develops and commercializes one or more new products based on our licensed patent rights, TAP’s commercialization efforts will, in addition to providing revenue to us, help drive market acceptance of immediate-release PPI products.

     To date, we have received an $8.0 million upfront payment from TAP in July 2002 following the execution of the sublicense and a $10.0 million milestone payment in February 2005 related to TAP’s development activities. We received the February 2005 milestone after we prevailed in an alternative dispute resolution proceeding that we initiated against TAP in August 2003. In the proceeding, we alleged that TAP had achieved a development milestone, and we were awarded the $10.0 milestone payment, plus interest and legal expenses. We paid 15% of the upfront sublicense fee and the February 2005 milestone to the University of Missouri and are also obligated to pay 15% of any further milestone payments, as well as share a portion of any royalty payments, we receive from TAP pursuant to our license with the University of Missouri. The milestone fees and royalty rates may be subject to adjustment during the term of the agreement based on a number of factors, including whether we commercialize or license an immediate-release formulation of any PPI other than omeprazole. In order for us to receive milestone fees in excess of $100 million under the agreement with TAP, TAP would generally need to develop and receive NDA approval for one immediate-release lansoprazole product and either TAP would need to also conduct development activities for an immediate-release lansoprazole derivative product or Takeda Chemical Industries, Ltd., or Takeda, would need to exercise its option and receive regulatory approval for lansoprazole or lansoprazole derivative products outside North America, as described more fully below. TAP is responsible for all of its product development and commercialization expenses.

9

     Pursuant to the terms of the agreement, we also granted an option to Takeda to receive a license covering all countries outside of North America to develop, manufacture and sell products resulting from the use of our immediate-release PPI technology with lansoprazole and derivatives of lansoprazole. The rights would be exclusive with respect to lansprazole and non-exclusive with respect to derivatives of lansoprazole. In the event that Takeda exercises its option, we would be entitled to receive aggregate upfront payments of up to $5.0 million and aggregate milestone payments of up to $7.75 million, depending on whether Takeda exercises the option for all territories outside North America and whether Takeda is able to commercialize an immediate-release lansoprazole or lansoprazole derivative product through regulatory approval.

     The agreement with TAP will remain in effect in the U.S. or Canada until there is no longer a valid claim under the patents covering the University of Missouri technology in the U.S. or Canada, respectively, upon which TAP’s improved formulation is based, which we expect will be no earlier than 2016. In addition, we have the right to terminate the agreement if TAP does not meet diligence obligations with respect to the development of an improved PPI formulation. Either TAP or we may terminate the agreement prior to its expiration under other circumstances, including bankruptcy or uncured breach of any material provision of the agreement. TAP may also terminate the agreement without cause at any time by giving us 60 days prior written notice.

Manufacturing and Distribution

     We rely on third parties for the manufacture of both clinical and commercial quantities of our products and for product distribution, and we do not currently have any of our own manufacturing or distribution facilities. Our third-party manufacturers are subject to extensive governmental regulation. The FDA mandates that drugs be manufactured, packaged and labeled in conformity with current good manufacturing practices, or cGMP. In complying with cGMP regulations, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to ensure that their services and products meet applicable specifications and other requirements. We intend to continue to outsource the manufacture and distribution of our products for the foreseeable future, and we believe this manufacturing strategy will enable us to direct our financial resources to commercialization without devoting the resources and capital required to build cGMP compliant manufacturing facilities.

     We currently rely on Patheon Inc. as our only supplier of Zegerid Powder for Oral Suspension and have entered into an agreement with Patheon which provides for the commercial supply of this product. The commercial supply agreement requires that we purchase a significant percentage of our requirements of this product from Patheon and also obligates us to fund certain equipment purchases. This agreement has an initial five-year term beginning from July 2004 and thereafter continues in force indefinitely. Either party may terminate the agreement at any time after the initial term with 18 months written notice. We can terminate the agreement at any time if we decide to no longer market our powder for oral suspension product with six months written notice. We can also terminate this agreement with 30 days written notice in the event any governmental agency takes any action that prevents us from purchasing or selling the product for a certain period of time. Either party may terminate the agreement if the other party fails to perform any material term of the agreement subject to prior written notice within a specified time period.

     In addition, in September 2004, we entered into a manufacturing and supply agreement with OSG Norwich Pharmaceuticals, Inc., or Norwich, for the supply of commercial quantities of Zegerid Capsules, which is currently under development. The agreement provides for an initial four-year term beginning upon commencement of commercial manufacturing and thereafter continues in force indefinitely unless terminated with 18 months written notice. We can also terminate the agreement, effective immediately, at any time if we decide to no longer market the product, in the event any governmental agency takes any action that prevents us from importing, exporting, purchasing or selling the product or in the event of certain regulatory proceedings involving the manufacturer. Either party may terminate the agreement if the other party fails to perform any material term of the agreement and fails to cure such breach within a specified time period, subject to prior written notice. We have not yet entered into any commercial supply agreements for Zegerid Chewable Tablets.

     We also currently rely on Union Quimico Farmaceutica, S.A., or Uquifa, as our exclusive supplier of the omeprazole active ingredient in each of our current products. Under our supply agreement with Uquifa, we must purchase all of our requirements of omeprazole from Uquifa. This agreement has an initial four-year term with automatic two-year renewal terms. We can terminate the agreement upon at least 12 months notice prior to the expiration of the initial term or any extension term. In addition, we can terminate this agreement with 30 days written notice in the event any governmental agency takes any action that prevents us from purchasing or selling either omeprazole or the finished product for a certain period of time. Either party may terminate the agreement if the other party fails to perform any material term of the agreement subject to prior written notice and an opportunity to cure.

     Although there are potential sources of supply other than Patheon, Norwich and Uquifa for our products and active pharmaceutical

10

ingredients, any new supplier would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacture of such products or ingredients.

     We sell our approved products to pharmaceutical wholesalers, who in turn seek to distribute the products to retail pharmacies, mail order pharmacies, hospitals and other institutional customers. We have retained third-party service providers to perform a variety of functions related to the distribution of our approved products, including logistics management, sample accountability, storage and transportation. In addition, we have retained third parties to perform various regulatory monitoring services for us, including adverse event reporting, safety database management and other product maintenance services. We have also entered into channel services agreements with wholesalers under which we receive certain distribution management services and data reporting from the wholesalers, in exchange for a fee.

Intellectual Property

     Our goal is to obtain, maintain and enforce patent protection for our products, compounds, formulations, processes, methods and other proprietary technologies invented, developed, licensed or acquired by us, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the U.S. and in other countries. Our policy is to actively seek to obtain, where appropriate, intellectual property protection for our products, proprietary information and proprietary technology through a combination of contractual arrangements and laws, including patents, both in the U.S. and elsewhere in the world. We regard the protection of patents, trademarks and other proprietary rights that we own or license as critical to our success and competitive position. Laws and contractual restrictions, however, may not be sufficient to prevent unauthorized use or misappropriation of our technology or deter others from independently developing products that are substantially equivalent or superior to our products.

     Due to the length of time and expense associated with bringing new pharmaceutical products to market, we recognize that there are considerable benefits associated with developing, licensing or acquiring products that are protected by existing patents or for which patent protection can be obtained. Although we do not currently own any issued patents, all of the products we currently market and intend to market incorporate patented technology owned by others that we have licensed. In addition, we have applied and intend to continue to apply for patent protection for new technology we develop whenever we determine that the benefit of patent protection outweighs the cost of obtaining patent protection.

     We also depend upon the skills, knowledge and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require our employees, consultants, advisors and certain other contractors to enter into confidentiality agreements which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. Additionally, these confidentiality agreements require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third party’s proprietary technology.

     We have received U.S. and EU trademark registration for our corporate name, Santarus^®. In addition, we have received U.S. trademark registration and have applied for EU trademark registration for our brand name, Zegerid^®, and have applied for trademark registration for various other names. Over time, we intend to introduce new trademarks, service marks and brand names and maintain registrations on trademarks that remain valuable to our business.

License Rights from the University of Missouri

     In January 2001, we entered into an exclusive, worldwide license agreement with the University of Missouri for all of its patents and pending patent applications relating to specific formulations of PPIs with antacids and other buffering agents. Currently, five U.S. patents have been issued and several U.S. patent applications and international or foreign counterpart applications are pending and are subject to this license. The five issued patents, U.S. Patent Nos. 5,840,737, 6,489,346, 6,645,988, 6,699,885 and 6,780,882, together generally cover pharmaceutical compositions combining PPIs with buffering agents, such as antacids, and methods of treating GI disorders by administering solid or liquid forms of such compositions, and expire in July 2016.

     Pursuant to the terms of the license agreement, we paid the University of Missouri an upfront licensing fee of $1.0 million in 2001, a one-time $1.0 million milestone fee in 2003 following the filing of our first NDA and a one-time $5.0 million milestone fee in July 2004 following the FDA’s approval of Zegerid Powder for Oral Suspension 20 mg. We are required to make additional milestone payments to the University of Missouri upon the achievement of certain regulatory events related to obtaining approvals outside the U.S. which may total up to $3.5 million in the aggregate. We are also required to make milestone payments based on first-time

11

achievement of significant sales thresholds, up to a maximum of $86.3 million, and to pay royalties on net sales of our products. In addition, we are required to bear the costs of prosecuting and maintaining the licensed patents but the University of Missouri remains responsible for prosecution of any applications. We issued to the University of Missouri 164,284 shares of our common stock in connection with the license agreement. Under the license agreement, we are permitted to sublicense our rights to third parties. We are obligated to pay to the University of Missouri a portion of any sublicense fees, milestone payments or royalties that we receive from any sublicense, including our sublicense to TAP. Under the license agreement, we are required to carry occurrence-based liability insurance with policy limits of at least $5.0 million per occurrence and a $10.0 million annual aggregate.

     The license from the University of Missouri expires in each country when the last patent for licensed technology expires in that country and the last patent application for licensed technology in that country is abandoned, provided that our obligation to pay certain minimum royalties in countries in which there are no pending patent applications or existing patents terminates on a country-by-country basis on the 15th anniversary of our first commercial sale in such country. If we fail to meet diligence obligations in specified countries, the University of Missouri can terminate our license or render it non-exclusive with respect to those countries. Our rights under this license are also generally subject to early termination under specified circumstances, including our material and uncured breach or our bankruptcy or insolvency. We can terminate this agreement at any time, in whole or in part, with 60 days written notice.

Competition

     The pharmaceutical industry is subject to intense competition. Our success will depend, in part, upon our ability to achieve market share at the expense of existing, established and future products in the relevant target markets. We face, and will continue to face, competition in the development and commercialization of our products primarily from pharmaceutical and biotechnology companies, many of which have significantly greater financial and other resources than we do, as well as from academic institutions, government agencies and research institutions.

     Our competitors have addressed the market for our Zegerid products through the development and marketing of many products, including:

     Prescription Products:

	•	PPIs: AstraZeneca plc’s Prilosec® and Nexium®, TAP’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 Reliant Pharmaceuticals, 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’s Tagamet, and Johnson & Johnson’s and Merck’s Pepcid® AC and Pepcid® Complete, among others; and
	•	Antacids: Johnson & Johnson’s and Merck’s Mylanta®, Novartis AG’s Maalox®, Pfizer’s Rolaids® and GlaxoSmithKline’s Gaviscon® and Tums®, among others.

     Many of our competitors are large, well-established companies in the pharmaceutical field. Given our relatively small size and the entry of our new products into a market characterized by well-established drugs, we may not be able to compete effectively. For example, our competitors may have a greater ability to undertake more extensive research and development, manufacturing, marketing and other programs. They may also have significantly greater financial and other resources than we do, and they may have significantly larger field sales force organizations and invest significant amounts in advertising and marketing their products, including through television and other direct-to-consumer methods.

     In addition to competition from existing commercial products, a number of companies and research institutions have focused research and development resources on developing new products, including reversible acid inhibitors, cytoprotective compounds,

12

derivatives of current PPIs and motility agents and combinations thereof that may be utilized to treat GI diseases and disorders, and the pace of technological development and the number of product candidates may increase over the next few years. Future products that are developed may be based on new and different technology that may involve faster mechanisms of action than our products or exhibit other benefits relative to our products.

     Our ability to compete with products that our competitors develop will depend in part on our competitors’ ability to obtain patent protection for their products and product candidates and the periods of exclusivity resulting from these patents. Many of the patents covering antacids or H2-receptor antagonists have expired and are subject to generic competition. In addition, among the currently-marketed PPIs, Prilosec is the only product for which the primary patent has expired. To date, several generic companies have launched generic delayed-release omeprazole products. As more PPI patents expire, we expect our competitors to compete with us by introducing additional generic products as well as allocating additional resources to research relating to potential treatments with greater potential for patent-based exclusivity, such as prodrugs and isomers of PPIs, reversible acid inhibitors and motility agents.

Government Regulation

     Governmental authorities in the U.S. and other countries extensively regulate the testing, manufacturing, labeling, storage, recordkeeping, advertising, promotion, export, marketing and distribution, among other things, of pharmaceutical products. In the U.S., the FDA, under the Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations, subjects pharmaceutical products to rigorous review. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture or market our products, and we may be criminally prosecuted.

     We and our third-party manufacturers, distributors and clinical research organizations may also be subject to regulations under other federal, state, and local laws, including the Occupational Safety and Health Act, the Environmental Protection Act, the Clean Air Act and import, export and customs regulations as well as the laws and regulations of other countries.

FDA Approval Process

     To obtain approval of a new product from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product and proposed labeling. The testing and collection of data and the preparation of necessary applications are expensive and time-consuming. The FDA may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing our products.

     The process required by the FDA before a new drug may be marketed in the U.S. generally involves the following: completion of preclinical laboratory and animal testing in compliance with FDA regulations; submission of an investigational new drug application which must become effective before human clinical trials may begin; performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use; and submission and approval of an NDA by the FDA. The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap. In Phase I clinical trials, the product is tested in a small number of patients or healthy volunteers, primarily for safety at one or more doses. In Phase II, in addition to safety, the sponsor evaluates the efficacy of the product on targeted indications, and identifies possible adverse effects and safety risks, in a patient population somewhat larger than Phase I clinical trials. Phase III clinical trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically-dispersed test sites.

     Clinical trials must be conducted in accordance with the FDA’s good clinical practices requirements. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The Institutional Review Board, or IRB, generally must approve the clinical trial design and patient informed consent at each clinical site and may also require the clinical trial at that site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

     The applicant must submit to the FDA the results of the preclinical and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product and proposed labeling, in the form of an NDA, including payment of a user fee. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the policies adopted by FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 10 months in which to complete its initial review of the NDA and respond to the applicant. The review process and the target response date under PDUFA may be

13

extended if the FDA requests or the NDA sponsor otherwise provides additional information or clarification regarding information already provided in the submission. Following completion of the FDA’s initial review of the NDA and the clinical and manufacturing procedures and facilities, the FDA will issue an action letter, which will either include an approval authorizing commercial marketing of the drug for certain indications or contain the conditions that must be met in order to secure final approval of the NDA. According to the FDA, the median approval time for NDAs approved during calendar year 2003 was approximately 15 months. If the FDA’s evaluation of the NDA submission and the clinical and manufacturing procedures and facilities is not favorable, the FDA may refuse to approve the NDA.

Section 505(b)(2) New Drug Applications

     As an alternate path to FDA approval for new or improved formulations of previously approved products, a company may file a Section 505(b)(2) NDA. Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The Hatch-Waxman Amendments permit the applicant to rely upon certain preclinical or clinical studies conducted for an approved product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.

     To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book publication. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents, the Section 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired. The Section 505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired.

     If the applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a legal challenge to the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of their receipt of a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant. Thus, the Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay and patent litigation before its products may be commercialized. Alternatively, if the listed patent holder does not file a patent infringement lawsuit within the required 45-day period, the applicant’s NDA will not be subject to the 30-month stay.

     In 2003 and 2004, we submitted Section 505(b)(2) NDAs for our Zegerid Powder for Oral Suspension 20 mg and 40 mg products, respectively. Each of these NDAs referenced preclinical and clinical studies conducted for Prilosec. Following submission of our NDAs and filing of the NDAs by the FDA, we provided notice of our Paragraph IV certifications to AstraZeneca, the holder of the Prilosec NDA, and certain related companies holding the listed patents, which include various AstraZeneca and Merck entities. In each case, AstraZeneca did not file a patent infringement lawsuit within the required 45-day period. Therefore, the NDAs for our Zegerid Powder for Oral Suspension 20 mg and 40 mg products were not subject to a 30-month stay of approval. We also intend to submit Section 505(b)(2) NDAs for Zegerid Capsules and Zegerid Chewable Tablets and anticipate providing similar Paragraph IV certifications, and AstraZeneca may file a patent infringement lawsuit against us in connection with these NDAs. Any such patent infringement litigation against us could result in a 30-month stay of approval for the particular NDA, would divert management’s attention and our resources and, if successful, would be materially adverse to our business. Although AstraZeneca did not file a patent infringement lawsuit against us in connection with our NDAs for Zegerid Powder for Oral Suspension within the 45-day period, it may decide to pursue litigation at any time in the future.

Other Regulatory Requirements

     Even though the FDA has approved our Zegerid Powder for Oral Suspension 20 mg and 40 mg products and to the extent the FDA

14

approves any of our other products, we will continue to be subject to a number of post-approval regulatory requirements. If we seek to make certain changes to an approved product, such as the addition of a new labeled indication or making certain manufacturing changes or product enhancements, we will need FDA review and approval before the change can be implemented. While physicians may use products for indications that have not been approved by the FDA, we may not label or promote the product for an indication that has not been approved. Securing FDA approval for new indications or product enhancements and, in some cases, for manufacturing and labeling claims, is generally a time-consuming and expensive process that may require us to conduct clinical studies under the FDA’s investigational new drug regulations. Even if such studies are conducted, the FDA may not approve any change in a timely fashion, or at all. In addition, adverse experiences associated with use of the products must be reported to the FDA, and FDA rules govern how we can label, advertise or otherwise commercialize our products.

     The FDA also may, in its discretion, require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. For example, as part of our post-marketing commitments to the FDA in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension 20 mg and 40 mg, we have committed to evaluate the product in pediatric populations, including in PK/PD and safety studies which we plan to initiate during the second half of 2005.

     In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

     Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

     In addition, we and the third-party manufacturers on which we rely for the manufacture of our products are subject to requirements that drugs be manufactured, packaged and labeled in conformity with cGMP. To comply with cGMP requirements, manufacturers must continue to spend time, money and effort to meet requirements relating to personnel, facilities, equipment, production and process, labeling and packaging, quality control, recordkeeping and other requirements. The FDA periodically inspects drug manufacturing facilities to evaluate compliance with cGMP requirements.

     Also, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning recordkeeping and control procedures.

     Outside of the U.S., our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all of the risks associated with the FDA approval described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country.

Employees

     As of March 15, 2005, we had 383 employees. A total of 57 employees were engaged in clinical research, regulatory, product development and manufacturing, and medical affairs, 22 of whom hold Ph.D., M.D., Pharm.D. or equivalent degrees, 301 were in sales, marketing and business development, and 25 were in administration and finance.

15

Available Information

     We make available free of charge on or through our Internet web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. Our Internet address is www.santarus.com.

Risk Factors

     The following information sets forth factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this report, the information incorporated herein by reference and those we may make from time to time.

Risks Related to Our Business and Industry

At this time, we are largely dependent on the success of our initial approved product, Zegerid Powder for Oral Suspension 20 mg and 40 mg, and we cannot be certain that we will be able to successfully commercialize this product.

     We have invested a significant portion of our time and financial resources in the development and commercialization of Zegerid Powder for Oral Suspension 20 mg and 40 mg. We anticipate that in the near term our ability to generate revenues will depend on the commercial success of Zegerid Powder for Oral Suspension, which in turn, will depend on several factors, including our ability to:

	•	generate commercial sales of the product through our own sales force and our co-promotion arrangement with Otsuka America Pharmaceutical, Inc., or Otsuka America, or any other collaboration with pharmaceutical companies or contract sales organizations that we may later establish;
	•	establish effective marketing programs and build brand identity;
	•	obtain acceptance of the product by physicians, patients and third-party payors and obtain and maintain distribution at the retail level;
	•	establish and maintain our agreements with wholesalers and distributors on commercially reasonable terms; and
	•	demonstrate commercial manufacturing capabilities as necessary to meet commercial demand for the product, including samples, and maintain commercial manufacturing arrangements with third-party manufacturers.

     We will continue to incur significant and increasing costs as we continue to support the commercial launch of Zegerid Powder for Oral Suspension, and we have encountered low initial demand for the 20 mg dosage strength. We generated a net loss of $33.3 million for the three months ended December 31, 2004, as compared to a net loss of $21.2 million for the three months ended September 30, 2004, which increase was primarily attributable to increased costs associated with our commercial activities and personnel. As of December 31, 2004, we had recognized only approximately $634,000 in net sales of Zegerid Powder for Oral Suspension and had an accumulated deficit of approximately $138.3 million, which includes our net loss of $81.5 million for 2004.

     We cannot be certain that our recent launch of Zegerid Powder for Oral Suspension 40 mg and our continued marketing of the 20 mg dosage strength will result in increased demand for the product. If we fail to successfully commercialize this product or are significantly delayed in doing so, we may be unable to generate sufficient revenues to sustain and grow our business and attain profitability, and our business, financial condition and results of operations will be materially adversely affected.

Our other Zegerid products under development may not be approved by the FDA, and any failure or delay associated with our product development and clinical trials or the FDA’s approval of such products would increase our product development costs and time to market.

     We face substantial risks of failure inherent in developing pharmaceutical products. The pharmaceutical industry is subject to stringent regulation by many different agencies at the federal, state and international levels. Our products must satisfy rigorous standards of safety and efficacy before the U.S. Food and Drug Administration, or FDA, and any foreign regulatory authorities will

16

approve them for commercial use.

     Only Zegerid Powder for Oral Suspension 20 mg and 40 mg has been approved for commercial sale by the FDA. We have recently completed pivotal pharmacokinetic/pharmacodynamic, or PK/PD, clinical trials evaluating the 20 mg and 40 mg doses of Zegerid Capsules and Zegerid Chewable Tablets, and we plan to submit new drug applications, or NDAs, to the FDA seeking approval for these products during the second half of 2005. In connection with its review of our NDAs, the FDA may request additional information from us, including data from additional clinical trials. In addition, the FDA ultimately may not grant marketing approval for these products.