I like some of the ideas already presented here. Especially the idea of ret-conning the events of original film where Billy being shot wasn't quite as fatal as originally thought.
My idea, for a direct follow-up that ignores all the other sequels made for SNDN, would be to have Billy survive being shot at the end of SNDN, but just barely. Ricky is indeed the boy who witnessed this, and also warns Mother Superior by saying, "Naughty".
The film then flash forwards, "ONE YEAR LATER". Effectively making the film a period piece, and very much set in the mid 1980's. We then cut to a local mental hospital, on the outskirts of the town where the original film's events took place, where Billy has been residing in and has been something of a model patient. Similar to how he was for the bulk of his stay at the orphanage, or even how he presented himself at the toy store he worked at in the original film prior to going nuts. At the same time, we also begin to realize that Ricky has been traumatized by witnessing his brother being shot the year prior, but unfortunately has not been given any slack in discipline by Mother Superior.
This is optional, but I also think it would be somewhat humorous, and a throw back to the original film, if during the time we see Billy being a cooperative patient, that he helps in any way he can with the hospital staff set to a music montage. Perhaps even helping staff decorate for the holidays where it's also painfully aware that staff is avoiding decorating anything specifically relating to Santa Claus, as they would be painfully aware of Billy psychosis.
I am not quite sure how I would handle Billy's inevitable relapse into bonkers Santa Claus-ville, but however it may transpire, Billy is unintentionally exposed to Santa imagery, which can also give quick cuts to the original film's carnage, and Billy mind snaps again. He then proceeds to perhaps killing a few of the hospital staff/and or guard, and escapes.
Following this, it's more broad strokes now. I do like the idea of Billy confronting the 1971 killer Santa, but personally I would make it less of a focal point and just something that happens out of sheer happenstance or luck. Like maybe following Billy's escape from the mental ward, he wanders into a gas station which is being robbed, already-in-progress, by .. you guessed it ... 1971 Killer Santa. Seeing the Santa Claus killer of his parents further unhinges Billy's mind, but while this is going on, and Billy's being struck by a panic attack, I would have 1971 killer Santa make comments/jokes towards Billy that essentially paint Billy as a absolute joke in 1971's killer Santa's mind. To me, it came across as if 1971 killer Santa had a sense of humor, if even a dark one, in the original, and I would want this to continue on so it would be in keeping with his character. 1971 Killer Santa disregards Billy as a scared idiot and re-directs his attention towards the robbery, where unsurprisingly Billy recovers from his panic attack and blindsides 1971 Killer santa, and kills him. Following this, Billy also kills the cashier and the one customer inside the gas station as well. In keeping with the original's tone, I would maybe have it where Billy, after killing 1971 Killer Santa, spots a porno magazine in the customer's hand, deduces that the cashier sold him the mag, says, "Naughty!" and offs them as well.
When he exits the gas station, Billy is shown wearing the Santa Clause outfit that 1971 Killer Santa had on. He then starts walking towards the town where most of the original film took place and carnage ensues again!
I am not quite sure how I would incorporate, and to what extent, Ricky and Mother Superior, but ideally they would play roles more so than just mere cameos. Making the film a period piece, set in the mid 1980's, and keeping the dark humor, and atmosphere the original film had would be vital components that would HAVE to be retained for a true follow-up.
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