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CBST > SEC Filings for CBST > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for CUBIST PHARMACEUTICALS INC


12-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains and incorporates by reference "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. In some cases, these statements can be identified by the use of forward-looking terminology such as "may," "will," "could," "should," "would," "expect," "anticipate," "continue," "believe," "plan," "intend," "estimate," or other similar words. You are cautioned that forward-looking statements are based on current expectations, and are inherently uncertain, and you should not place substantial reliance on such statements. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including the risks and uncertainties discussed in Item 1A of Part II under the heading "Risk Factors" in this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is provided by us as of the date of this Quarterly Report on Form 10-Q, and, except as required by law, we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding our expectations with respect to:

(i) our financial performance, including revenues, expenses, capital expenditures, gross margin and income taxes and our expected available cash and use of cash and net operating loss, or NOL, carryforwards;

(ii) the manufacturing and commercialization, including sales forecasts and the rate at which we exhaust our existing inventory, of CUBICIN® (daptomycin for injection), ENTEREG® (alvimopan) DIFICID® (fidaxomicin), and our product candidates;

(iii) the strength of our intellectual property portfolio protecting CUBICIN, ENTEREG, DIFICID and our product candidates, and our ability to successfully enforce this intellectual property portfolio;

(iv) the development, regulatory filing and review, timing of commercial launches and commercial potential of our products and product candidates, such as tedizolid phosphate, ceftolozane/tazobactam (formerly known as CXA-201), bevenopran (formerly known as CB-5945), and surotomycin (formerly known as CB-315), and the costs and expenses related thereto, including (a) the anticipated timing and results of our clinical trials, timing and results of our meetings with, and submissions to, regulatory authorities, (b) the timing of our commercial launch of tedizolid phosphate, and (c) the expected benefits from the Qualified Infectious Disease Product, or QIDP, designations for tedizolid phosphate, ceftolozane/tazobactam and surotomycin;

(v) our plans to (a) continue adding products and product candidates through internal development, in-licensing and acquisition, including relating to our option to acquire Adynxx, Inc., or Adynxx, and (b) expand our international operations; and

(vi) the expected benefits from our acquisitions of Trius Therapeutics, Inc., or Trius and Optimer Pharmaceuticals, Inc., or Optimer, including our ability to utilize approximately $192.0 million of Trius NOLs in the future.

This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the condensed consolidated financial statements and accompanying notes to assist readers in understanding our results of operations, financial condition and cash flows. We have organized the MD&A as follows:

† Overview: This section provides a summary of our financial highlights, business developments and product and product pipeline updates for the three and nine months ended September 30, 2013.

† Results of Operations: This section provides a review of our results of operations for the three and nine months ended September 30, 2013 and 2012.

† Liquidity and Capital Resources: This section provides a summary of our financial condition, including our sources and uses of cash, capital resources, commitments and liquidity.

† Commitments and Contingencies: This section provides a summary of our material legal proceedings and commitments and contingencies that are outside our normal course of business, as well as our commitment to make potential future milestone payments to third parties as part of our various business agreements.


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† Critical Accounting Policies and Estimates: This section describes our critical accounting policies and the significant judgments and estimates that we have made in preparing our condensed consolidated financial statements.

† Recent Accounting Pronouncements: This section provides a summary of recently issued accounting pronouncements.

Overview

We are a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. Such products and product candidates are used, or are being developed to be used, primarily in hospitals and other acute care settings, including home infusion and hospital outpatient clinics. Cubist has three marketed products, CUBICIN, ENTEREG and DIFICID. Prior to our acquisition of Optimer on October 24, 2013, we co-promoted DIFICID in the United States, or U.S., under our co-promotion agreement with Optimer. In addition, Cubist has four drug candidates that have reached Phase 3 clinical trials and several pre-clinical programs, each being developed to address areas of significant medical needs.

CUBICIN is a once-daily, bactericidal, intravenous antibiotic with proven activity against methicillin-resistant Staphylococcus aureus, or MRSA. CUBICIN is approved in the U.S., the European Union, or EU, Japan and many other countries for the treatment of certain infections caused by Gram-positive bacteria, including treatment for certain bloodstream infections. ENTEREG is approved in the U.S. to accelerate upper and lower gastrointestinal recovery following partial large or small bowel resection surgery with primary anastomosis. ENTEREG is not approved for marketing outside of the U.S. DIFICID is approved in the U.S. for the treatment of Clostridium difficile-associated diarrhea, or CDAD, and is also approved in the EU, Canada and Australia for treatment of Clostridium difficile infections. On October 21, 2013, we received approval of our supplemental new drug application, or sNDA, by the U.S. Food and Drug Administration, or FDA, to expand the use of ENTEREG to accelerate upper and lower gastrointestinal recovery following any surgery that includes a partial bowel resection with primary anastomosis.

Financial Highlights



The following table is a summary of our selected financial results for the
periods presented:



                                        Three Months Ended            Nine Months Ended
                                           September 30,                September 30,
                                       2013           2012           2013           2012
                                             (in millions, except per share data)
U.S. CUBICIN revenues, net          $     229.9    $     208.3    $     659.1    $    593.2
U.S. ENTEREG revenues, net                 13.7           10.1           37.2          29.2
International product revenues             13.0           12.0           40.4          36.0
Total worldwide product
revenues, net                       $     256.6    $     230.4    $     736.7    $    658.4

Net (loss) income                   $     (33.9 )  $      40.3    $     (12.6 )  $    116.2
Basic net (loss) income per
common share                        $     (0.50 )  $      0.63    $     (0.19 )  $     1.83
Diluted net (loss) income per
common share                        $     (0.50 )  $      0.55    $     (0.19 )  $     1.59

Business Developments

The following is a summary of significant business developments that occurred during the nine months ended September 30, 2013, or that impacted the period thereof. For 2012 developments or for a more comprehensive discussion of certain developments discussed below, see our Annual Report on Form 10-K for the year ended December 31, 2012, or 2012 Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 27, 2013.

Optimer Merger Agreement

On October 24, 2013, we completed our acquisition of Optimer for cash consideration of $550.5 million, or $10.75 per share, plus one transferable contingent value right, or CVR, for each outstanding share of Optimer's common stock, which entitles the holder to receive a cash payment of up to $5.00 per CVR upon achievement of certain sales milestones for a total


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maximum undiscounted potential CVR payout of $253.9 million. This transaction will be accounted for under the acquisition method of accounting for business combinations, with Cubist treated as the acquirer, in the fourth quarter of 2013.

On September 16, 2013, we entered into a Series A Convertible Preferred Stock Purchase Agreement with Optimer, pursuant to which Optimer issued to us a total of $25.0 million of non-voting senior preferred stock in consideration for a cash payment of $25.0 million. The non-voting senior preferred stock owned by us at the completion of the merger was extinguished for no consideration and will be treated as consideration transferred at its fair value under the acquisition method of accounting for business combinations. See Note O., "Subsequent Events," in the accompanying notes to condensed consolidated financial statements for additional information.

Trius Merger Agreement

On September 11, 2013, we completed our acquisition of Trius. Under the terms of the merger agreement, we purchased 100% of the issued and outstanding shares of Trius common stock for: (i) $13.50 per share in cash, or $704.4 million excluding transaction costs we paid on behalf of Trius, plus (ii) one non-transferable CVR which entitles the holder to receive an additional cash payment up to $2.00 per CVR for a maximum aggregate undiscounted CVR payout of $108.4 million. See Note C., "Business Combinations and Acquisitions," in the accompanying notes to condensed consolidated financial statements for additional information.

2017 Convertible Senior Notes

In September 2013, certain holders of $221.2 million aggregate principal amount of our outstanding 2.50% convertible senior notes due 2017, or 2017 Notes, converted their notes at a conversion rate of 34.2759 shares of common stock per $1,000 of principal amount, or approximately $29.18 per share of common stock, into 7,580,923 shares of our common stock in privately-negotiated transactions. To induce these holders to convert, we agreed to make individually-negotiated aggregate cash payments of $22.0 million to the converting holders of the 2017 Notes as consideration for their agreement to convert their 2017 Notes. See Note J., "Debt," in the accompanying notes to condensed consolidated financial statements for additional information.

2018 Convertible Senior Notes and 2020 Convertible Senior Notes

In September 2013, we issued $800.0 million aggregate principal convertible senior unsecured notes in two series, with one series consisting of $350.0 million aggregate principal amount of 1.125% convertible senior notes due 2018, or the 2018 Notes, and the other series consisting of $450.0 million aggregate principal amount of 1.875% convertible senior notes due 2020, or the 2020 Notes, resulting in net proceeds to us, after debt issuance costs, of $775.6 million. See Note J., "Debt," in the accompanying notes to condensed consolidated financial statements for additional information.

Convertible Bond Hedge and Warrant Transactions

In connection with the issuance of the 2018 Notes and 2020 Notes, to minimize the impact of potential dilution to our common stock upon conversion of the 2018 Notes and 2020 Notes, we entered into convertible bond hedge transactions, or convertible bond hedges, covering 9,705,442 shares of our common stock. The convertible bond hedges have an exercise price of approximately $82.43 and are exercisable when and if the 2018 Notes and 2020 Notes are converted. We paid approximately $179.4 million for these convertible bond hedge transactions and recorded this amount as a reduction to additional paid-in capital, net of tax.

Concurrently with entering into the convertible bond hedges, we entered into privately negotiated warrant transactions whereby we sold warrants to acquire, subject to customary adjustments, 9,705,442 shares of our common stock at an exercise price of approximately $96.43 per share, also subject to adjustment. The warrants will have a dilutive effect to the extent that the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the applicable exercise price of the warrants during the measurement period at the maturity of the warrants. We received $121.7 million for these warrants and recorded this amount to additional paid-in capital. See Note J., "Debt," in the accompanying notes to condensed consolidated financial statements for additional information.

Hydra License Agreement Amendment

In June 2013, we entered into an amended and restated collaboration and license agreement with Hydra Biosciences, Inc., or Hydra, under which we made an upfront payment of $15.0 million to Hydra in connection with a restructuring of the financial terms of our original agreement. See Note B., "Business Agreements," in the accompanying notes to condensed consolidated financial statements for additional information.


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Astellas License Agreement Amendment

In March 2013, our license agreement with Astellas Pharma Inc., or Astellas, was amended to expand our rights to manufacture, market and sell any eventual products that incorporate ceftolozane (formerly known as CXA-101), including ceftolozane/tazobactam, to include certain Asia-Pacific and Middle East territories. With the attainment of these rights, we now own worldwide rights to ceftolozane/tazobactam. As consideration for these rights, we made a one-time payment of $25.0 million to Astellas in March 2013. See the "Commitments and Contingencies" section within this MD&A for additional information.

Adynxx Option Agreement

In February 2013, we entered into an option agreement with Adynxx. Under the agreement, we made a $20.0 million payment to Adynxx and obtained an exclusive option to acquire 100% of the outstanding shares of Adynxx. Adynxx is studying AYX1 as a potential treatment for the reduction of acute pain and prevention of persistent and chronic pain following surgery. See the "Commitments and Contingencies" section within this MD&A for additional information.

Product Pipeline Updates

We are developing tedizolid phosphate as a potential therapy for the treatment of certain serious Gram-positive bacterial infections, including those caused by MRSA. In October 2013, we submitted a New Drug Application, or NDA, to the FDA seeking approval of tedizolid phosphate for the treatment of acute bacterial skin and skin structure infections, or ABSSSI. The FDA previously designated tedizolid phosphate as a QIDP for its potential ABSSSI, hospital-acquired bacterial pneumonia, or HABP, and ventilator-associated bacterial pneumonia, or VABP, indications in each of the intravenous and oral dosage forms of tedizolid phosphate. As a result of this designation, tedizolid phosphate is eligible for certain incentives, including an accelerated NDA review period, and if tedizolid phosphate is ultimately approved by the FDA, a five-year extension of Hatch-Waxman exclusivity.

We are developing ceftolozane/tazobactam as a potential therapy for the treatment of certain serious Gram-negative bacterial infections in the hospital, including those caused by multi-drug-resistant Pseudomonas aeruginosa and extended-spectrum beta-lactamase producing strains of bacteria a such as Escherichia coli and Klebsiella. We completed enrollment for both of our global Phase 3 clinical trials studying ceftolozane/tazobactam in complicated urinary tract infections and complicated intra-abdominal infections, or cIAI. We recently initiated an open-label clinical trial evaluating ceftolozane/tazobactam in patients with VABP in July 2013. First patient enrollment in this open-label clinical trial triggered a $40.0 million milestone payment to the former shareholders of Calixa Therapeutics Inc., or Calixa, which was paid in August 2013. The FDA recently designated ceftolozane/tazobactam as a QIDP in all three of its potential indications, and as a result, ceftolozane/tazobactam is eligible for the same incentives as tedizolid phosphate, as discussed above.

We are developing surotomycin as a potential therapy for the treatment for CDAD. We began Phase 3 clinical trials of surotomycin in July 2012. In late 2012, the FDA designated surotomycin as a QIDP, and as a result, surotomycin is also eligible for the same incentives as tedizolid phosphate and ceftolozane/tazobactam, as discussed above.

We are developing bevenopran as a potential therapy for the treatment for opioid-induced constipation, or OIC, in patients with chronic non-cancer pain. We began a Phase 3 long-term safety study of bevenopran in OIC in late 2012. We recently initiated Phase 3 efficacy trials of bevenopran in patients with OIC and chronic non-cancer pain in July 2013.

In addition, we continue to seek opportunities to build our pipeline of acute care therapies through our business development efforts and through our clinical development of compounds that we have developed internally.

Results of Operations for the Three Months Ended September 30, 2013 and 2012

Revenues

The following table sets forth net revenues for the periods presented:


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                                    Three Months Ended September 30,
                                       2013                  2012          % Change
                                              (in millions)
U.S. product revenues, net       $           243.6     $           218.4         12 %
International product revenues                13.0                  12.0          9 %
Service revenues                               3.8                   7.2        (48 )%
Other revenues                                 5.6                   0.6        766 %
Total revenues, net              $           266.0     $           238.2         12 %

Product Revenues, net

Our net U.S. product revenues included $229.9 million of sales of CUBICIN and $13.7 million of sales of ENTEREG for the three months ended September 30, 2013, as compared to $208.3 million of net U.S. product revenues from sales of CUBICIN and $10.1 million of sales of ENTEREG for the three months ended September 30, 2012. Gross U.S. product revenues totaled $278.0 million and $250.9 million for the three months ended September 30, 2013 and 2012, respectively. The $27.1 million increase in gross U.S. product revenues was primarily due to price increases of 5.5% and 5.9% for CUBICIN in July 2013 and January 2013.

Gross U.S. product revenues are offset by provisions for the three months ended September 30, 2013 and 2012, as follows:

                                                   Three Months Ended September 30,
                                                      2013                  2012           % Change
                                                             (in millions)
Gross U.S. product revenues                     $           278.0     $           250.9          11 %
Provisions offsetting U.S. product revenues:
Contractual adjustments                                     (13.2 )               (13.5 )        (2 )%
Governmental rebates                                        (21.2 )               (19.0 )        11 %
Total provisions offsetting product revenues                (34.4 )               (32.5 )         6 %
U.S. product revenues, net                      $           243.6     $           218.4          12 %

Contractual adjustments include provisions for returns, volume-based rebates, and pricing and early payment discounts extended to our external customers, as well as wholesaler distribution fees. Governmental rebates represent estimated amounts for Medicaid rebates, Medicare coverage gap discount program rebates and chargebacks related to 340B/Public Health Service, or 340B/PHS, and Federal Supply Schedule, or FSS, drug pricing programs. We reversed approximately $6.0 million of revenue reserves, primarily consisting of Medicaid program rebates, as a result of receiving claims information from certain state governments and additional data regarding the usage of CUBICIN by managed care organizations, or MCOs, during the three months ended September 30, 2013.

Service Revenues

For the three months ended September 30, 2013 and 2012, service revenues were $3.8 million and $7.2 million, respectively, and include the ratable recognition of the quarterly service fee earned in accordance with the co-promotion agreement we entered into with Optimer in April 2011, as amended in July 2013, to promote and provide medical affairs support for DIFICID in the U.S. Also included in the three months ended September 30, 2012, are revenues related to a $3.5 million payment for a portion of Optimer's gross profits on net sales of DIFICID in the U.S. that exceeded the 2012 annual sales target, as stipulated in the co-promotion agreement.

On July 30, 2013, we entered into an amendment to our co-promotion agreement with Optimer which was due to expire on July 31, 2013. The amendment extended the term of the existing co-promotion agreement in substantially its current form through the earlier of July 31, 2014, or the completion of our acquisition of Optimer. On October 24, 2013, as a result of completing our acquisition of Optimer, we terminated the co-promotion agreement and DIFICID became a marketed product of Cubist. See Note B., "Business Agreements," and Note O., "Subsequent Events," in the accompanying notes to condensed consolidated financial statements for additional information.


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Costs and Expenses



The following table sets forth costs and expenses for the periods presented:



                                                   Three Months Ended September 30,
                                                      2013                  2012           % Change
                                                             (in millions)
Cost of product revenues                        $            61.0     $            55.7            9 %
Research and development                                    123.4                  70.2           76 %
Contingent consideration                                      2.6                   1.5           79 %
Selling, general and administrative                          74.9                  40.4           85 %
Total costs and expenses                        $           261.9     $           167.8           56 %

Cost of Product Revenues

Cost of product revenues was $61.0 million and $55.7 million for the three months ended September 30, 2013 and 2012, respectively. Included in our cost of product revenues are royalties owed on worldwide net sales of CUBICIN and U.S. net sales of ENTEREG under our license agreements with Eli Lilly & Co., or Eli Lilly, costs to procure, manufacture and distribute CUBICIN and ENTEREG, and the amortization of the ENTEREG intangible asset and other intangible assets. Our gross margin for both the three months ended September 30, 2013 and 2012, was 76%.

Research and Development Expense



Research and development expense for the three months ended September 30, 2013
and 2012, consisted of the following:



                                                  Three Months Ended September 30,
                                                      2013                 2012          % Change
                                                           (in millions)
External expenses                              $             68.9     $          40.6           70 %
Unallocated internal research and
development expenses                                         52.9                29.6           79 %
Milestone and upfront payments                                1.6                   -          N/A
Total research and development expenses        $            123.4     $          70.2           76 %

The increase in research and development expenses for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, is primarily due to: (i) an increase of $28.3 million in external expenses, primarily related to Phase 3 clinical trial expenses for ceftolozane/tazobactam and bevenopran, as well as manufacturing process development expenses to support the clinical trials for ceftolozane/tazobactam; and (ii) an increase of $23.3 million in unallocated internal research and development expenses primarily due to additional headcount to support our clinical and pre-clinical programs and $12.4 million in stock-based compensation expense related to the acquisition of Trius.

Contingent Consideration Expense

Contingent consideration expense for the three months ended September 30, 2013 and 2012 is primarily due to the time value of money. Contingent consideration expense may fluctuate significantly in future periods depending on changes in estimates, including probabilities associated with achieving the milestones and the period in which we estimate these milestones will be achieved.

Selling, General and Administrative Expense

The increase in selling, general and administrative expense for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, is primarily due to: (i) transaction costs of $14.1 million related to the acquisition of Trius and Optimer; (ii) stock-based compensation expense of $11.6 million related to the acquisition of Trius; and (iii) an increase in employee-related expenses and consulting charges, including legal costs.


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Other Income (Expense), net



The following table sets forth other income (expense), net, for the periods
presented:



                                                  Three Months Ended September 30,
                                                     2013                  2012           % Change
                                                            (in millions)
. . .
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