Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CBST > SEC Filings for CBST > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for CUBIST PHARMACEUTICALS INC

Form 10-K for CUBIST PHARMACEUTICALS INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. See also "Cautionary Note Regarding Forward-Looking Statements" for additional information. Additionally, percentage changes from period over period may not recalculate due to rounding.

Introduction

This Management's Discussion and Analysis, or MD&A, is provided in addition to the accompanying consolidated financial statements and footnotes to assist the reader 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 performance during the years ended December 31, 2013, 2012 and 2011, as well as an update on our late-stage clinical pipeline and significant business developments that occurred during the year.


Results of Operations: This section provides a review of our results of operations for the years ended December 31, 2013, 2012 and 2011.


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, as well as our commitment to make potential future payments to third parties as part of our various business agreements.


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 consolidated financial statements.


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

Overview

Our strategic intent is to become the leading global biopharmaceutical company focused on discovering, developing and commercializing therapies for acutely ill patients-those in treatment for serious acute illnesses for days or weeks in hospitals or outpatient acute care settings.

Product Revenue Growth

We derive most of our revenues from sales of CUBICIN, DIFICID and ENTEREG in the U.S. Our worldwide net product revenues represent net U.S. product revenues of our three marketed products as well as international product revenues, which relate to the payments we receive from international distributors in connection with their commercialization of CUBICIN and DIFICID and our direct sales of DIFICID in Canada. The cash flow generated from sales of our products funds important investments to drive our future growth.


Table of Contents

The following table is a summary of our net product revenues for the periods presented:

                                                    For the Years Ended
                                                       December 31,
                                                 2013       2012      2011
                                                       (in millions)
            U.S. CUBICIN revenues, net         $   908.0   $ 809.2   $ 698.8
            U.S. DIFICID revenues, net              12.2         -         -
            U.S. ENTEREG revenues, net              51.0      40.2       2.6


            Total U.S. product revenues, net   $   971.2   $ 849.4   $ 701.4
            International product revenues          61.2      50.5      36.7


            Total product revenues, net        $ 1,032.4   $ 899.9   $ 738.1

Late-Stage Clinical Pipeline

During 2013, we advanced our clinical pipeline as we sought to leverage our acute care-focused business model. As of December 31, 2013, we have four product candidates in Phase 3 clinical trials. Three of these late-stage product candidates, assuming successful clinical trial results and receipt of required regulatory approvals, would be used to treat hospitalized patients with serious infections:


Tedizolid phosphate-an investigational therapy in development for the treatment of certain serious Gram-positive bacterial infections, including those caused by MRSA. In October 2013, we submitted an NDA to the FDA seeking approval of tedizolid phosphate for the treatment of ABSSSI. In December 2013, the FDA accepted this NDA with Priority Review and assigned a PDUFA action date in June 2014. We plan to file an MAA with the EMA in the first half of 2014. We expect to initiate a Phase 3 clinical trial to assess the safety and efficacy of tedizolid phosphate in HABP/VABP in the first half of 2014. The FDA previously designated tedizolid phosphate as a QIDP for its potential ABSSSI, HABP, and VABP indications in each of the I.V. and oral dosage forms. 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.


Ceftolozane/tazobactam-an I.V. antibiotic candidate in development as a potential treatment for certain infections caused by Gram-negative bacteria including Pseudomonas aeruginosa and extended-spectrum beta-lactamase producing strains of bacteria such as Escherichia coli and Klebsiella in the following indications: cUTI, cIAI, and HABP/VABP. Phase 3 clinical trials for cUTI and cIAI commenced in 2011. In November 2013, we announced that ceftolozane/tazobactam met its primary endpoint of statistical non-inferiority compared to levofloxacin for cUTI and in December 2013 we announced that ceftolozane/tazobactam met its primary endpoint of statistical non-inferiority compared to meropenem for cIAI. We plan to file an NDA with the FDA for the cUTI and cIAI indications in the first half of 2014, and subsequently file an MAA with the EMA for both indications in the second half of 2014. We expect to initiate a Phase 3 clinical trial to assess the safety and efficacy of ceftolozane/tazobactam in HABP/VABP in 2014. Pseudomonas aeruginosa has been cited as a pathogen of concern by the U.S. Congress as well as the IDSA, due to the levels of multi-drug-resistance which exist in many hospitals. The FDA has designated ceftolozane/tazobactam as a QIDP in all of the potential indications that we are currently developing, and as a result, ceftolozane/tazobactam is eligible for the same incentives as tedizolid phosphate, as discussed above.


Surotomycin-an oral antibiotic candidate in development as a potential treatment for CDAD. We began Phase 3 clinical trials of surotomycin in July 2012. CDAD is a serious disease in the U.S. and many parts of the world, with significant levels of recurrence associated with increasing


Table of Contents

risk of mortality. Data from our Phase 2 clinical trial, as announced in 2011, showed that treatment with surotomycin reduced recurrence in study subjects by more than 50% when compared with study subjects treated with the standard of care, oral vancomycin. The FDA designated surotomycin as a QIDP, and as a result, surotomycin is also eligible for the same incentives as tedizolid phosphate, as discussed above.


Bevenopran-an oral investigational therapy in development as a potential treatment for OIC. OIC is the most common side effect for patients undergoing long-term treatment with opioids to relieve chronic pain, such as serious back pain. We initiated Phase 3 efficacy trials in patients with OIC and chronic non-cancer pain in July 2013. During the fourth quarter of 2013, we decided to stop these Phase 3 efficacy trials in light of the FDA's planned 2014 Advisory Committee meeting to discuss the potential for elevated cardiovascular events related to mu-opioid antagonists, and the enrollment challenges associated with the current design of these Phase 3 efficacy trials. Based upon the outcome of the Advisory Committee meeting, we may reevaluate whether to proceed with any new Phase 3 efficacy trials, and the design of such trials. Enrollment in the Phase 3 long-term safety study we initiated in October 2012 was completed in February 2014. We expect to complete the study in the first half of 2015.

See "Business" in Item 1 of Part I to this Annual Report on Form 10-K for a discussion of our products and product candidates.

Financial Highlights

    The following table is a summary of our selected financial results for the
periods presented. See the "Results of Operations" and "Commitments and
Contingencies" sections of this MD&A for additional information.

                                                        For the Years Ended
                                                           December 31,
                                                   2013             2012      2011
                                                  (in millions, except per share
                                                               data)
  Total revenues, net                           $   1,054.4        $ 926.4   $ 754.0
  Net (loss) income                             $     (18.6 )(1)   $ 154.1   $  33.0 (2)
  Basic net (loss) income per common share      $     (0.27 )(1)   $  2.42   $  0.54 (2)
  Diluted net (loss) income per common share    $     (0.27 )(1)   $  2.10   $  0.52 (2)


--------------------------------------------------------------------------------
    (1)


The year ended December 31, 2013, resulted in a net loss primarily due to:
(i) four product candidates in phase 3 clinical trials which resulted in an increase in research and development expense of $200.0 million or 72%;
(ii) $24.3 million in restructuring charges recorded and $22.6 million in transactions costs incurred in connection with our acquisitions of Optimer and Trius; (iii) $55.3 million of impairment charges, partially offset by $47.6 million of contingent consideration income; and (iv) a $34.6 million loss recorded in connection with the induced conversion of $221.2 million of the principal amount of our 2.50% convertible senior notes due 2017, or 2017 Notes, in September 2013.

(2)
During the year ended December 31, 2011, we recognized $91.5 million of contingent consideration expense primarily related to increasing the fair value of our contingent consideration liability related to ceftolozane/tazobactam.


Table of Contents

Changes to our liquidity position and financing capability during 2013 were as follows:


As of December 31, 2013, we had cash, cash equivalents and investments of $578.6 million, as compared to $979.4 million as of December 31, 2012.


In October 2013 and September 2013, we completed our acquisitions of Optimer and Trius. See "Business Developments" below for additional information.


In September 2013, certain holders of $221.2 million aggregate principal amount of our outstanding 2017 Notes converted their notes into 7,580,923 shares of our common stock in privately-negotiated transactions. As of December 31, 2013, the outstanding principal amount of our 2017 Notes was $228.8 million.


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 the 1.125% convertible senior notes due 2018, or 2018 Notes, and the other series consisting of $450.0 million aggregate principal amount of the 1.875% convertible senior notes due 2020, or 2020 Notes, resulting in net proceeds to us, after debt issuance costs, of $775.6 million. As of December 31, 2013, the outstanding principal amount of our 2018 Notes and 2020 Notes was $350.0 million and $450.0 million, respectively.


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 hedges covering 9,705,442 shares of our common stock, which have an exercise price of approximately $82.43 per share and are exercisable when and if the 2018 Notes and 2020 Notes are converted. We also sold warrants to acquire, subject to customary adjustments, 9,705,442 shares of our common stock with an exercise price of approximately $96.43 per share, also subject to adjustment. We paid approximately $179.4 million for the convertible bond hedge transactions and recorded this amount as a reduction to additional paid-in capital, net of tax. We received $121.7 million for the warrants and recorded this amount to additional paid-in capital. See Note K., "Debt," in the accompanying notes to consolidated financial statements for additional information.

Business Developments

The following is a summary of certain significant business developments that occurred during the year ended December 31, 2013, or that impacted the period thereof:

Optimer Acquisition

On October 24, 2013, we completed our acquisition of Optimer for upfront cash consideration of $550.5 million. Under the terms of the merger agreement, we purchased 100% of the issued and outstanding shares of Optimer common stock for $10.75 per share in cash, plus one transferable contingent value right, or CVR, for each outstanding share of Optimer 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 maximum, undiscounted potential CVR payout of $253.9 million. See Note D., "Business Combinations and Acquisitions," in the accompanying notes to consolidated financial statements for additional information.

Trius Acquisition

On September 11, 2013, we completed our acquisition of Trius for upfront cash consideration of $704.4 million. Under the terms of the merger agreement, we purchased 100% of the issued and outstanding shares of Trius common stock for $13.50 per share in cash, plus one non-transferable CVR for each outstanding share of Trius common stock, which entitles the holder to receive an additional


Table of Contents

cash payment up to $2.00 per CVR upon achievement of certain sales milestones for a maximum potential CVR payout of $108.4 million. See Note D., "Business Combinations and Acquisitions," in the accompanying notes to consolidated financial statements for additional information.

Results of Operations for the Years Ended December 31, 2013 and 2012

Revenues

    The following table sets forth revenues for the periods presented:

                                               For the Years
                                                   Ended
                                               December 31,
                                              2013       2012     % Change
                                               (in millions)
           U.S. product revenues, net       $   971.2   $ 849.4          14 %
           International product revenues        61.2      50.5          21 %
           Service revenues                      12.3      23.2         (47 )%
           Other revenues                         9.7       3.3         196 %


           Total revenues, net              $ 1,054.4   $ 926.4          14 %

Product Revenues, net

Our net U.S. product revenues included $908.0 million of sales of CUBICIN, $12.2 million of sales of DIFICID, as a result of our acquisition of Optimer in October 2013, and $51.0 million of sales of ENTEREG for the year ended December 31, 2013, as compared to $809.2 million of sales of CUBICIN and $40.2 million of sales of ENTEREG for the year ended December 31, 2012. Gross U.S. product revenues totaled $1.1 billion and $977.9 million for the years ended December 31, 2013 and 2012, respectively. The $139.0 million increase in gross U.S. product revenues was primarily due to: (i) price increases of 5.9% and 5.5% for CUBICIN in January 2013 and July 2013, respectively, which resulted in $109.5 million of additional gross CUBICIN U.S. product revenues; (ii) a $10.2 million increase in ENTEREG gross U.S. product revenues driven by an 11.0% increase in carton sales and a 11.9% price increase in January 2013; and
(iii) the addition of DIFICID to our product portfolio in October 2013, which resulted in additional gross U.S. product revenues of $16.6 million.

Gross U.S. product revenues are offset by provisions for the years ended December 31, 2013 and 2012, as follows:

                                                        For the Years
                                                            Ended
                                                         December 31,
                                                       2013        2012      % Change
                                                        (in millions)
 Gross U.S. product revenues                         $ 1,116.9   $  977.9           14 %
 Provisions offsetting U.S. product revenues
 Contractual adjustments                                 (61.5 )    (55.3 )         11 %
 Governmental rebates                                    (84.2 )    (73.2 )         15 %


 Total provisions offsetting U.S. product revenues      (145.7 )   (128.5 )         13 %


 U.S. product revenues, net                          $   971.2   $  849.4           14 %

Contractual adjustments include provisions for returns, pricing and early payment discounts extended to our external customers, as well as wholesaler distribution fees, volume-based rebates and other commercial rebates. Governmental rebates represent estimated amounts for government-


Table of Contents

mandated rebates and discounts relating to federal and state programs, such as Medicaid, the VA and DoD programs, the Medicare Part D Coverage Gap Discount Program and certain other qualifying federal and state government programs. We reversed $18.0 million of revenue reserves during the year ended December 31, 2013, which includes $10.0 million related to Medicaid program rebate reserves that had been accrued since the enactment of the Affordable Care Act. The change in estimate for Medicaid rebates was based on receipt of claims information from certain state governments and other additional data during 2013, as a result of lower than estimated usage of CUBICIN by MCOs.

International Product Revenues

International product revenues are primarily based on sales of CUBICIN by Novartis, our distribution partner in the EU. International product revenues for the year ended December 31, 2013, consisted of $58.7 million for CUBICIN and $2.5 million for DIFICID for a total of $61.2 million compared to $50.5 million for the year ended December 31, 2012. The increase in international product revenues primarily related to an increase in CUBICIN sold by Novartis in its territories as well as the addition of DIFICID.

Service Revenues

Service revenues for the years ended December 31, 2013 and 2012, were $12.3 million and $23.2 million, respectively. Service revenues for the years ended December 31, 2013 and 2012, include the ratable recognition of the quarterly service fee earned in accordance with our co-promotion agreement with Optimer to promote DIFICID in the U.S. Also included in the year ended December 31, 2012, are revenues totaling $8.5 million related to a bonus payment received from Optimer for the achievement of an annual sales target and to our portion of Optimer's gross profits on net sales of DIFICID in the U.S. that exceeded the annual sales target for the first sales year, 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 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 began marketing DIFICID ourselves. See Note C., "Business Agreements," in the accompanying notes to consolidated financial statements for additional information.

Other Revenues

Other revenues for the years ended December 31, 2013 and 2012, were $9.7 million and $3.3 million, respectively. The increase in other revenues for the year ended December 31, 2013, primarily relates to a $5.0 million sales milestone during the year ended December 31, 2013, as a result of Novartis achieving a predetermined level of aggregate sales of CUBICIN, which we recognized upon achievement.


Table of Contents

Costs and Expenses

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

                                                  For the Years
                                                      Ended
                                                  December 31,
                                                 2013       2012     % Change
                                                  (in millions)
         Cost of product revenues              $   260.3   $ 230.1          13 %
         Research and development                  477.7     277.7          72 %
         Impairment charges                         55.3      38.7          43 %
         Contingent consideration                  (47.6 )   (29.0 )        64 %
         Selling, general and administrative       258.0     171.8          50 %
         Restructuring charges                      24.3         -         N/A


         Total costs and expenses              $ 1,028.0   $ 689.3          49 %

Cost of Product Revenues

Cost of product revenues were $260.3 million and $230.1 million for the years ended December 31, 2013 and 2012, respectively. Included in our cost of product revenues are costs to procure, manufacture and distribute our products, royalties owed on worldwide net sales of CUBICIN and U.S. net sales of ENTEREG under our license agreements with Eli Lilly, and the amortization of intangible assets. Our gross margin for the years ended December 31, 2013 and 2012, was 75% and 74%, respectively. We expect our gross margin percentage in 2014 to be lower than our gross margin percentage in 2013, primarily related to additional amortization expense related to acquired intangible assets.

     Research and Development Expense

    The following table contains a breakdown of our research and development
expense for the periods presented:

                                                            For the Years
                                                                Ended
                                                            December 31,
                                                           2013      2012     % Change
                                                            (in millions)
External expenses:
Marketed products                                         $  25.2   $  17.3          46 %
Phase 3 programs:
Tedizolid phosphate                                           3.0         *         N/A
Ceftolozane/tazobactam                                      111.1      70.2          58 %
Surotomycin                                                  41.0      20.3         102 %
Bevenopran                                                   45.7       8.2         457 %
Earlier-stage programs                                       24.0      29.2         (18 )%
Milestone and upfront payments                               45.3       5.5         724 %
Research and development employee-related expenses          122.5      82.0          49 %
Other unallocated internal research and development
expenses                                                     59.9      45.0          33 %


Total research and development expense                    $ 477.7   $ 277.7          72 %


*
Program is the result of the Trius acquisition in September 2013.


Table of Contents

For each of our research and development programs, we incur both external and internal expenses. External expenses include clinical and non-clinical activities performed by CROs, lab services, purchases of drug product materials and manufacturing development costs. We track external research and development expenses by individual program, with the Phase 3 costs associated with development activities for our four current Phase 3 programs identified in the table above. Marketed product expenses include external expenses for post-marketing Phase 4 trials for CUBICIN, DIFICID and ENTEREG. Milestone and upfront payments included in research and development expense relate to the licensing or purchase of research and development assets that did not qualify as business combinations. Research and development employee-related expenses include salaries, benefits and stock-based compensation expense. Other unallocated internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities.

The increase in research and development expenses for the year ended December 31, 2013, as compared to the year ended December 31, 2012, is primarily due to: (i) an increase of $104.8 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 $39.8 million in milestone and upfront payments primarily related to the acquisition of expanded rights to develop and commercialize ceftolozane/tazobactam from Astellas for $25.0 million and the upfront fee of $15.0 million to Hydra Biosciences, Inc., or Hydra, to amend our license and collaboration agreement; and (iii) an increase of $55.4 million in unallocated internal research and development expenses and employee-related expenses primarily due to additional headcount to support our clinical and pre-clinical programs including $12.8 million in postcombination stock-based compensation expense related to the acquisitions of Optimer and Trius.

Impairment charges

In connection with our acquisition of Adolor in December 2011, we acquired an in-process research and development, or IPR&D, asset related to bevenopran . . .

  Add CBST to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CBST - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.