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CBST > SEC Filings for CBST > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for CUBIST PHARMACEUTICALS INC

Form 10-Q for CUBIST PHARMACEUTICALS INC


11-Aug-2014

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. 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 I under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 and in Item 1A of Part II under the heading "Risk Factors" in this Quarterly Report on Form 10-Q. The information contained herein 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 both domestic and international revenues, expenses, including research and development and selling, general and administrative expenses, capital expenditures, gross margin and income taxes, including the availability of federal research tax credits, and our expected available cash and use of cash and net operating loss (NOL) carryforwards;

(ii) the future performance of our international alliance partners;

(iii) the manufacturing and commercialization, including pricing and reimbursement of CUBICIN® (daptomycin for injection), DIFICID® (fidaxomicin), ENTEREG® (alvimopan), SIVEXTROTM (tedizolid phosphate) and our product candidates, including sales forecasts, the rate at which we exhaust our existing inventory, and the timing of financial milestones related thereto;

(iv) the development, regulatory filing and review, timing of commercial launches and commercial potential of our products and product candidates, such as ceftolozane/tazobactam, bevenopran, and surotomycin, including (a) the anticipated timing and results of our clinical trials, timing and results of our meetings with, submissions to, and responses from regulatory authorities and
(b) the expected benefits from the Qualified Infectious Disease Product (QIDP) designations for ceftolozane/tazobactam and surotomycin;

(v) our efforts to continue adding products and product candidates through internal development, in-licensing and acquisition;

(vi) the expected benefits from our acquisitions of Trius Therapeutics, Inc. (Trius) and Optimer Pharmaceuticals, Inc. (Optimer); and

(vii) the impact on our business related to our receipt of a Form 483 from the U.S. Food and Drug Administration (FDA) in July 2014.

This Management's Discussion and Analysis of Financial Condition and Results of Operations (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 financial highlights, a summary of our product and product pipeline updates, and a business update for the three and six months ended June 30, 2014.

† Results of Operations-This section provides a review of our results of operations for the three and six months ended June 30, 2014 and 2013.

† 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.


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† 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.

† 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. Our 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. We have four marketed products, three product candidates that have reached Phase 3 clinical trials, and several earlier-stage programs, each being developed to address areas of significant medical needs.

Financial Highlights



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



                                        Three Months Ended June 30,         Six Months Ended June 30,
                                           2014              2013             2014              2013
                                                     (in millions, except per share data)
Total revenues, net                   $        294.4    $        258.8   $        555.6    $        488.7
Operating income                      $         42.2    $         28.1   $         70.5    $         37.9
Net income                            $         24.0    $         15.2   $         48.3    $         21.3
Basic net income per common share     $         0.32    $         0.23   $         0.64    $         0.33
Diluted net income per common share   $         0.30    $         0.23   $         0.61    $         0.32

Marketed Products

Our four marketed products are as follows:

† CUBICIN-a once daily intravenous (I.V.) lipopeptide antibiotic approved in the United States (U.S.) for the treatment of certain serious skin and bloodstream infections caused by susceptible Gram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). CUBICIN is also approved in the European Union (EU), Japan and many other countries for similar indications.

† DIFICID-an oral macrolide antibiotic approved in the U.S. for the treatment of Clostridium difficile-associated diarrhea (CDAD). DIFICID is approved in a number of other countries outside of the U.S. for treatment of Clostridium difficile (C. difficile) infection (CDI).

† ENTEREG-an oral, peripherally-acting mu-opioid receptor antagonist. ENTEREG is approved in the U.S. to accelerate upper and lower gastrointestinal (GI) recovery following surgeries that include partial bowel resections with primary anastomosis. ENTEREG is not approved for marketing outside of the U.S.

† SIVEXTRO-a once daily I.V. and oral oxazolidinone antibiotic approved in the U.S. for the treatment of certain serious skin infections caused by susceptible Gram-positive bacteria, including MRSA. SIVEXTRO was approved in the U.S. on June 20, 2014 for the treatment of adult acute bacterial skin and skin structure infections (ABSSSI). We commercially launched SIVEXTRO in the U.S. at the end of the second quarter of 2014. We submitted a New Drug Submission to Health Canada in March 2014 seeking approval of tedizolid phosphate for the treatment of ABSSSI. In February 2014, the European Medicines Agency (EMA) accepted for review our marketing authorization application (MAA) seeking approval of SIVEXTRO for the treatment of certain complicated skin and soft tissue infections (cSSTI). Additionally, we initiated a Phase 3 clinical trial to assess the safety and efficacy of SIVEXTRO in hospital-


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acquired bacterial pneumonia (HABP)/ventilator-associated bacterial pneumonia (VABP) in June 2014. In 2013, the FDA designated SIVEXTRO as a QIDP for its now approved indication in ABSSSI, as well as for its potential indications in HABP and VABP, in each of the I.V. and oral dosage forms.

Product Pipeline Updates

As of June 30, 2014, we have three product candidates that completed or are in Phase 3 clinical trials, two of which, assuming successful clinical trial results and/or receipt of required regulatory approvals, could be used to treat hospitalized patients with serious infections. Our three product candidates that have reached Phase 3 clinical trials are as follows:

† Ceftolozane/tazobactam-an I.V. antibiotic candidate in development as a potential treatment for certain infections caused by susceptible Gram-negative bacteria including Pseudomonas aeruginosa and extended-spectrum beta-lactamase (ESBL) producing strains of bacteria such as Escherichia coli and Klebsiella pneumoniae in the following potential indications: complicated urinary tract infections (cUTI), complicated intra-abdominal infections (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. In June 2014, the FDA accepted, with Priority Review, the New Drug Application (NDA) we submitted in April 2014 seeking approval for ceftolozane/tazobactam for cUTI and cIAI. We plan to 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. 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 certain incentives, including an accelerated NDA review period, and if ceftolozane/tazobactam is ultimately approved by the FDA, a five-year extension of Hatch-Waxman exclusivity.

† 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 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 has designated surotomycin as a QIDP, and as a result, surotomycin is also eligible for the same incentives as ceftolozane/tazobactam, as discussed above.

† Bevenopran-an oral investigational therapy in development as a potential treatment for opioid-induced constipation (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. During the fourth quarter of 2013, we decided to stop our 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, which occurred in June 2014. Enrollment in the Phase 3 long-term safety study we initiated in October 2012 was completed in February 2014, and we now expect to complete the study in the second half of 2014. Based on our assessment of the outcome of the Advisory Committee meeting, insights from the FDA's expected action on the naloxegol NDA in September 2014, and the results of our long-term safety study, we may re-evaluate whether to proceed with any new Phase 3 efficacy trials, and the design of such trials.

We continue to seek opportunities to build our pipeline of potential acute care therapies through our business development and internal discovery efforts.

Business Update

In July 2014, following a routine inspection of our facilities, we received a Form 483 from the FDA containing certain observations regarding our facilities. In connection with these observations, in August 2014 we voluntarily recalled certain lots of CUBICIN in two separate recalls due to, among other things, the potential presence of particulate matter, including glass particulate, in vials produced by certain of our contract manufacturers. While we have estimated the financial impact of these recalls to be immaterial, the costs associated with our efforts to address the observations contained in the Form 483 are uncertain.


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Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013



Revenues



The components of our net revenues for the periods presented are as follows:



                              Three Months Ended June 30,                      Six Months Ended June 30,
                               2014                2013         % Change         2014             2013        % Change
                                     (in millions)                                   (in millions)
U.S. product revenues,
net                       $         265.2     $         239.5          11 %  $       505.7    $       452.8          12 %
International product
revenues                             17.5                15.0          17 %           34.5             27.4          26 %
Service revenues                        -                 3.7        (100 )%             -              7.3        (100 )%
Other revenues                       11.7                 0.6       1,687 %           15.4              1.2       1,079 %
Total revenues, net       $         294.4     $         258.8          14 %  $       555.6    $       488.7          14 %

U.S. Product Revenues, net



Our net U.S. product revenues consisted of the following for the periods
presented:



                            Three Months Ended June 30,                    Six Months Ended June 30,
                             2014                2013         % Change       2014             2013        % Change
                                   (in millions)                                 (in millions)
U.S. CUBICIN product
revenues, net           $         234.7     $         227.1          3 % $       446.9    $       429.2          4 %
U.S. DIFICID product
revenues, net                      15.9                   -        N/A            30.3                -        N/A
U.S. ENTEREG product
revenues, net                      14.6                12.4         18 %          28.5             23.6         21 %
Total U.S. product
revenues, net           $         265.2     $         239.5         11 % $       505.7    $       452.8         12 %

Our net U.S. product revenues increased $25.7 million and $52.9 million for the three and six months ended June 30, 2014, respectively. The increase is primarily due to the addition of DIFICID to our product portfolio as a result of our acquisition of Optimer in October 2013, and an increase of $7.6 million and $17.7 million for the three and six months ended June 30, 2014, respectively, in net U.S. CUBICIN product revenues.

Our total gross U.S. product revenues are offset by provisions as follows for the periods presented:

                             Three Months Ended June 30,                     Six Months Ended June 30,
                              2014                2013         % Change        2014             2013        % Change
                                    (in millions)                                    (in millions)
Gross U.S. product
revenues                 $         318.6     $         272.3          17 % $       604.1    $       518.2          17 %
Provisions offsetting
U.S. product revenues:
Contractual
adjustments                        (21.9 )             (16.0 )        37 %         (41.8 )          (30.0 )        39 %
Governmental rebates               (31.5 )             (16.8 )        88 %         (56.6 )          (35.4 )        60 %
Total provisions                   (53.4 )             (32.8 )        63 %         (98.4 )          (65.4 )        50 %
U.S. product revenues,
net                      $         265.2     $         239.5          11 % $       505.7    $       452.8          12 %

Our gross U.S. product revenues increased $46.3 million and $85.9 million for the three and six months ended June 30, 2014, respectively. The increase was primarily due to: (i) price increases of 5.5% for CUBICIN in July 2013 and January 2014, which resulted in $28.6 million and $53.8 million of additional gross CUBICIN U.S. product revenues for the three and six months ended June 30, 2014, respectively; and (ii) the addition of DIFICID to our product portfolio through the 2013 acquisition of Optimer, which resulted in additional gross U.S. product revenues of $21.5 million and $41.2 million for the three and six months ended June 30, 2014, respectively. These increases were partially offset by a decrease in CUBICIN vials sold in the U.S., which resulted in a decrease of $6.0 million and $14.1 million in gross CUBICIN U.S. product revenues for the three and six months ended June 30, 2014, respectively.

Certain of our product sales qualify for rebates or discounts from standard list pricing due to contractual agreements or government-sponsored programs. Our contractual adjustments include provisions for returns, pricing and early payment discounts extended to our external customers, as well as wholesaler distribution fees, and other commercial rebates. Our governmental rebates represent estimated amounts for government-mandated rebates and discounts relating to federal and state


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programs, such as Medicaid, the Veterans' Administration and Department of Defense (DoD) programs, the Medicare Part D Coverage Gap Discount Program and certain other qualifying federal and state government programs. The increase in provisions against gross product revenue for the three and six months ended June 30, 2014, was primarily driven by (i)increased U.S. sales of CUBICIN; (ii) the addition of DIFICID and (iii) the reversal of approximately $6.6 million of previously reserved for Medicaid program rebates during the three months ended June 30, 2013, as a result of receiving claims information from certain state governments and additional data regarding the usage of CUBICN by managed care organizations.

International Product Revenues

Our international CUBICIN product revenues are primarily based on sales of CUBICIN by Novartis AG (Novartis), our distribution partner in the EU and certain other territories. The increase in international product revenues for the three and six months ended June 30, 2014 is primarily due to an increase in CUBICIN sold by Novartis in its territories.

Costs and Expenses



Our costs and expenses consisted of the following for the periods presented:



                              Three Months Ended June 30,                      Six Months Ended June 30,
                               2014                2013         % Change         2014             2013        % Change
                                     (in millions)                                   (in millions)
Cost of product
revenues                  $          88.6     $          63.0          41 %  $       162.2    $       118.7          37 %
Research and
development expense                 104.9               115.2          (9 )%         225.5            229.4          (2 )%
Contingent
consideration (income)
expense                             (24.8 )               2.6      (1,058 )%         (58.1 )            4.6      (1,352 )%
Selling, general and
administrative expense               80.0                49.9          60 %          149.7             98.1          53 %
Restructuring charges                 3.5                   -         N/A              5.9                -         N/A
Total costs and
expenses                  $         252.2     $         230.7           9 %  $       485.2    $       450.8           8 %

Cost of Product Revenues

Our cost of product revenues are comprised primarily of royalties owed on worldwide net sales of CUBICIN and U.S. net sales of ENTEREG under our license agreements with Eli Lilly & Co. (Eli Lilly), costs to procure, manufacture and distribute CUBICIN, DIFICID, ENTEREG and SIVEXTRO, and the amortization of the ENTEREG, DIFICID and SIVEXTRO intangible assets. Our gross margin for the three and six months ended June 30, 2014, was 68.7% and 70.0%, respectively, compared to 75.2% and 75.3% for the three and six months ended June 30, 2013, respectively. The decrease in our gross margin is primarily due: (i) to $11.5 million and $21.7 million of intangible asset amortization resulting from the acquisitions of Optimer and Trius during the three and six months ended June 30, 2014, respectively; and (ii) a $6.3 million and $7.0 million increase in the provision for inventory reserves during the three and six months ended June 30, 2014, respectively.

Research and Development Expense



Our research and development expense consisted of the following for the periods
presented:



                             Three Months Ended June 30,                      Six Months Ended June 30,
                              2014                2013         % Change         2014             2013        % Change
                                    (in millions)                                   (in millions)
External expenses        $          52.8     $          61.6         (14 )% $       120.4    $       114.4           5 %
Unallocated internal
expenses                            46.1                38.0          21 %           99.1             74.4          33 %
Milestone and upfront
payments                             6.0                15.6         (62 )%           6.0             40.6         (85 )%
Total research and
development expenses     $         104.9     $         115.2          (9 )% $       225.5    $       229.4          (2 )%

Our research and development expense decreased $10.3 million for the three months ended June 30, 2014. The decrease is primarily due to: (i) a one-time expense of $15.0 million related to the upfront fee paid to Hydra Biosciences, Inc. (Hydra) to amend our existing license and collaboration agreement during the three months ended June 30, 2013; and (ii) an $8.8 million decrease in external expenses, primarily related to a decrease in Phase 3 trial costs related to ceftolozane/tazobactam due to the completion of our cUTI and cIAI Phase 3 trials in 2013. These decreases were partially offset by: (i) an $8.1 million increase in unallocated internal research and development expenses, primarily related to employee-related expenses to support our clinical


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and pre-clinical programs, including headcount associated with our acquisition of Trius; and (ii) a $6.0 million milestone expense incurred related to ceftolozane/tazobactam during the three months ended June 30, 2014.

Our research and development expense decreased $3.9 million for the six months ended June 30, 2014. The decrease is primarily due to the $15.0 million expense related to the upfront fee paid to Hydra described above, and $25.0 million related to the acquisition of expanded rights to develop and commercialize ceftolozane/tazobactam from Astellas Pharma Inc. (Astellas) incurred during the six months ended June 30, 2013. The decreases were partially offset by: (i) a $24.7 million increase in unallocated internal research and development expenses, primarily related to employee-related expenses to support our clinical and pre-clinical programs, including headcount associated with our acquisitions of Optimer and Trius; (ii) the $6.0 million milestone expense described above; and (iii) a $6.0 million increase in external expenses, primarily due to increases in external expenses associated with our SIVEXTRO and DIFICID products, which were acquired in 2013, primarily related to clinical trial costs, including our SIVEXTRO Phase 3 HABP/VABP trial, and an increase in manufacturing expenses associated with ceftolozane/tazobactam, partially offset by a decrease in Phase 3 clinical trial expenses for ceftolozane/tazobactam due to the completion of our cUTI and cIAI trials in 2013.

Contingent Consideration (Income) Expense

Our contingent consideration income was $24.8 million and $58.1 million for the three and six months ended June 30, 2014, respectively, compared to contingent consideration expense of $2.6 million and $4.6 million for the three and six months ended June 30, 2013, respectively. Contingent consideration income for the three and six months ended June 30, 2014, is primarily due to a decrease in the market price of the publicly-traded contingent value right (CVR) security issued in connection with our acquisition of Optimer.

Contingent consideration (income) expense may continue to 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, and in the case of the Optimer CVR, the market price of the security. See Note D., "Fair Value Measurements," in the accompanying notes to condensed consolidated financial statements for additional information.

Selling, General and Administrative Expense

Our selling, general and administrative expense increased $30.1 million and $51.6 million for the three and six months ended June 30, 2014, respectively. The increase in selling, general and administrative expense is primarily due to:
(i) an increase of $9.6 million and $20.2 million in employee-related expenses for the three and six months ended June 30, 2014, respectively; (ii) an increase of $8.4 million and $12.4 million in marketing-related expenses for the three and six months ended June 30, 2014, respectively; and (iii) an increase of $5.5 million and $9.8 million in professional services, including legal fees, for the three and six months ended June 30, 2014, respectively, primarily related to our CUBICIN litigation and international expansion.

Other Expense (Income), net



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



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