Cubist Pharmaceuticals Inc. Q3 2008 Earnings Call Transcript

Oct.16.08 | About: Merck & (MRK)

Cubist Pharmaceuticals Inc. (CBST) Q3 2008 Earnings Call October 16, 2008 5:00 PM ET

Executives

Eileen McIntyre - Senior Director, Corporate Communications

Mike Bonney - President and CEO

Rob Perez - COO

Steve Gilman - CSO

David McGirr - CFO

Analysts

Tom Shrader - Rodman & Renshaw

Michael Yee - RBC Capital Markets

Greg Wade - Pacific Growth

Matt Duffy - BDR Research

Kevin Degeeter - Oppenheimer

Howard Liang - Leerink Swann

Biren Amin - Stanford Group

Rachel McMinn - Cowen and Company

Alan Carr - Needham & Company

Tom Russo - Robert W. Baird

Jason Kantor - RBC Capital Markets

Operator

Greetings and welcome to the Cubist Pharmaceuticals third quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eileen McIntyre, Senior Director, Corporate Communications. Thank you. You may begin.

Eileen McIntyre

Good afternoon and thank you for joining us for the Cubist third quarter call. Before introducing our speakers, I will read the Safe Harbor statement and describe the context for use of non-GAAP financial measures.

Forward-looking statements may be made during this call relating to, among other things, projected product revenues, company's financial performance and our products and pipelines.

These statements are neither promises nor guarantees, and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected or suggested today.

Such risks and uncertainties are detailed in the company's periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q.

Cubist is providing this information as of the date of today's call and does not undertake any obligation to update any forward-looking statements made during this call or contained in the slides to follow as a result of new information, future events or otherwise.

During this call in order to provide greater transparency regarding Cubist's operating performance, we will be referring to certain non-GAAP financial measures that involve adjustments in GAAP figures. In particular, we will present information on non-GAAP net income and net income per share.

Any non-GAAP financial measures discussed should not be considered an alternative to measures required by GAAP and are unlikely to be comparable to non-GAAP information provided by other companies.

Any non-GAAP financial measures disclosed are reconciled to the most directly comparable GAAP financial measure in a table included in our press release issued this afternoon and available in the news section of our website.

A further discussion of why we feel these measures are important to investors and the reason for which our management uses these measures is also included in the press release.

Speakers on today's call will include Cubist's President and CEO, Mike Bonney; our Chief Operating Officer, Rob Perez; Chief Scientific Officer, Steve Gilman; and Chief Financial Officer, David McGirr. You will hear first from Mike Bonney. Mike?

Mike Bonney

Thanks, Eileen. As you have seen from our news release this afternoon, we have delivered a quarter with very positive results on both the top line and the bottom line. These results stand out particularly in a time of much concerning news in the economy and financial markets. We are continuing to execute against our strategy to grow revenues and profits by optimizing CUBICIN, by bringing in exciting late-stage acute care programs and by advancing promising internally developed anti-infective programs.

Our top line is fueled by the continued growth of CUBICIN, which, in Q3, achieved year-to-year net revenue growth in the US of 45%. This level of year-to-year growth is particularly impressive as CUBICIN has now passed the five-year anniversary of its initial approval in the US. A great birthday present for CUBICIN on the 12th, its fifth anniversary, was the issuance of the dosing patents in Japan.

We estimate that more than 570,000 patients have now been treated with this drug in the US. Rob will report on these results and key drivers for continued CUBICIN growth shortly. This quarter, we are reporting for the first time a contribution from MERREM, which we began selling for AstraZeneca in US hospitals in late July. We are very pleased by the results here. As you will recall, based on GAAP accounting rules, the lion share of the service revenues we expect to earn for selling MERREM in 2008 will be reflected in Q4 results.

However, sales since we took over responsibility for MERREM have been very strong. We delivered GAAP diluted EPS of $0.44 per share for the third quarter. David will provide more detail on our very strong financial performance later in the call. We have also made important progress in recent months of our advancing pipeline. Steve will be providing some important updates on our advancing Phase 2 candidate ecallantide, being developed for the reduction of blood loss during on-pump cardiothoracic surgery, or CTS.

The unmet medical need here is quite significant and no one else has a product as far along in development as ecallantide for blood loss in cardiothoracic surgery. We estimate a market opportunity for this drug of greater than $500 million. We also are on target for two IND filings by the end of this year for our Cubist discovered antibiotic candidates, one for the treatment of multi-drug resistant Gram-negative infections and the second for the treatment of C-difficile infections.

Now to discuss the results for the quarter in more detail, I will turn it over to Rob.

Rob Perez

Thanks Mike. I will begin by providing some additional color on another exceptional quarter for CUBICIN results. As Mike said, US net product revenues for CUBICIN grew 45% year-over-year and they were up almost 10% versus a very strong Q2. Royalties from CUBICIN sales outside the US are on track with 2008 guidance.

Looking at drivers of the US results, we saw strong growth in both inpatient and outpatient sales. Year-to-date growth for 2008 is 53% for outpatient and 42% for inpatient. Today, the outpatient market represents about 45% of total CUBICIN sales in the US. We expect continued growth here but the larger opportunity in terms of overall days of therapy remains in hospital.

We continue to make slow but steady progress against our main competitor, vancomycin. For the year-to-date period through August versus the same period last year, vancomycin has lost 1.5 share points while CUBICIN has increased its share by 1.9 points. As a result, we have narrowed the gap between CUBICIN and vancomycin by almost 3.5 share points thus far in 2008.

We expect to see and hear quite a bit about the use of vancomycin to treat patients with staph aureus at the higher end of its susceptibility range at the ICAAC IDSA meeting in Washington D.C. later this month. There are three poster sessions at the conference focused on this topic.

For those of you attending the meeting, you will see that interest in CUBICIN remains high, with more than 105 accepted abstracts mentioning daptomycin. Some of the clinical abstracts that were accepted explore the safety daptomycin at higher doses and examine efficacy in a range of serious infections, including VRE bacteremia and in patients where immuno compromised.

Among the non-clinical abstract of interest is the 2005 to 2008 susceptibility update for daptomycin and competitors tested against Staph aureus, using islets from 20 US hospitals. The authors point out that daptomycin has maintained its high potency against Staph aureus with no change observed in the five years since launch.

Now turning to MERREM, which we began to sell to US hospitals for AstraZeneca early in Q3. As Mike mentioned, we have been very pleased with results thus far, and we are tracking ahead of forecast for 2008. What even more exciting is that our sales team is achieving these results while continuing to do a great job of supporting CUBICIN growth.

It is still early in the MERREM program, but we are beginning to answer the question of how effective we can be as a multi-product company. I have two other updates on CUBICIN before I turn the call over to Steve. We took a 7% price increase in the US as of October 1. This was nine months since the last increase. We try not to be too predictable when increasing price for obvious reasons and the nine month interval was consistent with what we have done previously, when our price increases have ranged between 7 and 12 months apart.

Finally, we can check off another 2008 milestone, based on the initiation in Q3 of our CUBICIN 10 milligrams per kilogram MRSA bacteremia trial. The objective of this trial is to assess the safety of CUBICIN at 10 milligrams per kilogram for 28 to 42 days, compared to vancomycin alone. This is a difficult to enroll patient population, so we are expecting data in 2011.

Now, Steve will provide an update on our product pipeline. Steve?

Steve Gilman

Thanks, Rob. Cubist Scientific Community was in the spot light the last month as we opened our new state-of-the-art lab expansion here in Lexington. The new space is great, but what we are most excited about today are the advances we are making in our clinical pipeline.

As discussed in some detail at our R&D investor event in September, our candidate for the treatment of Gram-negative infection, CB-182804 and our C. difficile associated diarrhea candidate, CB-183315, are both progressing towards targeted IND filings by year end. In our Phase 2 ecallantide program for reducing blood loss in patients undergoing on-pump cardiothoracic surgery, we have had a very positive and productive quarter of activity.

We recently unblinded the data from the Kalahari 1 trial, which, as you know, we ended early so we could focus on designing the Phase 2 dose ranging trial, with an objective of launching this new trial by year end. Today, we will be able to provide a top line summary of the Kalahari 1 data, but let me reiterate that this study has just recently been unblinded and we are still reviewing several study details.

Our initial interest in licensing ecallantide was due, in part, to the results of a relatively small proof-of-concept trial in 41 patients, known as the 883 trial in which ecallantide treatment of patients undergoing primary CABG surgery resulted in approximately 50% reduction in transfusion volumes, compared to placebo. In addition, the Kalahari 1 trial was underway which was designed to evaluate the safety and efficacy of a low and a high dose of ecallantide.

The population consisted of patients undergoing primary CABG surgery and/or a single valve replacement or repair and therefore, they were at relatively low risk of hemorrhage as was true for the primary CABG population studied in the 883 trail.

The exciting news from Kalahari 1 with a total of 69 patients dosed is that the efficacy signals seen was consistent with that observed in the smaller 883 proof-of-concept trial. The primary endpoint in Kalahari 1 was chest tube drainage and there was good evidence of efficacy. However, the value of this endpoint is limited and transfusion volumes are more clinically relevant and preferred by the FDA.

In all patients, and in the subset of patients undergoing primary CABG, there was a statistically significant dose response with respect to transfusion volume. For example, in the primary CABG population, median transfusion volume was reduced approximately 25% in the low dose group and 65% in the high dose group at the 12-hour time point as compared to placebo.

Primary CABG patients who received the high dose of ecallantide had a reduction in transfusion volume at every time point examined compared to placebo-treated patients and this was statistically significant at the 12-hour in hospital discharge time points. With respect to safety, ecallantide was well tolerated in this trial.

The Kalahari 1 results underscore our confidence in the opportunity for ecallantide for surgical indications and reconfirms the decision we made when we in-licensed the programs from Dyax earlier this year. In addition, as we anticipated, these data will help us to make the final decision on the protocol design and doses to use in our planned dose ranging trial.

Also this quarter, we have had very positive interactions with our advisory board of experts in the cardiac surgery field regarding the protocol design for the Phase 2 dose ranging trial.

In this trial, we will study the safety and efficacy of two or three doses of ecallantide compared with placebo in primary CABG patients, using transfusion volume as the key efficacy parameter. In addition, we now also plan to proceed with a second parallel Phase 2 trial in a surgical population at higher risk of bleeding which will help us generate information on the safety and efficacy of ecallantide treatment in this population prior to Phase 3 studies.

Protocols for both trials are now under review internally and with our key opinion leader advisory board. We expect to launch the dose ranging trial by year end, followed shortly by the start of the trial in higher risk patients. We anticipate that these two trials, which we expect to complete in early 2010, will together provide a comprehensive data set on approximately 500 patients for our end-of-Phase 2 meeting with the FDA, which we are targeting for mid-2010.

Now over to Dave McGirr.

David McGirr

Thanks, Steve. The press release we issued this afternoon contains the key financial data for Q3 2008. Total revenues of $112.4 million are up 41% from Q3 2007, and include for the first time MERREM service revenue of $1.4 million. US net CUBICIN revenue of $109.2 for Q3 2008 is up 45% from Q3 2007. Gross margin for Q3 was 78.7%, which is up from 77.5% in Q3 2007.

Turning now to costs. R&D expense for Q3 was $28.6 million, down from Q2 as that quarter included $17.5 million of upfront and milestone payments for ecallantide. Sales and marketing expense was $22.2 million. G&A was $9.3 million, which is more than $1 million lower than Q2 and in line with guidance.

Net income of $27.9 million is up 40% over Q3 2007 and 30% of the increase in gross margin year-over-year has dropped to the bottom line. EPS fully diluted is $0.44. This is growth of 37.5% over Q3 2007. The non-GAAP slide shows that EPS on this basis was $0.54 basic and $0.48 diluted for the quarter. The adjustment for Q3 2008 is for FAS 123 (NYSE:R). Our cash equivalents and investments were $373 million at quarter end, which is up $15 million from the quarter end Q2.

Now to guidance. We are increasing the US net revenue guidance to a range of $410 million to $420 million. This guidance reflects the underlying strength of our business as well as the 7% price increase we took on October 1. Apart from sales and marketing, all of the other items in our guidance remain unchanged from July. Sales and marketing is now expected to come in around $86 million, reflecting the increase in top line. As it is clear from our press release, we have not reversed our tax valuation allowance in Q3.

This is a topic we review regularly with our tax and accounting advisors and it will be reviewed again as we prepare year-end financials for 2008. There had of course been much discussion in the markets off late regarding the fair value of auction rate securities, or ARS. Our assessment for Q3 was that our ARSs are still temporarily impaired. That is a technical accounting definition. As a result, there is no P&L impact.

We did adjust the value on our balance sheet to our best estimate of fair value, which is supported by an independent external report. Change to other than temporary impaired would require accounting adjustment to fair value to flow through our P&L. Our holdings remain fully performing on the face value of $58.1 million and the cash equivalents and investment figure we report is adjusted for and reflects the fair value figure as of September 30, 2008 of $27 million.

We have demonstrated again this quarter that we are able to deliver meaningful revenue and EPS growth, and at the same time, build our pipeline and increase our cash balance. Going forward, our models forecast that we can fund the development of all the programs we are currently working on and grow EPS. Also, in today's unsettled capital markets, we have no need to raise capital to fund our current activities. We will continue to keep our focus and execute our plan. This concludes our prepared remarks on the quarter.

So now let's open up the lines for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). First question is from Tom Shrader with Rodman & Renshaw. Please go ahead with your question.

Tom Shrader - Rodman & Renshaw

Good afternoon.

Mike Bonney

Hi, Tom.

Tom Shrader - Rodman & Renshaw

I have a question. The revenue numbers are quite good, maybe a little better than anybody thought. My memory is that there is a new initiative to try to hit additional positions in the hospital. Is that the origin? Is that going better than anticipated? Can you give us any more detail about where the extra sales are coming from and whether there is a trend?

Rob Perez

Hi, Tom, it is Rob. About a little over a year ago, we started trying to expand our efforts beyond ID. We have always called on ID to a great degree but we started to go outside to internists and hospitalists and other specialties. I would not say that is the major driver of our increased success. Really, I think it is our ability to communicate the differences between CUBICIN and vancomycin.

The concern that physicians increasingly have about vancomycin and its efficacy, particularly at the higher susceptibility ranges. So I think that is probably more of a driver than our increased call efforts. Still, the majority of our business comes from infectious disease physicians and while we are getting more use outside of ID, we still have some work to do there as well.

Tom Shrader - Rodman & Renshaw

Any sense that people are pushing dose as they get more comfortable with the drug?

Rob Perez

There is certainly a lot of buzz about higher doses with CUBICIN but we have not seen big movement in the dose. There is been slight increases in the overall dose, and I think we still believe that, in particular those physicians outside of ID. There is work that we can do for them to just make sure that they are using the drug appropriately in bacteremia. So there is definitely interest amongst the thought leaders but overall the dose movement has been pretty small. There is still room for growth there.

Tom Shrader - Rodman & Renshaw

Okay. Do you have a sense of what percent of the total of outpatient vancomycin use you have. You called it a smaller opportunity. Are you closer to saturated there, do you know?

Rob Perez

Well, we are nowhere near saturated in either market because vancomycin is such a dominant player in both. There is a reason for that comment really is just to make sure that we are not setting the expectation that we are always going to have this 45% outpatient mix. As we continue to grow the inpatient, that number overall could come down and still we could have healthy growth in outpatient and healthy growth in inpatient.

Tom Shrader - Rodman & Renshaw

Did you have a reasonable number for what percentage of outpatient you have?

Rob Perez

For vancomycin?

Tom Shrader - Rodman & Renshaw

Yes.

Rob Perez

I think it is fair to say Tom that our share in the outpatient is slightly higher than inpatient but it is on the order of maybe 12% on outpatient and 9% on inpatient.

Tom Shrader - Rodman & Renshaw

So it is very close. Okay. Then just one last quick question, Kalahari 1, you gave a transfusion volumes. Can you give us a sense of how many units of blood that is? How do we translate that to units of blood? Is there a reasonable way to do that?

Rob Perez

Sure, Steve is looking at the data.

Steve Gilman

I am looking at the data. The volumes, we have used the conversion ratio about 360 mills per unit. If you look at the mills in the median, for example, at 12 hours post, it is about 12.3 liters of total volume. So, convert that back to units if you care to by that 350.

Tom Shrader - Rodman & Renshaw

So it is quite a lot.

Steve Gilman

That is in the placebo group of course.

Tom Shrader - Rodman & Renshaw

So it is quite a lot of units, is it not?

Steve Gilman

Yes.

Tom Shrader - Rodman & Renshaw

Okay. Very useful. Thank you very much.

Operator

The next question is from Jason Kantor with RBC Capital Markets. Please go ahead with your question.

Michael Yee - RBC Capital Markets

Hey, it is Michael Yee for Jason. Quick question on the guidance. The lower end for 410, the price increase on what you did for the third quarter, implies flat. Do you actually think that is a scenario that is out there? Or do you just think that is conservative given I do not think there is any seasonality in the fourth quarter?

Then, on the R&D guidance, you did not really change that, but given where you came in pretty low. Definitely it implies some pretty huge spike in the fourth quarter. Do you think that is conservative as well? Or do you think there is actually stuff built into that in the fourth quarter that maybe we are not thinking about?

Mike Bonney

Okay. Michael, I am going to ask Steve to comment on the last question that Tom Shrader asked about units of Kalahari and then we will come back to your question.

Steven Gilman

So Tom, I looked at the wrong table and that the 12 number I gave you is units transferred. So I just want to say those are units, not 12 liters. That is why, it surprised me when I looked at it myself.

Mike Bonney

Okay. With respect to guidance we obviously have great confidence in where we are headed with CUBICIN. I think we have provided an appropriate range at about a 2.5% total range. We are expecting to see growth through the balance of this year. With respect to the R&D cost, David, do you want to take that with respect to the guidance?

David McGirr

Yes. I think we are building, as you know, we are accelerating. We are getting ready for these IND filings for the two compounds that we are working on. There is a lot of expenditure involved there and other programs are moving along. The ecallantide program is meant to be launched before the end of the year. So yes, there is a lot of activity in R&D in the fourth quarter.

Michael Yee - RBC Capital Markets

Okay. The high end really implies almost a 50% jump but we will expect a lot of spending then in the fourth quarter.

David McGirr

We only spend what we have to spend, Mike.

Michael Yee - RBC Capital Markets

Okay. Thank you..

Operator

The next question is from Greg Wade with Pacific Growth. Please state your question.

Greg Wade - Pacific Growth

Thanks and congratulations on a really stand out quarter. First off, Steve I wonder if you can give us a bit of an update on the HCV program and when we might see the Kalahari 1 data presented? Then my second question, David, your R&D guidance for the year would suggest a $39 million or so fourth quarter expenditure. I realize that you are not probably providing guidance for 2009 today, but is this a reasonable run rate?

Is there any reason to expect that there would be a decrease in the run rate on the R&D expense line beginning in 2009? Would you expect that this is a flat rate number? Or is there any reason from an underlying business perspective to see growth in the R&D line throughout 2009 as we model things out? Thanks.

Mike Bonney

Okay, so first part of this question is hepatitis C, Steve, update on hep C program.

Steve Gilman

Yes. There is really no update since the September R&D day. We are conducting a couple key animal efficacy studies, looking at some additional PK data to make a determination whether we can, this program will be an ID candidate in 2009, so that we will still be on track to make that decision in the first quarter of 2009.

Mike Bonney

Second question was Kalahari-1 data and when it would be published. We literally are still in the process of analyzing the data so I think it is premature for us to opine yet, Greg, when that will actually be submitted and be published.

David McGirr

On your R&D question Greg, I tend to look at the $135 million guidance number for the year rather than the quarters. This something is true in terms of which quarter when things happen. So annualizing the number, I think, for Q4 may not be the right way to go.

Assuming we are successful, and I think this is very important for everyone to understand, R&D should grow at Cubist in dollar terms because it shows we are doing well, our programs are progressing, we are in the clinic, we are doing everything we are meant to be doing. So you should be applauding an increase in the R&D spend.

Greg Wade - Pacific Growth

I am clapping in the background here. Follow-up. You had 69 patients in your Kalahari-1 study. Bit of a change, you are going to do two more Phase 2s here, one in the high risk population. Did you see anything in the higher risk patients that were in the Kalahari-1 group? Can you give us a little more background as to why you are thinking about pursuing this additional Phase 2 study? Thanks.

Mike Bonney

Sure, Steve?

Steve Gilman

Yes, okay. Well, first of all, as I said, the product was well-tolerated in all patients, not just in the subset of lower risk patients and just to put a fine point on it, there were not really any high risk as we would defy really high risk patients in the Kalahari-1 trial. Whether you have CABG alone or you have a CABG plus a valve, they are still considered reasonably low risk.

Now, with respect to the reasons for doing two trials, well, those ranging trial, we are trying to do with that trial is use a low risk patient population which if you will has a lot less noise in it and can very accurately, we predict, pick the best dose that will see a nice, a smooth dose response curve and again a larger patient population and that will help us do the dose selection.

The trial in higher risk patients is really to help us understand the endpoints changes that we will be presumably putting in our Phase 3 design so this helps us with being able to have a much richer database, to have a very cogent discussion with the FDA in 2010.

Greg Wade - Pacific Growth

Thanks very much and thanks for taking my questions.

Operator

The next question is from Matt Duffy with BDR research. Please state your question.

Matt Duffy - BDR Research

Hi, and thanks for taking my question. Couple of things. Did you see any inkling of any loading in with the price increase?

Mike Bonney

No, none at all. As you know, Matt, we have pretty clear transparency right into either the hospital pharmacy, or the outpatient infusion centers, etcetera and there was no blip in the order volumes as we approached the end of September.

Matt Duffy - BDR Research

Okay, great, with all the presentations that you are going to have at ICAAC, maybe you could comment on what one you are most excited about or you think are most meaningful, moving ahead?

Rob Perez

This is Rob. Honestly that the ones that could be most meaningful are not on CUBICIN. There are three sessions on vancomycin and what comes out of the meeting regarding a more general well-appreciated view of the issues with vancomycin could be the biggest driver for not only our success but the whole branded market. So while there is this great information on CUBICIN the things to really watch are what happens with vancomycin.

Matt Duffy - BDR Research

Okay, thanks. Just a follow-on on to one of Tom's questions. Being in the ICUs and talking to the different types of docs with MERREM, are you starting to see any movement in terms of levels of ID restrictions inside the hospital for use outside the infectious disease docs to allow more intense versus more institutions actually use CUBICIN?

Rob Perez

We are. It is not, it is a hospital by hospital phenomenon but one of the things that we are seeing five years in is more and more institutions seem like they are comfortable with CUBICIN and comfortable with letting CUBICIN be used a little bit more broadly. I can think of a couple of very large institutions that used to have a very strict protocol where you actually had to call the infectious disease physician on their beeper, and get approval for use of CUBICIN. Those restrictions have been relaxed in certain settings like ICU, like nephrology and some others.

So I do think that one of the things we are seeing with our momentum here is an increased comfort in the market with the use of the product.

Matt Duffy - BDR Research

Okay. Very good. Thanks.

Operator

The next question is from Kevin Degeeter with Oppenheimer. Please go ahead with your question.

Kevin Degeeter - Oppenheimer

Hi, good evening. Congratulations on an excellent quarter. Maybe just one or two questions. On MERREM, you mentioned that the launch or your contribution, your sales have been strong in the quarter. Can you give us any additional color as to, is there opportunity here for you to exceed the minimums that you have described in previous press releases? Or what metrics can we use to appreciate the P&L impact of the stronger than perhaps anticipated performance?

Mike Bonney

Yes, the specific terms, Kevin, of the relationship with AZ by contract are confidential. What we have said in the past, now we are happy to repeat it here is that we have agreed on a baseline delivery of revenue for actually both the period of '08 and '09. If MERREM performs at those levels, we would receive the full service fee that we have agreed which is on the full year about $20 million, in our guidance for this year is about $9 million. If we under perform that we would get less. If we over perform it, we would get more.

So far, it appears that we are tracking north of that. We have been very pleased with the results since we took over promotion of this drug and selling of this drug in the hospitals. So in terms of what the slope of that curve is, we are not in a position to tell you what that is; and unfortunately the GAAP rules, the way the contract is structured and apply the GAAP rules to it, what you will end up in seeing is either in the fourth quarter or maybe even into the first quarter you will be able to see the full impact of what our performance looks like.

Kevin Degeeter - Oppenheimer

Okay. That is helpful. Thanks. Maybe just one other topic here, as an aside, Novartis in Europe I mean continues to track perhaps somewhat less robustly than we might have thought. They had a setback with their hospital based products for staph back in August. Do you have a sense there is still the same level of commitment at Novartis for hospital-based antimicrobials or just help us appreciate what Novartis may or may not be doing to further the wrap-up there?

Mike Bonney

Sure. We have no concern about their interest and their commitment. I mean while they did have a setback, they also had a purchase of an anti-infective company in protease and they still view CUBICIN as their first entrée into the infectious disease market. So we do not think the issue of sales falling below where I think a lot of us would hope is a commitment issue.

Kevin Degeeter - Oppenheimer

Okay. Maybe only one last question if I may. You stated previously that you continue to be interested in in-licensing, late-stage clinical asset or perhaps another commercial asset, with the capital markets in the manner in which they are, does that change? How you view product acquisitions versus perhaps small company acquisitions or just any updated thoughts on business development would be helpful?

Mike Bonney

Sure, Kevin. We remain very focused on acquiring the kind of assets that you talk about, late-stage hospital-based assets that would leverage our infrastructure and so forth. Whether that be, late in clinical development or in the market, we are prosecuting both sets of assets. I think the current difficulty in the capital markets is making this in many respects a target rich environment. We intend to be very disciplined about this.

I think the our greatest need strategically is later stage something that we could acquire to generate additional revenue in the relative near term as opposed to early, but we have seen even already in the last few weeks an increased inbound, set of inbound calls for folks who are concerned about their ability to raise the funds necessary continue to prosecute whatever technology they may have.

Kevin Degeeter - Oppenheimer

Terrific. Thanks a lot. Congratulations.

Operator

The next question is from Howard Liang with Leerink Swann. Please go ahead with your question.

Howard Liang - Leerink Swann

Thanks very much and congratulations on a nice quarter.

Mike Bonney

Thanks, Howard.

Howard Liang - Leerink Swann

If I could ask first a financial question to David. So the gross margin guidance is 22% to 23%. I think you have been trending below that in the last couple of quarters. How should we think about the fourth quarter? Should we really think about there is going to be a big jump for the fourth quarter?

David McGirr

No, I think we just gave you the range because there is some uncertainty in cost of goods. It is a batch processing method that we follow and as we have reported in prior quarters, you can sometimes lose a batch. It is unpredictable when that happens and so we would like to have a little bit of a range in case that would happen.

Howard Liang - Leerink Swann

Okay, great. Was there much R&D spending on ecallantide in the third quarter?

David McGirr

The question was, was there much ecallantide R&D spending in the third quarter?

Howard Liang - Leerink Swann

Yes.

David McGirr

Yes, there actually has been a fair amount. As soon as we signed the deal with Dyax we took over the responsibility for Kalahari 1 etcetera. So there has been spending in that regard. There is also been some work done as Steve mentioned in preparing for the next round of studies. It is not huge expense but there is some spending there as well.

Howard Liang - Leerink Swann

Okay. Then I have question regarding Kalahari 1 study. Is the conclusion that you have a very profound dose response between the two different doses?

Steve Gilman

I think that is one of the conclusions that we did see a dose response, if you remember the 883 trial. It was a flat dose response so all three of the doses tested there seemed to show about the same efficacy on transfusion volumes. So we were pleased to see a dose dependent effect. So as I said, it helps give us some estimates on where the starting dose range ought to be as we start the next trial.

Howard Liang - Leerink Swann

Okay. So what does this result inform you in terms of picking dose, picking doses for the next trial and I think what is the high dose you can go?

Mike Bonney

Well, go ahead, Steve.

Steve Gilman

No, you go, Mike. I will follow you.

Mike Bonney

Well, you may remember 883 study, the highest dose was 120 mg. The Kalahari 1 highest dose was 91 mg whereas we said earlier, we are analyzing all this data and it looks like from the safety standpoint, we have pretty big window here. I think the key issue is efficacy and with the Kalahari-1 data, we have a much better view of what the dose response could look like, both because I think the wider interval between doses as well as the clearly different dose response.

Howard Liang - Leerink Swann

Okay.

Mike Bonney

So we have not declared and we are not yet ready to declare publicly what the doses will be in the Phase 2 are but we are very close to being able to put that to bed and move forward.

Howard Liang - Leerink Swann

Okay. Regarding CUBICIN and ICAAC, are we going to see the high dose short term in duration trial presented?

Mike Bonney

Well, that data had already been published so I do not believe that there is a presentation at ICAAC.

Howard Liang - Leerink Swann

Okay. Maybe there could be data from other companies, data on short duration. Could you just talk about what your opinion might be regarding the utility of that kind of data?

Mike Bonney

Yes, and really what we heard from and really loud and clear from the thought leaders is the way they want to use CUBICIN, the thing they are much more interested in is information on using it at higher doses. They feel very comfortable with the safety profile of the product and frankly want more information on how safe it is to be used at higher doses for longer durations, as opposed to a higher dose for short duration.

So. While there may be some utility in a short duration for skin and for less complicated disease, CUBICIN, the physicians really want to use it for sicker patients and they want to use it at the highest doses possible. So that is really where we have focused our efforts on getting them information on higher doses for longer periods of time as evidenced by our 10 milligrams per kilogram bacteremia study.

Howard Liang - Leerink Swann

Okay, great. Thanks very much.

Operator

The next question is from Biren Amin with Stanford Group. Please go ahead with your question.

Biren Amin - Stanford Group

Thanks for taking my questions. Regarding CUBICIN, can you just give us a generic filing update?

Mike Bonney

No, there is no update to give you.

Biren Amin - Stanford Group

Great. Thanks. Regarding outpatient growth for CUBICIN this quarter, it seems to have lagged inpatient growth, whereas in quarters past excluding Q1, you seem to have seen growth outpacing the inpatient setting in the inpatient setting. So any reason why outpatient growth has been lagging this quarter?

Mike Bonney

No, it is really just a choppy business, Biren. As I said, outpatient is actually for year-to-date. Outpatient is actually leading inpatient growth for the year and a lot of times you have to do with one sales come in June versus July etcetera. So you get a little choppiness quarter-over-quarter but both businesses are very strong and the outpatient business has been very healthy all year.

Biren Amin - Stanford Group

Okay. A couple questions on ecallantide. Was there any serious adverse events observed in Kalahari?

Mike Bonney

Do you want to take it Steve or you want me to take it?

Steve Gilman

Well, the patients who undergo cardiothoracic surgery have a lot of events so but there certainly were no treatment emergent events. Again as I said the drug itself was well tolerated but sure in these kinds of patients, they are very serious surgery. They have all kinds of events.

Biren Amin - Stanford Group

Okay. How many patients do you plan to enroll in the two Phase 2 trials?

Steven Gilman

Again our current estimate is around about 500, total between the two trials. Again, we are still nailing up those details and we will do so in the next month or so.

Biren Amin - Stanford Group

Fantastic, thank you.

Operator

The next question is from Rachel McMinn with Cowen and Company. Please state your question.

Rachel McMinn - Cowen and Company

Thanks very much and congratulations as well on the quarter. A couple of questions, one on CUBICIN, can you talk about the trends, you mentioned that dose has not moved at all but has the mix between complicated skin infections versus bacteremia or osteomyelitis, does that changed at all over the past couple of quarters?

Mike Bonney

We are seeing more bacteremia and I do not want to say that dose has not moved at all. It just has moved in a rather small degree and not significantly. So we are definitely seeing more use in bacteremia. The way the use breaks down right now, Rachel is about 48% of the use of the product is in skin, 35% in bacteremia and endocarditis and about 7% osteo and 10% other. For the first half of the year that is pretty much the way it breaks down.

Rachel McMinn - Cowen and Company

I do not know that I have all the information every time you collect that data, but if you were to track based on your market research, and the average number of days of CUBICIN therapy, presumably that would be increasing. Is that really a key driver of what is going on with the sales growth here?

Mike Bonney

Well, the great thing about CUBICIN is there is so many drivers for potential growth and I do not have the days per course data because that data is not easily collected. It would make sense as bacteremia, it becomes a greater mix of our business, that people are using it for a little bit longer course. You have got courses that are getting a little bit longer, doses that are getting a little bit higher, but it is not all that.

I would argue to a much greater degree, it is increased penetration into the mind share of physicians. Doctors are getting more comfortable with this product. They feel very comfortable using it at both the prescribed doses and even higher in some instances and they are getting more comfortable using it instead of vancomycin.

Rachel McMinn - Cowen and Company

Great. Then two other questions, financial related. In terms of the 500 patients worth of ecallantide trials, have you given us or can you give us any type of guidance as to how much that is going to cost? Then my other financial question is on tax rate, Dave you sound like you are perhaps getting a little bit closer to recognizing a fully taxed rate, maybe you can give us a sense of when you expect that timing to happen?

David McGirr

Let me take that one first, Rachel. We do look at it each quarter and I specifically made the point that it will clearly have a lot of attention in Q4. Until you look at all the inputs, you can not declare when that will happen but it is something we have had a lot of attention.

Rachel McMinn - Cowen and Company

What is the biggest -- I mean you have been sustainably profitable for a while now, so is it your future M&A activity? What is it that could potentially drive you to not be profitable? Because it is not like CUBICIN sales are all of a sudden going to be cut by 80% next quarter or the quarter after that?

Mike Bonney

You are absolutely right on, Rachel. It is to do with our business development activities. If we were to in-license an asset and have an in-process R&D right done which could shrink, I mean it does not have to push it below zero, but a bit like our ecallantide spend in Q2 when we came close that unsettles the sustainable profitable input to the equation. So it is all based on BD.

Rachel McMinn - Cowen and Company

Okay. Then of the R&D cost for ecallantide next year?

David McGirr

We have not declared what is that is going to be. In our January call, we will certainly provide guidance as we have done in the past two years for 2009.

Rachel McMinn - Cowen and Company

All right. Thanks very much.

Operator

(Operator Instructions) The next question is from Alan Carr with Needham & Company. Please state your question.

Alan Carr - Needham & Company

Very good afternoon, everyone.

Mike Bonney

Hey, Allen

Alan Carr - Needham & Company

Back to ecallantide, can you remind me what the doses were in Kalahari and in the previous trial?

Steve Gilman

The doses in Kalahari were 15 milligrams and 91 milligrams. The doses in the 883 trial were 30, 60 and 120.

Alan Carr - Needham & Company

Okay.

Steve Gilman

So we have seen--

Alan Carr - Needham & Company

What you were saying?

Steve Gilman

No, just those are the doses.

Alan Carr - Needham & Company

Okay. Coming back to CUBICIN then, can you give us an update on -- you had a number of trials planned or underway and potentially wrapping up, some of them expected to happen in the second half '08. There are some pediatric trials and some in renal impaired patients, I seem to recall?

Steve Gilman

Yes, that is right.

Alan Carr - Needham & Company

Can you give us an update on all those?

Mike Bonney

We are actually in pretty good shape on all of them there. Rob will give you the details but the top line here is that we are proceeding with the all the Phase 4 commitments that the pediatric in the renal that you talked about the prosthetic joint trial is under way for some time. We have said that, Rob announced here this afternoon that the high dose bacteremia trial has been initiated as well.

Alan Carr - Needham

Okay, so that is it. When was that one supposed to end?

Mike Bonney

The high dose bacteremia trial we expect to see data in 2011.

Alan Carr - Needham

Okay. I believe, is there another, there was another trial in, was there another trial that was supposed to end in the second half of '08?

Rob Perez

Yes, so let me go through them Alan, just so that you have a sense. So in the area of high dose, we have the PJI trial which is a trial looking at 6 and 8 milligrams per kilogram against prosthetic joint infections. It is a proxy for osteomyelitis, and once again I slow to enroll trials but we are not expecting data there until 2010.

Mike mentioned the MRSA bacteremia trial is getting kicked off now. We also have some Phase 4 commitments in renal impaired patients. So there is a PK study that we expect results by year end for the renal program as well as a combination, infectious endocarditis combination study looking at CUBICIN with and without jet. Then there is the pediatric trial where our strategy really is to continue to get PK data in younger and younger patient populations, and we have a safety and efficacy trial in 7 to 17 year olds where we expect data by the first half of 2010. We have a PK study in 2 to 6 year olds starting enrolling the back half of this year.

Alan Carr - Needham

Okay, thanks. Now, one last thing. You mentioned that you are on track for INDs for the two preclinical antibiotic programs. Is it safe to assume these trials would start in early '09 then?

Mike Bonney

Presuming the FDA agrees with us, yes.

Alan Carr - Needham

I think that is it. I think most of my other questions have been answered. Thanks very much.

Mike Bonney

Okay, thank you.

Operator

The next question is from Tom Russo with Robert W. Baird. Please go ahead with your question.

Tom Russo - Robert W. Baird

Good afternoon and congratulations on the quarter.

Mike Bonney

Thank you.

Tom Russo - Robert W. Baird

First, going I think I ask this every time, but just can you comment that the pharmacoeconomic study is published and if that is something that you are using in the field yet?

Mike Bonney

No, it is not published yet. The data has been presented but not published as of yet, this is the data from our Phase 3 staph RN bacteremia study which basically showed that even if vancomycin were free, CUBICIN would still be a better value, given treatment failures and adverse events. So while the data can be cited, if you will, it is not something that we are able to show proactively because it is not published.

Tom Russo - Robert W. Baird

Just since it seems like it could even help further on the margin, do you have any sense of when that might publish?

Mike Bonney

I do not have that in front of me.

Tom Russo - Robert W. Baird

Okay. In terms of the panel meeting coming up next month, obviously there is a lot more opportunity for those drugs outside of skin than there is inside of the CSSSI area. Can you just maybe comment big picture as you look into next year, what your thoughts are right now on the three agents that are going to be before the committee and whether or not you would expect them to compete at all for share with CUBICIN?

Mike Bonney

Well, first of all, they have got to get through the committee, which is going to be very interesting couple of days. If in fact any or all of them should get through and ultimately make it to market, what we expect is there will be competition within skin.

We continue to expect to be very well differentiated in the more serious infections, including bacteremia and endocarditis and the other thing to mention and I have said this to pretty much all you before, is our competitor is vancomycin. While the new product is something that we truly think about it and watch, at the end of the day our success will be made or broken by what happens to the vancomycin.

So, there is some benefit actually of more companies and more people shooting at vancomycin. So while there may be some battles around the edges with skin, if we stick to our game and continue to focus on vancomycin, then we are going to be fine.

Tom Russo - Robert W. Baird

Okay. Lastly, earlier stage in your pipeline, if another competitor in CDI had positive data before you got into the clinic including maybe reducing recurrence rates, I am thinking about the Optimer product, would that impact at all, how you think about that opportunity or would it still be full steam ahead?

Mike Bonney

Yes, I think it would impact. We have said that before. We have said it at our R&D day a couple of weeks ago, in fact that this is a marketplace that we think is underserved but there is a lot of potential competition in the clinic out there and we are going to pay very close attention to it and as the market condition, we will make the appropriate decisions as we go.

Whether we would make a decision immediately upon seeing those data or not is not something we are going to opine on that, but we certainly will take any new developments in the marketplace, including new strains, the disappearance of strains and new data into consideration as we go forward. I think it is important to note however, while it is possible that you would see a reduction in recurrence rates in the Optimer trial, that trial was designed and powered as a non-inferiority trials I think, so whether they will actually be able to see that difference or not I think is yet to be seen.

Tom Russo - Robert W. Baird

Okay, thanks a lot and great quarter.

Mike Bonney

Thank you.

Operator

The next question is from Jason Kantor with RBC Capital Markets. Please state your question.

Jason Kantor - RBC Capital Markets

Hey thanks and I joined late and really most of my questions have been answered but congratulations on a really good quarter. Is there anything that you think you might be impacted by in this advisory committee in terms of trials you are running or thinking about running? What do you think the big issue is here for the FDA with regard to these agents?

Mike Bonney

Well, I do not believe that there is going to be anything in this particular advisory committee that will impact Cubist or CUBICIN but who knows, this is a very unusual announcement that came out earlier this week with one day of deliberation regarding complicated skin and the appropriate non-inferiority index there and then followed immediately by two days and three drugs being reviewed in its applications in for skin.

My suspicion and I have no information is that we have no information as an organization beyond that which is in the public domain. This is going to follow a pattern that is been established really since Congress came down on this revision of the FDA around the approval, and initiated a series of conversations within the agency and with various external groups, including IDSA and other advisory committees and workshops around, what is the appropriate clinical trial design to demonstrate appropriate levels of safety and efficacy for antibiotics.

I think probably most of the folks on the phone can remember their recent workshop on pneumonia, and I think that probably had some impact on the advisory committee facts in pneumonia and it feels a little bit to be based on the topic here that we are going to go through a similar exercise on complicated skin or skin structure in November.

Jason Kantor - RBC Capital Markets

Okay. Thank you.

Operator

There are no further questions in queue. I would like to turn the call over to Michael Bonney for closing remarks.

Mike Bonney

Thank you, Operator. I want to thank you all for your time and attention this afternoon. Despite the turmoil in the credit and equity markets, here at Cubist we remain calm and remain very focused on executing the strategy we have laid out for you all. I think it is quite clear from these results that that execution is going remarkably well. Please mark your calendars now for the next update on our execution of the strategy, which will be the Q4 and full year 2008 call which is scheduled for January 22nd at 5 o'clock Eastern Time. Thanks a lot.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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