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Cubist Pharmaceuticals, Inc. (NASDAQ:CBST)

Q4 2012 Earnings Call

January 23, 2013 5:00 p.m. ET

Executives

Eileen McIntyre - Senior Director of IR

Michael Bonney - CEO

Steven Gilman - CSO and EVP of Research & Development

David McGirr - CFO

Robert Perez -

Michael Tomsicek -

Analysts

David Friedman - Morgan Stanley

Steve Byrne - Bank of America Merrill Lynch

Mario Corso - Mizuho Securities

Adnan Butt - RBC Capital

Alan Carr - Needham & Co.

Brian Skorney - Brean Murray, Carret

Irina Rivkind - Cantor Fitzgerald

Stephen Willey - Stifel Nicolaus

Operator

Good day. My name is Nicky and I will be your event manager today. At this time, I would like to welcome everyone to the Cubist Pharmaceuticals fourth quarter full-year earnings call. All lines have been placed on mute to prevent any background noise. And please note that today's web conference is being recorded. We will be taking questions over the phone at the end of today's presentation. (Operator Instructions). At this time, I would like to turn today's program over to Eileen McIntyre. Eileen, you may begin.

Eileen McIntyre

Good afternoon and thank you for joining us for our review of fourth quarter and full year 2012 business performance and financial results for Cubist Pharmaceuticals. Before introducing our speakers, I will read the Safe Harbor Statement and describe the context for use of non-GAAP financial measures. Today’s presentation includes forward-looking statements relating to our business, including those set forth on this slide. We may also make forward-looking statements during the Q&A session following our prepared remarks. These statements are neither promises nor guarantees, and there are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in these forward-looking statements. These and other risk factors are described in the slide shown, and the risk factors section of our most recent quarterly report on form 10-Q filed with the SEC.

Forward-looking statements are made as of today’s date and we do not undertake any obligation to update any forward-looking statements. We will also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Cubist’s operating performance. Please refer to the slide being shown regarding our use of non-GAAP financial measures, as well as additional slides on the Investor Relations page of our website, which contain the reconciliations between our non-GAAP financial measures and GAAP financial measures.

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

Michael Bonney

Thanks, Eileen. We’ve just completed a very important year for Cubist and in many ways 2013 represents the start of a new chapter for the company. We have begun a year in which we expect total revenues for the company will exceed $1 billion. We have invested in a compelling pipeline of well differentiated therapies three of which are now actively enrolling patients in phase 3 trials. Later this year we expect to announce initial phase 3 data from our lead development program ceftolozane/tazobactam which we believe has blockbuster potential.

In 2013 we are also taking the initial steps to create a commercial presence in the European Union ahead of the anticipated launch assuming success of ceftolozane/tazobactam. Cubist’s results for 2012 are very strong. Total revenues for the year of $926.4 million represent year over year growth of 23% or $172.4 million in additional top line revenue. This revenue result came in near the top of our 2012 guidance which we had tightened in October the high end of our previously raised revenue guidance for the year.

Revenues for Cubicin and Entereg as well as our service revenues for co-promoting Optimer’s Dificid were all within the guidance we updated in October. For 2012 our non-GAAP adjusted operating income grew by more than 12%, a strong result as we invest in late stage trials for our rapidly advancing pipeline. As David will explain in a few minutes, our GAAP operating income saw extraordinary growth due to the impact of contingent consideration in 2011. We ended 2012 with cash, cash equivalents and investments of $979 million and importantly we improved our net cash position by the retirement of the remainder of our 2013 convertible debt during the fourth quarter. Our 2017 converts with a $450 million phase value remain.

During this call, David, Rob and Steve will provide their perspectives on our successful 2012 as well as financial guidance and operational milestones for the year ahead. But let me give you a preview. Beginning with the top line our revenue guidance for 2013 for the first time brings anticipated total Cubist revenues above the $1 billion mark. In addition, on a worldwide basis we expect sales of Cubicin including Cubicin revenues prior ex-U.S. partners will pass the $1 billion blockbuster threshold this year.

Turning to our pipeline, this is the first time in my 10 years as CEO of Cubist that we begin the year with three therapeutic candidates actively enrolling patients in phase 3 trials. 2013 is particularly important for the development of ceftolozane/tazobactam, our IV antibiotic candidate for the treatment of certain infections caused by gram negative pathogens.

As Steve will review later on the call, we now have FDA alignment on a reduction in the numbers of patients to be treated in the phase 3 trials we have underway based on draft guidance, completed intra-abdominal infections issued by the agency last fall. This is good news for Cubist as we now expect that we will be able to complete these trials and provide top line results later this year, we will then seek to file an NDA about six months after top line assuming success.

The MAA (ph) filing will follow for the very large market opportunity we see in the EU and while I will be able to discuss some initial steps we expect to take this year toward building a Cubist acute care organization in Europe. I’d like to underscore the significance of the FDA direct guidance which enabled us to reduce patient enrolment number, our CUTI and CIAI trials. This is the latest in a series of promising actions over the past 15 months by the U.S. and EU regulatory authorities designed to encourage the discovery and development of new agents for treating infections caused by multi-drug resistant pathogens.

Most recently the FDA has announced that they will hold a public hearing on February 4 and 5 to obtain input on creating a new approval pathway for therapeutics for limited well defined sub-populations of patients with serious or life threatening condition, including infections caused by antibiotic resistant bacteria. These positive regulatory developments are important for companies like Cubist and the investors supporting our work as well as for physicians and patients.

Now David will provide perspective on key financial results for 2012 as well as our full financial guidance for ’13. David?

David McGirr

Thanks Mike. As you saw two weeks ago we had strong revenue growth in Q4 and for the full year 2012. I won’t spend time reading the numbers which are reiterated in today’s release and on this slide. I’ll now draw your attention first to key parts of the 2012 P&L and balance sheet because there are some accounting points that need some explanation and then I will move quickly to the 2013 guidance as we know that is what you want to hear.

Costs for 2012 came in the 25.6% giving us a gross margin of 74.4%. This reflects some challenges we had with bevenopran production earlier in the year that we discussed in Q1 and Q2. As the year progressed our margins improved. R&D costs for the year reflect the good progress being made developing our pipeline and the pick up in enrolment for ceftolozane/tazobactam in the second half of 2012.

SG&A expenses are in line guidance. The numbers you see on the P&L for in process R&D and for contingent consideration needs some explanation. The numbers you see for Q4 relate to the bevenopran our phase 3 candidate in development is a potential treatment for opiod induced constipation or OIC. Our view on the significant opportunity in the U.S. is unchanged. However, we had to make some adjustments to our valuation model based on our current assessment of the European commercial opportunity and the regulatory hurdles for OIC agents there. We now will delay developing the bevenopran for the EU until and unless the market opportunity and regulatory path justify the investment requirements.

This change in our expectations regarding the bevenopran opportunity in Europe impacts our Q4 and year end accounting as follows. We took a non-cash impairment charge of $38.7 million on our (inaudible) effort during the quarter. A non-cash contingent consideration gain was also recorded as a result of reducing the probability of making EU related milestone payments for (inaudible). Q4 contingent consideration income was $36 million. This contingent consideration income is not taxable and therefore lowered our tax rate bringing the rate to 22.8% for the year.

GAAP operating income of $237.1 million is up 79% year-over-year. The contingent consideration expense in 2011 of $91.5 million reduced the operating income that year. Non-GAAP adjusted operating income of $274.5 million is in our guidance range and up 12% from 2011. GAAP EPS for Q4 2012 was $0.51 on a fully diluted basis. For the full year GAAP EPS was $2.10 fully diluted.

Non-GAAP diluted EPS was $0.48 for Q4 2012 and $2.55 for the full year. Now the guidance, our total revenue estimate is in a range of between $1 billion and $1.045 billion. For Cubicin we expect U.S. net revenues in a range of between $900 million and $925 million. At the mid-point this will be another year with more than $100 million in growth in net Cubicin U.S. revenue. Revenues from sales of Cubicin by our international partners also should grow and here we estimate a range of $53 million and $58 million in revenues booked by Cubicin.

Turning to Entereg, we expect to grow revenues to a range of between $45 million and $50 million this year. We estimate our service and other revenues for the year including revenues from our co-promoter Optimer’s Dificid through July this year will be about $15 million. The most notable – noticeable growth in our expenses reflects the investments in R&D this year. Our estimated range for 2013 R&D spend is between $375 million and $395 million. The biggest driver of the R&D increase is our additional spend in phase 3 trials including the ramp in enrolling for trials are already underway and the expected initiation of our phase 3 program in ventilator associated bacterial pneumonia or VAVP for ceftolozane/tazobactam and our planned phase 3 efficacy study for the Vanoprene (ph).

SG&A for the year is expected to be in a range of $180 million to $195 million. At the mid-point this will be up 9% from 2012 as we continue to exercise tight control on this number. The clinical trial spend this year, an increase in anticipated external spend of close to $100 million versus last year impacts our expectations for operating income. However we feel comfortable with an estimate for non-GAAP adjusted operating income range of between 230 and 250 million and for that operating income a range of between 175 and 190 million for the year.

Now let’s de-construct these numbers. Without an increase of around $100 million in clinical trial spend in 2013, our non-GAAP adjusted operating income would be estimated to be in the range of $330 million to $350 million. At the mid-point of 340 million that would be growth of 24% over the equivalent figure in 2012. We had a choice to make it here. We could focus on growing the operating income line or we could build a robust pipeline and take the resulting reduction in operating income. We believe that building the pipeline is the way to future financial performance.

Our balance sheet is strong and we estimate at year-end balance in cash, cash equivalents and investments of around $1.1 billion (inaudible) to any cash outlays for business development. We continue to have $450 million phase value in convertible debt due in 2017.

Now over to Rob.

Robert Perez

Thanks David. My focus this evening is on the following. First, I will discuss the drivers for Cubicin’s continued growth. Then I would like to talk about our enthusiasm for Entereg and the learning we will leverage this year. I will briefly touch on our ongoing co-promote of Optimer’s Dificid antibiotic. Finally, I will provide some perspective on how we plan to build the commercial presence in the EU ahead of the expected launch of ceftolozane/tazobactam assuming positive data later this year.

Cubicin performance throughout the world in 2012 was very strong with revenue growth to Cubist of 17% globally. U.S. net revenues of $809.2 million represented year-over-year net revenue growth of more than $110 million. This was the highest net revenue volume growth we’ve seen in the U.S. since 2008 and our second highest dollar volume growth ever. In international market, Cubicin revenues to Cubist grew to $50.5 million in 2012, an increase of 38% over 2011. Admittedly some of this extraordinary growth ex U.S. was driven by some inventory build for what is shaping up to be a very successful launch in Japan.

That being said, we were pleased to see the health overall growth in the international Cubicin business. The growth in the Cubicin franchise reflects the benefit that our customers see in this product, a cost effective antibiotic with proven clinical success. We believe Cubicin offers tremendous value when used for appropriate patients. Generally sicker patient with MRSA skin or blood stream infection where the wrong antibiotic choice can have a quite dire consequence. We expect to continue to see growth in Cubicin U.S. revenues from a combination of vial growth in a low single-digit and pricing aligned with the value that Cubicin delivers for our customers and the patient they serve.

The Cubicin guidance range we provided today for U.S. net revenues in 2013 assumed little if any growth in the overall market for MRSA therapy. We continue to price Cubicin based on its value and its position in the treatment hierarchy. Consistent with that strategy we took a January 1 price increase of 5.9%. Part of the value Cubicin offers is that’s an IV antibiotic that sticks well with the outpatient treatment setting. We continue to see very good growth both the hospital and outpatient settings in the U.S. We believe that meaningful and probably growing percentage of what we ship to hospital pharmacies is used in hospital outpatient clinic. It’s impossible for us to track where vials go once they are shipped to hospitals.

However, a recent analysis by Cubist financial team found that at least 15% of Cubicin vials sold to hospital pharmacies in 2012 were actually used in hospital outpatient clinic. This confirms our hypothesis that outpatient use is greater than the 48% shown on the slide. In addition, while we don’t have historic data to confirm this, we believe that the growth in outpatient shown here at 12% is also likely understated.

Now turning to Entereg which we added to our hospital franchise at the start of 2012, as we relaunched this product over the past year we have been very pleased with the positive reaction from prescribing surgeon both specialists who do (inaudible) surgery routinely and general surgeon for whom such surgery is a less frequent procedure. We’ve also learned that the translated the positive yield of the product value into regular use requires follow up with a number of pre and post op professionals involving care of this surgical patient.

Finally we made sure that we matched the enthusiasm that our sales for innovation has with this product ensuring we balance the extra time and attention that Entereg requires the institutionalized use but the focus we want to maintain on Cubicin and for the next several months on our co-promote of Dificid. We saw good momentum for Entereg as we ended the year with Q4 growth and carton sold of 6.1% compared with exceptionally strong Q4 of 2011, the final quarter in which (inaudible) were still promoting the product.

Overall we grew Entereg sales 41% in 2012, our first year of promoting the product. We look forward to FDA action on the SNDA filed in December seeking our label expansion to include additional types of surgeries that impact our function. We continue to expect Entereg to achieve $100 million in peak year sales. Entereg is just one of the ways we've been able to leverage our acute care infrastructure in the U.S. in recent years. Our two year co-promote with Optimer for the CDAD therapy Dificid in the U.S. began in July of 2011 and continue through July of this year. This has been another great opportunity to leverage the acute care infrastructure we built in the U.S. and we look forward to continuing our partnership with Optimer over the next several months.

I will end my remarks with some perspective on our plan to create an acute care commercial presence in the EU. As most of you know in September we announced that we hired Dr. Patrick Vink as our international general manager. Over the last few months we have done a lot of work with Patrick to determine what we consider an optimal approach for expansion. One decision we made that we will almost certainly build the EU organization ourselves that will maximize the launch of ceftolozane/tazobactam as opposed to buying an existing infrastructure that would need to be retrofit to sell the product.

We get the process started by making a very small number of key hires in Europe in the next several months to allow us to initiate an important relationships and the regulatory end market access areas. But we will wait for topline results from the initial phase 3 trial expected in the second half of this year before we begin to add additional personnel. We would consider accelerating this build as we found our marketing or close to launch acute care assets in the EU that would fit well with the ceftolozane/tazobactam but we want to fit to be right.

We continue to look for late stage acute care assets for the US as well as the EU market. Now over to Steve?

Steven Gilman

Thanks Rob. I will begin with an update on our phase 3 trials for ceftolozane/tazobactam in CUTI and CIAI. As we announced earlier this month we now have aligned with the FDA on the plan to adjust the patient enrolment target for the CUGI and CIAI trial consistent with the agency’s recent draft guidance. We now plan to enrol only about 1000 patients in each indication, down from the original targets about 1500 in CUTI and about 1800 in CIAI.

For the sake of efficiency we will maintain the original two trial structure for each indication but once the enrolment targets are achieved we will pull the data from the two trials of CUTI and the two trials in CIAI prior to analysis. This means that we will report results and file the NDA with one trial in each indication. This change will modestly increase the power of the analysis results in both indications.

There are no changes to the trial protocol. The only adjustment is the number of patients. As you recall in the global phase 3 trials in CUTI and CIAI we had some lag in enrolment last year due primarily to slower than expected ex-US site initiations. I am happy to report that the litigation plans we launched last summer have been successful in both the CUTI and CIAI trials and are now enrolling at a good pace. Based on both the new enrolment numbers and the current pace of enrolment we feel quite comfortable inviting that we expect topline data in both indications in the second half of this year with an NDA filing expected to follow within six months of top line.

This quarter we will be reviewing this enrolment approach with the EMA to ensure alignment with our planned EMA submission package. Given the EU’s aggressive stance (inaudible) antibiotic drug approvals we have every reason to believe that the EMA will favorably consider this change in enrolment strategy and are confident that any agreement we may reach with the EMA will still enable us to release topline data in both trials in the second half of 2013.

The slide we are showing now also provides additional clinical and regulatory milestones for the year ahead. We expect to initiate our phase 3 ventilator associated bacterial pneumonia program for ceftolozane/tazobactam by mid year. As you may recall this program will include one registration supporting trial and we will also conduct a smaller open label informational trial. In both cases, we’re using the three gram 3 times a day dosing regimen that was shown to be well tolerated in phase 1 and is double the dose that had been studied in CUTI and CIAI.

The phase 3 registration trial with an all cause mortality is expected to take up the full year to enrol. Data from the open label trials should read out in 2015 and we would seek to published this data in a peer-reviewed journal prior to filing the SNDA of hospital acquired and ventilator associated bacterial pneumonia. We will continue to enrol patients throughout 2013 in the phase 3 program for surotomycin formerly known as CB-315 in clostridium difficile associated diarrhea, or CDAD. Bevenopran, formerly known as CB-5945 given development as a treatment for opiod induced constipation. We began enrolling our long-term phase 3 safety trial in October 2012 and expect to initiate the three-phase three efficacy trial in the first half of 2013.

Based on our most recent dialogue with the agency, as of December 2012 we continue to believe that our overall NDA submission plan consisting of a large 1400 patients placebo controlled for long-term safety trial plus three 600 patient efficacy trials will satisfy FDA requirements for an NDA filing in OIC assuming of course the efficacy and safety data are robust. We have designed these trials including implementing a data safety monitoring board and expert adjudication of cardiovascular AEs and withdrawal events to give us the best potential for success with this program.

For our acute pain CB-625 this year we will be analyzing phase 1 results and we will be making a go or no go decision to phase 2 in the first half of the year. Finally as Rob mentioned, we filed the SNDA seeking a label expansion for Amtrak and we expect the FDA to take act on this filing later in the year.

Now to Mike.

Michael Bonney

Thanks Steve. You’ve just heard several clinical and regulatory milestones for the year. These are listed here along with two additional milestones. Of note in the first half of this year our internal and external legal teams will be preparing for scheduled marketing claims construction hearing on April 10 in our patent infringement litigation with Hospira. An operational goal in 2013 is to bring online the third fill/finish provider we selected for CUBICIN last year. Significant milestones to be achieved by year end include anticipated total Cubist revenues of more than $1 billion and worldwide sales of Cubicin also getting through the $1 billion mark.

We had another impressive year of Cubist and we are very optimistic about our future. And in June of last year we began to more explicitly articulate our future vision by announcing our building blocks of growth. We’re pleased with our momentum as we enter 2013 and we look forward to continued progress against these aggressive but achievable targets for 2017. We appreciate the support of the investment community in getting us to this important stage in our growth for the leading global acute care biopharmaceutical company.

Now let’s open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of David Friedman [Morgan Stanley].

David Friedman - Morgan Stanley

I was wondering just for Cubicin in the US if you could talk about how your gross to net has changed in fourth quarter as well as the vial growth, if you are still willing to talk about that –

Robert Perez

Hi David, this is Rob. Fourth quarter gross to net for Cubicin was 13.4% which was just about it was in the fourth quarter of 2011. For the year gross to net was 13.5% in 2012 and that was up from 12.6% in 2011. So we saw some growth but not extraordinary in 2012. On vials, Cubicin vials were up 2.2% in Q4 of 2012 over Q4 of 2011. For the full year vials were up 5.2% in 2012 over 2011 and sequential Q4 over Q3 was 3.7% in vials.

David Friedman - Morgan Stanley

And then just a quick follow up, do you have a sense of where you could expect gross to net to be over 2013 and beyond, is this a number that you would think is going to continue to creep up over time or is there a ceiling at some point?

Robert Perez

I think that there is a ceiling at some point but the affordable care act it’s fully implemented and depending on what choices patients make for how they’re going to be insured we could see some increase in the gross to net over time. It does appear that, that changed, slowed down a bit at least for the short term.

Operator

Our next question comes from the line of Steve Byrne [Bank of America Merrill Lynch].

Steve Byrne - Bank of America Merrill Lynch

Rob, can you talk about what share of Cubicin vials are actually in the bacteremia and are you seeing that increase as vanco MIC levels increase?

Robert Perez

It’s been fairly stable. Right now Cubicin use is about 30% in bacteremia and it’s been pretty stable at that amount, Steve we’re not really seeing a change in the mix of business. There are couple things driving I’d say Cubicin overall share or I don’t have that, the individual market share per indication but I would expect that our market share is higher in bacteremia but we also have the other kind of driving for us of patient use, which is driven more by (inaudible). So you have both of those things that continue to drive the business and continue to I think provide strong outlook for growth in the future.

Steve Byrne - Bank of America Merrill Lynch

And can you comment on any specific market research that tempered your outlook for the OIC market in Europe?

Robert Perez

So as you may know Steve, the use of opiods as chronic pain meds is relatively rare in the EU compared to the US. So that was a part of our decision-making, the mark opportunity just isn’t as large in the EU by any stretch of imagination as it is in the US. And the second thing is that the regulatory requirements for registering a drug for OIC in the EU are quite a bit different than the US and given that large disparity in markets we thought it prudent to focus at this stage on developing the drug for the US market. Once we see what the phase 3 data look like we may take another look at the EU but right now our view is that market is given the complexity of the regulatory path combined with the relatively small opportunity doesn’t justify the investment.

Steve Byrne - Bank of America Merrill Lynch

And just one for you Dave, can you comment on how much of your R&D guidance is milestone payments?

David McGirr

It’s not a huge amount of milestone in 2013. We also have this time clinical trials and internal resources to support that clinical trials.

Operator

Our next question comes from the line of Mario Corso [Mizuho Securities].

Mario Corso - Mizuho Securities

I was wondering just on 5945 you could talk labout where you are or how you’re viewing presently the licensing opportunity there and is there any quantification of the European cost you’re talking about for 2013 as well?

David McGirr

I will answer the second part of that question first. We’re not pursuing anything in Europe. So there are no costs associated with European development of 5945 in our guidance for 2013.

Michael Bonney

We did have a interest in 5945 but as you probably can tell we feel very strongly about this product and we felt like we have the resources and the ability to run this trial. And we didn't need to do a deal unless we like the deal. So after taking stock of what we had, we decided that it was best to go forward with the phase 3 trial ourselves and we will look at partnering opportunity when we get the data. But our sense is that this market is breaking towards us in terms of the potential competitive profile of bevenopran versus the competition and we want to make sure we are getting the right deal for the product.

Operator

Your next question comes from the line of Adnan Butt [RBC Capital].

Adnan Butt - RBC Capital

First a couple on Cubicin, can you shed some light on how much vial growth surge you’re expecting in 2013 and then if you cannot after – if you don’t want to answer that, and basically what’s changed to drive outpatient use and what’s driving ex-US use (inaudible)?

Michael Bonney

Okay, we’re not going to give you the vial growth number and frankly give me a chance, talk a little bit about – I did mention that what we are still positive is going to be a smaller portion growth overall than price and at this point in Cubicin’s kind of strategy that is expected. So I was focused more on the dollars that will be growing for $110 million in 2012 as David mentioned it’s $100 million at the midpoint of our guidance this year, we’re going to get it from some vial growth but also price. So I don’t want you to be too focused on just the vial growth.

Robert Perez

The outpatient growth you saw on the slide was 12% for outpatient and 15% for inpatient. One of the things we are seeing and one of the dynamics that I spoke about is we are starting to see extraordinary growth in the hospital outpatient market, and that’s we’re hearing from our sales force. And that complicates the analysis a little bit because those vials are counted as in patient (inaudible) we don’t have a way to track every vials in terms of where it ends up getting used. We have done some analysis to show that that a good chunk of Cubicin vials and I mentioned 15% during the call are used in the hospital outpatient department. So all that means that really we are not seeing a change in the way that product is used. But we are seeing a shifting of some of our outpatient growth to frankly a place where it’s counted as inpatient. So that makes the analysis a little bit tricky but what that says is that over 50% of actual vials are used in the outpatient setting and that the growth is probably more split evenly or even still greater in outpatient but we can’t track it specifically as we did in the past.

And then finally on the EU, we’re getting healthy growth across-the-board. Novartis was up substantially in their market both existing market as well as some of their newer markets Latin America, Brazil for example doing very, very well. We’re seeing really strong growth in small markets like Canada, they are starting to pick up but another significant player is Japan where Merck is off to a very good start in their launch and I mentioned that part of their – part of the ex-US sales – smaller part that was driven by the build up of some inventory and Merck’s doing that to ensure that they have enough for what is turning out to be a very nice launch. So we are excited about the ex US Cubicin opportunity and it’s really starting to pick up.

Adnan Butt - RBC Capital

If I could just get a question on pipeline you mentioned that there was some interest in the program. Can you shed some light on how much interested it was and then does it mean that you will now partner when the program is completed or is your option to potentially partner while phase 3 is still ongoing that’s still out there on the table?

Michael Bonney

So we’re open to partnering the asset at any appropriate time. We’ve had a range of parties interested but our view is that the value that this asset could bring is underappreciated. And so we are very comfortable funding the phase 3 program for the US and looking at what that data looks like before we reengage but certainly if someone is interested in engaging the four of the phase 3 data we’d be happy to entertain those conversations.

Operator

Our next question comes from the line of Alan Carr [Needham & Co.]

Alan Carr - Needham & Co.

Wondering if you could give us an update on your views on the C. diff opportunity for 315. And to what extent you are still involved with Optimer and the co-marketing and the sort of insights you are gaining from that?

Michael Bonney

Sure, while we are still involved with Optimer until July of this year we don’t expect that the relationship will continue past that. Both companies have essentially said that the partnership will likely end at that point. We’ve been very pleased with the relationship and we are continuing to promote the product through July of this year but at that point the Optimer folks will focus on Dificid and we will focus on Surotomycin 315. And we do believe that the market opportunity remains healthy. That’s still a very, very large market, worldwide we estimate they are at least 30 million days of therapy in the CDAD space. And while we will have to see what the impact of Optimer’s pricing schedule will be and it’s really too early to tell what impact that will have on the market. We still believe that the market is strong and that where we have a drug that can get to the 400, 500 million worldwide peak year number.

And again, keep in mind Alan that we have complete rights to this product, that we owe no royalties and essentially the incremental commercialization costs assuming ceftolozane/tazobactam will be minimal.

Alan Carr - Needham & Co.

And can you also comment, I guess, broadly on Gram-positive and MRSA infections. You mentioned that your assumption was at flat MRSA cases. And I'm wondering if you can tell us a bit more what you are thinking about the status of gram-positive infections in hospitals?

Michael Bonney

Well, I think we are now at a place in the past much of the growth in the MRSA market was growth of MRSA relative to MSFA. So the staff pie is changing from a susceptible staff to a resistant staff market. That has levelled off at this point and now the growth is really a growth of population overall. We are not really getting any increases in MRSA relative to MSSA. So that’s why you are looking at overall market growth, I think that the market in the US for MRSA therapy grew about 1% in 2012 so that will give you a sense for what’s going on with the overall market. These are volume growth numbers Alan.

Alan Carr - Needham & Co.

Can you give us the same sense for gram-negative in pseudomonas, which 201 is primarily going after?

Michael Bonney

What we have seen in the 70 years since penicillin was introduced our alternating sign ways of resistance were gram positive agents, gram positive bacteria become resistant, new antibiotics developed for the gram positive resistant bacteria and then you see a growing increase in resistance for the gram negative. That appears to be part of the cycle we are in right now. So that combines the two questions that you asked Alan, resistance to the generally used agents whether they be third generation surplus 4 and (inaudible) or even ceftolozane/tazobactam continue to truck along at a scary rate somewhere between 25% of strain isolated across the US and the EU appear to be resistant to one or more of those other agents. So I think we are in sort of what is becoming or at least in some factions of the IV community is thought to be the sort of normal cycle of alternating levels of resistance of gram positive and gram negative bacteria.

Operator

Our next question comes from the line of Brian Skorney [Brean Murray, Carret].

Brian Skorney - Brean Murray, Carret

I guess just as we kind of think a little longer-term about R&D costs, it looks like, based on the OIC timelines, you might see increases in the Phase 3 costs towards the end of the year, at the same time we might see beginning to the decrease of the ceftolozane/tazobactam. But obviously, I'm not asking for long-term 2014 guidance, but do you think these are going to essentially offset? And should we think that R&D expenses, at least for the programs now are ramping up and will be at a standstill over the next two, three years before a fall off?

Michael Bonney

Well, we’re not going to provide even directional guidance beyond 2013 Brian but I think it is fair to say that when we roll out our building blocks of growth in June for what we think the company can become financially and some other parameters by the end of 2017 we were pretty clear that we expect R&D as a percentage of revenue to be a bit higher than the industry average but to come down to about the 25% range give or take because it will be dependent upon what products we have in the portfolio etc at that time. But we do expect that over the next five years or so the R&D expense as a percentage of revenue will decline from the guidance numbers we’ve given you in 2013.

Operator

Our next question comes from the line of Irina Rivkind [Cantor Fitzgerald].

Irina Rivkind - Cantor Fitzgerald

I was wondering if you could make a general comment about pricing of gram-negative agents relative to branded gram-positive compounds? Do you think that the life-saving properties of these gram-negatives warrants higher pricing that you may be able to get for CXA-201 than, for example, a drug like CUBICIN? Thank you.

Michael Bonney

What I say is that we expect similar dynamic, I would say we’re not going to comment on what the pricing will be for our product or others. But similar dynamic in that the market will be from a days perspective will be dominated by generics, dominated meaning somewhere in the neighborhood of 60 to 70% of the market days will be dominated by products where the pricing is very, very low. But then there will be another segment and we think that somewhere in the neighborhood of 30 to 40% where the drivers are really not going to be priced and where you can’t get branded pricing and that's really what we saw on the gram positive and frankly one of the kind of innovation with the Cubicin business is having a strategy where you could yet brand a pricing for the appropriate patient. I think we’re going to see a very similar thing with the gram negative market and without commenting on whether the pricing is going to be higher or lower than gram positive I do think that there'll be a significant niche somewhere in the 30%, 40% range where efficacy is going to be the driver.

The difference between gram-negative and gram positive however is on the gram positive side there are more products that are branded competing for that space, on gram-negative we’re going to be one of possibly two that will be competing for that branded segment. So that’s one of the reasons why we are still excited about 201, ceftolozane/tazobactam.

Irina Rivkind - Cantor Fitzgerald

And then I just have a quick follow-up on your milestones that you are eligible to receive from the Optimer partnership in 2013. Are you -- I noticed in your guidance, you're not really modeling on the $12.5 million in additional milestones that you are eligible to receive. Should we think about that as upside?

Michael Bonney

We are basically the taking the same approach in 2013 as we did in 2012 and only guiding to the service revenues, we will have to see how the revenue numbers look as the second 12 months of the three year agreement unfold here.

Operator

Our last question comes from the line of Stephen Willey [Stifel Nicolaus].

Stephen Willey - Stifel Nicolaus

Just curious, I guess as you think about building out EU infrastructure is it safe to assume that the plans there are to build out a formal EU sub and then, I guess longer-term are there anything that you guys think that you can do on the sub front to bring the effective tax rate down here in the States?

Michael Bonney

Yeah we actually have already created a subsidiary in the EU, we have actually some employees there now who work as quality folks in our contract manufacturing for the contract manufacturers and clearly as our business develops more internationally given that the difference between US corporate tax rates and tax rate in many of the jurisdictions in the EU is we would expect to see some moderation in the overall effective tax rate.

Stephen Willey - Stifel Nicolaus

So it would be safe to assume then, that if you were to go out and acquire an acute care EU-based asset that would then be structured through that EU sub?

Michael Bonney

I don’t think that, that’s an unreasonable assumption but we of course would look at any individual transaction based on the facts and circumstances of that transaction.

Stephen Willey - Stifel Nicolaus

Great, thanks.

Michael Bonney

Well, thanks everyone for your attention this evening. We look forward to reporting on our results for the first quarter of 2013. Mark your calendars now for our conference call at 5 PM Eastern on April 18. Have a great evening.

Operator

Thank you for all your questions and thanks for joining us. This concludes today’s web conference. You may now disconnect.

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