Cubist Pharmaceuticals Inc. Q4 2008 Earnings Call Transcript

Jan.23.09 | About: Merck & (MRK)

Cubist Pharmaceuticals Inc. (CBST) Q4 2008 Earnings Call January 22, 2009 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

Rachael McMinn - Cowen & Company

Stephen William - Thomas Weisel Partners

Brian Skorney - ThinkEquity

Greg Wade - Pacific Growth

Eun Yang - Jeffries

Biren Amin - Stanford Group

Joel Sendek - Lazard Capital Markets

Tom Russo - Robert W. Baird

Alan Carr - Needham & Company

Kevin Degeeter - Oppenheimer

Matt Duffy - BDR Research

Justin Ferrioni - Counteract Capital

Operator

Welcome to the Cubist Pharmaceuticals 2008 and year end conference call. (Operator Instructions) It is now my pleasure to introduce your host, I'll Eileen McIntyre. Thank you, you may begin.

Eileen McIntyre

Good afternoon and thank you for joining us for our review of fourth quarter and full year 2008 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.

Forward-looking statements may be made during this call relate to go among other things projected product revenues, company financial performance, our products and pipelines. These statements are neither promise 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 to 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 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. Cubist is moving forward confidently and successfully as an acute care focused therapeutics company. We made marked progress in the last 12 months as we continued to leverage the capabilities and infrastructure we built.

The steps we've taken have all been made with a clear-eyed focus on driving long-term shareholder value. We've grown both the top and bottom lines in 2008 while bringing in additional assets and progressing exciting and important pipeline programs. I'm proud to share these highlights of the past year.

In the fourth quarter CUBICIN net revenues in the US grew by 43% over the previous year and we estimate that this important IV therapy is now being used to treat more than 640,000 patients with serious infections.

As you know, in late July we began promoting the established broad spectrum antibiotic MERREM I.V., in US hospitals for AstraZeneca. Our 2008 results include $9.4 million of service revenues based on the sales of MERREM IV in the US. And we expect an additional payment this quarter for over achieving our target sales in 2008.

Earlier last year we identified an in-licensed Phase II stage compound Ecallantide, which is being developed as a therapy to reduce bleeding in on-pump cardiothoracic surgery. In the months since we in-licensed this program, we have worked aggressively to get two Phase II studies ready for initiation. We have named those trials Conserve 1 and Conserve 2. We remain on track for an end of phase II meeting with the FDA in mid 2010 for this program. Steve Gilman will be providing an update on Ecallantide later on the call.

In December we submitted two INDs; one a potential therapy for infections caused by multidrug resistant gram-negative bacteria and another for a therapy being developed for C. difficile associated diarrhea or C. dad. These well differentiated candidates will address areas of high unmet medical needs.

As announced on January 9th, we have also entered into collaboration with Alnylam to develop and commercialize a potential RNAi therapy for the treatment of Respiratory Syncytial Virus or RSV. RSV is a virus that accounts for more than 300,000 hospitalizations a year in the US and can cause serious, sometimes life threatening respiratory infections in children and people with compromised immune systems. We are excited about the start of this new relationship.

As we continue to optimize CUBICIN and build our pipeline for future revenue growth, we also continue to manage our operations to grow. The bottom line, in 2008 we had a one time benefit, as we reported today, due to the release of the valuation allowance on our deferred tax asset. However, without this one-time benefit and including other non-GAAP adjustments, our underlying year over year growth in earnings on a non-GAAP basis was 55%.

Our impressive achievements in 2008 include our success in meeting all milestones established in our call last January, as well as meeting or exceeding all of our financial guidance for the year. This success is a direct reflection of the focus and discipline of the Cubist management team and the dedication, energy and teamwork of our employees, as well as our external collaborators and alliance partners.

Now to discuss the revenue results for Q4 and commercial growth drivers for 2009, I'll turn it over to Rob Perez, Cubist's Chief Operating Officer.

Rob Perez

Thanks, Mike. This has been a pivotal year for the Cubist commercial organization on a number of fronts. Most noticeable is the continued growth of CUBICIN revenues driven primarily by our success in the US.

As Mike mentioned, fourth quarter 2008 net revenues for CUBICIN in the US were up 43% versus a year ago. Taking a step back it's instructive to note that CUBICIN'S growth in share of market over the past five years to a share of approximately 10% today, corresponds nicely with declines in the market position of vancomycin.

In our long-range forecast, we never expected CUBICIN'S to overtake vancomycin and we assumed vancomycin will continue to maintain its dominant position in share of market days. However, the growing uncertainty about the clinical efficacy of vancomycin does create a significant opportunity for the continued growth of CUBICIN.

Podium presentations in scientist posters at the October combined ICAAC/IDSA conference and peer review publications in recent months have raised concerns about vancomycin’s clinical efficacy at MICs equal to or greater than one, levels that were within the recently lowered FDA’s acceptability breakpoints for vancomycin of less than or equal to two.

In addition, a publication this month in the American Journal of Health Systems Pharmacy based on a consensus review from the American Society of Health Systems Pharmacists and the Infectious Disease Society of America advised that, since vancomycin MIC is an important parameter for determining the potential success of a given dosing regimen an actual vancomycin MIC value ideally should be obtained from the micro lab.

The article goes on to advocate for higher doses of vancomycin as standard dosing practices are unlike to achieve concentrations needed for success when MICs are greater than 0.5. Finally, the author suggests that the desired serum concentration of vancomycin is likely not achievable at all if the vancomycin MIC is greater than or equal to two and that alternative therapies should be considered in these cases.

We've previously talked about our expectations for more than $750 million in peak sales in the US for CUBICIN. Based on our updated assessment of market drivers and the very large opportunities still ahead of us, we are announcing today that we now estimate peak sales for CUBICIN in the US of at least $1 billion.

Our increased peak sales estimate for CUBICIN is based on our expectations for continued erosion in the dominant market position of vancomycin, as well other factors including: the continued growth of our MRSA fueled in part by the growing problem of community acquired MRSA, the growth opportunity in the out-patient market, due to the interest of hospitals in getting patients discharged as quickly as possible, changes in our view of the competitive environment for the foreseeable future, and our existing US patent protection for CUBICIN extending until September of 2019.

As you may recall, we completed negotiating our international alliances for CUBICIN in early 2007. In 2008 we had an impressive collection of international regulatory approvals. At year-end Cubicin had been approved in a total of 58 countries, including the US. Today CUBICIN is being marketed in 25 of these countries with several additional market launchings expected in 2009. We look forward to the anticipated growth in our international revenue stream as CUBICIN begins to gain acceptance by infectious disease professionals in these new markets.

And 2008 was also an important year for our commercial organization as we showed for the first time that we can deliver results beyond CUBICIN. Our agreement with AstraZeneca to promote MERREM IV in US hospitals provided us with the opportunity to showcase our expertise in the challenging area of antibiotic hospital sales.

As we began promoting the second product we also wanted to assess the impact on CUBICIN. In recent months we've heard from a number of our sales professionals that MERREM IV is helping them with access to potential new CUBICIN subscribers, such as specialists in intensive care units. We are pleased with our initial success with MERREM IV and believe that the results to date are an important proof-point for our ability to leverage our acute care commercial organization.

In 2008, we booked service revenue for MERREM IV US hospital sales totaling $9.4 million. As Mike mentioned we over-achieved the agreed upon sales target for 2008 and as a result we expect to receive an incremental service revenue payment of about $4.5 million this quarter. You'll see this reflected in the 2009 revenue guidance that David will be providing.

Now for an update on our advancing pipeline, I'll turn it over to our Chief Scientific Officer Steve Gilman.

Steve Gilman

Thanks Rob. As Mike mentioned at the start of the call, pipeline developments of the last 12 months have been dramatic. As announced earlier this month we submitted two INDs inside late December: an IV antibiotic for the treatment of gram-negative infections as well as an oral antibiotic for the treatment of C. difficile infections.

Following standard FDA review procedures we anticipate starting Phase I studies for both programs this quarter. We have been moving aggressively ahead with the Phase II Ecallantide trials. We’ve now completed plans to initiate a dose ranging trial Conserve 1 and IRBs approvals are underway.

In this trial we are evaluating the safety and efficacy of three doses of Ecallantide compared to placebo in patients undergoing primary CABG surgery, who are having relatively low risk of bleeding complications.

Patients who receive one of three doses of Ecallantide intravenously at a constant rate of infusion, thus the total administered dose will be approximately 5.25 or 75 milligrams depending upon the patients' weight at the time on bypass.

We are working towards initiating Conserve 2, which will study the safety and efficacy of a single dose of approximately 75 milligrams of Ecallantide compared with 11/1.44 (inaudible) acid in patients who have a higher risk of bleeding. These patients would include individuals having a repeat (inaudible) more than one valve replacement or surgery involving both CABG and the valve replacement.

Based on the final protocols between these two trials, we expect to enroll a total of approximately 650 patients.

As Mike mentioned, we continue to be on track for an end of Phase II meetings with the FDA in mid-2010 for this program. Less than two weeks ago, we announced a new collaboration with Alnylam a leading RNAi company for development and commercialization of one or more agents to treat RSV infections, which are the cause of more than 300,000 hospitalizations each year in the US.

The terms of the deal with Alnylam are summarized in this light. We are very excited about the development of candidates as treatments for RSV infections, an area of high unmet medical need. We look forward to seeing data later this year from an ongoing Phase II study with the current lead candidate ALN-RSV 01 in adult lung transplant patients. We also plan rapidly advance one or more preclinical candidates in the RSV program towards key IND enabling studs.

In early 2010 based on a review of the totality of the data and the RSV program candidates, we expect to be well-positioned to determine the optimal path forward to maximize the value of the RNA program in RSV.

Now I'll turn the call over to our Chief Financial Officer, Dave McGirr.

Dave McGirr

As part of my remarks today, I will be discussing some important accounting topics. We will start with a brief review of the 2008 results and then move to 2009 guidance. The 2008 financials are strong. Total revenues of $434 million are up 47% from 2007. Gross margin or net product revenues were 78.6%, up from 76.3% in 2007.

Operating expense items all came in below our forecast. Operating income was $90.9 million, an increase of about 120% from 2007. I want you to focus on operating income, as we are going to come back to that line when we review the effects of the accounting topics I will review.

From here on the GAAP numbers while important and accurate needs some explanation. There are two significant accounting issues in Q4 2008. We have decided to reverse the valuation allowance on our deferred tax assets in Q4 2008, and to book a full tax rate going forward.

The effect of this decision in Q4 was a benefit to tax expense of approximately $127.8 million and an increase in GAAP EPS of $1.19 in the fourth quarter. Going forward this decision will result in a GAAP tax rate of about 39%, including Federal and state income taxes beginning 2009.

It's important to note that our cash tax liability will remain at approximately 5%, which is a combination of Federal alternative minimum tax and state net tax. This will continue until all of our Federal and state net operating losses NOLs and tax credits are consumed. We estimate that this will occur during 2010.

For your reference after the call today, we have included a slide with some background concerning the reversal of a deferred tax asset valuation allowance. The second accounting item affecting our 2008 results concern our investments in auction rate securities.

As you know based on market conditions over the past few quarters, we had classified our holdings of auction rate securities as temporary impaired and reduced their value on our balance sheet.

Based on an expectation of a continued period of uncertainty in the financial markets and other factors summarized on this slide, at year-end we have decide to do reclassify our auction rate securities from temporarily impaired to other than temporarily impaired. This decision requires us to take a $49 million impairment charge in 2008 as a component of other income expense from continuing operations. This is a non-cash charge and we continue to earn interest on the full face value of 58.1 million of auction rate securities.

Now I'll spend a little time on the non-GAAP figures for 2008. As in previous years we have shown the effects FAS 123(NYSE:R) and the one-time expense associated with the Illumigen and Ecallantide transactions. The change in classifications for our auction rate security and the deferred tax asset valuation allowance change are clearly set out for you on this slide. Non-GAAP EPS has grown fully diluted from $1.20 in 2007 to $1.86 in 2008.

And now our final comment on 2008. Cash equivalents and investments were $418 million at year end even after the auction rate security write down, which gives us net cash at year-end of $118 million, up from $48 million at the end of 2007.

Before getting to our 2009 guidance, it's important to point out two accounting issues that you should consider as you build your 2009 models. First as we've already discussed, for 2009 a full tax charge of around 39% should be included in your model. The second we need to discuss the adoption of APB 14-1, which I'm sure you've all been wait to go hear about.

As many of your aware, an accounting rule going in to effect as of January 1, 2009 will change the way we account for our convertible debt. The new treatment will apply to Cubist's financial statements back to June 2006 when the 2.25% convertible subordinated notes were issued.

We are required to book a theoretical interest charge to our GAAP P&L. In our case, we have determined that the cost to Cubist of non-convertible or straight debt in June 2006 would have been 8.5%. The actual coupon on the convertible notes is 2.25%. The difference which is a non-cash expense would hit the other income line.

So, the cumulative effects of the non-cash APB 14-1 expense and the largely non-cash tax expense significantly changed net income and GAAP EPS, which is why operating income may be a more useful figure.

Now let's move to 2009. First revenues; total revenues are expected to be in a range of $557.5 million to $577.5 million. The midpoint $567.5 million would be an increase of 31% from total 2008 revenues.

As you will see on this slide, our revenue guidance of $25 million from (inaudible) includes an anticipated incremental payment in 2009 of approximately $4.5 million from AstraZeneca for the over achievement in 2008. This should be booked in Q1 2009. The revenue guidance is necessarily conservative to reflect economic and business conditions we are all experiencing.

Next COGS. We expect our COGS to remain in the range that we saw in 2008 of 22% to 23%. Operating expenses are expected to be in the range of $304 million to $320 million. The midpoint is up 24% from 2008, and includes the $20 million upfront payment for the Alnylam collaboration and our expected share of the ongoing RSV development expense.

Our operating income; we expect a range of around $125 to $140 million. Let's focus in on this figure. As we've just reported, the operating income for 2008 was $91 million. The mid-point of our 2009 forecast shows a growth of 46% in operating income year-over-year. Other income expense, and it is an expense, reflects the impact of APB 14-1, which we have already reviewed.

Finally for the cash position. We expect to generate around $130 million of free cash in 2009, and end the year with around $550 million of cash; subject of course to our success in business development.

Now, I'll turn the call back to Mike.

Mike Bonney

Thanks, David. 2008 was a year of great accomplishment for Cubist. In the past 12 months we've made important progress against our long-term strategic goals. 2009 is shaping up as another important year for the company. Our expected milestones in 2009 include the completion of enrollment in the Ecallantide Conserve 1 trial, the completion of the Phase I studies for our gram-negative and CDAD programs and data due later in the year from the RSV lung transplant and dose fractionation studies.

We continue to be very active on the business development front and have a goal of bringing in a late stage product pipeline program this year. As we assess the additional opportunities for acquiring assets in today's market, we will continue to make strategically prudent, scientifically well-informed and financially disciplined decisions.

In 2009 for CUBICIN, our expected milestones include completing enrollment in ongoing Phase II studies of CUBICIN in prosthetic joint infections and in children with complicated skin infections. Continued progress for international partners with market launches and regulatory milestones and some important publications focused on pharmacoeconomics and out-patient use of CUBICIN.

With that, let's open the line for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Rachael McMinn with Cowen & Company. Please state your question.

Rachael McMinn - Cowen & Company

Thanks very much. I guess some longer term vision questions, as well as near-term questions. When you give your peak sales number of $1 billion, I guess how are you thinking about the overall MRSA market and what the CUBICIN share is and I guess the nearer term implications of the economy as well?

Mike Bonney

Rob.

Rob Perez

Well, sure, hi, Rachael, it's Rob.

Well really, to get to $1 billion in the US. CUBICIN needs to get to the mid to high teens overall. So we are not talking about a dominant market position, simply a mid to high teens share overall for that kind of a peak sales number.

Mike Bonney

We’ve also embedded in our assumptions, Rachael, and we've talked about this quite a bit in the past is that we expect the growth in the days of this market to continue but to continue to grow at a declining rate.

Although last five or six years this market has grown roughly between eight and 13% per year depending upon the year and we predict over time that that rate of growth will decline to the mid, in fact even to the low single digits. And in that context the share numbers that Rob was talking about gets you to the $1 billion.

Rob Perez

And as far as the economic question, we've been asked whether we've seen any direct impact on our business and we really haven't seen an impact. The, the biggest objection with Cubicin has been since the first days of launch, the cost of the drug versus the cost of vancomycin. So the idea that we are hearing that objection, is that's kind of been there all along. We have as David mentioned kind of taken into account that hospitals are likely going to be a little bit more cash strapped as they move into 2009 and beyond and we want to make sure that we are being a little conservative if they are likely in order to look at more expensive drugs.

Mike Bonney

We think Rachael that part of the economic condition may in fact reduce elective surgery as an example, which will have an impact on census in hospitals, which we know is closely correlated with the degree to which IV antibiotics need to be used.

Rachael McMinn - Cowen & Company

Okay. So then I guess bringing that near-term, so when we think about your guidance you didn't say it, but I think I had it from the slides here CUBICIN in the US of 520 to 540 does that -- have you assumed then that the overall market really is flat in 2009 or it goes down at all as elective surgeries as we are hearing is declining?

Mike Bonney

What we are saying is that we have because of the economic conditions and because of the uncertainty that those economic conditions represent we've been conservative in our guidance for 2009 for CUBICIN US net revenues.

Rachael McMinn - Cowen & Company

Okay. Okay. Thank you. That's helpful. And just on the R&D side I was wondering if you could help us understand what the fixed cost is for CUBICIN in 2009, or if you could provide any clarity as to how it kind of breaks out for various programs?

Mike Bonney

Yeah, we have done this in the past and recognize that this is all forecast information. Roughly what we are talking about is between 25 and 30% of the R&D spend for CUBICIN. Roughly 25% to 30% for early stage discovery and the balance will be divided between various four clinical programs, Ecallantide, the two Phase I programs for CDAD and the gram-negative program and for the Alnylam RSV-- our share of the Alnylam RSV. And those breakdowns do include the upfront that we’ve already paid for the collaboration with Alnylam.

Rachael McMinn - Cowen & Company

Thanks very much, I will get back in the queue.

Mike Bonney

Thanks Rachael.

Operator

The next question is from Stephen William with Thomas Weisel Partners.

Stephen William - Thomas Weisel Partners

Hi, thanks for taking my question. I just have a question I think on the RSV program. I know the economics are pretty were pretty favorable and it does overlap in the [queue] . I was just wondering how you view the market potential of that candidate and is that something that you just jumped in on right away in ’09 with respect to R&D spend?

Mike Bonney

The answer to that last question is, yes, from the point in time the collaboration was signed and announced going forward we will split the cost of this program for US development 50/50 with Alnylam. We think of this market as having multiple segments. We think one of the largest and highest unmet needs segments is the inpatient segment, which consists predominantly of children but has a meaningful and growing segment of adults who are immunocompromised and at high risk once they develop an RSV infection.

There is also an out-patient segment in this marketplace. Which we think represents some real upside potential depending upon the ultimate risk benefit ratio that is defined by these particular inhibitors as we get further along the development path. But the inpatient market is one of the most attractive elements to us. The out-patient market is largely pediatric market and we think we can access that, should the risk benefits support that with a very small sales force as it turns out.

We've done a lot of analysis over the last roughly four years on this marketplace and while it is out-patient, it is a very specialized out-patient market that we think fits with our skill-set very nicely.

Rob Perez

I would also add that just as kind of kind of a reference points Synagis which is a product that is used of course for prophylactic therapy is a product that has achieved over $1 billion in annual sales. So the market obviously has the potential to support significant products and we think the addition of a useful therapeutic in this market could be a really good product.

Stephen William - Thomas Weisel Partners

When you talk about sitting down and assessing the totality of the day in 2010 that includes both the adult and naturally infected child and both pediatric data as well?

Mike Bonney

Perhaps Steve…

Steve Gilman

At that point the real decision point was, will be which of the family molecules to take into pediatric trials. There will be no pediatric trials at that point at the end of this year, that will be the next sort of wave study that will go on will be pediatrics.

Stephen William - Thomas Weisel Partners

And you talked about bringing in a later stage assets. It looks like with the cash flow that you guys are going to generate this year that should be obtainable. In talking to do smaller companies do you kind of get the sense now that the valuation that some of these guys are asking for some of these later stage assets are starting to come in. I know the complaint on the business side previously were these guys withholding pretty fast to what they were – to what they had previously assessed these valuations at. So do you get a sense that some of these smaller guys with some of these later stage assets now are starting to cave in with respect to the terms that they are seeking?

Rob Perez

Well I do think that we are seeing some changes on a number of fronts. One; you are seeing more structured deals happen, if you just take a look at what's going on in the environment. And additionally at least for us at Cubist, the amount of inbound calls from smaller companies that have assets that are looking for potential partners has increased dramatically.

So our phone has really been kind of ringing off the hook. And now we have a different problem and that is assessing all of these assets to try to find which ones are actually the right fit for us. So it's definitely changed since the fourth quarter of 2008. So, definitely a good opportunity for a company like Cubist that has generated cash.

Stephen William - Thomas Weisel Partners

Great, thanks a lot.

Operator

The next question is from the line of Brian Skorney with ThinkEquity.

Brian Skorney - ThinkEquity

Hey, guys, how you doing today, just a couple of quick questions. First, when we are talking about the $1 billion figure that you are guiding towards now for peak sales of Cubist. Can you kind of go over what clinical assumptions go into that? Are you talking that with a high dose label or would we see an even higher figure if you do get high dose? Also is pediatric assumption in there and the prosthetic joint study, are you assuming that those are all positive.

Rob Perez

We are assuming there continues to be new data to support continued growth of CUBICIN, but we aren't assuming necessarily an additional indication is necessary in order to reach those levels. We are also assuming that the growth of MRSA continues as Mike mentioned and also the erosion of vancomycin continues on a slow but steady space.

Brian Skorney - ThinkEquity

My other question is regards to Ecallantide. Dyax has an upcoming advisory committee hearing panel for approval of the same drug in HAE. Could you kind of go over what your assumptions are going into that and what impact that might have on your development?

Steve Gilman

I'll start and Mike can add any commentary he likes. Obviously we know about the meeting and we are going to have several people there. We are wishing Dyax great success.

Mike Bonney

I think we will learn a lot about any [CMC] questions because it's common CMC. Their indication of course is subcutaneous, so it's a different route of administration. So some of the whether safety and efficacy results are analyzed won't necessarily be always translatable into our IV product, but certainly with the safety data package as we review, the path looks good and we hope it continues still and we will be at the meeting to cheer them on.

Brian Skorney - ThinkEquity

Alright guys. Thank so much.

Mike Bonney

Thank you Brian.

Operator

Our next question is from Greg Wade with Pacific Growth. Please go ahead with your question.

Greg Wade - Pacific Growth

Good evening and congratulations on a great quarter. David, I wonder if you just might discuss what you saw in Q4 on a unit demand basis throughout the quarter, whether the pattern of demand in Q4 this past year was different than in previous fourth quarters? And if possible to explain what looks to be about a 3% unit growth Q4 over Q3, and then if you could also reflect upon how demand has been in the first three weeks of this year and whether that's reversed any of the weakness that's apparent in the fourth quarter. Thanks.

Rob Perez

Sure, Greg, this is Rob, I'll take that. You know, of course, I am not going to talk about Q1 2009. You'll hear about that on our next conference call. But as far as Q4 '08, first point is that demand ended up right about where we thought it was going to. We came in right kind of smack in the middle of the guidance that we gave. So, demand was right about where we thought.

The one I think interesting and somewhat unique characteristic of 2008 was a middle of October that was softer than we had seen previously, and I think the combined ICAAC/IDSA conference corresponded with that dip and it's possible that just the amount of physicians out of their offices for that combined conference could have potentially had a bit of an impact on October.

But that was something that was a little unique. And then the last thing would be in the past couple of years as you know we've taken price increases on January 1. And so one could assume though we don't sell through wholesalers, that perhaps on an individual basis some hospitals were guessing at that a little bit in the past years' Q4. This year we took the price increase in the beginning of the quarter, so obviously that was unlikely to happen. But once again we think that's a small impact if at all, because hospitals don't stock a lot of our product. But those are a couple of extraordinary events.

Mike Bonney

Greg, I'd add one thing, and I think that embedded in your question was a statement about volume growth, which I assume you derived from the price of the 7% price increase on October 1. Because of the way the government mandated rebates work, we don't realize the full impact of a price increase immediately.

It takes generally a few quarters for that full price increase to work through the system. So, in fact we realize more like 5.5% of that 7% price increase. So unit growth was a bit higher than what you've articulated in the fourth quarter.

Greg Wade - Pacific Growth

That’s helpful. Thanks, I'm aware of that. If I might just ask another question? Steve, with respect to the RSV therapeutic opportunity, two things, is it anticipated that this will be an inhaled product and if so in what form nebulized dry powder inhaler, metered dose inhaler etcetera?

And then if you could just reflect upon the competitive landscape and the therapeutic area here. There's obviously a therapeutic antibiotic and small molecule inhibitor and a vaccine in development and how you believe that the Alnylam product is going to be the victor in this race. Thank you.

Steve Gilman

Thanks Greg. So this will be a nebulizer, probably the [carry-bulb] nebulizer, and so the nebulizer's delivery. That answers your first question.

On the competitive landscape is it actually pretty sparse really in this area, there are a couple of things out there; several things have failed.

When we look at the efficacy bank you get out of the Alnylam RNAi inhibitors in animal models and what they've seen on safety side and the exploratory. Although it's not exactly translatable to GEMINI study it's very encouraging in terms of showing antiviral activity.

We think with the right clinical trials and as we begin to develop we will see very strong efficacy and good safety and we think we will be able to compete against those things. They are all about head to head at this point.

Greg Wade - Pacific Growth

Great. Thanks and good luck.

Operator

Your next question is from Eun Yang from Jeffries.

Eun Yang - Jeffries

Thanks very much. On this CDAD compound that may go into Phase I this quarter, given that Vancocin may go generic sooner than later and there is another Phases III product already over Vancocin. I am just wondering what kind of a characteristic that you have assimilated, as the compound was developing?

Mike Bonney

I think you raise a very good point Eun. We are paying very close attention to how this marketplace evolves. We do have a very highly sidle in vitro compound that we filed the IND on and importantly that sidelity exists at the point of sporulation and in the assay. So what that means is that you shut down toxin production and the ability of the bacteria to sporulate. So we are quite interested in those attributes of the molecule.

Now of course that's all preclinical data and we'll have to see if that works in the clinic. In terms of how we think about the program, we are paying very close attention to the market, we are of course well aware of both issues that you articulated that is the potential for generic Vancocin as well as the Phase III data that had been reported from the first Phase III for Optimer's OPT-80 compound.

We do think that the large unmet medical need here is in the reduction of recurrence rates relative to vancomycin. We think that the attributes I just talked about for our molecule gives us a fighting chance to show an improvement there. But there is a very fundamental question about if the second Phase III study that Optimer is running recapitulates the results of the first one; can you do better than that reduction?

Because it appears that relapse rates are driven by two things, one is perhaps not quite cleaning out the gap of C. difficile and the other is perhaps re-infection given that there are spores throughout the hospital or the nursing home. And so the way we are going to run this program is we are going to do the single ascending dose study, assuming the FDA has no issues with the IND. We will then wait and we think given the public commentary from Optimer about the timing of their second Phase III, we will be able to see those data or at least see the top line of those data before we make the decision to move into the [NAD].

Depending on what those data look likely we'll either go forward or we'll step back and consider whether there's really a commercially justifiable profile that we think this molecule has a reasonable chance of hitting given what were we know about it at that time.

Eun Yang - Jeffries

Okay, thanks. And the second question is just a quick question and you mentioned that US sales expectations has gone up to $1 billion from $750 million. Can you kind of comment on what kind of a timeframe that you are thinking about getting to $1 billion in sales in the US,

Mike Bonney

Yes, we have been very careful to articulate no time frame for either the greater than $750 million or at least $1 billion. We think that the history of antibiotic IV -- antibiotic market is the products tends to grow for an extended period of time as more and more clinicians become more comfortable with them. And so we are not predicting any kind of hockey stick shaped event in the future but rather just slow and is steady growth as couldn't to take some of the volume share from vancomycin.

Eun Yang - Jeffries

Thanks very much.

Mike Bonney

The next question Jason Kantor of RBC Capital Markets. Please state your question.

Jason Kantor - RBC Capital Markets

Great, I had a couple questions, so I will try to be somewhat selective here. The expense guidance, is that also somehow tempered by the macro environment and it looks like your marketing expenses as a percent are coming precipitously down in 2009. What would be causing that?

Mike Bonney

So we are always prudent in terms of not letting the expense phase get up in front of the financial capacity of the firm. Jason I think we will add a [cracker] to that. With respect to the sales and marketing expenses specifically as we said a few times -- what's the key driver of the growth in sales and marketing expenses over the last three or four years has been expansion of the sales force.

This last expansion that we undertook to 164 salespeople was done anticipating that we would be able to have a little bit of capacity for a deal like mere MERREM. And so we are not building into the base plan in 2009 any significant expansion there.

The other thing I would just raise your attention to is that the new pharmacode is impacting kind of the mix if you will of marketing expenses in particular and so while it looks flat it's actually just a reallocation away from things that we will no longer be doing, in order to be compliant with the new version of the pharmacode to other things that we think will generate the appropriate level of revenue this year.

Jason Kantor - RBC Capital Markets

Now you guys talk about some potential buying in the fourth quarter and previous years. Does that explain the seasonality that you had been seeing, do you still expect potential flat to down on a unit basis in Q1 as we've seen before?

David McGirr

That, Jason, I wouldn't, I wouldn't want to kind of overstate that there was a ton of buying in Q4 previously. I think as I said it would have been a hospital by hospital basis and we still expect that Q1 will be a flat to down quarter when it comes to units. The seasonality is much more likely due to hospital census and the fact that CUBICIN doesn't have an pneumonia indication than any Q4 buying.

Jason Kantor - RBC Capital Markets

Now you guys were reporting, when you talk about cost of goods, how are you -- are you including the MERREM revenue in that at all?

David McGirr

No, we are not. Cost of goods is based on CUBICIN revenue.

Jason Kantor - RBC Capital Markets

Okay. Because what's strange is you were looking for last year 22 to 23%. You started out at 23% and you worked your way all the way down to about 20% in the fourth quarter. Now you are saying the same thing, this year 22% to 23%. I mean is there something that could happen in the second half of ‘08 that its going away and we shouldn't expect that benefit in 2009?

Mike Bonney

The answer to that Jason is there will be a royalty. Remember there's two components to our cost to goods is the true cost of manufacturing logistics, then there is royalty we paid to Lilly and as we sell more product, we pay more royalty to Lilly as a percentage, so while in 2008, we came in just below 13% to Lilly for the royalty, that will go up. In 2009, we are just going to sell more drugs, so even if we make improvements in manufacturing, we kind of give it up on the Lilly side.

Jason Kantor - RBC Capital Markets

Okay. And…

David McGirr

And the way it works Jason as we said every year, the first drug sales were at the lowest tier royalty et cetera. So if the sales grow, we are now getting an increasing percentage of the total sales in the year as the highest Lilly royalty rate. That’s so if the sales go up our net Lilly royalty increases as well.

Jason Kantor - RBC Capital Markets

Well that’s the optimism of what you saw last year in terms the cost of goods or…?

David McGirr

We excluded all in the fourth quarter. We don’t lower it, we try and straightline it. We have to reconcile at the end of the year but its more to do with volume, we are not going to see an improvement year-over-year on cost of goods.

Jason Kantor - RBC Capital Markets

Okay. Thank you.

Operator

Okay. The next question is from Biren Amin with Stanford Group. Please state your question.

Biren Amin - Stanford Group

Yeah. Thanks for taking my question. I know you mentioned in the upfront Alnylam payment is included in the R&D guidance. So I was wondering if they were additional milestones related to that agreement that are also included in the ‘09 guidance?

Mike Bonney

The way that the deal structured Biren we there are milestones associated with European development but not with the US development at this point. The development that we’re pursuing is driven by really the US regulatory standard and we’ll be further down the road before we decide whether there are European specific activities in the event we undertake and I would also say those milestones tend to be quite late in the development program, not early on.

Biren Amin - Stanford Group

Okay. And also, it fight back I guess upfront payment, in a way from the current deal as well as the upfront payment that occurred in 2009 from the Alnylam agreement. It suggests that there have could possibly the 50% increase in R&D expenses. What accounts for this increase?

Mike Bonney

Well we got four programs in the plant Biren. As opposed in essentially none in the clinic last year, we had some expenses associated with finishing of the Kalahari 1 study that was ongoing when we brought the dealings of Dyax, but we really have initiated the Phase II programs very late in the year, so the bulk of the Phase II expenses of the ongoing operation expenses if you will for ecallantide are all in 2009.

Biren Amin - Stanford Group

Okay great, thanks.

Mike Bonney

Sure.

Operator

The next question is from Joel Sendek with Lazard Capital Markets. Please state your question.

Joel Sendek - Lazard Capital Markets

Alright, thanks. I have a few questions, first I am wondering if you can help me on the EPS guidance on a GAAP basis, or what would be the EPS guidance. I went through the numbers and I come our using the midpoint in operating income line around $0.90. Does that sound about right?

David McGirr

Yes and we have really just provided you with the components and we would like you to do the arithmetic. I think we have you all the pieces you need. So we haven’t specifically give an EPS guidance.

Joel Sendek - Lazard Capital Markets

Okay, that is fine. Then should we be looking -- I mean you are guiding us obviously that operating income, which is the most logical way to look for how the business is performing. But I guess, we have to have a EPS number that we publish and I am wondering if, will that -- should that be the GAAP one with all the expenses in there even they are non cash expenses?

David McGirr

I think it initially question Joel, because, one of the thing is that we can get consistency we will be in good shape. And if everybody could just look at one set of numbers we’ll have to better that. One the challenges we have is historically some people have looked at GAAP, some people have looked at non-GAAP and its not for us to say, which you should look at, we look at both.

And part of our purpose of directing you towards the operating income is, that is the most consistent number that we have historically and going forward. And operating income is a GAAP number. And I think that’s important to understand. So, its consistent but its also a GAAP number.

The challenge near-term with GAAP EPS is this [APB] 41, which is distorting numbers for companies who have to deal with that which is not in the company, and as we transition through from having alternative minimum book tax having 39% book tax, clearly that is the distortion through going forward.

So I think you guys will have to make up your minds which number you want to focus on. But I'm encouraging you to focus on operating income.

Joel Sendek - Lazard Capital Markets

Alright I will sponsor this alternative conference call after this and we can all talk about.

My second question is, you mentioned a lot of the companies that I have been on calls for so far this quarter have been talking about, the recessionary impact and conservative guidance and things like that. I'm wondering how the recession impacted the sales of Cubist and has it impacted yet, and how could it in the future?

Mike Bonney

Well Joel, we haven’t really seen an impact yet, the concern that we have is that there is beginning to be a little bit of evidence that things like elective surgeries are declining, and what that does is reduce expenses in the hospitals. And as we have seen over the past four years or five years we have been in the market, first quarter expense is down and our revenue was flat to down. And so, we know there is correlation, we can't describe the exact causality here but there is certainly correlation between hospitals expenses and IV antibiotic use.

Now, in fairness Q1 is also a mix issue because of the pneumonia is much more common in Q1 than it is in other quarters of the year. But we are just being cautious here, I guess is the way I would say it, because we don't know how deeper how long this recession is going to be.

And our basic rule of thumb is let's build the financial plan for the organization based on a number that we have high, high confidence in even though there is obviously much more uncertainty this year than years past just in the general economy. And so that's our concern and we are working on developing better data sources so that we can track things like hospital census and elective surgeries and so forth over the course of the year.

Joel Sendek - Lazard Capital Markets

Okay. Thanks.

Operator

Our next question is from Tom Russo with Robert W. Baird. Please state your question.

Tom Russo - Robert W. Baird

Good afternoon. I was hoping to start the slide on page 7 for your market share. In the past around the end of the year, beginning of the next year there have been some dips in share, but it looks like it's been flattish for a little bit longer period up until now. And I was just wondering if you could remind us if that has to do with the settings where the drug is used or things of that nature or if there is something else that has market share looking flat on that chart?

Mike Bonney

Yeah, Tom, I think first of all you got to recognize that these are quarterly numbers over a long period of time. So they can move slowly quarter-over-quarter, but our share has been increasing. I believe we gained about almost 1.5 share points or so last year. And remember the CUBICIN strategy is not to be a dominant market share player, so those share points even at low amounts represents significant terms of business that our price points. So while it's climbing slowly, it is still feeling a CUBICIN growth.

Tom Russo - Robert W. Baird

And then David could you comment on what didn’t get down on the R&D line in Q4 relative to the guidance that was given in October and whether that shifted into 2009?

David McGirr

I’m not sure I could identify individual program running. I think we are just being more efficient and there is always slippage in dates. December 31 someone's arbitrate in the R&D world, an experiment maybe going on and won’t necessarily end on December 31 and so you have to pay for January the 5. And so I think that’s a very hard line to trying for financial people to live of December 31, but I think the sign is somewhat arbitrary.

Tom Russo - Robert W. Baird

Okay. And then if I – the buyback of the $20 million upfront payment from Alnylam from the first quarter what looks like you are guiding to about a $150 million to a $160 million in R&D expense for ’09. Thinking ahead for 2010 and 2011 it Phase III as a range of possibilities for Ecallantide in terms of the size and what not. But can you manage that program within your existing percent of sales or how should we think about what R&D cut looks like if Ecallantide does in fact move forward into Phase III.

David McGirr

Well I think a couple of things Tom with respect to that question. The first is we only provide one year guidance at a time. The second thing is strategically and I think you're seeing some evidence of this in 2008 certainly. The way we think about that P&L is that a portion of the incremental gross margin we are generating by CUBICIN growth, we dropped at a bottom line and trying to grow operating net income if you will, and a portion of it we allocate to the ongoing development programs.

And we are very confident that our business plan is sustainable over a number of years, given the rate at which we expect CUBICIN to grow and that IV antibiotics in general to grow over the long term. So we are not going to get into the specifics until we have more information, but we are very confident in the sustainability of our business model here.

Tom Russo - Robert W. Baird

Okay, thanks very much.

David McGirr

Thank you.

Operator

(Operators Instructions). The next question is from Alan Carr with Needham & Company.

Alan Carr - Needham & Company

Hi, good afternoon everyone. I was wanting your comment on your international guidance? Do you have any changes to your long-term projections there, in terms of key potential? [MRSA] start in relatively modest guidance for this year ex-USA. Can you comment on that and how you think your partners are doing?

Rob Perez

Our international guidance as you know is between $12 million and $16 million, the lion share of that will still be driven by Novartis. In terms of how our partners are doing, I think Novartis is continuing to put a significant effort behind CUBICIN. They are trying lots of different things to try to infuse even more momentum into sales. They did go sales last year, in the neighborhood of 130% - 140% right around that area.

So, they are not going to able to grow the sales to numbers that we see here in the US for lots of reasons, both because MRSA is less of a problem through (inaudible). That's one of the fact that they have an additional competitor like a peptide competitor, and they also don't really have the outpatient market that we have in US.

That being said they remain committed and believe that this is the $150 million plus market opportunity for them in end user sales, and they are working to get after it. So we will continue to see it. I mean the growth in the international market like in the US grows slowly. So based on where it's in the last couple years, they are seeing increase growth, but it's happening slowly over time.

David McGirr

Can I just tighten something up there? Our international guidance revenue is actually around $12.5 million, it's a slightly different number.

Rob Perez

Okay, all right.

Alan Carr - Needham & Company

Rob, you said, 12-16, but is actually 12.5, right?

Rob Perez

Right, 12.5. I have been corrected.

Alan Carr - Needham & Company

Last component to this. So it's approved in 25, no launched in 25, approved in 58. What sort change could we expect to see in the number of countries where CUBICIN won't be able this year? Do you have any?

Rob Perez

We do expect that there will be a numbers of new product launches, new countries. I'm looking for list inside in here. So, countries includes South Korea with [new] Pharmaceutical, Taiwan with our partner TTY Pharmaceuticals, Mexico, Brazil, Venezuela, Columbia, Chile with Novartis, and then Vietnam, Hong Kong and Taiwan with AstraZeneca. So, there a number of markets now recognized that most of these markets are small, but together they start to add up and will continue to fuel growth for CUBICIN internationally.

Alan Carr - Needham & Company

There aren’t any particularly big ones that you are expecting to come on this year?

Rob Perez

The next big market really is China and Japan. Those two markets are progressing. We have trials that needed to done in both those markets. In China, we have a trial that’s going on a skin trial and the launch for skin won't be expected until 2010 and similar timeframe for Japan.

Alan Carr - Needham & Company

Okay. One other question unrelated to international sales, can you comment on, I guess, the extent of the impact you see. You mentioned an economic impact, the potential economic impact that was driving your conservative guidance. Can you put a number around that? What certain number you expect to see? What percentage I guess declined in hospital admissions and that sort of thing that works into your conservative guidance?

Rob Perez

I think, Alan if we could predict the depth and severity of this economic downturn and then get to the impact on hospitals with any level of confidence, we should probably be in a different business. What we are really doing is just saying look guys; it's always easier to deal with the positive upside than a negative downside. So let's get real confident that we can even in the worst case scenario deliver this guidance range and that's what we have to find here.

Alan Carr - Needham & Company

Okay. Thanks very much.

Operator

Next question is from Kevin Degeeter with Oppenheimer. Please go ahead with your questions.

Kevin Degeeter - Oppenheimer

Yeah. Thanks for taking my question, I want to have my congratulations on, it was a nice quarter on most of the top line and managing expenses. I guess, most of my questions have been answered, but may be a couple housekeeping ones. On MERREM is there an opportunity to earn the additional I guess the earn out payment twice a year, is there an opportunity in the third quarter to recognize additional earn out or is that primarily of January first quarter effect?

Mike Bonney

It's a January effect because of the way the contract is structured. So, I will just remind all of you that if you think of the $20 million base contract, if we hit that, it's a $1.5 million, Q1; $1.5 million, Q2; $1.5 million Q3 and then the 15.5 in Q4. For 2009, in Q1 we are attending to book the additional roughly 4.5 million but that’s the catch up from 2008, so if there were to be additional money to owe to us for how we perform in ’09 that will not show up until Q1 in 2010.

Kevin Degeeter - Oppenheimer

Yeah, terrific. That’s right and helpful. And I was just noticing on your presentation of the pipeline in your discussions through some of your investors, you don't want to discuss the HCV program, can you just give us an update there or status and whether or not 2009 guidance include additional investments in the HCV program?

Mike Bonney

Perhaps Steve.

Steve Gilman

As we discussed in our R&D day in September, there are number of technical issues we certainly [as we saw at ] the program it's another target, another mechanism. We like the program but there is some technical issues we need to get before we configure out whether from this protein we can have an IND candidates, and that’s we are working through now and yes there is a fairly limited amount of project allocation for that in 2010 and

Mike Bonney

2009.

Steve Gilman

Sorry 2009. And the plan is in the first half of the year to come to a decision point as to whether that’s a verifiable R&D candidates that we really want to take in humans or have to take a further step back with the program.

Kevin Degeeter - Oppenheimer

Okay. Just, so we shouldn’t interpret from the absence of that program on your pipeline side, I mean a decision is already have been made on that?

Steve Gilman

No, that’s correct. It's just because it's really right now in really a research portfolio, it hasn’t really got to really development decision yet.

Kevin Degeeter - Oppenheimer

I appreciate the clarity. Thanks so much.

Operator

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

Matt Duffy - BDR Research

Hi guys, thanks for taking my question. Just a couple of things on the current CUBICIN sales. Looking at you think that MERREM is getting more traction in ICs and surgeons and in that sort of things. Is there a metric that you guys are going to be able to follow to look at that? And then should just corelated to that is, what then is this is for inpatient and outpatient going through fourth quarter, and what does growth look like in each of those segments?

Rob Perez

Sure Matt. I don’t have a metric for ICU sales beyond what we are hearing from our sales people. And added and you know that a number of sales people, even though they have been experienced hospital sales people, they may not have much experience selling in the ICU. So their comfort level in selling in the ICU wasn’t as great as it could have been.

And frankly we didn’t think that we had much penetration with CUBICIN as we would have liked in that segment. So what we are now is because with MERREM which is very well excepted in the ICU, our representatives have a lot more of confidence, and this is giving them new targets in the ICU. So I don’t have a quantitative metrics, but I can tell you that our sales people are much more confident in ICU than they have been.

And your second question was about the [inpatient] and outpatient. So we are still having round about 45% outpatient share of the overall business. And we saw a significant growth in both in and outpatient during the year.

Matt Duffy - BDR Research

Right. And is the split between skin and endocarditis etcetera is that fairly static at this time?

Rob Perez

They have been very static. The [bacteremia] is part of the business, it's going a little faster as they are taking up an increasing part of the pie, but again it's still the largest chunk of business thus far.

Matt Duffy - BDR Research

Great, thanks very much.

Operator

The next question is from [Justin Ferrioni with Counteract Capital]. Please state your question.

Justin Ferrioni - Counteract Capital

Hi, good afternoon. Couple of [projecting] questions for David. Just remind on the accounting treatment of the new convert rules? Do you have the (inaudible) full share count including – and include obviously the interest expense?

David McGirr

In the dilution calculation yes, if you back the interest expense out as if you use the treasury method, so that you don’t double count, its either debt or equity, so you have to back it up.

Justin Ferrioni - Counteract Capital

Okay. And I think you said this, but what's the face value of this auction rate securities that are still paying at this point?

David McGirr

58.1 million

Justin Ferrioni - Counteract Capital

Okay. And I think that former question that was just asked on MERREM, is the bonus that you achieved in the fourth quarter which you'll receive this quarter, has that somehow changed the hurdle rate for 2009 in any way?

David McGirr

No, we have a pre-negotiated forecast for 2009. So we had negotiated that number prior to or at the beginning of the deal.

Justin Ferrioni - Counteract Capital

So, how about, I believe its 2010 the final year of the contract I believe?

David McGirr

Well we don’t have a numbers agreed upon yet for 2010, but at the end of 2009 both companies will sit down and agree to that number.

Justin Ferrioni - Counteract Capital

Okay. Thank you very much.

Operator

The next question is a follow-up from Eun Yang with Jefferies. Please go ahead with your question.

Eun Yang - Jefferies

Well, thanks very much. It looks like televancin may get approval from the FDA this year for skin infection. So I'm just wondering based on the panel meeting last year and what you are hearing, what do you think about the impact -- potential impact over their products and CUBICIN sales are going forward and secondly whether your guidance for this year in the US actually assumes televancin launch sometime this year. Thank you.

Steve Gilman

Thanks, (inaudible) Yes, our guidance does assume a televancin launch and we don't assume much of an impact on CUBICIN sales. Given the advisory panel and the likely label that will be attached to televancin with the concerns expressed by the advisory panel, likely to be reflected in that label, we don't think that it will be much of a competitor for complicated skin but obviously it doesn't have a bacteremia claim. So I really don't think it's going to have much of an impact on CUBICIN.

Eun Yang - Jefferies

Thank you.

Operator

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

Rachel McMinn - Cowen And Company

Yeah, just one follow up. When you talked about elective surgery and those being down as a macro issue and causing you to be more conservative with your guidance and I don’t really think about CUBICIN as being a drug that's used prophylactically for surgery. Do you have a sense based on your market research what proportion of CUBICIN sales are derived from that segment on the market?

Mike Bonney

It's really not used for prophylaxis, it's used for post surgical infections. Very commonly that's a big portion of the complicated skin used. So few elective surgeries means fewer post surgical infections.

Rachel McMinn - Cowen And Company

Okay, so, it’s just the one I am clear then. So you think that will -- I guess on the skin side have you said that 50% of the use is in skin right now and so we should assume that the vast majority of that, if there is significant downturn in surgeries, that there could be a significant downturn in that part of the sales?

Steve Gilman

Yeah, our percentage in skin is in the kind of mid 40% of total CUBICIN used. We don’t think it'll be significant because the skin represents a wide range or different types infections, bites, diabetic ulcers, post surgical infections, accidents. Any number of things, but overall surgical use could be lower if is in fact our concerns about this economic downturn affecting elective surgery, by hospital funds is down etcetera. The other thing is just the more patient you have in the hospital, the more opportunity there to develop and MRSA infection and so I don’t -- you are making a more direct correlation with elective surgery and our revenue than what I’m trying to communicate here.

We think elective surgery is an element that will drive expenses down, few patients in the hospitals, means fewer MRSA infections, means that the rate of growth may not be quite as robust as it might have been had everybody who had elective surgery options in 2009 actually pursue them.

Rachel McMinn - Cowen And Company

I see. Okay. Thanks very much for the query.

Mike Bonney

Thanks, Rachel.

Operator

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

Mike Bonney

Thanks, [Joe] and thank you all very much for you time and attention today. We know these are challenging times for many of you and we wish you all the best in 2009. Our first quarter call is scheduled for Tuesday April 21st at 5 pm. We look forward to talk to you at that point of time therefore. Take care.

Operator

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

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