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Cubist Pharmaceuticals, Inc. (NASDAQ:CBST)

RBC Capital Markets' Healthcare Conference

February 26, 2013 3:05 pm ET

Executives

David W. J. McGirr - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Eileen C. McIntyre - Senior Director of Investor Relations

Analysts

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Welcome, everybody. My name is Adnan, Adnan Butt with RBC Capital Markets. I have with us here, David McGirr, CFO of Cubist; and Eileen McIntyre, Cubist as well. David and Eileen, thank you for attending. There's several things happening at the company. Obviously, CUBICIN is the foundation of everything, but lots of things happening in the pipeline as well. So I'll start with CUBICIN first. How has the market changed over the past few years? And how do you expect it to evolve? Is an expectation of unit growth still a viable or fair expectation?

David W. J. McGirr

Yes, we continue to see unit growth. We think we'll have vial growth in 2013 and beyond. Just to that into perspective in 2012, year-over-year, we had roughly 16% growth in CUBICIN sales in '12 over '11, of which just a bit below 6% came from vial growth and the balance came from price increase growth. So meaning -- still meaningful mid-single-digit vial growth. And that, put it in context, and that's in a market where the underlying disease state, the MRSA market, is not growing. The MRSA market -- or may be growing between 0% and 1%. But the underlying market is not growing a whole lot, but we still were able to pick up over 5% vial growth. And that's largely coming from vancomycin, taking share from vancomycin.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. So it's been mentioned several times, but I'll ask it again, what is the value proposition? How does it allow you to drive growth using price increases?

David W. J. McGirr

Well, the value proposition is, to us, clear and there's a lot of data supported. It also seems to fit very well with where the medical community and the hospital community are going just now and that is to, obviously, treat the patients, the appropriate patients with the right drug to make them better. But it also is looking at the overall cost of the system. And so while at a very superficial level, some people will say, but wait a minute, you can buy vancomycin for, let's say, $15 a day. And if you're buying CUBICIN for a skin patient, it might be somewhere around $200 a day, so that's a big difference. But that's not looking at the overall cost of delivering to that patient in the system. And if you start to look at trying to discharge fewer days in the hospital and secondary events which sometimes can occur with patients on vancomycin, the -- for those hospitals who have done the work, and they haven't all done it. For those who've have done the work, the CUBICIN story is quite compelling in terms of why it's worth spending that extra to acquire the drug to actually help the patient to get them home sooner.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. The indications, and where it's used, does that play a part in this value proposition?

David W. J. McGirr

Well, again, I think you have to remember where we're used and how do I use them. Well, maybe just set the stage on that. We are still predominantly used after vancomycin has been tried, and vancomycin has not given the result that the medics were looking for. And so, we're often the second used drug. And the patients who tend to get CUBICIN are extremely ill. They have other things going on in their day and they're often very fragile patients. And so, there are -- there's no question, there are patients with a particular type of skin infection, perhaps not as serious, vancomycin is a perfectly good choice for those patients. If you get the more severe cases and certainly the very fragile patient, CUBICIN becomes a much more compelling choice for them. So that can be a severe skin infection, it can be bacteremia, it can be right-sided endocarditis, those are the areas where -- which are covered by our label. And so you can see across that range of condition where CUBICIN fit.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Is there one that's driving growth? Or is it pretty much endocarditis then, you know...

David W. J. McGirr

Our actual market share, if you look at the days of therapy, that days have kind of a leveler, we probably have more of our business still in skin and then followed by systemic bacteremia or endocarditis. And then there are a couple of other places we are used. We are used in osteomyelitis, even though we do not have a label and we cannot promote there, but we know we're used there. And then there is a kind of bucket called, other, which is where we are used too. But the bulk, about 80% of our businesses is between skin and bacteremia or endocarditis.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. The shift in inpatients versus outpatients, what is driving it? Is it a medical need? Is it economic? What's the leading to more use outside the administration?

David W. J. McGirr

CUBICIN, even though it's an IV drug, it's actually a very good drug for the outpatient setting. And that comes from 2 ways that can be administered. The way when we launched was an IV infusion for 0.5 hour, once a day though, only once a day, as opposed to vancomycin, which is twice a day, sometimes up to 2 hours. So you perhaps could have a patient tethered for 4 hours on vancomycin, whereas in CUBICIN's case, it might only be 0.5 hour. Quality of life, that's important and that allowed us to push the drug into the outpatient market very successfully. The other set up we now have is the 2-minute infusion, the push with the syringe. And while we can't be explicit about how much of our business is done with the 2-minute push because it's the same vial that's sold, just how we administer it, we do hear from users they -- that the 2-minute push has been a big plus in the hospital outpatient setting, but also in other settings in the outpatient settings. So the bottom line is, roughly half of our business is inpatient, half our business is outpatient. The outpatient have generally, not exclusively, but generally been discharged from the hospital. They've started on CUBICIN in the hospital and then when the time has come to discharge them, they are discharged on CUBICIN. And that feeds right into this convenience of use in the outpatient setting.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. And is the share of outpatient increasing, stable? How do you expect the trend to shape up?

David W. J. McGirr

It's pretty -- it's been pretty stable. But we have an interesting quirk there. We know, again, from talking to the hospitals that they are using CUBICIN in their outpatient setting. So that's technically an outpatient patient. But we sell the drug to the hospital. So we actually can't track, we know we delivered to the hospital pharmacy, whether that's administered inpatient or outpatient, it's not clear to us. So we think that even we have data, which shows that I think it's 52% inpatient, 48% outpatient, or did I reverse that? Is that right?

Eileen C. McIntyre

Yes.

David W. J. McGirr

52% in, 48% out. That may be slightly wrong because they may -- some of that 52% inpatient may actually be outpatient in the hospital setting.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

The reason I asked is because the landscape is changing a bit. There's a number of oral and long-acting antibiotics that are in Phase III or have had data or expected to maybe get approved. What impact, if any, do you expect them to have on CUBICIN?

David W. J. McGirr

I think...

Eileen C. McIntyre

Think again about what David was saying about these types of patients for CUBICIN. These are patients who have poor immune systems or is very, very ill or the infection itself is really serious, such as bacteremia. Generally, they have started on vancomycin and ended as an outright failure or they get an MIC back because vancomycin is not going to work with this patient. And then they get moved to CUBICIN. So we have data in bacteremia that there newer agents that comes to the marketed don't have, and these are sick patients. We don't think that the infectious disease community will immediately move to a strong half-life drug in that patient population. They do like to preserve their flexibility. When you got a really sick patient, you want to be able take drugs on and off, you don't want to just be able -- just have to add things. So we think in the niche where CUBICIN is used, we don't think new skin-only indication therapies are going to [indiscernible]. There could be opportunities for them. With the less seriously ill patient population, there's a lot of vancomycin use that CUBICIN really can't compete directly for. And there may be an opportunity for them there. But we don't think in our niche those kind of therapies going to be a substitute for CUBICIN.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

This is actually a decent segue into the next line of query for me. I'll obviously ask about the Paragraph IV filers. But before I head in that direction, can you remind us again the settlement that the company reached with Teva? I think it was a couple of years ago on that Paragraph IV litigation? What it means to the economic?

David W. J. McGirr

Absolutely. So we came to an agreement with Teva and Teva will enter the market either in June of 2018, if we get our pediatric exclusivity. If we fail to get that, obviously we're working aggressively to achieve that, they would come to the market in December of 2017, we will be their exclusive supplier, so all of the daptomycin that Teva sells will come from Cubist itself. And the economics work this way. We supply them the product, and we ship it to them at a cost-plus and, it's a cost-plus on an economic arms-length basis, so its a true cost-plus, having allow us to book those revenues. And then, Teva will obviously, market the drug the way they choose to. They'll price the drug way they choose to and they will have some expenses associated with that. They also get a small percentage of their gross revenues, which they get. And then what's left is really the gross margin. And the gross margin is split between Cubist and Teva with more than 50%, I can't tell you exactly what the number is. But more than 50% of that gross margin comes to Cubist. So we'll have got the cost plus 10% and we'll get more than 50% of gross margin. So a very substantial amount of the cash flow from daptomycin once it goes generic through Teva will continue to have accrued a lot.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And how long is that arrangement in space?

David W. J. McGirr

It lasts until the last Orange Book patent expires, which currently is 2028.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And that litigation, did it take place over the -- well, first, how did you convince them to settle with you?

David W. J. McGirr

I'll explain something. In the Delaware courts, which is where we litigated with Teva, and we're litigating with Hospira, there's a parallel pie, so you go through the whole process, you would normally expect and with Markman hearings and then court date. But in the background, the parallel, there's a court-mandated arbitration process that you go through and you meet with a magistrate, another judge in the Delaware system and the 2 parties are required to have ongoing discussions about, is there a settlement possible. And what Delaware is doing very pragmatically is trying to clear the court and have fewer court dates. So we were in that process with Teva. And towards the end of that process, we had a meeting and it was 3 weeks before the court date. And it became clear to us that Teva was interested in a settlement. And there were some proposals made and we were able to come to agreement in the course of that -- in the course of that session. It also became very clear in that discussion that Teva was interested in having us be their sole supplier.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. Now is it fair to assume that similar process would be underway with the other Paragraph IV challenges as well?

David W. J. McGirr

Yes, we have one other one, which is Hospira. And that's underway. They brought their Paragraph IV challenges and there's a court for that, which we can talk about if you want. But basically, we have one case now, which is going to the Delaware court system and the next date of significance is the Markman hearing, the claims construction hearing. And that will take place on April 10. So a couple of months time.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

It's the same judge?

David W. J. McGirr

Same judge, same court, same deal. Interesting little quirk there when we were going through the Markman hearing with Judge Slip with Teva and both sides submit their briefs, which is what happens and then they comment on each other's briefs and it all comes together. The day of the Markman hearing, Judge Slip actually ruled from the bench that he didn't need to have a hearing, he'd already made his decision, and here's my decision. So we don't know if that's what he'll do again, but that's what's what he did with Teva. He's known to be a very efficient judge, so that, just something to bear in mind. So we have the Markman hearing coming up in April and then it goes very quiet and the court, the actual court date, the bench hearing, is set for February of 2014. So don't expect to hear a whole lot between April 2013 and February 2014.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

These meetings behind the scenes that are in place to encourage both parties to settle. Is there -- how frequent are they or...

David W. J. McGirr

I don't remember how frequently. They're fairly regularly set. Every few months, there's a the meeting.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

What is different about this litigation versus when it's litigated versus Teva? Am I running correctly that there are more patents in place now than the prior?

David W. J. McGirr

Yes. When we litigated with Teva, there were 3 Orange Book patents. There are now 5 Orange Book patents that are being litigated. So there are 2 more and they go out further. The dates extend beyond the date that we are litigating with Teva. So -- and for those of you who don't live Paragraph IV challenges and litigation, which hopefully you don't, the key to this is there are 5 patents in the Orange Book. If Hospira wants to prevail, they have to defeat all 5. Defeating 1, 2, 3, or 4 achieves nothing for them. All 5 have to be back to one site. So that's -- 5 is more than 3.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

But are they claiming that they don't infringe?

David W. J. McGirr

Yes. The moment is very much in the, I couldn't use the word generic, boilerplate. It's either they won't infringe or there not valid.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And then what was the strategy behind filing the NDA?

David W. J. McGirr

Well, for the 5O5B2? What that is, is we have a single setup in the U.S. for a 500-milligram vial. In other parts of the world, we have a dual setup, we have a 500-milligram vial and a 350-milligram vial. We've just never registered the 350-milligram vial in the U.S. and that's for a purely practical reason. We're much fatter people here in the U.S. than the rest of the world and so we need more -- this is a weight-based drug and so you need a big vial to suit most of us. Whereas in Europe and elsewhere in the world, they're better, they're healthier, and so you don't need as much drug. So what Hospira did was they filed an NDA because that's just a practice. So that in the invent they were to overturn the patent, they could also launch a 350-milligram vial. We would have to do the same thing. If we chose to have a 350 set up in the U.S., we have to do the same thing. As I said at the beginning, all of those have now been convinced to the one case.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And what was the reason for convincing them all?

David W. J. McGirr

Well, it's the same goop in the vial. If you think about we're litigating over what's in the vial, we're not litigating over the vial. That's the same stuff.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Let's spend a little bit of time on -- we'll get back to the other 2 revenue assets but 201. The study is enrolling fine now. Last year, I guess, there were some enrollment delays. It wasn't under the company's control, but nevertheless, so what's the status now and when -- what is the timing of it?

Eileen C. McIntyre

[indiscernible] for CXA-201 previously. We have seen very nice enrollment pickup. All of the ex-U.S. sites are now up, and we got them all up in the second half of last year and they've been enrolling very nicely since then. And we expect to have data, top line data for both complicated urinary tract infections and for complicated intra-abdominal infections in the second half of this year. And 6 months from that top line data, we expect to file an NDA for those first 2 indications.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

There's 2 questions for you there, Eileen. First, could the timing be further fine-tuned as the year progresses? Or are you pretty sure that it's -- so it's at the second half now, but could it be third quarter, fourth quarter? Will the company get more clarity on that as the year progresses?

Eileen C. McIntyre

We'll see how it goes. We haven't indicated that we would right now we're comfortable saying in the second half. It could be that one of these will weed out sooner than the other, or if they're very close together, we may announce top line for both together. We'll be having enrollment and there's a lot of process as the trial ends in getting that data together before top line.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And how much detail would you select if one were to weed out sooner? How much detail would you be willing to release?

Eileen C. McIntyre

Yes, I should probably expect because it's very important to get this kind of data in front of a peer-to-peer audience. So top line, you'll give relatively skinny data in terms of positive results or negative results or any questions, but you don't give a lot of the actual numbers because you want to preserve the opportunity to sell that in a peer-to-peer forum.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And why is the 6 months timing, is that based upon just how much work you expect to do? Are you waiting for other studies to be complete?

Eileen C. McIntyre

Just the work that needs to done. Within that 6 months, we feel comfortable we can get NDA ready to file.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Is the same data package needed to file in the U.S. as in outside the U.S. or are they different?

David W. J. McGirr

Of course, different format but it will be with the same data package. And that actually raises a very interesting point, which I'd like to make a statement about today and this is actually news, which I'm announcing here is that we -- those of you who follow our story and follow what we've been doing with 201 know that we had a chance to pool our trials. We had 2 trials going for complicated urinary tract and 2 trials going for intra-abdominal infections. And based on a change in guidance from the FDA, we were able to get agreement that at the end of day, we'll actually just pool all that data into a one trial and to be able to use that to analyze the IAI and one trial to analyze the UTI data.

Eileen C. McIntyre

With fewer patients.

David W. J. McGirr

With fewer patients. So that's a significant benefit to us. So we get fewer patients, less cost and higher powering. We had previously said that we're going to have similar discussions with the EMA but whether they would accept this pooling arrangement. And this is what I want to tell people today, is that we now have agreement with the EMA with the same pooling structure, the same pooling approach that we have agreed with the FDA will now be acceptable to the EMA, so it is going to be exactly the same set of trials, exactly the same pool of data that is used in both location.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

What convinced them?

David W. J. McGirr

Well, interestingly enough. They probably -- the bigger movement probably came from the FDA. The EMA was probably closer to the type of structure we're doing. Initially, the FDA was further apart and then came over and the FDA moved in line -- the EMA, sorry, moved in line.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. And what about other studies that are either ongoing? I think a Phase II is kind of ongoing for pneumonia?

Eileen C. McIntyre

Well, actually a Phase III in ventilator-associated bacterial pneumonia will start around mid-year. It going to be a big trial and will last a long time because if the all clause mortality endpoint, this global trial to get enough patients to show the difference with that kind of endpoint, that could take up to 4 years. But at the same time, to your point about a smaller trial, we're also going to start an open label smaller trial that's 300 patients or so, and that one will have a slightly different endpoints instead of closed-mortality clinical signs and symptoms. The idea being that we can get that data published, so that if there were physicians who is interested in using it to their expectations in pneumonia, there will be data they can reference. Obviously, we don't promote for pneumonia until we have that Phase III data.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

You file 6 months from when the data comes out for 201? What's the new review cycle for 201? Is it shorter than the typical 12-month cycle?

Eileen C. McIntyre

Yes. Actually we got what is called QIDP status, a Qualified Infectious Disease Product status. I don't know, some of you may be familiar with the GAIN Act that was part of PDUFA 5, where the FDA is now for really resistant pathogens and there's a certain list of those pathogens that were agreed to. They are giving accelerated reviews, so it's a guarantee of 4 months less review period. So that 8 months time for FDA's review, which is good news for patients and good news for investors and Cubist.

David W. J. McGirr

And then you have data from the Phase II study.

Eileen C. McIntyre

We're hoping to have that sometime in 2015, probably shortly after the drug launch has resumed.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

What are peak sales expectations for the gram-negative market and U.S. versus ex-U.S.?

David W. J. McGirr

This is a large market. It's a larger market opportunity than the one we addressed with CUBICIN, for Gram-positive and MRSA. A lot of that is driven by the non-, the ex-U.S., particularly, the European. The instance the gram-negative infections is much higher in Europe than Gram-positive MRSA infections. And so, when you combine -- some increased the size in the U.S. and this very much larger market, Europe. The number of days of therapy, you can address it by 80% larger for the Gram-negative market than the Gram-positive market. So put that in perspective, we are driving this year the somewhere over $900 million of sales of CUBICIN in the U.S. alone, with about a 14% market share, and we do believe we will get past the $1 billion in the next few years with CUBICIN in the U.S. So we're going to launch ceftolozane/tazobactam into a market which is 80% bigger.

This is when they get straightforward. To achieve $1 billion of ceftolozane/tazobactam sales, you need market shares in the single-digits. So we're not saying that's what we're targeting, that's not saying what we want to get, but I'm just kind of calibrating the market for you. We've got $1 billion of CUBICIN at '14 so to get to $1 billion, you need 5, 6, 7, 8.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Is this space competitive? Are there other companies trying to target the same indication?

David W. J. McGirr

It is competitive in that there are other companies trying to target Gram-negative pathogens, but we're probably most advanced, specifically for Pseudomonas aeruginosa.

Eileen C. McIntyre

And it's high levels of resistance for the existing therapies. There are many generics that are used in the Gram-negative therapies but they're all getting to a point of dangerous levels of resistance, 20%, 25% the surveillance data shows the pathogens that are resistant at pseudomonas aeruginosa.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

So I can't let you go without asking of business development question. Our expectations there is still the same as before in that -- well is that [indiscernible] deal that was the recent option to apply their antibiotic -- pain medications? Is pain something that the company is becoming very serious about as an indication of interest? What is the business development criteria that you're looking at?

David W. J. McGirr

It's about acute care, it's about providing therapeutics for the acute care setting. It's not a therapeutic focus. So acute care to us is in and around the hospital, so that would be antibiotics, acute pain, acute cardiovascular will probably be the top 3. You could think of anesthesiology, as well, perhaps but this is a channel strategy, not a therapeutic strategy.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

And perhaps, I mean, to meet the 2017 guidance, does there have to be a deal? Can we use that internally?

David W. J. McGirr

No, we need business development. We need revenues from another source to get to the $2 billion of 2017 revenue.

Adnan S. Butt - RBC Capital Markets, LLC, Research Division

Okay. Okay. David, Eileen, thank you so much for your time. It's a pleasure having you here. Everybody, the breakout session is in the Louis Salon. Thanks so much for attending.

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