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Executives

Eileen C. McIntyre - Vice President of Investor Relations

Michael W. Bonney - Chief Executive Officer and Director

Robert J. Perez - President and Chief Operating Officer

Steven C. Gilman - Chief Scientific Officer and Executive Vice President of Research & Development

Michael John Tomsicek - Chief Financial Officer and Senior Vice President

Analysts

Jason Kantor - Crédit Suisse AG, Research Division

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

Steve Byrne - BofA Merrill Lynch, Research Division

David Friedman - Morgan Stanley, Research Division

Eun K. Yang - Jefferies & Company, Inc., Research Division

Alan Carr - Needham & Company, LLC, Research Division

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

Cubist Pharmaceuticals (CBST) Q1 2013 Earnings Call April 18, 2013 5:00 PM ET

Operator

Good day. My name is Nicky and I will be your event manager today. At this time, I would like to welcome everyone to the Cubist First Quarter 2013 Review. [Operator Instructions] At this time I would like to turn today's program over to Eileen McIntyre. Eileen, you may begin.

Eileen C. McIntyre

Good afternoon and thank you for joining us for our review of Q1 2013 business performance and financial results for Cubist Pharmaceuticals.

Before introducing our speakers, I will read the Safe Harbor statement and describe the context for use of non-GAAP financial measures.

Today's presentation includes forward-looking statements relating to our business, including these set forth on this slide. We may also make forward looking statements during the Q&A session following our prepared remarks.

These statements are neither promises nor guarantees and there are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in these forward-looking statements.

These and other risk factors are described in the slide shown and the Risk Factors section of our most recent annual report on Form 10-K filed with the SEC. Forward-looking statements are made as of today's date and we do not undertake any obligation to update any forward-looking statements.

We will also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Cubist's operating performance.

Please refer to the slide being shown regarding our use of non-GAAP financial measures, as well as additional slides on the Investor Relations page of our website, which contain the reconciliations between our non-GAAP financial measures and GAAP financial measures.

Speakers on today's call will include: Cubist's CEO, Mike Bonney; President and Chief Operating Officer, Rob Perez; Chief Scientific Officer, Steve Gilman; and our Chief Financial Officer, Mike Tomsicek.

We will first hear from Mike Bonney. Mike?

Michael W. Bonney

Thanks, Eileen. Before I get into our operating results for Q1, I would like to acknowledge the senseless tragedy that befell Boston on Monday. While we had a few tense hours late Monday as we tried to confirm that all employees and their families were safe and sound, I can report that to be the case. Thanks to all of you who sent notes of concern. It means a great deal to me and to us that in that moment of horror, so many of you were willing to reach out. Of course, many were not as fortunate as the Cubist group to escape harm and our thoughts and prayers go out to them.

Now onto the business at hand. With 1 quarter of 2013 completed, we have moved forward on multiple fronts in what we expect to be a transformative year for Cubist. Today, we have reported a solid quarter of revenue growth. We remain on track to achieve our 2013 guidance across all revenue lines. While Cubist continues to drive the top line today, we've seen an increased contribution from ENTEREG this quarter. Mike Tomsicek will provide additional perspective on our financial performance later in the call.

During Q1, we made important progress with our late stage pipeline. As announced in late February, we now have alignment with the EMA as well as the FDA regarding pooling of data from our ongoing Phase III trials for ceftolozane/tazobactam, our antibiotic in development for the treatment of certain Gram-negative infections. We believe that ceftolozane/tazobactam has a peak year sales potential in the U.S. and the EU combined of at least $1 billion.

We're also excited about the potential of our 2 additional Phase III programs, surotomycin, if successful, should provide infectious disease physicians with another important weapon to combat the serious problem of recurrence associated with Clostridium difficile-associated diarrhea or CDAD.

Bevenopran has already demonstrated, in Phase II data, its potential as a best-in-class treatment for opioid-induced constipation, an area of high unmet medical need. Steve will provide an update on our clinical programs in a few minutes.

During the first quarter, Cubist made a couple of investments which we believe will help support the achievement of certain of our 5-year Building Blocks of Growth goals announced last summer. Rob will discuss the strategic importance of both our acquisition of full global rights to ceftolozane/tazobactam and our option to acquire Adynxx, which has a novel, potentially transformative, acute pain asset in Phase II.

Cubist's strategic focus continues to be the discovery, development and commercialization of therapies for acutely-ill patients treated in and around the hospital. We believe our expertise in the acute care space is leverageable across therapeutic areas and we intend to continue to deploy cash in a disciplined manner as we have in Q1 to gain access to additional promising assets.

Now over to Mike T. for a review of the Q1 financials.

Michael W. Bonney

Thanks, Mike. A solid quarter across the board. Total net revenues of $230 million for the quarter keeps us tracking towards our expectation to exceed $1 billion in total net revenues this year.

We are also staying on target with operating expenses and cost of goods sold with only 1 exception, the total operating expenses for the quarter, which add up to $164 million, include the $25 million payment to Astellas for additional geographic rights to ceftolozane/tazobactam, which was booked as an R&D expense. So if we exclude the $25 million, our OpEx for the quarter would have been $139 million.

The payment to Astellas was not anticipated in guidance we provided in January, I'll update that for you shortly. Q1 is usually a heavy outflow quarter for cash, as the Lilly royalty for CUBICIN is paid semiannually. Our Q1 payment to Lilly was $71.6 million.

In Q1, we also had the Astellas and Adynxx payments impacting our cash balance, but our operating cash flow remains very strong and we ended the quarter with cash, cash equivalents and investments of nearly $941 million.

We continue to be comfortable with the guidance we provided for year-end cash of around $1.1 billion, subject, as always, to any BD developments.

One final comment on cash, we are now assessing alternatives to enhance the security of our supply chain. This could involve some capital investments, so stay tuned.

Incorporating what I've mentioned into revised guidance, I'd like to update only our 2013 guidance for R&D expense and operating income. Driven by the transaction with Astellas in Q1, R&D guidance will now be in the range of $400 million to $420 million. Guidance for GAAP operating income will now be between $150 million and $165 million. There is no impact on our guidance for non-GAAP adjusted operating income. We remain confident in the rest of our guidance from January and look forward to seeing that through in the balance of the year.

Now over to Rob.

Robert J. Perez

Thanks, Mike. I'll start today by providing some context for our Q1 revenues for CUBICIN and for ENTEREG.

First, CUBICIN. In our 2013 guidance, we anticipate CUBICIN U.S. net revenues for the full year of between $900 million and $925 million. This suggests growth from 2012 of somewhere between 11% and 14%. In Q1, the year-over-year growth for CUBICIN U.S. net revenues was 9.4%. Those of you who have been following the Cubist story for multiple years know that Q1 is a seasonally softer quarter for CUBICIN.

This year, an important factor in year-over-year Q1 performance was the spike in flu-related pneumonia in the U.S. this winter. You may have seen recent commentary by the CDC on the record-breaking incidence of pneumonia associated with the recent flu season. What this means is that in the winter of 2013, hospitals were full of patients for whom CUBICIN was likely not an appropriate treatment. Notwithstanding the seasonal anomaly, we remain on track to achieve the annual guidance we've provided for CUBICIN in the U.S.

The infectious disease community continues to be concerned with clinical outcomes associated with vancomycin at higher MICs within its susceptibility range.

A publication in CID this quarter reported on a matched retrospective cohort study of CUBICIN compared with vancomycin, when the vanco MIC was greater than 1. In this study of outcomes in MRSA bacteremia patients, both 30-day mortality and persistent bacteremia were significantly lower in the CUBICIN treated group.

A brief comment now on CUBICIN International. We continue to see good momentum in sales of CUBICIN by our ex-U.S. partners. Novartis reported that first quarter sales of CUBICIN in its territories were up 12.9% versus a year ago. The revenues that we recorded from sales of CUBICIN by our ex-U.S. partners are a bit lumpy based on how we recognize this revenue.

In Q1 last year, we booked some large vial shipments in support of the launch of CUBICIN in Japan, so the lumpiness is more noticeable this quarter. We are comfortable with our 2013 guidance for international revenue of between $53 million and $58 million.

Turning to ENTEREG, we're starting to see the positive results of our learning last year. The first quarter this year looks particularly strong, up close to 19% in net revenue against Q1 last year. Remember that in Q1 of last year, we were just starting the relaunch of ENTEREG and had not begun to rollout the effort to all hospitals. For the full year for ENTEREG, we are on target against the 2013 net revenue guidance we provided, a range of between $45 million and $50 million.

Finally, we continue to generate service revenues for our support of DIFICID in U.S. hospitals, as co-promote partner for Optima. This relationship is set to end in late July, when our 2-year agreement expires.

Turning to business development. In Q1, we were pleased to report 2 important strategic transactions. First, as announced last month, we acquired from Astellas the remaining geographic rights for the commercialization of ceftolozane/tazobactam in certain Asia Pacific and Middle East territories. We are pleased to have accomplished this in a timely fashion, ahead of Phase III data. By securing full global rights now, we are well-positioned to optimize the international commercialization of this asset.

Second, as announced in February, we negotiated an option to acquire Adynxx. We believe that the Adynxx asset, AYX1, has the potential to become an important new therapy for the many patients who suffer from acute, persistent or chronic postsurgical pain. Our payment provided us the exclusive option to acquire Adynxx after our review of the Phase II data. This is the type of program that we believe will help us meet one of our Building Blocks of Growth goals of having 4 late-stage acute care assets in the pipeline in 2017.

Now over to Steve.

Steven C. Gilman

Thanks, Rob. First, a quick update regarding the sNDA filed for ENTEREG last year. We now have been notified by the FDA that the timing -- that the filing was accepted and the PDUFA date is October 21. Also, the clinical data that form the basis of this sNDA had been accepted for poster presentation on May 7 at the American Neurological Association Meeting in San Diego.

Now onto our late stage pipeline. First, ceftolozane/tazobactam, our Phase III IV antibiotic candidate for certain Gram-negative infections. I want to underscore the good news we announced in Q1 concerning the Phase III trials underway for ceftolozane/tazobactam in complicated urinary tract infections or cUTI and in complicated intra-abdominal infections or cIAI. We have follow-up interactions with both the FDA and the EMA in response to the new draft guidance that the FDA issued last fall.

As announced in February, we now have concurrence from both agencies regarding the reduction in target patient enrollment and evaluation of results for each indication on a pooled patient basis. This means that while we are maintaining the 2 trial structure in the field for the Phase III trials for both cUTI and cIAI, all of the patient information for each indication will be pooled before we analyze the data.

So our analysis in the end will be done as if we had conducted a single trial of about 1,000 patients in each of these 2 indications. We continue to expect that we will announce top line data for both the cUTI and cIAI Phase III trials in the second half of this year. We also continue to expect that we will initiate our Phase III program for the HAP/VAP indication in the middle of this year.

As we announced during Q1, we now have QIDP status for all 3 target indications for ceftolozane/tazobactam and have received notification of Fast Track status for the ceftolozane/tazobactam NDA.

I want to provide some perspective on the importance of ceftolozane/tazobactam in terms of its potential as a treatment for serious infections caused by multidrug-resistant Pseudomonas aeruginosa.

In Q1, we held our first international advisory committee meeting for this program. The global infectious disease key opinion leaders affirmed to us that their most critical problem, what keeps them up at night, is the poor clinical outcomes, including death, associated with the increasing incidence of multidrug-resistant Pseudomonas aeruginosa.

I'll briefly touch on surotomycin, our Phase III program in development as a potential treatment for C. diff. Enrollment is progressing in line with our plan to submit an NDA and MAA in the second half of 2015. Based on what we've seen through Phase II, along with the inherent qualities of the cyclic lipopeptide, we believe surotomycin has the potential to become a valued treatment option for patients with this very serious disease.

Turning to our third Phase III program, Bevenopran, in development as a potential therapy for treating opioid-induced constipation. We are very pleased with enrollment to date and the long-term safety trial and we continue to expect that we will begin enrollment in the efficacy trials by the end of 2Q.

Now, an update on our TRPA1 program and, in particular, CB-625, the acute pain candidate we took into Phase I last year. We completed the multiple ascending dose study, which demonstrated that oral BID doses of CB-625 were safe and well-tolerated. However, due to CB-625's poor solubility, we were unable to achieve plasma levels that we believe will be high enough to demonstrate clinical efficacy for this TRPA1 antagonist. Hence, we have decided to discontinue further development of CB-625.

We continue to be excited by the scientific underpinnings of our TRPA1 program. We are continuing our discovery efforts to identify additional TRPA1 antagonists with enhanced pharmaceutical properties in an effort to advance one of these to clinical studies as quickly as possible. The current scientific literature continues to support our view that the TRPA1 ion channel is one of the most interesting novel pain and inflammation targets.

Now back to Mike Bonney.

Michael W. Bonney

Thanks, Steve. 2013 is an important year for Cubist on several fronts. In the months ahead, we look forward to continued progress against all of our 2013 milestones, which are listed on this slide.

A quick update on our patent litigation with Hospira. The Markman claims construction hearing took place, as scheduled, on April 10. At this hearing, Judge Sleet said he expected to issue his ruling of claims construction within about 30 days. This is one step in the process leading up to a scheduled 5-day bench trial next February.

Last year, we shared with you our aspirational, but achievable, Building Blocks of Growth goals for the year 2017. We expect some of the target 2017 net revenues of $2 billion will come from our advancing Phase III pipeline. We're now within months of anticipated top line Phase III data for ceftolozane/tazobactam, an antibiotic candidate with potential as a treatment for infections caused by multidrug-resistant Pseudomonas aeruginosa. As you heard from Steve, this is an area of high unmet medical need and significant commercial potential in the U.S., the EU and elsewhere.

Our Phase III clinical programs for surotomycin and Bevenopran are also progressing on target. We believe that all 3 of our late-stage clinical programs address important medical needs and have the potential to create significant values for our shareholders.

Funding for this important work is generated by the cash flow from CUBICIN, which we continue to drive towards it's greater than $1 billion peak year net revenue potential. Also contributing to our top line today is U.S. revenue from ENTEREG, which we believe has peak year potential of $100 million in net revenue.

Later this year, we expect to start acting on our plans to build a commercial presence in the EU in preparation for the potential launch of ceftolozane/tazobactam. A European commercial presence can help us achieve our target of $2 billion in revenues by 2017 in 2 ways: By helping us to more fully realize the potential of ceftolozane/tazobactam; and by making CUBICIN a more attractive commercial partner for additional acute care assets.

If we achieve our 2013 financial and program goals, and it is our intent to do so, this will be a truly transformative year for Cubist. As we continue to execute commercially and advance our promising development programs, so that Cubist has a robust future, we never forget the need for financial discipline in everything we do.

Operator, let's open the lines up for your -- for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jason Kantor.

Jason Kantor - Crédit Suisse AG, Research Division

I guess my first question relates to the $25 million rights purchase you did in the first quarter. Can you give us some sense of how those territories may relate to your plans for geographic expansion? And how much of the market opportunity, the $1 billion-plus market opportunity for CXA-201 do you assess is in those territories? Where is that at?

Michael W. Bonney

Sure, Jason. We know that resistant -- multidrug-resistant Pseudomonas is a problem worldwide. The $1 billion, at least $1 billion in revenue that we expect from ceftolozane/tazobactam assuming success in the clinic and a successful registration path, actually does not include any estimate of revenue from these newly-acquired territories. What this actually allows us to do is to gain control of the molecule in every market in the world, which we think will enhance our ability to position it whether it's either in our direct organization in the U.S. and EU or through partnerships, which is the most likely case for the new territories that we've acquired.

Jason Kantor - Crédit Suisse AG, Research Division

And you've also mentioned early in your comments that you were going to be spending some money on alternatives supply chain, could you explain what that's about and how much money are we talking about?

Michael W. Bonney

Yes, so what we've flagged here, Jason, was that it is possible we will be spending money to secure the supply chain. So what we're looking at is -- and we don't have an estimate of the dollars, but what we're looking at here is between ceftolozane/tazobactam, some of the other Phase IIs and CUBICIN, we think we're at a point where making some capital investments to ensure that we have a secure supply for all of these products may make some sense. So stay tuned. What we didn't want to do was to end up in a situation where we made a significant capital investment, however you define significant, and have it be a surprise. So we're just letting you know at this point that we're looking at this. And stay tuned, we may make some investments there.

Robert J. Perez

And Jason, this is Rob. One of the things to think about is our -- now that we're potentially looking at a portfolio of products, some of these investments make more sense today than they would've been when we were essentially a one-product company. So that's the reason for considering those opportunities.

Operator

Your next question comes from Adnan Butt with RBC Capital Markets.

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

So first, I appreciate the qualitative color on the impact on CUBICIN from the flu season. Is there a way to quantify it? And can you give us the vial growth numbers realizing that they are down to that reason?

Michael W. Bonney

Sure. Vials were down 2.1% for the quarter versus Q1 last year. Again, I say this every time now that we're talking about vials that we're into a situation with CUBICIN where the vial growth expectations are single-digits. For example, last year, I think we grew 5.2% in vials for the entire year. So in any given quarter, if you have any anomaly, you can see changes in the vial growth. So the number is we're down 2%, but the most important thing is to keep an eye on the revenue line. That's really the number to watch. And as we said, we remain committed to the guidance.

Robert J. Perez

And in terms of quantification of the pneumonia, that's a very difficult thing to do, the flu-driven pneumonia. But we have seen historically is in -- CDC has been keeping the statistics, I believe, since '05, '06 winter. And the more severe the winter, the more impact we tend to see on CUBICIN. It's a very gross correlation to add now.

Michael W. Bonney

And it's also off of the year last year that had one of the lightest flu and pneumonia seasons we've seen. And if you remember, we had an extraordinarily strong Q1 last year.

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

Okay. And then just one question on the pipeline. For ceftolozane/tazobactam, does the updated trial design change the statistics for the study in any way? And can you remind us again the rationale for filing 6 months after the data is announced?

Steven C. Gilman

Well, to the first question, no. The actual protocol, the statistics, all other aspects of the trial are in full force in effect as they were before the change in numbers of patients and reminding you of the change in numbers of the patients really came from the FDA in terms of our consideration of being able to do that. The second part of the question is why does it take 6 months to file an NDA after you'd online the data, because it takes 6 months to put together the sNDA, analyze all -- publish all the study reports and get the sNDA submitted. So that's, frankly, a pretty aggressive time line relative to industry perspectives.

Operator

Your next question is from Steve Byrne with Bank of America.

Steve Byrne - BofA Merrill Lynch, Research Division

How much of that $1 billion potential estimate you have for C/T is in HAP/VAP? And am I right that one of the studies that you're planning to launch midyear is -- has Zosyn as a competitor and the other one it's imipenem, is that right?

Michael W. Bonney

Yes, that's right. And VAP -- HAP/VAP or VAP is an important part of the $1 billion potential that we see trans-atlantically for cef/tazo. But we've not broken it out specifically, Steve, as to what percentage it is.

Steve Byrne - BofA Merrill Lynch, Research Division

And this is the one that's pivotal, that will have a 28-day mortality primary endpoint?

Steven C. Gilman

That's correct.

Michael W. Bonney

28 days post treatment.

Steve Byrne - BofA Merrill Lynch, Research Division

It looks like the -- in the old -- in a case and study, that Bayer and Nektar have had a proportion cured primary endpoint, is that inconsistent with recent guidance?

Steven C. Gilman

Well, I don't -- we don't follow the inhaled guidance as much as we do systemic. We use antibacterial guidance. So I don't know, I can get back to you on that, Steve. But it's certainly inconsistent with the guidance that we've received from the agency and as was discussed in the 2010 ADAC meeting on HAP/VAP.

Steve Byrne - BofA Merrill Lynch, Research Division

And I have one more to hit. Mike Tomsicek, with the contingent consideration forecast for the year, $32 million, is that assuming favorable data in the 2 C/T studies by year end?

Michael John Tomsicek

Yes, it does assume a favorable inflection in those studies.

Steve Byrne - BofA Merrill Lynch, Research Division

And will that bring your estimate of CPRs to the full value that you negotiated when you acquired that asset? Or could there be more to come on that?

Michael John Tomsicek

No. It would not. There would remain some probabilistic triggers after the positive data associated with approval and then future sales introductions and milestones that will cause additional increases in recognition of that expense when those occur.

Operator

Your next question comes from David Friedman with Morgan Stanley.

David Friedman - Morgan Stanley, Research Division

I was wondering, just 2 questions, quickly. One is, is it possible to just go a little deeper into this than this pneumonia issue? And is it -- I mean, is the implication that less people got MRSA infections? Or just less were admitted? Or why would sort of more people getting an unrelated problem lead to less of -- the problem that you guys deal with? And then the second question we had was just around Hospira, they had recently been received like a tentative FDA approval based on what I assume is some version of daptomycin that they submitted. Is this something that you can talk about as to whether you know if they are producing their drug at scale? And is it through fermentation or not?

Robert J. Perez

So David, I can handle the pneumonia question. And I'll kick the other one to Mike. Regarding pneumonia -- First of all, if you follow CUBICIN over the years, you know that Q1 is always our softness quarter. And while there may be a few things that contribute to that, the most significant is the fact that CUBICIN is not appropriate for patients who have pneumonia. At least, who have had pneumonia from an inhaled pathogen. So when physicians are looking at treatment choices in flu season, when the patient has pneumonia, they have to kind of worry about whether the patient has pneumonia or may have pneumonia. They have to worry about the choice of an anti-infective. So we tend to be softer in winter and Q1 and we tend to be kind of correlated with pneumonia in flu season. As I said last year, we had one of our strongest Q1s in many years and it was no surprise that it also was a very warm winter, if you recall, and a very low level flu season. So the fact that this was a historic, somewhat historic season makes it that much more challenging. And we tend to have a little bit lower, a little bit lighter share in the winter and in Q1. And then as the year progresses, it tends to pick up. So, this is something we've seen, frankly, since 2003, 2004 when we launched the drug.

Michael W. Bonney

And with respect to your question about Hospira, they did announce a tentative approval. This is an expected part of the FDA process. And essentially what it means is that their approval remains tentative until the 30-month stay is lifted or expires or a court rules that Hospira is not infringing and valid claim in our orange-book listed patent stake. We have no way of knowing, David, how they are producing the drug at this point or at what scale.

Steven C. Gilman

Okay. And maybe just last, sorry. If you could just discuss quickly your understanding of the investment of time and money required to make CUBICIN at scale?

Michael W. Bonney

Sure. Certainly, the fermentation process is complex, but not way outside the norm for a fermented product. The challenge is, at least in our experience, is purifying the soup that comes out of the fermenter at commercial scale and commercial purity. And those purification suites are, again to the best of our knowledge, are not transferable. That is to say we can't retrofit a purification suite for another antibiotic and have it work for CUBICIN, nor can you run other antibiotics to the CUBICIN purification suite and still use it for CUBICIN. Those suites at commercial scale, and we've built a couple of them over the years, most recently, the most recent one we built cost somewhere between $25 million and $35 million of capital to get it actually built and up and running before it's even validated or anything like that. And that's been a few years, David. So I'm not sure what the current cost are but I'd be hard-pressed to imagine they've gone down.

Operator

Your next question comes from Eun Yang with Jefferies.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Steve, if I understood you correctly, for CXA-201, Phase III for VAP and HAP trials and Phase II open-label study, are they starting around the same time?

Michael W. Bonney

Yes. They will generally be started around the same time.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Now, if a Phase II open-label study starts by mid of this year, then when do expect the data?

Michael W. Bonney

We expect to have it sometime not too long after the tentative approval date for the drug.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Which is 2015? 2014?

Michael W. Bonney

You have to say, basically, go 6 months from top line data we expect to file. We know that this is a QIDP antibiotic, and that's been achieved for all of its indications, which commits the FDA to both a Fast Track and 8 months review cycle. So wherever you think we're going to produce the data at the second of this year, that's the starting point then you add 6 months for the assembly of the NDA and 8 months for the review from the FDA.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. And then surotomycin for C. diff, are those 2 Phase III studies designed to enough number of patients with NAP-1 strain. So if the surotomycin show -- has superior efficacy over vancomycin, should we be able to see the difference from the data?

Steven C. Gilman

Well, first and foremost, our design is to be able to show noninferiority to vancomycin on response, but superiority to vancomycin with respect to relapse or recurrence. So very similar to the design of the design of the Optimer trials. With respect to NAP-1, we do expect to have roughly 1/3 of the strains, generally, that's what we had in our Phase II study, although the geographic spread is a little different. So we will have significant numbers of NAP-1 strains to be able to see whether there's effect on NAP-1 strains either both in response and in relapse or recurrence. But it's not powered to show that difference, that's the important part. The powering is around recurrence rates, not around NAP-1 responsiveness.

Operator

Your next question is from Alan Carr with Needham & Company.

Alan Carr - Needham & Company, LLC, Research Division

Can you give us some, the latest on inpatient versus outpatient trends? And then, also wondering what your latest thoughts on the commercial opportunities in C. diff? Based on how DIFICID's done over the last 1.5 year or so, what are your thoughts on prospects for surotomycin? Have those changed? And then the third one, looking at the opportunity in Gram-negatives for CXA-201, cutting in a different way, Europe versus U.S, can you give us a sense of what you think along those lines geographically in terms of the opportunity there?

Michael W. Bonney

Sure. Okay, first of all, CUBICIN we're actually classifying it now, Alan, as hospital versus outpatient, because, keep in mind that there's some outpatient associated with hospital outpatient that is kind of -- we can't tease out from "in-patient sales." So hospital versus outpatient was 53% hospital, 47% outpatient, and the growth numbers were 11% growth for the hospital segment and 8% growth for the outpatient segment. And just to get -- to repeat as I've said in the last couple of quarters, we've seen really strong growth in the hospital outpatient part of our business. So while it's still outpatient, hospitals, I think, are recognizing the benefit of CUBICIN in that setting and it's kind of skewed a bit the way that we've looked at inpatient and outpatient in the past. So that's what's going on there. Regarding C. diff, we obviously have had a chance to get to know this market over the last couple of years. We've been very pleased with our partnership and relationship with Optimer, though it is coming to an end in July. We remain very enthusiastic about this market. We know some of the challenges that exist in the market that Optimer has had to deal with that we'll have to deal with. But we do think that our product has the potential to be differentiated and has the potential to drive worldwide sales in the $400 million to $500 million range. We would remain committed to those numbers and believe that those are possible. So this market is kind of broken a little bit differently maybe than some people expected. But I think the fact that we've been able to participate in it the last couple of years makes us very well prepared to launch surotomycin if in fact it is successful. And then your third question was Gram-negative, EU versus U.S.

Alan Carr - Needham & Company, LLC, Research Division

One thing more specifically, the Pseudomonas since that's where a focus of yours[ph].

Michael W. Bonney

Great. Yes. One of the major differences between the MRSA market in which CUBICIN competes and the Gram-negative Pseudomonas markets is that the difference in Gram-negative pathogens, generally, and Pseudomonas, specifically. In terms of the U.S., the EU importance, one of the main reasons for us building our own infrastructure in Europe is because the commercial opportunity in Europe is about the same as in the U.S. In fact, you see Pseudomonas numbers that are -- you see greater Pseudomonas resistance in the EU than you see in the U.S. So the opportunity is significant outside the U.S. and, overall, keep in mind that when you look at U.S. and EU combined, the opportunity for Gram-negative products is 80% larger than the MRSA opportunity. So significantly large and the split is much more even than we see in Gram-positive.

Operator

Your next question is from Irina Rivkind with Cantor Fitzgerald.

Irina Rivkind - Cantor Fitzgerald & Co., Research Division

I was just wondering, with respect to your capital investment in your supply chain. How does that -- is that expected to constrain your cash for M&A, is the first question. And then the second question is, I was just hoping you could comment on the 340B rebates in hospitals and how it's impacting Cubist's business as a whole.

Michael John Tomsicek

Sure. On the capital investment side, Irina, it's, I think, it's premature to articulate any specifics because we're relatively early in this process. But I don't envision this having any kind of meaningful impact on our ability to do BD. We're not talking about spending hundreds of millions, hundreds and hundreds of millions of dollars, which is what our current cash balance is on securing the supply chain. And with respect to the 340B...

Michael W. Bonney

Our growth to that really has been pretty stable. We're not having a significant change in our 340B business. So if 340B hospitals are out there, they certainly participate in CUBICIN and the outpatient part of our business. But it hasn't changed substantially either in this quarter or frankly over the last year or so.

Operator

And your final question is from Jason Kantor with Credit Suisse.

Jason Kantor - Crédit Suisse AG, Research Division

A follow-up, just real quick on the program that you're discontinuing. This, I believe, was from your relationship with Hydra, is that essentially over now? And how much have you put into that program to date? And is there any kind of write-off associated with that?

Steven C. Gilman

Well, I can speak to the collaboration. And write-offs, you're going to have to ask Mike T. But this collaboration was a 3-year collaboration. We started it 3.5 years ago and it's now officially over. We continue to have rights with the target and able to fully execute the program on our own.

Michael John Tomsicek

And we won't share with you what we spent to date, Jason, on this program. We continue to invest on the discovery side to try and find different chemical matter that engages this receptor appropriately. And Mike, I believe, I'm correct there's no write-off associated with this at all.

Michael W. Bonney

No, there is none.

Eileen C. McIntyre

Operator, if there are no more questions, we can end the call.

Operator

And there are no further questions.

Michael W. Bonney

Thank you. Thanks for your attention this evening, folks. We look forward to reporting on our results for the second quarter of this year. Mark your calendars now for our conference call at 5:00 p.m. Eastern Time on July 18. Thanks. Have a great evening.

Operator

Thank you again for joining us. This concludes today's web conference. You may now disconnect.

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