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Cubist Pharmaceuticals Inc (NASDAQ:CBST)

Q2 2013 Earnings Call

July 18, 2013 5:00 pm ET

Executives

Eileen C. McIntyre - Vice President of Investor Relations

Michael W. Bonney - Chief Executive Officer and Director

Michael John Tomsicek - Chief Financial Officer and Senior Vice President

Robert J. Perez - President and Chief Operating Officer

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

Analysts

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

Terence C. Flynn - Goldman Sachs Group Inc., Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

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

Alan Carr - Needham & Company, LLC, Research Division

Steve Byrne - BofA Merrill Lynch, Research Division

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

Jason Kantor - Crédit Suisse AG, Research Division

James F. Molloy - Janney Montgomery Scott LLC, Research Division

Chris Hamblett

Howard Liang - Leerink Swann LLC, Research Division

Matthew Harrison - UBS Investment Bank, Research Division

Operator

Good day. My name is Julie, and I will be your event manager today. At this time, I would like to welcome everyone to the Cubist Pharmaceuticals Second Quarter 2013 Review Webinar. [Operator Instructions] Please note that today's web conference is being recorded. We will be taking questions over the phone at the end of today's presentation. [Operator Instructions]

At this time, I would like to turn today's program over to Eileen McIntyre. Eileen, you may begin.

Eileen C. McIntyre

Thank you. Good afternoon, and thank you for joining us for a review of Q2 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 our non-GAAP financial measures.

Today's presentation includes forward-looking statements relating to our business, including those set forth on this slide. We may also make forward-looking statements during the Q&A session following our prepared remarks. These statements are neither promises nor guarantees, and there are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in these forward-looking statements.

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

We will also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Cubist's operating performance. Please refer to the slide being shown regarding our use of non-GAAP financial measures, as well as additional slides on the Investor Relations page of our website, which contain the reconciliations between our non-GAAP financial measures and GAAP financial measures.

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

We'll first hear from Mike Bonney. Mike?

Michael W. Bonney

Thanks, Eileen. In 2013, Cubist has begun a transformative second chapter. As we move forward against aggressive near-term goals, we've also continued to make decisions in a thoughtful manner with a view to long-term value creation.

I'm pleased to report total net revenues in Q2 of $259 million. This is the first time we've had a quarter with revenue representing an annualized run rate of greater than $1 billion. Our top line growth in the second quarter reflects continued double-digit revenue growth for CUBICIN, now approaching its 10th anniversary since approval in the U.S.

In Q2, CUBICIN U.S. net revenues at $227 million were up 13.5% versus Q2 a year ago. I believe our discipline in positioning CUBICIN for the seriously ill patients for whom the greatest value can be delivered aligns this product and Cubist as an organization with the needs of patients, treating physicians, acute care institutions and payers.

Also contributing to our revenue growth in Q2 was ENTEREG, now 1.5 years into its relaunch following our acquisition of Adolor. Q2 net revenues for ENTEREG of $12 million are up 28% versus Q2 in '12, and we believe this reflects an increasing understanding of the value of this therapy in reducing the length of hospital stays. Rob will provide more color on revenue growth for the quarter.

As of mid-year, we've also made important progress for our 3 late-stage clinical candidates. As you know, we expect to announce top line results later this year for trials in 2 of 3 target indications for ceftolozane/tazobactam, an IV antibiotic in development as a potential treatment for certain serious infections caused by Gram-negative bacteria, including Pseudomonas aeruginosa. Pseudomonas is a pathogen associated with already concerning and increasing levels of multidrug resistance. We believe ceftolozane/tazobactam has the potential, assuming success, of achieving at least $1 billion in peak-year sales.

Also progressing in Phase III are surotomycin, our oral antibiotic candidate in development as a potential treatment for Clostridium difficile-associated diarrhea bacteria, or CDAD, and bevenopran, an oral candidate in development as a potential treatment for opioid-induced constipation in patients with chronic noncancer pain.

We continue to be very enthusiastic about the opportunities for all of these programs. Steve will provide some updates on each of our late-stage clinical candidates later in the call.

Now over to Mike Tomsicek for a review of the Q2 financials.

Michael John Tomsicek

Thanks, Mike. I'll touch briefly on top line revenues. CUBICIN net revenues in Q2 show us that the use of the product is holding up well in the midst of quite challenging economic times for hospitals. We remain comfortable with both the guidance range we provided for CUBICIN revenues in 2013 and with our peak-year sales expectations for CUBICIN net revenues of greater than $1 billion in the U.S. alone. International CUBICIN revenues also continued to show good momentum in Q2.

Turning to ENTEREG, we had another strong quarter. Hereto, we continue to see the year coming in within the guidance range we've provided.

One note on gross to net for the quarter. Based on rebates claimed and information received to date from certain states, we've now lowered our Medicaid rebate reserve. For Q2, gross to net was 12% as a result of the adjustment. This is about 2 percentage point less than we expect going forward.

Service revenues in Q2 reflects the base fee for our co-promote relationships with Optimer. That will end as scheduled this month. I can say definitively at this point that we will earn only base fees for year 2 of the contract, and no bonus revenues are expected in Q3.

Turning to cost. SG&A and COGS were both on target with our expectations. R&D is up versus Q2 of 2012 as a result of a couple of things: the additional developmental cost as expected associated with progressing our 3 promising late-stage clinical programs and a $15 million payment to Hydra Biosciences in connection with an amendment to our license and collaboration agreement related to our preclinical TRPA1 program. As you heard from Steve last quarter, we are aggressively continuing our discovery effort to identify additional TRPA1 antagonists with enhanced pharmaceutical properties.

Our payment to Hydra in Q2 resulted in a restructuring of the downstream deal economics, including the elimination of any further milestone payments, which could have totaled hundreds of millions in aggregate, for success across multiple indications. Operating income for Q2 of just over $25 million reflects the items I just mentioned. We will be making an adjustment to both the R&D line and op income line of our guidance for 2013 to reflect the Hydra payment.

Non-GAAP adjusted operating income for the quarter was $51.3 million. Cash, cash equivalents and investments as of June 30 totaled just over $1 billion, and we remain confident and comfortable with our year-end guidance here of $1.1 billion, subject to any business development activity in the second half.

The only changes we are making to 2013 guidance are to add $15 million to the R&D line and subtract the same amount from the operating income line to reflect our payment Hydra. Non-GAAP op income is unchanged. Now over to Rob.

Robert J. Perez

Thanks, Mike. I'd like to add a bit of color on both CUBICIN and ENTEREG revenues for Q2.

First, CUBICIN. Q2 was another solid quarter for CUBICIN, the foundation of our Building Blocks of Growth objective. Measured against our first half in 2012 that was particularly strong, CUBICIN in the first half of 2013 has grown its U.S. net revenues by 11.5%. In Q2, specifically, the growth in CUBICIN U.S. net revenue was 13.5%. I'm very pleased with this result especially given the challenges that exist in the hospital market.

In this evolving health care environment, we continue to position CUBICIN for seriously ill patients, where we believe we can provide the greatest value, both in clinical outcome and in potential savings for total cost of care. The value CUBICIN delivers for appropriate patients provides the context for our continued pricing premium over generic vancomycin. On July 1, we took a price increase for CUBICIN in the U.S. of 5.5%.

CUBICIN revenues from sales by our partners outside the U.S. continue to tick up nicely this year. For the first 6 months, the revenues to CUBICIN from x U.S. sales are up 14% versus 2012. More specifically, Novartis reports CUBICIN growth of 21% in their territory for the first half of 2013, with notable strength in Italy, Spain and Germany, as well as Brazil and Russia. Also of note, our partner for China, AstraZeneca, succeeded in gaining a label expansion there in Q2 to include a broadened definition of bacteremia instead of just endocarditis. This is good to see, though we're not likely to see much revenue from CUBICIN sales in China until they gain reimbursement.

In Japan, the MRSA treatment guidelines were recently issued, and CUBICIN was listed as an appropriate treatment option for bacteremia, endocarditis, skin and skin structure infections and bone and joint infections.

Now turning to ENTEREG. Q2 was another strong quarter for ENTEREG, with net revenue growth of 28% versus Q2 last year and year-to-date growth in net revenue of 23%. This is now our sixth quarter with ENTEREG in the bag of our U.S. organization. And in each quarter, we've seen double-digit net revenue growth over the previous year. We believe this success reflects the important work we've done to gain institutional adoption of ENTEREG at the hospital and integrated health system levels.

My final topic this evening is our planned build of commercial infrastructure in Europe. We are particularly excited about the opportunity that Europe represents for ceftolozane/tazobactam. You may have seen a report concerning health care associated infections released by the European Centre for Disease Prevention and Control earlier this month. According to this survey of more than 1,000 hospitals in 30 countries, on any given day, 1 in 18 hospitalized patients in Europe has at least 1 healthcare associated infection.

Also interesting were some statistics on the incidence of resistant pathogens in European hospitals. In this survey, methicillin resistance, or MRSA, was found in 41.2% of Staphylococcus aureus isolates, and carbapenem resistance was reported in 31.8% of Pseudomonas aeruginosa isolates. We've seen evidence that government payers in Europe are aware of the critical need for new therapy to treat infections caused by multidrug-resistant pathogens.

As we await Phase III data for the initial target indications for ceftolozane/tazobactam, we have taken some initial steps toward our planned build of an x U.S. commercial presence. Our head of International business, Patrick Vink, has now filled 3 key positions at our Swiss headquarters, with start dates between now and early September. Other hires will be phased in over the next couple of year, with timing tied to positive Phase III data, EMA regulatory approval and the country-specific health technology assessments needed as input to pricing. We would expect, assuming approval of ceftolozane/tazobactam by the EMA in our 3 targeted indications, that we would ultimately have a direct sales presence in all of Western Europe, some of Eastern Europe, as well as Canada, Australia and New Zealand.

Now over to Steve.

Steven C. Gilman

Thanks, Rob. This has been another quarter of significant pipeline progress measured in trial enrollment, favorable regulatory interaction and in recruiting top talent.

Let me start with a very positive regulatory update regarding the pediatric clinical work already underway for CUBICIN. As you know, CUBICIN is currently only approved to treat adults of certain Gram-positive infections. In late May, the FDA issued what is called a written request for CUBICIN, which specifically outlines the studies in the pediatric populations required to qualify for pediatric exclusivity. The written request culminates years of work within Cubist to design feasible pediatric studies that were acceptable to the FDA.

The written request is consistent with the verbal understanding we've had with the agency, and we are working diligently to complete the requested pediatric study that would make us eligible for a 6-month expansion of exclusivity. Assuming we receive pediatric exclusivity, our license to Teva to sell a generic daptomycin for injection product will begin in June 2018 as opposed to December 2017. One important thing to remember is that granting of pediatric exclusivity is not dependent on the outcome or results of the trial but is solely dependent on the completion of the study.

Next, regarding the sNDA for ENTEREG and radical cystectomy, we continue to expect a response from the agency by the scheduled PDUFA date of October 21.

Now turning to our late-stage clinical pipeline. First, a couple of updates concerning ceftolozane/tazobactam. We remain on track to announce top line data by year end from both our Phase III programs in complicated urinary tract infections, or cUTI, and complicated intra-abdominal infections, or cIAI.

For those of you who checked the status on clinicaltrials.gov, you may have seen that the enrollment is complete in 1 of the 2 roughly 500 patients trial segments of our cUTI Phase III program. As you'll recall, we've maintained a 2-trial structure in the field for both cUTI and cIAI, although the fiscal analysis will be conducted on a pooled database with about 1,000 patients for each targeted indication. We will cut off enrollment when each trial segment reaches about 500 patients so that the trials remain balanced.

Our focus as we complete enrollment remains on the quality of trial execution, our top priority, not the specific months that we will report top line. That said, we do expect to be able to announce top line data for both cUTI and cIAI indications in the fourth quarter of this year.

We're also happy to report that we have now enrolled our first patient in the open-label trial in ventilator-associated bacteremia pneumonia, or VABP. This roughly 300 patient informational study, which should lead out in 2015, will provide an early assessment of the efficacy and safety of ceftolozane/tazobactam in VABP patients.

One other important update regarding our pneumonia clinical plan. The significant discussion around the passage of the GAIN Act about the growing problem of multidrug-resistant pathogens and the diminishing investment in R&D for new antibacterials has led to a period of evolving regulatory guidance for antibacterial drug development. As you might recall, the GAIN Act mandated that the FDA issued guidance on streamlined ways to study drug-resistant bacterial infections. On June 26, the FDA issued a draft guidance in this regard. Based on this guidance and many other discussions with FDA and others, we see an opportunity at this time to engage regulatory agencies through U.S. and Europe with a smaller novel pathogen-specific clinical trial design for ceftolozane/tazobactam in pneumonia rather than the large registration study that we have discussed before.

We believe that such a trial design would allow us to provide health care professionals with more clinically meaningful and differentiated pseudomonas-specific data. We are now in the process of engaging the FDA and EMA to discuss our proposed alternative protocol for a registration supporting study that incorporates this new regulatory thinking. We expect to have clarity on this alternative by year end 2013 and do not expect the time frame to registration-quality data to be materially different from our initial VABP plan.

Now turning to surotomycin, our candidate as a potential treatment for CDAD. The global Phase III program is enrolling well. There's been a fair amount of media buzz this year around CDAD, particularly regarding the use of fecal matter transplant as a last resort for patients who have experienced multiple recurrences. The interest of infectious disease community in pursuing such challenging remedies underscores the serious consequences associated with the recurrence of this disease. And assuming success, we continue to believe surotomycin has the potential to become a highly valued therapy adoption in patients with CDAD.

Now an update on bevenopran, our new opioid receptor antagonist in development as a therapy for opioid-induced constipation, or OIC. During 2Q, some statements made by others who are developing new opioid receptor antagonists suggested that FDA might require a pre-approval cardiovascular outcome study for OIC. This was not consistent with what we had heard previously from the FDA. We reached out again to the agency in June and reaffirmed our belief that our Phase III program as designed, including a 1-year safety study and 3 efficacy studies, should be sufficient for NDA submission, providing, of course, there are no imbalances between placebo and bevenopran with respect to cardiovascular or other safety events. As we announced this afternoon, we have begun enrollment in the Phase III efficacy program. The Phase III long-term safety study is ongoing.

Finally, as we announced recently, Dr. Lorianne Masuoka has joined Cubist as our Chief Medical Officer, and she will now lead the overall clinical strategy and operations of Cubist's global clinical programs while overseeing clinical research, medical affairs, clinical operations, biostatistics and data management and pharmacovigilance. Dr. Masuoka, who has been the CMO of Nektar Therapeutics, brings to Cubist a great blend of medical and scientific leadership, diversity of therapeutic area expertise and global management skills. She's a terrific addition to the Cubist team, and we're excited to have her join us as we drive towards achieving our Building Blocks of Growth long-term goals.

Now back to Mike.

Michael W. Bonney

Thanks, Steve. Earlier in the call, I mentioned that we make decisions in a thoughtful manner with a view to long-term value creation. In the remarks made this evening, you've heard a number of instances of such decision-making. For example, we made a payment to Hydra this quarter to transfer certain proprietary technologies and know-how to Cubist related to TRPA1 preclinical program while also eliminating future milestone payments. We also are carefully staging our commercial build-out in EU by bringing in some key talent now ahead of expected top line data from the ceftolozane/tazobactam pivotal studies. And we've decided to engage proactively with the FDA and the EMA on the potential improvement in our Phase III VAP trial design for ceftolozane/tazobactam, which could be very helpful, we believe, in generating more clinically meaningful and differentiated data.

When we introduced our Building Blocks of Growth long-term goals just over a year ago, I described them as aids to decision-making, keeping us focused on the long-term value we're working to create. We know that as shareholders, you have to balance a desire for near-term results with the opportunity for future gains. We're aligned with you.

With that, operator, let's open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Adnan Butt.

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

I'll start by asking a couple of questions on ceftolozane/tazobactam. First, what does the QDIP (sic) [QIDP] designation mean in terms of approval timelines and is there an accelerated path for Europe as well? And then secondly, in terms of data that were expected to -- the data that will come out, what do you think it needs to show for physicians to be convinced to use it? Is it the non-inferior -- well, in addition to the non-inferiority endpoint, do we need activity against specific strains, specific resistance? Is it the same in the U.S. versus Europe?

Michael W. Bonney

Okay. Let me handle the first part of that question, and I'll turn it over to Steve for the second part. With respect to QIDP designation, what that means is both the ability to achieve Fast-Track status, which means that we could do a rolling NDA submission. It also means that the FDA has committed to -- once that submission is complete, to establish an 8-month PDUFA date. So 8 months from the completion of the NDA filing assuming success, the FDA would be committed to ruling on whether this is positive or not. There is no accelerated pathway in the EU at this time for the review of antibiotics, even those with activity against resistant pathogen. Steve or Rob, do you want to handle the question on what we're looking for in the non-inferiority -- in the Phase III data, rather?

Steven C. Gilman

To answer that question, I mean, obviously the most important thing in this trial is the non-inferiority margin and meeting that margin for both those trials. That is the primary endpoint, and that's the most important endpoint. And so really, that's the take home, but we will have information in there on activity against various pathogens obviously from this as we get microbiology activity in these trials. And we'll want to see enough data in the pathogens to get to particular pathogens on the label. We will not be seeing in this trial any differentiated data with respect to drug-resistant pathogens. That's not the design of this trial. We have the data with respect to preclinical and in vitro MIC data and surveillance data just as we do with all antibacterials that are approved on a non-inferiority basis. You make that argument via other mechanisms other than clinical data for the time being.

Robert J. Perez

Yes. And I would just add, Adnan, that as a non-inferiority trial, as Steve said, you can't get too excited about the numbered difference one way or the other. If it's noninferior, the percentages could be up a couple or down a couple. It's noninferior. And that difference really is not going to be the driver of use of the product. It's more the product's potency and susceptibility relative to pathogens that they care about and pseudomonas is really the pathogen that they care about. So for us, getting the noninferiority result end, we think, is what we need to just go out and make this product successful.

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

Rob, just to follow up. Are the pathogens represented -- the pathogens to focus on, are they fairly similar between the U.S. and Europe? And then I'm back in queue.

Steven C. Gilman

Yes. I mean, really, what the key pathogens in these trials are pseudomonas [indiscernible]. There are a handful of other ones that will come up and back. But no -- and they are the same. The resistance rates do vary a bit across various parts of Europe and versus Europe overall in the U.S. But they're all very high and they're all very scary.

Robert J. Perez

Yes.

Operator

Your next question comes from the line of Terence Flynn.

Terence C. Flynn - Goldman Sachs Group Inc., Research Division

Just 2 for me. First, on the R&D guidance. It looks like you're implying that spend is going to go down in the second half after I net out the $15 million. Just wondering if that second half level is a good base to think about as we head into 2014. And then on the BD front, just wondering if it's a good assumption that you're waiting to see the CXA data before making any major decisions on this front. And then any latest thoughts on areas of interest outside of anti-infectives?

Michael W. Bonney

Sure. Terence, let me take the first part of that and Mike can pick up the guidance question on R&D. From a BD standpoint, I don't think it is a fair assumption to assume that we will wait to see the CXA data, the ceftolozane/tazobactam data before acting. It doesn't -- that is not suggestive of guidance that we will execute a deal before we see that data, but we don't see our business development activity as contingent upon seeing what those data look like. So Mike, do you want to pick up the guidance question?

Michael John Tomsicek

Sure, yes. I'm not in the position to guide for 2014 R&D spend yet. We'll still have a quite a number of Phase III trials going, but we'll have to understand a little bit better our performance in the second half of the year and our budgeting process before we give you guidance on that. I have one other detail to add, it's come to my attention that I had said our Q2 operating income was $25 million, whereas I had meant to say it was $28 million. This $28 million is stated correctly in the headline of our press release and in the attached slides and table. So my apologies for that.

Terence C. Flynn - Goldman Sachs Group Inc., Research Division

And how about areas of interest on BD, Mike?

Michael W. Bonney

Terence, it's pretty much the same as we've talked about historically. Our greatest -- there's sort of 2 buckets. One is we're looking for commercial or near-commercial stage assets that we can run through the current infrastructure. It would be great if that could also be run through the anticipated European infrastructure. The second area that we're looking at, of course, is try to build out the pipeline, so that once these Phase III assets get through clinical development, presumably through the regulatory process, we have others things coming along behind them. But our key element of all of our BD activities has been and remains the ability to leverage the commercial infrastructure.

Operator

Your next question comes from the line Ken Cacciatore.

Ken Cacciatore - Cowen and Company, LLC, Research Division

I wanted to ask CXA-201 and maybe talk about it in terms of business development decisions, and you were just answering the last question. But wondering, since we all share your enthusiasm around 201, can you talk about when you finally get that data, the decision to go ahead and build out your European infrastructure or your international infrastructure and maybe your willingness at that point to pause and wait and see what folks that have -- already have infrastructures in place, whether someone may place a value on this product in your portfolio that will make you instead of pursuing additional business development, maybe speak to sell [ph] the company at that point? Can you talk about the decision tree once the 201 data is known and your willingness to as opposed to spending quite a bit of money, I would assume, to build that international business, just stop and pause and think about shareholder value in a different way?

Michael W. Bonney

So let me respond to this question. The first thing to understand is that the build following the results of the Phase III data in Europe, as Rob tried to lay out in his prepared comments, is staged. So it's not like once we see the data, there is a green light to build in all those countries we're talking about. It is a very detailed plan that Patrick has put together that represents a staged build over multiple years as we make progress through the European regulatory process and then the centralized EMA process and then through the health technology assessments and pricing discussions in many of those markets. So I think that it's a false presumption to believe that we'll be incurring a huge bolus of expense immediately. This is going to be a very staged build over, frankly, multiple years as we work through the regulator and pricing processes in these markets. With respect to taking a pause, we basically feel very strongly that after a long experience, that running the company on the assumption that someone will buy us actually decreases shareholder value because it reduces the alternatives that we have. That said, both the board and the management team take their fiduciary duties very seriously, and any kind of serious inquiry would be dealt with in an appropriate manner at that point. We are very committed to building shareholder value, but that's very different than pausing what is a very thoughtful and staged build to see what happens there.

Operator

Your next question comes from the line of Eun Yang.

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

Question on CXA-201. So you started the Phase II study, in the HAP and VAP application and then you're going to also start the Phase III near term. So I'm just wondering whether your Phase II might slow down the Phase III enrollment.

Michael W. Bonney

So the concern, if I just heard you correctly, Eun, is -- will the Phase II -- it's really an open-label study, it doesn't lend itself easily to a phase definition, but the open-label study, will that slowdown accruals in the Phase III? Steve, do you want to take that one?

Steven C. Gilman

Yes, no. It's not. They're overlapping trials. It's not actually a Phase II in advance of a Phase III, it's a parallel to Phase III study. And actually if you look on clinicaltrials.gov it would be listed as a Phase III because it's not a gating step to start a Phase III. And they'll be run in different territories and at different centers, and we don't see them competing for patients or disturbing each other, if you will.

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

Okay. Now on 315, I'm assuming that you are trying to show that 315 is better than vancomycin in terms of a recurrence rate. So can you talk about having assumptions to show superiority in that regard?

Steven C. Gilman

Yes. So the trial is a trial that has the primary endpoint is noninferiority with vancomycin with respect to response rate, followed by superiority with respect to recurrence rate. So we expect the label, if successful, of course, the label to be quite similar in the key clinical parameters to the difficile label.

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

Powering assumption showing superiority

[Technical Difficulty]

Eileen C. McIntyre

Yes, Eun, go ahead. You're asking about powering assumptions.

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

I just wanted to know any powering assumptions to show superiority in the recurrence rate?

Steven C. Gilman

That's powered -- I don't have it in front of me. It's powered at around 85%.

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

And the difference that you'd like to detect?

Steven C. Gilman

Well, so -- yes, we powered that to show, obviously, a statistically different relapse rate versus vancomycin, and if you recall in our Phase II study, that was about 50%.

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

5-0?

Steven C. Gilman

5-0.

Operator

Your next question comes from the line of Alan Carr.

Alan Carr - Needham & Company, LLC, Research Division

A couple of them. One of them relates to CUBICIN and the price increase that you took. I'm wondering if there's any change in tone here in response to that by hospitals and payers over time? Rob, you said in the past, there's always been resistance. I wonder if any of that changing qualitatively or quantitatively? And then the second is around the registration plans for ceftolozane, and after UTI and intra-abdominal. I wonder if you could talk a bit more about what the -- this open label Phase III trial in pneumonia will do for you? And then also how that relates to this organism-specific trial that you're contemplating and discussing with the FDA? I guess, can you give us some details around what you're thinking for that other trial?

Michael W. Bonney

So Rob, you want to take the price increase question and Steve can pick up the registration question for 201.

Robert J. Perez

Sure, thanks, Alan. Yes, the price increase has been pretty consistent with what we've seen previously. Hospitals are certainly under increasing economic pressure, and we're aware of that. They have always been concerned about high-priced branded drugs. So that hasn't changed. I think what we are doing well is continuing to communicate the value of CUBICIN and continuing to make sure we communicate the patients for whom CUBICIN is an appropriate choice, not only clinically, but economically as well. So because of that, we feel like we do have pricing room and that taking price at an appropriate level, which is what we think we're doing, is justified. So it's never easy. Hospitals don't like it, but we do feel we can defend it for patients that are appropriate for CUBICIN.

Michael W. Bonney

Steve?

Steven C. Gilman

Okay, so the open-label trial is a trial that's being conducted in pneumonia patients and VAP patients. It's going to study -- it's open label so that you can study certain populations that you can't study under a blinded trial. So for example, as you know, you can't do placebo-controlled trial, and so you can't enter patients into a randomized prospective registration supporting trial that have multi-drug resistant pathogens because you have to exclude them to get them into the trial. So in this trial, you can open it to all comers, you can see multi-drug resistant pathogens, and we can also study agents comparatively that are difficult to study or unstudyable in a registration-supported trial. For example, pip/tazo, which will be the comparator in this trial. You can't do that in a head-to-head trial against ceftolozane because to blind that, you have a 4x-a-day therapy in [indiscernible] but 3x-a-day therapy in ceftolozane/tazobactam and to do a study to compare them, you'd have to give people infusions every 7x a day. And you can't really do that. So this is a way to study different comparators, different populations, and provide, really, an early look at efficacy and safety in this patient population. So it's a bit of an experimental trial. It will just give us some comfort. It's not a power trial, it's only in 300 patients. And it's also just to remind everybody that with those in these pneumonia trials are going to be twice the dose of the dose use in IAI and UTI just to recall or jog your memory. Now with respect to the -- and that is quite different than the original trial, the original blinded controlled trial, which would have been against any tenen [ph] and would have enrolled some 950 patients and studied all-cause mortality. See, in the open-label study, we can study clinical efficacy but don't need to study a registration-supporting trial or a regulatory endpoint, which was all-cause mortality in the prior long -- large pneumonia trial. So it's quite different than our -- the 2 trials were quite different than our original -- in our original thinking. Now with respect to how it might be different with the new pathogen-specific trial, the pathogen-specific trial will be different in a couple of ways not least of which it will actually have -- we'll have a way to prescreen patients for sort of biased [ph] the trial with respect to Pseudomonas infections, the open-label trial is open label, so we'd couple [ph] anybody that would come through. And the rest of the details, I -- really, we're still in the conversation phase with the agency, so we'd be articulating more clarity on that trial, but I think I'd stopped there, Alan, if you don't mind.

Alan Carr - Needham & Company, LLC, Research Division

So the -- to make sure I understand this right, the original plan for the -- you called it, previously called it a Phase II open-label trial, now it's a Phase III open-label trial. Before that was used sort of as a publication strategy to have some data on efficacy of this drug in pneumonia before that larger 900-patient Phase III trial would have been done. But here, it looks like it might be sort of an opportunity for you all to learn more about how this drug behaves in some specific -- well, in particular, I guess MDR Pseudomonas, and you might use that information for this -- the new trial that you're in discussions with the FDA about that might -- the pathogen specific one. Is that the right way to think about it?

Michael W. Bonney

Well, I think, Alan, that the open-label study really has the same intent that it always has, which is to provide information about the use of ceftolozane/tazobactam in ventilator-associated pneumonia. And clearly they will be including an exclusion criteria, but think of it as sort of all comers when Gram-negative infections are suspected. The pathogen-specific trial is and again, we don't know exactly what that looks like. We have a proposal that we'll discuss with the regulators based on [indiscernible] guidance. But that will focus strictly on Pseudomonas ventilator-associated bacterial pneumonia. Based on this new guidance, we believe that if that study, once we agree it with the regulators, would provide data that would allow us to put ventilator-associated pneumonia if -- assuming success, into the label.

Alan Carr - Needham & Company, LLC, Research Division

Okay. So you had mentioned before that it doesn't impact the timing for adding this to the label. I remember the 900-patient Phase III trial was going to take a while. Do you think that this 300-patient Phase III open label, will that one take a while to read out too? Or is that one, we might also see something in the [indiscernible]...

Michael W. Bonney

We respect that one to read out. Our timing hasn't changed on that. We expect that one to read out sometime in 2015 as Steve said in his prepared comments.

Operator

Your next question comes from the line of David Friedman.

Unknown Analyst

Hi, it's Sarah [ph], actually, for Dave. Just a quick question on the Hospira litigation. We noticed yesterday that there was a court document put out where Hospira basically stipulated that they infringed and they have to prove invalidity. Is this something you guys expected? Does it change your thoughts or strategy at all? If you could just give us an update there?

Michael W. Bonney

Thanks, Sarah. No, it is pretty straightforward. It is part of the whole process. It represents what Hospira's current view is. That's all. It doesn't really have any impact on how this thing is going to proceed. It's just a step in the process to make clear that at this stage, they are headed down the invalidation path.

Operator

Your next question comes from the line of Steve Byrne.

Steve Byrne - BofA Merrill Lynch, Research Division

Hey, Rob, I have a follow-up for you based on your comments earlier on the hospital-acquired infections in Europe. Can you comment on what are the primary drivers of those infections and what kind of pathogens they are, Gram-positive or Gram-negative?

Robert J. Perez

Yes. Steve, I don't have the specifics from that report in front of me. I do know that it was, generally, the -- they kind of called out the same pathogens that we see in the U.S. that are the troublesome pathogens, which was MRSA on the Gram-positive side and Pseudomonas on the Gram-negative side. The numbers look pretty similar to the numbers that are reported in the U.S., as well. I think the key point of that message is that the government regulators in Europe and in particular, the government payer bodies in Europe have recognized this issue. And there's a lot of government scrutiny, a lot of government reaction to this -- the issue of resistant pathogens. So we think that we will be if ceftolozane/tazobactam is successful, we will be launching into an environment where people appreciate the unmet need and we do hope that, that helps in terms of getting HTA [ph] assessments, et cetera.

Steve Byrne - BofA Merrill Lynch, Research Division

Okay, and then a somewhat similar question for the U.S. market. Can you comment on the level of concern that your hospital accounts have in the U.S. with respect to the potential for DRG payment reductions from either hospital acquired infections or readmissions? And what can you do to help them with those initiatives?

Robert J. Perez

Yes, it's a great question, and certainly, there is significant concern about all of the areas of reimbursement and some of the changes that are happening, be it readmission, be it value-based purchasing, et cetera. And hospitals are already under economic pressure. When you add some of these things, it makes them -- it obviously makes them very nervous. The good news is that many of the hospitals, particularly the ones that are most advanced in the way that they view their business and the way that they kind of have their head around their reimbursement situation, in those places, CUBICIN does very well because they really can have an appreciation of the total cost of care involving treating these patients and how CUBICIN can impact things like readmission, length of stay, et cetera. There are some institutions and frankly, this is unfortunately more the majority at this point, who aren't necessarily in that more enlightened place and they're reacting to this economic pressure, initially, by just cutting. And that doesn't just mean CUBICIN, they just cut wherever their expenses are large. And in that instance, we have to work a little harder to show them that acquisition cost isn't the only metric. You should be looking broader than that. So I'm kind of optimistic because I think those institutions that I've -- that are kind of in the latter part of that example are more likely to move upstream as they get more economic pressure and as they realize they can't cut their way to success in this new environment. So we're sticking with our messaging regarding value and that's working with the institutions that really have that bet [ph].

Operator

Your next question comes from the line of Brian Skorney.

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

I guess I have a couple of quick questions. Mike, I'm not sure if you could actually comment on this, but I'm just trying to figure out is there actually a scenario where there is a settlement for -- with Hospira, given the terms of the settlement and exclusivity that's been granted to Teva under that settlement or are there really only a binary outcome in terms of a successful defense of CUBICIN IT or a negative decision? I'm just trying to...

Michael W. Bonney

No, the Teva settlement really has no bearing on the nature of the resolution of the Hospira case. So we're fully prepared, we're very confident in our patents. We're fully prepared and we're asserting them vigorously. We'll see how the things evolve. We're very comfortable that we have a very strong patent estate here.

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

Right, and I think that's firm. I'm just trying to see is there actually an opportunity to settle based on the Teva settlement or is part of the exclusivity, would it make it impossible to actually reach any sort of settlement that would grant Hospira anything?

Michael W. Bonney

That's a level of detail that I can't respond to. Quite frankly, it's too -- it's both premature in the process and it gets too close to what our strategy is here. And I'm not going to run any risks in this regard. The -- I think, I'll repeat what I said earlier, the range of outcomes here, either a decision in a -- as a result of a bench trial or a settlement are open. There is no restriction based on the Teva agreement.

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just kind of a housekeeping issue, I know you went over the gross to net adjustment in the beginning of the call and I'm just a little -- I'm just trying to understand a little better. Am I right that relative to next quarter that this quarter had a benefit so there'll be a 2% impact on the negative side to the top line sales next quarter? Is that the way -- the best way to look at it?

Michael W. Bonney

Mike?

Michael John Tomsicek

Yes, we did run a 12% gross to net, where our gross was reduced by 12% to get to our net revenue. I would expect that to go to something closer to a 14% gross to net in future quarters. So yes, that would reduce our net revenues compared to gross.

Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division

Got you. And then, just from prior quarters, was the prior quarters, was it 12% or was this kind of a 1% down, and it's going back up to 14%?

Michael John Tomsicek

No, the prior quarter, if you look at Q1, the prior quarter was 13.3%. So what I'm saying specifically is future quarters are expected to have a larger reserve percentage.

Operator

Your next question comes from the line of E. Chen [ph].

Unknown Analyst

What do you plan to do to ensure efficient capture of international royalty revenues from CUBICIN sales going forward?

Michael W. Bonney

I'm sorry, could repeat the question?

Unknown Analyst

What do you plan to do to ensure efficient capture of international royalty revenues from CUBICIN sales going forward?

Michael W. Bonney

Well, we've been capturing royalties from international CUBICIN sales since, I believe, 2005. Each of our contracts with our partner stipulates both how -- what the royalty rate is, how those royalties are calculated and the time frame in which they need to be calculated. I don't envision that for CUBICIN changing going forward at this time.

Operator

Your next question comes from the line of Jason Kantor.

Jason Kantor - Crédit Suisse AG, Research Division

A couple of really small things, I guess. So the gross-to-net calculation you just went through, was that across all your products? Or was that just on ENTEREG because I remember you brought that up right after talking about ENTEREG. Or is that covers all your products?

Michael W. Bonney

That was CUBICIN.

Jason Kantor - Crédit Suisse AG, Research Division

That was CUBICIN gross to net, okay.

Michael John Tomsicek

Hold on, Jason. The gross-to-net numbers we discussed has been 12% do cover all products.

Michael W. Bonney

Oh, I'm sorry, Mike.

Michael John Tomsicek

Yes, that's fine, but the discussion that we had about Medicaid rebates and so on, really only apply to CUBICIN themselves and so for the bump in gross net comes from CUBICIN, but the numbers that we quoted being 12% or 14% going forward are across the whole business.

Jason Kantor - Crédit Suisse AG, Research Division

So when you think about the price increase, which usually you don't -- you can't -- it doesn't really recognize the whole price increase all at once, and that's a 5%, 5.5% you got a sort of quarter-to-quarter 2% change in gross to net. I mean, are -- will those, at least, kind of balance themselves out quarter-to-quarter, so it's kind of a wash? Is that a fair way to think about that?

Michael W. Bonney

As you know, Jason, we typically don't guide to gross to net, but I know that this quarter situation's a little bit more complicated because of the reserve release, which is why I did give some indication of what the back half of the year is supposed to -- or is looking like, where it's trending and that does encompass the price action we took on [indiscernible] July 1.

Jason Kantor - Crédit Suisse AG, Research Division

Okay. And with your -- with the $14 million or $15 million payment to Hydra, what precipitated the change in that relationship? Was it that they needed the money now? Or it seems like for not much money, you got out of a whole lot of milestones. So I'm just trying to figure out why that was offered up to you.

Michael W. Bonney

Yes, we were certainly approached by Hydra based on what their strategy is to see if we would be willing to negotiate something here, an amendment to the original agreement and this is where it ended up, Jason.

Operator

Your next question comes from the line of James Molloy.

James F. Molloy - Janney Montgomery Scott LLC, Research Division

Just a couple of small things as well. The second quarter, sort of nice bounce back in CUBICIN from the first quarter. Any sort changes in the first quarter or just sort of the fluctuations you may expect to see as you go along? And I know you gave the 5.5% on the pricing with a vial [ph] growth -- was vial [ph] growth given, I missed that?

Michael W. Bonney

Rob?

Robert J. Perez

Yes, so remember, Jim, that Q1s are usually soft. They're seasonally soft and have been really since launch. So while we usually see a bump from Q1 to Q2. We saw a nice bump this time in revenue. As far as vial [ph] growth, the vial [ph] growth was essentially flat year-over-year. It was up just like 0.1% Q2 '13 over Q2 '12. That's in relation to a market, a MRSA market that declined about 3.5% or so year to date through May, which is all we have in market data. So we were more negative on vial [ph] growth in Q1 and it bounced back positive but barely in Q2. So we were sequentially up almost 11% Q2 over Q1 in revenue. And I've given you the vial [ph] growth numbers.

Chris Hamblett

All right, a quick follow-up, I know a third party's saying you guys are in one of the bidders for Optimer. Is there other any comments you can make on that or you'd care to make and would that speak to your own CDAD product in Phase III?

Michael W. Bonney

No comments we'll make on that.

Operator

Your next question comes from the line of Howard Liang.

Howard Liang - Leerink Swann LLC, Research Division

Just a question of CXA-201, I think you've talked about the idea that we shouldn't expect superiority data to come from the current Phase III trials even in patient subgroups. Can you talk about how do you plan to build superiority data? Are you only hoping to show superiority in specific -- for specific pathogens, maybe [indiscernible] new guidance or is there something broader?

Michael W. Bonney

Well, we certainly have engaged with the regulators based on this new guidance because we think there's an opportunity here to demonstrate greater differentiation for ceftolozane/tazobactam. But superiority data is not something in the clinical context that you generally will see in an antibiotic trial. There are exceptions clearly. But generally, that is not the case. I would remind everyone that there are 2 portions of an antibiotic label. There's the micro in-vitro section and there is the clinical section. And basically, the way a physician makes decisions about which product to use when is a combination of what bugs does it have activity against and then does it get to the site of the infection in sufficient concentrations to be confident that you have a -- you can deal with that bug. Where superiority, and it's not a superiority in a promotional sense, will exist for this product we believe is on the breadth and scope of its coverage of Pseudomonas based on achievable blood levels that we get in the various tissues and the clinical trials was, of course, not be able to -- will not be able to enroll these resistant pathogens because it's not ethical to do that given a double-blinded study with -- if a pathogen is resistant to the comparator. But it's the combination of that in-vitro data, the micro data and the clinical data that says, yes, it gets to the site of the infection, yes, it is relatively safe to use, we know these are the adverse events you need to look out for, that the combination of those 2 things that drive the decision-making for a physician at the bed side.

Howard Liang - Leerink Swann LLC, Research Division

And, Howard, this is Rob. I think just to follow up on what Mike said, the anti-infective market is really one that's somewhat unique in the sense that it's not a Phase III study that drive this label that ultimately will tell you what the drug's going to do and a good reference for that is CUBICIN. We've mentioned how confident we are about it being greater than a $1 billion in the U.S. alone. There's nothing in the CUBICIN label that says that it's superior to anything. So just to give you a sense, there's -- the label and the data are a part of the story of how physicians use the drug, but as Mike said, they really do look at the patient clinically and look at how the drug works against the pathogens that they're worried about and that's why we're very excited about ceftolozane/tazobactam because of its efficacy. And we hope it bears out in the trial against Pseudomonas aeruginosa.

Operator

Your next question comes from the line of Matthew Harrison.

Matthew Harrison - UBS Investment Bank, Research Division

I have 2, so first, just on timing for 201, I know you said fourth quarter. Should we expect those studies to come together or potentially come separately? And then, a follow-up after that on the VAP [ph] studies. Just in terms of the new potential FDA guidance, could that change in terms of the size of the study and therefore, potentially make data available faster if you were to negotiate sort of single-pathogen studies?

Michael W. Bonney

?

With respect to the timing of the 201 IAI and UTI studies, it is certainly possible that they will be disclosed separately. It depends on when we get the data and what the relative timing is. With respect to the new guidance on VAP, I think it's premature for us to characterize until we actually have had the opportunity, had the conversations with the regulators what the implications are of this. We're quite confident simply because if it looks like the agreed-upon design will require a longer-term study, we would revert back to the already agreed plan. We're confident it won't take any longer than what we had originally thought with the all-cause mortality VAP study. There is a potential for it to become a smaller study, but because we're not taking, if you will, as broad a group of patients only those with pseudomonal VAP, there could be a trade-off in terms of the number of patients versus the time here. So it maybe a smaller study, but still take us the same amount of time as the all-cause mortality as -- is where I'm going. But once we get agreement on the protocol, we'll provide the guidance as best we can at that point on the timing.

Operator

And your next question comes from the line of Eun Yang.

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

So Rob, when you mentioned the market decline of 35.5% [ph] year-over-year for CUBICIN, I'm assuming that you are referring to brand drug utilization in the hospital setting, is that correct?

Robert J. Perez

Yes.

Matthew Harrison - UBS Investment Bank, Research Division

Now do you -- so based on what you see now, do you expect they will continue to decline?

Robert J. Perez

[indiscernible] basket of the drugs that we use to define the market [indiscernible] in the hospital, some of them are used a bit outside the hospital. But generally, it spreads [indiscernible] and MRSA infections. Do I continue to see it declining? We've seen pretty flat market growth generally over the past couple of years. I think this particular time period, as I said, we've seen some decline. But I think the -- my expectation going forward is that we're going to have a pretty flat market going forward. And that could be in any given quarter, it could be up a little, down a little. But that's generally what we've been seeing.

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

Another question for you, so from your experience with the promoting DIFICID in the U.S. over the last 3 years, are there some lessons that you want you can share with us or something that [indiscernible] yield major difference for surotomycin?

Robert J. Perez

Well certainly, we very much enjoyed the experience of working with Optimer, and we did get a chance to learn during the DIFICID launch. I'm not going to get into what those lessons were. The primary reason for doing that, that deal was to work with Optimer to make DIFICID as successful as possible for the first couple of years, and we did our best to do that. And now, we're focused on or at least as of the end of July, we will be focused on our own program and getting ready to make it as successful as possible. So I think the experience thus far or the experience over the last couple of years has been good one for CUBICIN and we certainly hope that it's been a good one for Optimer as well.

Operator

And there are no further questions.

Michael W. Bonney

Okay, thank you, operator. And thank you, all, for tuning in this evening. We look forward to reporting on our results for the third quarter of '13 on Tuesday, October 22 at 5 p.m. Eastern Time. Thanks a lot and have a good evening.

Operator

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

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