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Executives

Eileen McIntyre – Senior Director, Corporate Communications

David McGirr – SVP & CFO

Rob Perez – EVP & COO

Steve Gilman – SVP, Discovery & Nonclinical Development and Chief Scientific Officer

Mike Bonney – President & CEO

Analysts

Eun Yang – Jefferies & Company

Joel Sendek – Lazard Capital Markets

Alan Carr – Needham & Company

Greg Wade – Wedbush

Tom Russo – Robert W. Baird & Company

John Newman – Oppenheimer

Howard Liang – Leerink Swan & Company

Stephen Willey – Thomas Weisel

Cubist Pharmaceuticals, Inc. (CBST) Q4 2009 Earnings Call Transcript January 21, 2009 5:00 PM ET

Operator

Greetings and welcome to the Cubist Pharmaceuticals fourth quarter and year-end 2009 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Eileen McIntyre, Senior Director of Corporate Communications for Cubist Pharmaceuticals Incorporated. Thank you Ms. McIntyre, you may begin.

Eileen McIntyre

Good afternoon, and thank you for joining us for the fourth quarter and full-year 2009 earnings call 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.

This presentation includes forward-looking statements relating to among other things projected revenues, company financial performance, the ANDA litigation with Teva, our intellectual property protecting CUBICIN, our products in pipeline, our business development efforts, and our commercialization and manufacturing of CUBICIN. These statements are neither promises nor guarantees and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in any of these forward-looking statements.

These and other factors are contained in the company's filings with the SEC, including our most recent quarterly report on Form 10-Q. Cubist is providing this information as of the date of this presentation and does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise.

Within this presentation, in order to provide greater transparency regarding Cubist’s operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP figures. In particular, this presentation contains information on non-GAAP net income and net income per share. Any non-GAAP financial measures presented should not be considered an alternative to measures required by GAAP and are unlikely to be comparable to non-GAAP information provided by other companies.

Any non-GAAP financial measures presented are reconciled to the most directly comparable GAAP financial measures in a table included in our news release issued today and available in the news section of our Website. A further discussion of why we feel these measures are important to investors and the reasons for which our management uses these measures is also included in the news release.

Speakers on today's call will include Cubist’s President and CEO, Mike Bonney; Chief Operating Officer, Rob Perez; Chief Scientific Officer, Steve Gilman; and Chief Financial Officer, David McGirr. You will first hear from David McGirr who will review the financial results provided in our news release this afternoon. David?

David McGirr

Thanks, Eileen. We ended 2009 in a strong financial position, which gives us a very stable platform for all of the exciting activities we have planned for 2010. The details of our Q4 and full-year results are in the news release we issued earlier this afternoon, so I will focus briefly on the key numbers.

Our 2009 results reflect both the continued success of CUBICIN and our discipline around cost as we continue to develop a pipeline of acute care therapy. Total net revenues for Q4 at $166.7 million were up 27.1% year-over-year. For full-year 2009, at $562.1 million, total net revenues were up 29.6% year-to-year. These numbers reflect strong performance for CUBICIN in the US and internationally.

Gross margin for fiscal year 2009 was 78.3%. All of the cost areas came in as expected, with the exception of G&A, which came in above guidance as a result of a very active fourth quarter for transactions with one outcome being the Calixa acquisition. For full-year 2009, operating income was $137.8 million. Operating income grew 51.6% versus 2008, while revenues grew at 29.6%. These numbers illustrate the impressive leverage of our business model. The results reflect the transaction costs and stock-based compensation charge from the Calixa acquisition in the fourth quarter.

As a result of the acquisition, we also recorded significant assets and liabilities, in particular in-process R&D, goodwill and a liability representing the fair value of the contingent milestone payments. The in-process R&D amount will be amortized over the expected useful life of the assets, once CXA-201 receives regulatory approval. Any significant change in fair value of the contingent milestone would be recognized in accordance with GAAP at future reporting date. We continue to take a disciplined approach to developing our pipeline, in keeping with our dedication to growing operating income at a targeted percentage.

Diluted EPS for Q4 was $0.38 on a GAAP basis and $0.68 on a non-GAAP basis. For the full year, diluted EPS was $1.36 on a GAAP basis. The year-over-year non-GAAP EPS grew from $1.82 to $2.29, very good to see this 26% growth. The tax provision in Q4 2009 was $12.5 million and $40.3 million for full-year 2009. These are the book tax figures and the cash tax was $1.8 million in Q4 and $6.2 million for the whole year.

We ended the year with a solid balance sheet. After the Calixa upfront in transaction-related expenses, our cash and investments position at year-end was $496.2 million, a comfortable place to be in the current slowing improving capital market environment.

Now, Rob Perez will begin our review of product and pipeline developments. Rob?

Rob Perez

Thanks, David. 2009 was another strong year for Cubist on the top and bottom line, and we have confidence that our 2010 plan gives us the capacity for continued development of our product pipeline. I will begin today with a summary of commercial performance in 2009 and our product revenue expectations for 2010.

For CUBICIN, we ended 2009 with a strong fourth quarter. US net product revenues for Q4 of $147.8 million were up 23% from the fourth quarter of 2008. This was strong growth after six years on the market. For the full year, US net product revenues came in at $524 million, at the high end of the guidance range provided in October. The Cubist US acute care commercial organization continues to demonstrate its expertise in navigating the challenging hospital selling environment, helping to ensure that physicians have access to CUBICIN for the treatment of appropriate patients.

Cubist’s international revenues for CUBICIN reflect the momentum we have seen in Europe this year. Cubist’s share of full-year 2009 international net product revenues was $13.8 million. This beat our expectations for 2009 and represents an increase of 86% or $6.4 million from full-year 2008. Novartis continues to see a peak sales opportunity in Europe of between $150 million and $200 million in any user sales. We are pleased with the changes Novartis made to their CUBICIN sales model in Europe in 2009, and they now appear to have gained traction in a number of key countries.

Our 2009 service revenues for selling MERREM I.V. for AstraZeneca in US hospitals came in at $22.5 million, on target with our most recent guidance. This number is a combination of the $18 million earned for selling MERREM I.V. this year and the $4.5 million we received in the first quarter of 2009 for overachievement against our revenue target for MERREM I.V. in 2008. Our products and service revenue guidance for 2010 is as follows. For CUBICIN, we anticipate full-year 2010 net product revenues in the US of between $600 million and $620 million. This guidance range reflects our expectations for a number of revenue drivers, including our best judgment as of today on what we believe will be a modest potential impact from US healthcare reform on the acute care therapy market.

For CUBICIN international revenues, our 2010 guidance for revenues booked by Cubist are between $20 million and $25 million, largely based on expectations for an accelerating growth story for CUBICIN in the EU. Finally, our 2010 guidance for service revenues based on a minimum of six months of hospital sales activity for MERREM I.V. in 2010 is $7 million. We earned the full $7 million for achieving our target revenues during the six-month selling period and have some upside if we over-deliver. Cubist and AstraZeneca will review the collaboration midyear and determine if an extension to our agreement is mutually beneficial, given MERREM’s patent expiration in June.

Now, turning to our pipeline. It gives me great pleasure as we start 2010 to reflect on our success with business development in 2009, in particular the acquisition of Calixa Therapeutics announced in late December. This acquisition fits well with our strategic goal of bringing in later-stage acute care assets to leverage our acute care development, regulatory and commercial infrastructure and expertise. As you are aware from our internal discovery work, we have been interested in the unmet medical need and associated commercial opportunity in the Gram-negative antibiotics space for several years. The market opportunities for the Calixa combination agent, CXA-201is much like the market size and potential we saw in the Gram-positive space when we launched CUBICIN just over six years ago.

This slide gives you a quick snapshot of the striking similarities between our experience with CUBICIN and our expectation for CXA-201. First, let’s go back in time to 2003 when we launched CUBICIN in the US. As you can see on the slide, the key factors that led to CUBICIN becoming the most successful IV antibiotic in US history were MRSA with a Gram-positive pathogen of significant concern to the infectious disease community and its incidence was growing; also the standard of care agent, vancomycin was starting to show its age. Just a few months later, we see the first publication of our issues with clinical efficacy at MIC of 1 or higher. And finally, CUBICIN had demonstrated rapid cidality in vitro, while it was first launched in the US with an approved indication for complicated skin infections, CUBICIN was also being studied for blood stream infections where MRSA was a very worrisome pathogen.

The blood stream infection indication will be added to the US label three years after launch. Now, let’s fast-forward to 2010 and take a look at the similarities in the Gram-negative space. Multi-drug resistant Pseudomonas aeruginosa is a Gram-negative pathogen that is much like MRSA and its association with bad outcomes, including mortality, growing prevalence and increasing multi-drug resistance. Interestingly, Pseudomonas is becoming a big problem in hospitals across Europe, much more so than what we have seen to date for MRSA.

In the Gram-negative space today, the most frequently used agent, Zosyn is losing its spectrum against Pseudomonas. In vitro research done in 2008 showed Pseudomonas was susceptible to Zosyn only 75% of the time, and this situation will likely worsen with increased use of Zosyn now that it’s available as a generic. The Calixa-combination therapy CXA-201 much like CUBICIN is a rapid killer in vitro and its in vitro susceptibility against Pseudomonas type [ph] is 99% compared to Zosyn of 75%.

We are pursuing an aggressive clinical development plan for this IV antibiotic for the goal of an initial NDA filing in the second half of 2013. Assuming success, we launched CXA-201 with labeled indications in complicated urinary tract and complicated intra-abdominal infection, while also conducting studies in nosocomial pneumonia where Pseudomonas is associated with high mortality.

Similar to the path we followed with CUBICIN, we plan a supplemental filing for half of that after launch. Now, add to these similar opportunities the fact that the Cubist’s R&D and regulatory professionals are chopping at the bit to apply the processes and skills that they used so successfully for CUBICIN, and a hospital sales organization newly formed in late 2003 is now a proven, well-tuned machine. We also have the benefit of a world-class infectious disease medical affairs organization.

You couldn’t ask for a more promising matchup of unmet medical need, commercial opportunity, and impressive antibiotic candidate and a company with directly leverageable development in commercialization know-how. We estimate a peak sales revenue opportunity for CXA-201 of close to $1 billion in the US and EU combined, assuming successful development in all currently planned indications. The upfront payment to acquire Calixa, about $100 million after adjustments, primarily through Calixa’s cash acquired reflects the confidence that we have at this stage for the opportunity that CXA-201 represents. The balance of up to $310 million in potential payments to Calixa stockholders are tied to value-creating development, regulatory and commercial milestones.

Now, Steve Gilman will provide more detail on the Calixa development plan, and we will also highlight developments and anticipated news flow across all of our acute care pipeline programs in the year ahead. Steve?

Steve Gilman

Thanks, Rob. The Calixa acquisition adds an important anecdotal [ph] asset to our clinical pipeline and will be the focus of considerable clinical activity this year. I would like to start by reviewing the key differentiating aspects of the combination antibiotic CXA-201. We are developing CXA-201 as a first-line intravenous therapy for the treatment of certain serious Gram-negative bacterial infections particularly those caused by multi-drug resistant Pseudomonas aeruginosa. CXA-201 is a combination of CXA-101, a novel anti-pseudomonal cephalosporin, plus tazobactam, a beta-lactamase inhibitor that has been in clinical use since the 1990s as part of the IV antibiotic dose.

As Rob mentioned, the novel cephalosporin CXA-101 is rapidly cidal in vitro, with broad spectrum activity against Gram-negative pathogens and particularly strong potency against multi-drug resistant Pseudomonas aeruginosa. This differentiating anti-Pseudomonas spectrum of activity is clear on this table comparing the Pseudomonas susceptibility of CXA-101 with that of leading cephalosporin and (inaudible) on the market today. CXA-101 is now nearing completion of a Phase II trial for complicated urinary tract infections or CUTI, and we expect to report data from this group of concept trial in the first half of this year.

We are currently completing protocol design for a Phase II trial of a combination agent, CXA-201 for complicated intra-abdominal infections. We expect to initiate this trial in the first half of this year. We are also finalizing what our next steps will be in the CUTI indication. While we are designing a protocol for a Phase II CUTI trial with CXA-201, we are also evaluating the options of proceeding directly to Phase III in this indication based on the CXA-101 CUTI data, following and end of Phase II meeting with the FDA.

In the second half of 2010, we also expect to begin lung pharmacokinetic studies of CXA-201 to support an indication in nosocomial pneumonia. This should put us in a position to initiate a Phase II trial to evaluate the safety and efficacy of CXA-201 in patients with nosocomial pneumonia early in 2011. If successfully developed, CXA-201 would be differentiated primarily we believe for its efficacy against multi-drug resistant Pseudomonas aeruginosa. It would compete against agents that appear to be losing activity against Pseudomonas, in particular aeruginosa.

CXA-201 would benefit from the vision comfort with cephalosporin, a class with a well-established safety profile. Physicians also have many years of experience with the use of the beta-lactamase inhibitor tazobactam. While we are focusing resources immediately on the Phase II CXA-201 candidate, we will also soon complete a review of our single and multiple-ascending dose Phase I safety data for our internally developed CB-182,804 Gram-negative candidate. We expect to make a Go/No-Go Phase II decision on this program, which we see as quite complementary to the CXA-201 program later in the first quarter.

In our other internally-generated antibacterial program, CB-183,315, which is in development for the treatment of C. difficile Associated Diarrhea, or CDAD. We have now completed both the single and multiple dose Phase I studies. I am pleased to announce today that based on the safety data, we will be launching a Phase II CDAD trial, which will provide us the first opportunity to assess the ability of 315 to reduce relapse rate in humans, particularly among patients with CDAD infections due to the highly pathogenic NAP-1 strain. We expect to begin enrolment of this Phase II trial in the first half of this year.

Now, turning to CB-500,929 or ecallantide. As you know, in December, we made the decision to end enrolment early in the CONSERV-1 and 2 Phase II trials. We made this decision following notification by the DSMB that there was an imbalance in mortality in the two arms of the CONSERV-2 high-dose trial, which was studying a population of cardiac surgery patients at relatively high risk of bleeding. Despite an early end of enrolment in the CONSERV trials, we believe that we will have a sufficient number of patients, more than 450 across the two trials to allow for a robust analysis of clinical results of both safety and efficacy.

Assuming that we determine a path forward, we would prepare for an end of Phase II discussion with the FDA later this year. We expect to be in a position to determine the next steps for this program late in the second quarter.

Overall, we are going to have a very data-rich year for our pipeline. I will now turn the call over to Mike.

Mike Bonney

Thanks, Steve. Many of you on the call today have watched Cubist as we have taken bold and deliberate steps to build a different model for a successful biopharmaceutical company. Our focus continues to be on areas of clear unmet medical need and acute relocations including those with multi-drug resistant infections. This is a different path to success and one with unique challenges, but we now have reported our six year of strong growth.

Equally important is our determination of the clinical pipeline while growing operating income. This requires both strategic focus and financial discipline. It gives me great satisfaction today to report year-over-year operating income growth of more than 50%, while we have simultaneously advanced and extended our clinical pipeline. Drug development requires both integrity and adaptability. There will be delays and setbacks along the way, along with scientific advances and medical breakthroughs. We believe we have built a business model to foster this innovation while ensuring that we have the room to make needed changes and challenge assumptions along the way. The report card for 2009 milestones on this slide provides important proof points.

Accomplishments and important decisions made in 2009, and staged for some significant pipeline developments in the year ahead. Earlier in the call, Rob provided some specific products and service revenue guidance for 2010. For total revenue, our 2010 guidance is $627 million to $653 million. Operating income guidance in the range of $165 million to $184 million reflects the following line item expense guidance. R&D at between $170 million and $180 million reflecting the initiation of several clinical trials this year. Sales and marketing at between $90 million and $95 million, which reflects cost associated with a series of pilot programs this year for which we will carefully measure promotional response. G&A of between $59 million and $63 million, reflecting the underlying growth in the business.

As David said early in the call, we are in a strong financial position to move forward with some exciting clinical programs in 2010. Also on the agenda, of course, is the ongoing ANDA litigation process with Teva. A small number of folks here working with outside council will continue to do the appropriate things to move this process forward. Meanwhile, the bulk of the organization will drive revenue and progress our clinical pipeline.

We have some important pipeline decision points and clinical trial initiations plan for this year, along with the start of clinical data quota will continue into 2011. Expected milestones for 2010 are on this slide, include the following clinical pipeline developments. The amount from the topline data from the Phase II complicated urinary tract infection trial for the novel cephalosporin CXA-101, the initiation of clinical trials for the combination therapy CXA-201 for both complicated intra-abdominal infections and complicated urinary tract infections, along with important one PK work with 201 to facilitate for nosocomial pneumonia trials in 2011.

Analysis of safety and efficacy results for the more than 450 patients enrolled in the CONSERV-1 and CONSERV-2 Phase II trials, CB-500,929, and the determination of next step for this program, and a start of Phase II for CDAD candidates, CB-183,315 and a Phase II decision for internally-developed Gram-negative agent, CB-182,804. For CUBICIN, 2010 expected milestones include the announcement of topline results from the ongoing Phase II comparative dosing trial and prosthetic joint infections and the doubling of our API manufacturing capacity in support of long-term projected growth of CUBICIN uptake in the US and around the globe.

Let’s now open the lines to your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from the line of Mr. Eun Yang with Jefferies & Company. Thank you. Your line is open, you may proceed.

Eun Yang – Jefferies & Company

Thank you. I want to ask you a question on the CXA-201 product. I know that which is to be acquired by AstraZeneca, they have a similar combination product like you have from Calixa combination of cephalosporin and beta-lactamase inhibitor. My understanding is that your products probably have a better potency against this known as the infection, but are there any other damages that you have over the product?

Mike Bonney

Well, it’s off and the clinical development of both products to get too far into advantages versus disadvantages. I think what I would say, Eun is that we are very comfortable with the fact we have got a novel cephalosporin in 201, a class with many, many approved products, lots of clinical work and a variety of different molecules over here, very well understood, and a well-established beta-lactamase inhibitor, tazobactam. When you compare that to the Novacel [ph] program, they have a well-established and approved cephalosporin with a new beta-lactamase inhibitor, and we feel very comfortable about the profile of 201 versus what we can see in the competitive environment. Further I would say, like the Gram-positive space, the Gram-negative space is quite large in terms of invasive therapy, a wide range of different treatment approaches are necessary in order to deal with these Gram-negative infections. So, there is likely room for multiple successful new products to deal with multi-drug resistant in the marketplace.

Eun Yang – Jefferies & Company

Thank you. The second question is on our guidance to your CUBICIN sales. You had mentioned that there is a – you assumed a modest impact from healthcare reform, but could you or have you assumed some impact on (inaudible)?

Mike Bonney

Well, certainly. Eun, what we do when we provide guidance is we look at a variety of impacts that the marketplace may experience over the course of the coming year, and try to model out a range of possibilities market growth, new products, impact in this year. Impact of healthcare which is a complete wildcard at this stage in the game of course. And we provide a guidance range that we have high confidence, and that, that’s what we have done again in 2010.

Eun Yang – Jefferies & Company

Thank you.

Operator

Thank you. Our next question is coming from the line of Joel Sendek with Lazard Capital Markets. Your line is open, you may proceed.

Joel Sendek – Lazard Capital Markets

Hi, thanks a lot. So, I appreciate the fact that you have high confidence in your slowing up in the last answer, high confidence in your estimates, your projections. I guess I am wondering if the CUBICIN revenue projection is a little bit too conservative. If you just look at the fourth quarter, and you annualize that, it’s just 3% growth. And I am wondering if Q4 run rate, I am wondering, you know, it seems to me that’s a little bit too conservative and then I have a question on the Q1 after that? Thanks.

Mike Bonney

So, you know, I can confirm your maths though, you did a good job there.

Joel Sendek – Lazard Capital Markets

I didn’t do it in my head, I have to admit that.

Mike Bonney

With respect to too conservative or not, I guess everybody will come up with their own judgments. We are very comfortable. This is a guidance range for 2010, and we have high confidence that we can deliver, even given some of the uncertainties in the marketplace going forward.

Joel Sendek – Lazard Capital Markets

Okay. So, maybe the punch line that I can conclude from that is if these uncertainties work in your favor, maybe you know, you could beat that comfortably?

Mike Bonney

As in any year, as we get additional data and there is more clarity on how the year is going, we provide updates once we have that data.

Joel Sendek – Lazard Capital Markets

Right, okay. And then on 201, I really appreciate the fact that you actually put in writing, when you expect to file the NDA, a lot of companies don’t do that, that’s very helpful. But I guess I am wondering why it would take that long? It seems pretty straightforward to do a Phase II in, you know, but you characterize that as an aggressive estimate. I am wondering if there is a pathway that you can conceive where you could get on the market, you know, maybe earlier than 2014, and maybe your part of that question is, you know, what you need to do in Phase II, would it be an act of comparative trial, can you share with us any of your thoughts there?

Mike Bonney

Sure. We need to do of course Phase II and then two Phase IIIs for probably two indications with our current Q [ph], the Phase IIIs would include initially the first NDA complicated intra-abdominal and complicated UTI. The Phase II studies will be classic Phase II studies, dose ranging with active comparative and so forth. We will probably look at a couple of dose results CXA-201 just to make sure we are well positioned to go into Phase III, and then of course, you got to guard the Phase III and accrue all those patients, close the studies out, assemble the data, put the NDA together and so forth. Just a comment, on our comment about aggressive. We think the development plan is aggressive, we are pretty comfortable that the second half 2013 assuming this drug performs the way we expect it will perform and that we can operationalize the clinical development plan here the way we think we can, we would have a filing in the second half of 2013. We always with every development candidate look for ways to shorten development time.

We understand the value, the time, value of money, and if the unmet medical need becomes so great that the standards become a little bit different, given what we know about this drug or if we find ways that we can accelerate that development program, as we have already hinted that with a potential to move directly into Phase III complicated UTI, we would do to pull that filing date forward, but at this point, our best estimate is second half of 2013.

Joel Sendek – Lazard Capital Markets

Okay, that’s helpful. Thanks a lot.

Operator

Thank you. Our next question is coming from the line of Alan Carr with Needham & Company. Your line is open; you may proceed with your question.

Alan Carr – Needham & Company

Hi, good afternoon, gentlemen.

Mike Bonney

Hi, Alan.

Alan Carr – Needham & Company

A couple of questions here. You have said previously that the sales force hasn’t had much more pushback from hospitals in terms of pricing in 2009. I am wondering what your expectations are for that in 2010? And then coming from the other side, I am wondering if you can comment on changes or lack of changes that have been out there in terms of vancomycin sensitivity, what did you see in 2009, and what are your expectations for 2010?

Rob Perez

Sure. Alan, in terms of the price objection or the amount of kind of sales force about price, it really hasn’t changed much in 2009, but it is still, you know, the number one objection we hear that it’s still the major hurdle for them to overcome in order to expand CUBICIN use, and that’s very similar to other branded products. The good news is they now have many more tools in their bag to able to address that objection in good pharmacoeconomic studies and analysis that show that CUBICIN can actually benefit the hospital relative to lower acquisition cost drug like vancomycin. So, I guess I would answer your first question by saying I don’t expect that there is going to be a significant increase in the amount of price objections in 2010. It was high in ’09, it will be high in 2010, but we are hoping that through the materials that they have and the materials that we are developing, they will have even more success in positioning CUBICIN as a valuable addition for the hospital.

And second part of your question was in regards to vancomycin susceptible. Yes, so, the vancomycin susceptibility story is moving at kind of glacial speed, continues to kind of gather momentum, but at a very slow pace. Most of the thought leaders and the IV positions are very well in tune, and are making changes in the way that they prescribe vancomycin right now, where the change is much slower is outside of infectious disease physician in those Internet, hospitals and others who are as familiar and aren’t as in tune with vancomycin. So, that’s basically the way that it’s going, and while the data is out there and the IV community really gets it, you are not seeing as big of a change outside of IV, and as you know, the opportunity with vancomycin is just as big outside of IV as it is within IV. So, that’s one of the reasons we are spending some time in that area.

Alan Carr – Needham & Company

Excellent. Other quick follow-on, can you comment on what sort of changes AstraZeneca made in Europe to – you mentioned that they changed or made some changes to their sales model?

Rob Perez

Yes, Novartis.

Alan Carr – Needham & Company

I am sorry, Novartis.

Rob Perez

Yes. What they did essentially, we won’t get into the specifics, but what I can say is that they added some changes to their organization that made them a little bit more focused on CUBICIN, that made them a little bit frankly more like the way we sell CUBICIN here in the US. So, it wasn’t matter of that they added resources significantly, they did add some resources but it was really a matter of focus and dedication to CUBICIN, and we have seen that gaining some traction and feel really good about our relationship with Novartis in the way that they have been kind of operating to try to maximize CUBICIN sales.

Alan Carr – Needham & Company

Great, thanks very much.

Rob Perez

Sure.

Operator

Thank you. Our next question is coming from the line of Greg Wade with Wedbush. Your line is open; you may proceed with your question.

Greg Wade – Wedbush

Thanks, and thank you for taking my questions. Congratulations on a great quarter and also on your CUBICIN sales. I would like to offer folks some attention on the lower end of the financial guidance for CUBICIN sales. That would suggest potential growth of just 1.5% off of the fourth quarter’s run rate, and if you take a price increase in 2010 as you have annually, historically that suggest the potential for degradation and actually unit demand. I am wondering with respect to the modeling exercises that you have taken into account, what your assumptions are for the lower end of your guidance with respect to vancomycin market share and some success, and why you feel the product is repositioned against this marketplace? Thanks.

David McGirr

First of all, I would say that, you know, we do anticipate even at the lower end of guidance volume growth this year. It is also the case that, and again there is uncertainty of what we have assumed for next year is that our rebates, covering mandated rebates, they are based on healthcare reforms, will go up, so that we will see some erosion in our gross to net. That’s just the fact of life in the world in which we kind of live. If for whatever reason, that does not materialize, it could well have some impact on our side, but I will assure you, Greg, that even at the low end here, we do see volume growth continuing in this year. We are not going to get into specifics about how we view share at the low versus the high end for any competitive products because as you know, this is now a much more competitive product than has been historically, and we are not going to be disclosing our secret sauce, so that our competitors can go to school on it.

Greg Wade – Wedbush

Understand, and I appreciate that. And I totally respect that part of the answer. With respect to the modeling of, you know, that give us an opportunity, I can understand a one-time change in pricing, that might occur as a results etcetera. And so how should we think about pricing, should we incorporate a lower price, what would that lower price be, and then grow units off of that, maybe give us a little more insight there what you are thinking about future?

Rob Perez

Yes, Greg, as you know, we really don’t comment on pricing and our pricing strategy going forward. I think what you, as Mike suggested, what you hear in the guidance is that is our best estimate. Given the uncertainties that we see in the marketplace today, worried of a high confidence of coming in at the end of the year. As some of those uncertainties go away, we will update you as the year progresses and give you our sense of what we think at that time. But at this time, that range represents not only price, but all of the assumptions that go into the revenue drivers for 2010.

David McGirr

Can I just add one thing there? This question has come up in previous years when we have given guidance, and one thing we have reminded people in the past and including you, Greg, is it is an acute care product. It’s not a chronic product and Q4 of 2009 is an input but does not tell you necessarily how 2010 will worry. And nothing has changed this, I think we probably had that conservation last three or four years. So, just to remind you all of that.

Greg Wade – Wedbush

You know, David, I respect that. I would just say though that historically the Q4 sales performance represents the behavior pattern in the marketplace, has been an excellent place in which to model out the Q1 through Q4 of the coming year. And if it’s pricing, it’s changing the outlook, that’s fine. This guidance is based upon some sort of demand change. That’s far more important for us to understand and it’s not really quite clear with respect to the guidance and I respect. There is only limited granularity you can provide, but the guidance at the low end suggests there is going to be significant degradation in the change, both the demand curve from what we see. Thanks.

Operator

Our next question is coming from the line of Tom Russo with Robert W. Baird & Company. Your line is open, you may proceed.

Tom Russo – Robert W. Baird & Company

Good afternoon and thanks for taking the questions. On the Gram-negative pipeline, just to set expectations at a time, can you walk through what type of results for 101 in CUTI would lead to conducting another Phase II versus going straight to Phase III, or is that more of a regulatory discussion that determines that?

Mike Bonney

Well, I think it’s more of a regulatory in corporate strategy discussion that will drive that. I think we expected the 101 study to show safety and efficacy in that patient population, that’s helpful, and it’s part of the information that would take forth, but I think it’s somewhat independent of a path forward with 201, whether it’s another Phase II or Phase III approach.

Rob Perez

We want to have that data before we decide whether to engage with the regulatory authorities or not, Tom.

Tom Russo – Robert W. Baird & Company

Okay. Second question, on the BD [ph] side, you just completed a big deal, are still sitting on about $500 million in cash. What’s the intended use of that going forward? What should we be expecting?

Rob Perez

Well, we are not going to shut down our business development effort certainly, but I think it’s fair to say that we have raised the bar here. We will continue to maintain a strong cash balance going forward. At this point, we think the best use of our cash is to keep our war chest, if you will, so that if opportunities present itself, we are well positioned to be incredible acquirers if the opportunity comes up. And as I said before, with the Calixa acquisition for the foreseeable future, the bar has been set pretty high.

Tom Russo – Robert W. Baird & Company

Okay. I will just try this one, because I get the question. Folks are starting to look ahead for the Markman hearing in June, I know there is a limit on specifics, but can you comment on whether you have any visibility into what (inaudible) claims construction, what the range of outcomes could be and whether those could factor into decision-making from that point forward?

Mike Bonney

Well, I think Tom, that’s a very fair question. Clearly, Markman hearing is a claims construction hearing. We are not going to get into the specifics, but I think that historically at least in these hearings, the intent is to ensure that all of the parties, the judge and the two litigants are on the same page with respect to the specific meaning of the words in the various patents that are being asserted. And we expect that this Markman hearing will follow that similar pattern as you have seen at other Markman hearings historically.

Tom Russo – Robert W. Baird & Company

Okay. Thanks.

Operator

Thank you. Our next question is coming from the line of John Newman with Oppenheimer. Your line is open; you may proceed with your question.

John Newman – Oppenheimer

Hi guys. Thanks for taking the question. Just had a question on your spending guidance, I just wondered what your assumptions were for the spending on ecallantide during 2010, and also the Calixa assets during 2010? Thanks.

David McGirr

So, with ecallantide, our assumptions are that we will continue to shut down the trials as was indicated, CONSERV-1 and CONSERV-2, and wrap up the cost necessary to deal with that. And then, if there is a pass-forward, we would expect to be interacting with regulators later this year. We don’t assume that there is any meaningful spending clinical programs, in clinical trials for ecallantide going forward, because if there is a pass-forward, once you have the data, it will take a while to work through all of that with the regulators and get an approval and (inaudible). With respect to CXA-201, as we have indicated, we anticipate starting control clinical studies and complicated intra-abdominal, UTI could be a Phase II, could be a Phase III, with 201. We will also begin in 2010, lung PK work, and so our expectation is that somewhere in the neighborhood of 12% or so of our guidance number will be spent on CXA-201 in 2010.

John Newman – Oppenheimer

Okay, great. Thank you.

Operator

Thank you. Our next question is coming from the line of Howard Liang with Leerink Swan & Company. Your line is open, you may proceed.

Howard Liang – Leerink Swan & Company

Thank you very much. Regarding CXA-101, the Phase II trial that you have got ongoing, can you tell us what is the hurdle, I think compared to fore-test [ph]? Are you hoping to see superiority and also are you looking at subgroups infection, with Pseudomonas infection?

Steve Gilman

Well, we are going to do microbiology on everybody. So, we will get some microbiology against Pseudomonas, but there is not a lot, you don’t expect a whole number of islets from Pseudomonas infections in this cohort of patients, some 120 patients. So, this is a, you know, compared against (inaudible). So, it’s not first priority, it’s just a comparative trial to look at the relative safety and efficacy relative to comparative.

Howard Liang – Leerink Swan & Company

Great. And just one more question regarding the Markman hearing, between now and then, can you just tell us or is there anything that we can or we are going to learn now and then sort of in terms of eccentrics [ph]?

David McGirr

There is nothing that is – as far as we can tell, that would be the next public event in the prosecution of this patent litigation, sorry.

Howard Liang – Leerink Swan & Company

Thank you very much.

Operator

Thank you. (Operator instructions) Our next question is coming from the line of Stephen Willey with Thomas Weisel. Your line is open. You may proceed with your question.

Stephen Willey – Thomas Weisel

Yes, thanks for taking my question. I was just wondering if you could comment on the complementary nature of 804, I guess relative to the Calixa drug and how you think these two drugs may have the possibility to coexist in the market?

Rob Perez

Sure. We see CXA-201 as being an empiric choice for coverage of Gram-negative pathogens and most especially Pseudomonas. So, we see that as being more of a broadly used kind of workhorse drug that could potentially be a replacement for Zosyn. 804, we see as a drug that maybe is a little bit more specific, and further out in the treatment paradigm for patients who are more second-half, a specific pathogen. For example, think about a pathogen like Acinetobacter for example that, you know, where there is few treatment options, and we think 804 could end up being the exact kind of drug. So, the way to think about it is, one is more of a broader spectrum workhorse empiric therapy, the other is for patients who are more sick and need a drug for a specific Gram-negative pathogen.

Stephen Willey – Thomas Weisel

Okay. And then just kind of thinking, the Gram-positive regulatory guidance, the FDA obviously has kind of wavered a bit here over the last few years, and we are seeing it beginning to happen. Just wondering and I am not too familiar with some of the Gram-negative indications, but how is the regulatory guidance for things like UTI right now and intra- abdominal infections, and is that guidance I guess kind of out of place, which makes you comfortable enough to start designing pivotal trials?

Steve Gilman

Yes, it really does. cUTI and cIAI, intra-abdominal infections, both have relatively recent guidance and actually relatively recent history of drugs who follow the guidance and then got approved, Doripenem or Doribax, which was approved just a few years ago for both of those indications. Pneumonia whether it’s caused by Gram-positive pathogen or Gram-negative pathogen continues to be the source of lots of discussion with the FDA, and we would expect that by the time we completed the lung pharmacokinetic studies that we will have some additional clarity there, and if not, we will sit down with the FDA and do it, drug specifically.

Stephen Willey – Thomas Weisel

Great, thanks.

Operator

Thank you. Our next question is coming from the line of John Newman with Oppenheimer. Your line is open; you may proceed with your question.

John Newman – Oppenheimer

Hi guys, thanks for taking the follow-up. I just wondered if you could give us a rough idea of the percentage of CUBICIN sales that fall under Medicaid reimbursement that, you know, could, maybe will be or maybe will not be affected by any change in the healthcare with physicians. Thanks.

David McGirr

I don’t have the Medicaid specifically, I think, you know, it’s fair to say that, that a meaningful percentage though it’s less than half of our sales, or to patient calculations who received some sort of mandated rebate or charge back from the organization.

Rob Perez

But I think it’s important to note though that, you know, be it Medicaid or Medicare, remember drugs like CUBICIN that are used predominantly in the hospitals are not reimbursed specifically, right. So, they are reimbursed primarily through a DRG, the hospital gets in one payment, and that’s paid for all of the services. So, it’s not an issue where in Medicare and Medicaid, per se that the drug is in many instances reimbursed specifically.

John Newman – Oppenheimer

Okay, great. And do you have any early indications of what physicians might be thinking about the (inaudible). It seems like the renal toxicity and labeling may be a little bit of a disadvantage, but just wondering if you guys have any sort of early thoughts or indications there?

Rob Perez

It is very early, and the data that we have both the third-party data as well as what our sales folks are seeing is that it’s been very quiet. So, we really don’t have a lot to go on right now. We know they are out there, we know pretty much what they are saying, but at this point, it’s really too early to tell how well or whether it’s resonating. As we said, we feel really good about our ability to differentiate CUBICIN from (inaudible). In the skin setting where we overlap and of course in staph aureus bacteremia and endocarditis where we have the data and indication and they don’t. And obviously for them, the pneumonia indication still represents, I think a significant part of the promise of that drug, and you know, that’s not an area where we compete. So, we (inaudible) and we certainly will compete in skin and we feel very good about our position, but other than that, it’s not something that we are too worried about.

John Newman – Oppenheimer

Okay, great. Thank you. All right. Just one-quick follow-up. Do you expect to see the same type of price increases in 2010? I believe you took one price increase in 2009. Should we sort of anticipate the same type of pattern going forward?

David McGirr

Yes, John. It’s a question we get every year and I appreciate it, but we don’t give any guidance on our price in the future. I mean, it’s – what we can tell you is that what we have done in the past, which is we have taken price every, say eight to 12 months, and have taken it in the range of 6% to 8%. And that’s what we have done in the past, but we don’t comment on what we are going to do with price in the future.

John Newman – Oppenheimer

Okay, thanks.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any closing comments.

David McGirr

Thanks, operator, and thank you all for your interest in Cubist and for your attention this afternoon. Our first quarter 2010 earnings conference call is scheduled for the 15th of April, Thursday at 5 PM Eastern Time. Thanks a lot.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.

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Source: Cubist Pharmaceuticals, Inc. Q4 2009 Earnings Call Transcript
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