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Executives

Eileen C. McIntyre – Vice President of Investor Relations

Michael W. Bonney – Chief Executive Officer and Director

Michael J. 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

John Wren – Jefferies & Co.

Ken Cacciatore – Cowen & Co.

Mario Corso – Mizuho Securities

Morgan Haller – Robert W. Baird & Co.,

Marko Kozul – Leerink Swann

Jason D. Kantor – Credit Suisse Securities LLC

Steve Byrne – Bank of America Merrill Lynch

Liisa A. Bayko – JMP Securities LLC

Alan Carr – Needham & Co. LLC

Irina Rivkind Koffler – Cantor Fitzgerald

Stephen Willey – Stifel Nicholas\

Cubist Pharmaceuticals, Inc. (CBST) Q1 2014 Earnings Conference Call April 22, 2014 5:00 PM ET

Operator

Good day. My name is Julie, and I’ll be your event manager today. At this time, I would like to welcome everyone to the First Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that today's web conference is being recorded. (Operator Instructions).

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

Eileen C. McIntyre

Good afternoon and thank you for joining us for our review of the first quarter 2014 business performance and financial results for Cubist Pharmaceuticals.

Before introducing our speakers, I will read the Safe Harbor statement and describe the context for use of non-GAAP financial measures. Today's presentation includes forward-looking statements relating to our business, including 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 annual report on Form 10-K filed with the SEC. Forward-looking statements are made as of today's date, and we do not undertake any obligation to update any forward-looking statements.

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

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

We'll first hear from Mike Bonney. Mike.

Michael W. Bonney

Thanks, Eileen. We’ve had a strong on track first quarter, executing well against our 2014 guidance and milestones and making important strides towards our longer terms building blocks of growth goals. Our well-differentiated three product portfolio delivered total net revenue growth of just under 14% versus a year ago. Results that are inline with our guidance for 2014 announced in January.

Non-GAAP operating income of $18.8 million in the first quarter is also consistent with our expectations to get to our 2014 guidance range. GAAP operating income for Q1 was $28.3 million. This operating income performance as we continue to invest in important late stage trials and our ex-U.S. build reflects the discipline we continue to exercise in decision making aligned with our building blocks of growth goals.

We have two important antibiotic candidates now progressing and the regulatory review process, as we announced in the news released yesterday; we’ve submitted the NDA for ceftolozane/tazobactam and complicated urinary tract and complicated intra-abdominal infections. We now have the potential for two promising antibiotic candidates to be approved in the U.S. this year.

Moving from Phase III data to an NDA submission in four months time highlights yet again the strong focus and capabilities we have executing our strategy. ceftolozane/tazobactam assuming approval could help address the problem of serious infections caused by multi-drug resistant Gram-negative pathogens. Drug resistance created by extended spectrum beta-lactamases as well as the burden of illness associated with multi-drug resistant Pseudomonas aeruginosa create a significant market opportunity for a therapy with the appropriate attributes and clinical data. We believe ceftolozane/tazobactam can be such a therapy.

Turning to SIVEXTRO or tedizolid phosphate, on March 31, the AIDAC panelist voted unanimously who recommended the FDA approve SIVEXTRO for the treatment of skin infections caused by Gram-positive pathogens, including MRSA. We believe that both SIVEXTRO and ceftolozane/tazobactam assuming approval will become essential tools in the fight against multi-drug resistant pathogens. They can also help Cubist to achieve our building blocks of growth objectives, in particular our goal of achieving by the end of 2017 total net revenues of $2 billion. And non-GAAP adjusted operating income goal of $700 million.

Now, Mike Tomsicek will discuss our Q1 financials. Mike.

Michael J. Tomsicek

Thanks Mike. I’m going to start today with an update on the integration of Trius and Optimer. Our focus with both companies from the time the transaction closing last call, was to maintain valuable clinical development, regulatory and sales momentum, avoid disruptions for customers and patients and execute a speedy integration of infrastructure. The execution of these priorities has gone smoothly and we’re ahead of schedule.

At this point, a combined San Diego development team has been established and integration of the R&D organization is complete. The process of integrating SG&A is about 85% complete and should be finished by the end of Q2 as our final moves with both staff and space are completed.

In addition to important people and program assets, the two transactions came with $475 million and federal net operating losses or NOLs. Some of which we recently employed to further our rest of growth strategy. Ownership of intellectual property rights for tedizolid phosphate related to our direct sales of SIVEXTRO outside the United States has been transferred from the United States to the Cubist International Organization.

Going forward, our international team will set strategy, invest in, execute and collect royalties for SIVEXTRO outside the U.S. This step is consistent with our commitment to a global Cubist business and to maximizing global value of our asset and is another step towards achieving our target of lower overall tax rate.

Now to our final financial results for the quarter, you’ve seen the numbers and our total net revenues up 14% versus a year ago. Our on track with the guidance we provided in January. Rob will provide a bit more color on Q1 revenues for CUBICIN ENTEREG and DIFICID. For those of you tracking DIFICID revenue for the period covered by the CVR, the cumulative net revenues for the period that began July 1 of last year are now $45.9 million.

COGS, R&D and SG&A expenses are also on track with our guidance ranges provided in January. And GAAP COGS now fully reflects the costs of goods for DIFICID and the amortization of the DIFICID intangible asset. GAAP operating income is $28.3 million in Q1, compared to $9.8 million in the first quarter of 2013. Operating income on a GAAP basis is impacted favorably this quarter by the $35.6 million reduction in the fair value of the Optimer CVR based on its publicly traded price at quarter end.

Non-GAAP adjusted operating income was $18.8 million compared to $42.2 million in the first quarter of 2013. On a non-GAAP basis adjusted operating income is impacted unfavorably this quarter by pre-launch expenses for SIVEXTRO and ceftolozane/tazobactam. Our disciplined investments prioritization this year has contributed to our ability to remain profitable on a non-GAAP basis as we progress our late stage pipeline.

GAAP diluted earnings per share for Q1, is $0.30 compared to $0.09 in Q1 2013. Non-GAAP diluted EPS was $0.10 compared to $0.34 in the first quarter of 2013. Our cash and investments at the close of the first quarter were $566 million. At Q1 financial performance has fallen within expected ranges, we are making no changes to any of the 2014 guidance numbers, we provided in January.

Now over to, Rob.

Robert J. Perez

Thanks Mike. I’ll take a brief look back at the quarter and then touch on the important activities underway. As we prepare for two potential product launches in the next several months. This is our first full quarter with the Cubist-owned three product portfolios in U.S. and the modest commercial head count expansion we began in January is now complete.

Q1 total revenue is up $261 million up just under 14% versus the year-ago remain on tract to meet the guidance we provided in January. CUBICIN, typically experiences seasonal vial softness in Q1 due to a variety of factors, including increased emphasis on the pneumonia efficacy and challenges with hospital census. For the quarter in the U.S. vials were down by 3.6% versus a year ago. CUBICIN net revenues in the U.S. were up 5% versus Q1 2013. Our total product revenues from CUBICIN in this quarter including what we receive from our global partners are up 6.6% from a year ago.

Turning to ENTEREG. It’s good to see the solid momentum here for a fourth consecutive quarter. ENTEREG net revenues are up by 24% in the first quarter versus Q1 of 2013 and by 47% versus Q1 of 2012. The steps we’ve taken with the re-launch of ENTEREG are similar to what we are rolling out now with DIFICID. We began the re-launch of ENTEREG in 2012 by educating a targeted set of surgical suite decision makers about the unmet medical needs and the proven value that ENTEREG and deliver both for the patient and institution. We used the compiling clinical data in the label and underscored the Pharmacoeconomic benefit of reduced length of stay in the hospital.

At the same time, we work to create additional clinical data and ultimately for ENTEREG and expanded label that would help broaden awareness among important physician segments. And we look patient maintaining our focus through a first year when intangible results were not yet apparent. We are focusing our efforts this year for ENTEREG on opportunities in integrated healthcare systems with peri-operative care protocol. Some recently presented data from Intermountain Health Care provided additional support for the label Pharmacoeconomic value of ENTEREG.

Intermountain is an integrated system in Utah and Idaho that consists of 22 hospitals, 185 clinics, 1300 employee physician and a health insurance plan. It’s one of the nations leading health care systems and in many ways looks to us like the health care model of the future. Institution that are consolidated and coordinated with more centralized decision making and the technological capabilities needed to make care choices that balance cost and improve patient outcome.

Intermountain did their own trial to determine the value of ENTEREG. Their data showed that ENTEREG added to a very robust surgical pathway that already saved patient a day in the hospital, still accelerated GI recovery by an additional day. This is consistent with the Pharmacoeconomic benefit we saw across our Phase III and IV clinical trials.

As for DIFICID our re-launch is underway. At our North American sales meeting in February, we trained our customer facing teams on the more targeted positioning we are emphasizing for the product, focused on the patients with CDAD in whom the need for DIFICID is more clear. Coming out of the National Sales meeting we reengaged and while it is still early days, we are starting to see some signs of progress. We are encouraged by feedback from the field indicating growing understanding by physicians that the role DIFICID plays in treating appropriate CDAD patients.

Turning to the two Cubist antibiotic candidates now at the FDA, SIVEXTRO and ceftolozane/tazobactam. Our cross functional global launch teams are busy preparing for the anticipated launches, assuming regulatory approvals of first SIVEXTRO and then ceftolozane/tazobactam. By early 2015, we expect to be marketing five products in the U.S. We also continue to prepare for the launch of SIVEXTRO and ceftolozane/tazobactam outside of the U.S.

We view our international business as a new growth engine for Cubist. We expect to get to profitability in this business unit in 2016. And the increased percentage of our profits that we expect to generate outside the U.S. will help overtime with our overall tax rate. We also believe that the ability we will soon have to commercialize outside the U.S. makes us an attractive candidate for additional business development opportunities. Its been a busy productive quarter and we are executing well as we plan for an expanded product portfolio and larger geographic footprint.

Now, over to Steve.

Steven C. Gilman

Thanks Rob. Q1 was a very productive quarter for our pipeline programs; I’ll touch on several accomplishments. First, we were quite pleased by the unanimous Advisory Committee vote on March 31, recommending that the FDA approve SIVEXTRO for the acute bacterial skin and skin structure indication for which we filed an NDA last October. As you know the PDUFA date is June 20, and we are already engaged with the agency in the final review of label negotiations. Also in Q1 the EMA accepted for review the MAA filings for SIVEXTRO.

Turning to ceftolozane/tazobactam, as Mike Bonney mentioned, we are happy to report that our NDA seeking approval of ceftolozane/tazobactam in Complicated Urinary Tract Infections or cUTI and Complicated Intra-Abdominal Infections or cIAI, was submitted to the FDA yesterday, because ceftolozane/tazobactam has been granted QIDP status, we anticipate a PDUFA date in eight months, which would mean FDA action by late December.

We are also on track for submitting the MAA in Europe later this year. We’ll have 17 presentations on ceftolozane/tazobactam at the European Congress of Clinical Microbiology and Infectious Diseases, or ECCMID meeting in May. Importantly we now have conformation that the both cIAI data submitted as a late breaker as well as the cUTI data submitted earlier have been accepted for presentation.

A final note on ECCMID in addition to our ceftolozane/tazobactam work, we and our partners will be presenting a total of 25 posters or presentation on SIVEXTRO, CUBICIN and Surotomycin. This venue will provide a great opportunity for Cubist to interact with international key opinion leaders and highlight the depth and breadth of our Global Commitment to antibiotic discovery and development. Our ventilated nosocomial pneumonia trial for ceftolozane/tazobactam is now posted on clinical trials.gov and we expect enrollment to commence in this trial by mid-year.

With respect to our CDAD portfolio the planned interim analysis of the DIFICID hematopoietic stem cell trail, was completed by an Independent Data and Safety Monitoring Board or DSMB in February. As you might recall protocol pre-specified at DSMB review of unblinded data on the first approximately 300 patients enrolled in this prophylaxis trial while Cubist remains completely blinded to this patient information.

The DSMB recommended that this trial be continued to its original enrollment target of a total of 600 patients. We’ve concurred with this recommendation and expect top line data from this trial to be available in mid-2015. And we continue to expect the top line data from the Phase III program of Surotomycin in patients with CDAD will be available in mid-2015 as well.

Earlier, this year we announced that we were taking a novel Cubist discovered beta-lactamase inhibitor CB-618 into the clinic. We have now completed dosing and preliminary data analysis in this first in human safety and pharmacokinetics trial. We have not observed any development limiting adverse events in the normal volunteers.

In addition, the human PK parameters are consistent with our expectations based on preclinical studies. Based on these data we intend to meet with regulatory agencies in the next several months to discuss further development plans. We expect to have more to say about the development strategy for the CRE active beta-lactamase inhibitor later this year.

Finally, a quick update regarding the bevenopran program, we completed last patient in for all plan 1.400 patients in our long-term safety trial in the first quarter, because the initial enrollment was faster than anticipated, we now expect to achieve the needed patient exposure shortly and hence we plan to unblind and analyze the study in the third quarter this year.

We will also gain perspective from the multi-sponsored FDA Advisory Committee, which we expect will take place in June and also from the anticipated FDA action on another OIC candidate, naloxegol, which has a PDUFA date in September. With these perspectives assuming long-term – positive long-term safety data we would then be in a position to reengage with the agency on a potential path forward for Phase III efficacy trials.

Now back to Mike Bonney.

Michael W. Bonney

Thanks, Steve. As you've heard, we're progressing well against the milestones we established for you to track our performance this year. At this point, we can Mark two of these as accomplished the MAA filing for SIVEXTRO and the NDA submission for ceftolozane/tazobactam.

I'm quite proud of our passionate focus on the development of new therapies to address the global crisis of infections caused by multi-drug resistant bacteria. Commentary by panelists of the recent FDA AIDAC meeting reflected the recognition by the infectious disease community of the critical problem we are addressing. We've never been more committed or better positioned to arm physicians and their patients with new treatment options to fight the rising tide of serious and life-threatening pathogens.

With that operator, let’s move to the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Eun Yang.

John Wren – Jefferies & Co.

Hi, guys. This is John Ryan in for Eun thanks for taking my questions. I have a quick question and a quick follow-up and then I'll hop back the queue. For CUBICIN than the sequential percentage drop from third-quarter 2013 to first quarter 2014 sales is more significant down around 14% compared to the same relative drop for 2013 and 2012 6.5% and 2.8% respectively. Did the buying pattern in fourth quarter 2013 sales impact first quarter of 2014 sales at all?

Robert J. Perez

John this is Rob. Really we saw the same kind of pattern that we've seen in the past which is our Q1's are softest quarter and just to give you some perspective and some numbers. Vials as I mentioned were down 3.6% in Q1 of 2014. If you look at Q1 2013 over 2012, vials were down 2.1%. So, very, very similar and essentially you have a very similar market share movement.

Our market share is usually a little softer in Q1 given our lack of efficacy in pneumonia and we saw the exact same movement in market share in Q1 this year that we saw last year. We saw a little softer market this year in Q1 than we saw last year, but again, given the winter we just endured that doesn't surprise me at all. So I think that that overall macro answer is a very similar trend of what we've seen in the past and as we said, we remain committed to the guidance that we gave you in January.

John Wren – Jefferies & Co.

Great and then a couple quick follow-ups. What's the gross to net for CUBICIN what you expected to be by your in 2014 and then when do expect the decision for the Hospira litigation?

Michael W. Bonney

I can give you the growth demand for CUBICIN, the gross demand for CUBICIN was Q1 15.6% and I won't give you a forecast for it for the full year we don't provide that. I think the other question was Hospira question.

Michael J. Tomsicek

Yes with respect to Hospira there was of course no way were we can predict with any accuracy when the drug will rule that said the 30 month stay expires around about August 8 and it would seem reasonable the drug might ruled by them, but there's no guarantee that he well?

John Wren – Jefferies & Co.

Thank you.

Operator

Thank you. Your next question comes from the line of Ken Cacciatore.

Ken Cacciatore – Cowen & Co.

I want to follow-up quickly on that Hospira question is now that we've gone a little bit far here down the litigation pathway, is there still a chance you could all be talking to each other about settling this out? Is there any discussions going on? And then I had a follow-up question.

Michael W. Bonney

Yes I'm not going to comment on any potential settlement conversations, but I would direct you to previous paragraph for litigation by other firms and their settled everywhere from soon after notification of paragraph IV to sometimes on the courthouse steps for an appeal. So the President would suggest there's a wide range when that could happen, but that is not a prediction that it either is or will happen.

Ken Cacciatore – Cowen & Co.

Okay, great and then you have also talked I believe in your prepared remarks about making great progress on the EU build out. I was just wondering what feedback do you get from your shareholder base about taking on that the cost structure to build out the business versus kind of what’s happening in the industry here where a lot of acquisitive folks are out there. Just kind of how you think about creating value in general, given the great set of assets you have and a lot of cost that may take to build out the European infrastructure. Thank you.

Michael W. Bonney

Yes, generally Ken I think that of course you can’t comment on a public company shareholder base as a single unit, but the gestalt is which I think folks understand that we have really three key drivers for undertaking this build and they are generally quite supportive of it. the first is history with CUBICIN would suggest we’ll both get better penetration and clearly we would retain a much greater percentage of the gross margin, if we did it ourselves.

And the third is that as that operation becomes profitable which we expect to include the royalty payments that we currently receive that happen in 2016, it will have a positive and meaningful effect overtime more in our tax rate. So from the standpoint of our financial performance over the long-term, I think generally the investors have understood that and are supportive of it. we of course have the obligation to execute well and that’s something we are more than happy to take on.

Michael J. Tomsicek

I would add, Ken, that I think if anyone that the questions that people have going in were – is the ceftolozane/tazobactam which is really the reason we started down this path going to be big enough to support a full international operation and can we attract people at Cubist when no one really knows Cubist in Europe and I think the good news is, as we sit here today, as you know with the addition of tedizolid we now have two products to offset the build and we've been really, really pleased with our ability to get just stellar talent into the Cubist team and international.

And then I guess the final thing, which we hoped would be the case but we're also seeing is now that we have a European build underway, I think we are a much more attractive partner for other companies both small and large you have interesting assets and to could potentially need help in Europe and potentially not in the U.S. so I think all those things bode very well for us by having us and international presence.

Ken Cacciatore – Cowen & Co.

Thank you.

Operator

And our next question comes from the line of Mario Corso.

Mario Corso – Mizuho Securities

Yes, thanks for taking my questions. Wondering if you could talk about on DIFICID, when do you expect you will see some of the fruits to your labor there on the repositioning. And then looking at the two launches, how you envision the rollout of those two going and whether or not you'll be adding to the rep count or how you'll be segmenting the rep count to handle both of those things for the high-class problem there. Thanks very much.

Michael W. Bonney

Sure thanks Mario. First of all DIFICID as I mentioned we had our re-launch officially really in February where we brought everybody together and rolled out the new plan. So that was the chance for us to really get everyone together, get all of the elements of the plan in place and move forward and we've been pleased with the results that we've seen coming out of there.

We recognize, as I mentioned from ENTEREG that taking on a product like this and repositioning it and getting it to the right people with the right message does take some time and we do have to be patient, we're not expecting the sales are going to just kind of jump off the charts immediately, but we do have confidence that we're going to see the uptick in DIFICID sales that we expect.

So far so good its very, very early, but we're encouraged with what we're hearing from the sales force and of from our customers. As far as the launches, but first SIVEXTRO and I guess both hopefully assuming approval of SIVEXTRO and ceftolozane/tazobactam, we already added to the commercial team early this year so that's done and we don't feel like we're going to need to add significantly beyond that.

We always take a look and look for opportunities and if we think that there's room to add around the edges than we do, but we don't expect there's going to be significant commercial builds in the U.S. that is for these launches, because they really are in our sweet spot, they are calling on a similar customer, not the exact same customer, but a similar customer and the team is very excited about the opportunity to offer a portfolio of solutions now to our customers as opposed to just one terrific product.

Operator

Your next question comes from the line of Brian Skorney.

Morgan Haller – Robert W. Baird & Co.,

Hi, this is Morgan Haller for Brian today. Congrats on the quarter. So I mean I guess are you guys expecting to see the uptick in scripts from the DIFICID, now at the same time you're going to expect to see them in ENTEREG? Thanks.

Michael W. Bonney

Yes I'm not giving exact same time frame, obviously there are different situations. We have been involved with DIFICID longer obviously, so it should be – we should have a little bit better understanding of the product that being said there's a lot of complexities involved with DIFICID that we're working through. So I cant give you a timeline, I can just tell you it's a similar recipe and we feel very comfortable with apply that recipe in order to get the results and the very early stages are showing a similar reasons for optimism that we saw early in the kind of re-launch if you will of ENTEREG.

Operator

Your next question comes from the line of Marko Kozul.

Marko Kozul – Leerink Swann

Hey good afternoon. A question on SIVEXTRO, I was wondering if you could remind us what you said about the market opportunity and what proportion of that maybe is represented by treating MRSA?

Michael W. Bonney

What we said about – we haven't given any kind of peak year numbers for SIVEXTRO just yet. What we said was that when we did acquisitions of both Trius and Optimer saw the combined products being between $600 million and $1 billion at peak. For SIVEXTRO, like the other products in the gram-positive space MRSA is really the driver, so while it may get some use outside of MRSA. MRSA it was really the driver and the reason for being mostly because the semi-synthetic penicillin and other products that are pretty inexpensive a very effective against susceptible staph.

So while it's true that a product that is oral maybe used more empirically when they don't know whether it's susceptible staph or MRSA, therefore I think the possibility of SIVEXTRO getting more empiric use than certainly CUBICIN and maybe even other products is higher, MRSA is really going to be the reason for people selecting new product.

Marko Kozul – Leerink Swann

Terrific can you also comment on any change in the mix between how you see the market evolving from treatment in the hospital to outside the hospital?

Michael J. Tomsicek

Yes, I mean we are seeing that now that -- and it's not just for the antibiotic space, its just a general trend in hospitals that patients that are actually going into hospitals now are much more sick actually length of stays generally are increasing, because the people who are in hospitals are more sick and are staying there longer and there's definitely a trend to treating more patients outside the hospital, treating them in observation units and certainly getting them out of the hospital sooner.

A big heart of our attraction to SIVEXTRO was the ability to use this once-a-day safe and convenient oral therapy to get patients out of the hospital, and be that as a hospital avoidance strategy in the ER, or patients who are on either SIVEXTRO or something else in the hospital can be transitioned out of the hospital on a very effective oral therapy. So our belief is that having a convenient, safe, once-daily therapy is going to provide an option for physicians that they really haven't had before to get patients out of the hospital instead of having to keep them in there for their IV therapy.

Operator

Your next question comes from the line of Jason Kantor.

Jason D. Kantor – Credit Suisse Securities LLC

Hi, thanks. A couple of things, could you explain a little bit more of your off shoring of your IP and how you think that if you could maybe quantify how you think that might impact your long-term tax rate and then also I missed a little bit about your new beta-lactamases program. What do you think the tab is for a drug like that given the drug-resistant bacteria that are out there and some of the fast to market strategies others have been discussing?

Michael W. Bonney

Hey Jason, this is Mike with respect to the tax question that you had. So for that drug SIVEXTRO now the direct ex-U.S. sales will be royalty to the International organizations. So using NOLs we transferred that asset to the International organization and so now a larger percentage of the profits on that product or essentially all the profits on the product will be recognized outside the U.S. as more favorable tax rate. And as we indicated on the previous call, we expect to be in the low-teens with our international tax rate and this is an important part of that.

Michael J. Tomsicek

With respect to the beta-lactamase inhibitor 618, we do expect this to take a nontraditional path forward into clinical development whether that's a particular LPAD type of pathway, whatever that is, we're still discussing that or starting those discussions, but we do not really see this as more of a traditional ceftolozane/tazobactam type of couple – three indications and alike, but a more limited special population approach.

Jason D. Kantor – Credit Suisse Securities LLC

And what did you say in terms of the timing of the next clinical trial there I'm sorry, I was cut off from the call.

Michael J. Tomsicek

We didn't – you didn't miss that we didn't say it. We'll be getting more feedback to you when we get through the FDA discussions and get an agreement on our path forward.

Jason D. Kantor – Credit Suisse Securities LLC

Great, thank you.

Operator

Your next question comes from the line of Steve Byrne.

Steve Byrne – Bank of America Merrill Lynch

Just following up on Jason's question Steve is that 618 likely to be combined with ceftolozane or would you consider combining it with carbapenem?

Steven C. Gilman

Well again those are conversations we are going to be having, but the nice thing about the profile that we’ve seen to-date in this – first-in-man study is that there is a lot of flexibility to pair this with a number of different agents and those are the kinds of development options we’ll be discussing with the agency and communicating with you later.

Steve Byrne – Bank of America Merrill Lynch

And a financial question for Mike. What looks like a reversal on the contingent consideration is that all driven by the market value change of the CVR's or does it also reflect your own expectations for the outlook for DIFICID?

Michael W. Bonney

It doesn’t not represent our own expectations that's basically a mark-to-market transaction, so its really all driven by the change in that CVR valuation from the end of 2013 to the end of Q1 2014. There is a small residual contingent consideration, timing adjustment too as we get closer to the payment of certain CVR’s, there is a time adjustment, but 95% of that is mark-to-market only and not a change in that front.

Steve Byrne – Bank of America Merrill Lynch

So every quarter you could have a swing based on that mark to market change?

Michael W. Bonney

You are absolutely right.

Steve Byrne – Bank of America Merrill Lynch

And what was the gain on the transfer of the IP offshore for tedizolid?

Michael W. Bonney

I’m not sure what do you mean by gains.

Steve Byrne – Bank of America Merrill Lynch

Well you will have – you offset it with NOLs I think you said, so I was just trying to get an idea of what kind of a gain you are expecting to offset within NOLs.

Michael W. Bonney

Yes you know the gain – whether you refer to it as a gain or the valuation of the assets, going from memory I think its in the $80 million to $90 million range of the trade that we made to move it offshore.

Steve Byrne – Bank of America Merrill Lynch

A similar action you would do with some of your other pipeline assets.

Michael W. Bonney

Yes, it's always a possibility the size of this asset in the presence of NOLs to kind of trade an asset that has cash value overtime instead of paying upfront cash is always a consideration. The size of this one and our profitability pattern that we expect offshore over coming years convinced us that this was the right move for this asset. We’ll make the decision on other assets on a case-by-case basis.

Steve Byrne – Bank of America Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Liisa Bayko.

Liisa A. Bayko – JMP Securities LLC

Thanks for taking my question. you had mentioned the sort of softer market conditions in the first quarter, is there any reason to believe that that’s sort of going to continue, I know there’s been sort of a shift to the market getting slightly smaller because of more outpatient therapy. Could you just comment on, is there sort of any indicator?

Michael W. Bonney

Liisa, I really can't predict what the future quarters are going to be, but I can tell you that this type of pattern is something we've seen every year. We've seen in the CUBICIN market in particular and again given the situation this year both with the weather pattern, the pneumonia season, the flu season to see a pattern very similar to what we saw last is pretty expected. So, all I can tell you is it was very consistent with the pattern that we've seen for CUBICIN now for a decade.

Liisa A. Bayko – JMP Securities LLC

Okay, great that’s it, the rest of my questions had been answered so thank you.

Operator

Your next question comes from the line of Alan Carr.

Alan Carr – Needham & Co. LLC

Hi, thanks for taking my question. One quick one up front, in your 618 Phase I, was that just by itself or did you try that in combination with other drugs like ceftolozane or penam?

Michael W. Bonney

Well, we did do some PK studies while also obviously measuring safety in combination with a couple other potential pairing candidates to look primarily in this case for any drug,, drug interactions and making sure that they don’t interact with each other and we didn’t see any.

Alan Carr – Needham & Co. LLC

Okay, thanks. And then, with respect to CXA-201, you all have traditionally talked about the positioning there in terms of Pseudomonas and I’m wondering how you're thinking these days in light of the Phase III results in cUTI? And then, also I wondered if you could comment on some of the challenges here with DIFICID again? The guidelines play a role in this in the absence of DIFICID in guidelines play a role in – which was expectations for any revisions to treatment guidelines. Thanks.

Michael J. Tomsicek

So, in terms of Pseudomonas and its the role it plays in cUTI and complicated intra-abdominal infections, we do believe Alan as you know that one of the benefits for ceftolozane/tazobactam and one of the differentiating factors is potency against Pseudomonas. And we do believe that this is an area where that this product will be different than frankly anything else on the market. I think the – somewhat surprising result from the cUTI trial and the superiority that was achieved in the trial was the impact of ESBL.

And this is a more important factor in complicated UTI and I think one of the factors that again surprised us from the data was the fact that a product like Levaquin at a very high dose would not have the benefit that one might expect, given this pathogen. So that was exciting to us, because I do think that we now have a product that can really differentiate on a couple of different areas, not just the Pseudomonas but also the coverage of ESBL in particular in complicated UTI where I think the data show it maybe a bigger problem than anyone thought.

Regarding DIFICID and guideline certainly having DIFICID on the guideline is going to be if that can ever happen, its going to be a benefit to the product. It's not that be all end all and I could tell you its not part of what we have to get done immediately in order to see uptick in sales. I kind of had mentioned the plan going forward and there are elements of the plan tactically that we need to get done. and this is one of the things we'll be working on but it's not the only thing and that even the biggest thing. So, what's more important for us is to get the messaging right to get the sales force behind it correctly and to really make sure that we're targeting appropriate patients where the benefit of DIFICID really matters the most and that’s what we're doing right now and again we're encouraged with the very early sings.

Alan Carr – Needham & Co. LLC

Can you comment a bit more about who the appropriate patients are?

Michael J. Tomsicek

Sure. It's patients where recurrences are more of a challenge, so patients who are oncology patients for example, patients with renal insufficiency, patients with less than adequate immune systems, patients who have been on systemic antibiotics previously those are examples of some of the patient's and elderly patients as well. All of whom are more susceptible and where those patients – if they have a recurrence it's more devastating to that.

Michael W. Bonney

Think fragile patients now.

Alan Carr – Needham & Co. LLC

Great. All right, thanks very. I appreciate it.

Operator

Our next question comes from the line of Irina Koffler.

Irina Rivkind Koffler – Cantor Fitzgerald

Hi, thanks for taking the questions. I wanted to follow up a little more on a day would and differentiating it from the generic ZYVOX based on what we saw in the FDA panel briefing documents it didn't really look like the two drugs were that different aside from GI tolerability can you sort of talk us through what you are going to lead with when you try to get formulary approval for that product in the phase of the generic ZYVOX that’s the first question.

And then the second question is on DIFICID in the prophylaxis trial. What should we make of the fact that its you're DSMB decided to continue the study I mean what you expecting to see some kind of early signal in terms of benefit to these stem cell transplantation? Thanks.

Michael W. Bonney

Sure, Irina I will take the SIVEXTRO question and then I will over to Steve. So I think it’s a basket of attributes for SIVEXTRO that will carry today versus ZYVOX either generic or not frankly. First of all you are looking at a product that’s once a day with a shorter course remember that that SIVEXTRO was a six to eight course versus 10 days for ZYVOX.

Because of the increase impotency of SIVEXTRO we also hope to be able to show in the label from differentiation in drug, drug interaction in potentially overall both safety and tolerability. For example we start fewer GI adverse of that significantly fewer GI adverse events versus ZYVOX as well.

So there is a number of attributes and we have to wait and see what the label negotiation are going to be to see what going to be in that label, but we are confident that when you look at this package of features and benefits you are going to be have a product that differentiates well versus ZYVOX.

What we said was that look we are not pertaining that a generic ZYVOX doesn’t make any different, but we do think this product has a lot of benefits over ZYVOX and ultimately there are some areas where ZYVOX really is an appropriate given some of the adverse events associated with it some of the drug, drug interaction et cetera and we believe that SIVEXTRO will offer a great opportunity for those patients.

Michael J. Tomsicek

And regarding the question about the prophylaxis trial is may remember when we bought Optimer this trail was underway and developed and we didn’t – when we analyzed the trial design Cubist we saw at the most of likely outcome would be with the trial we go to 600 patients. The DSMB has three options in these things and of course we don’t see any information so I can’t tell you any details. They can either say the trial is futile and that means there isn’t any separation between the groups.

So it could or would likely to be one at the end of 600 total patients or it could obviously be so dramatically different and then a 100% of the patients or something, a huge difference or in fact it looks more likely like there is clearly a difference, if you just need to achieve statistical significance, you need to conduct – study the rest of the patient.

And really it’s a latter thing that their information and their recommendation tells you that there is clearly something going on the trial. Its not they would have said it was futile and recommended be stopped the trial, but that will take the total of 600 to get a likelihood of statistical outcome, of course no guarantees that trial is underway.

Irina Rivkind Koffler – Cantor Fitzgerald

Thank you.

Operator

And our next question comes from the line of Stephen Willey.

Stephen Willey – Stifel Nicholas

Yes hi, thanks for taking the question. With respect to DIFICID can you maybe just give us a little bit of color now with respect that how much of DIFICID uses is front line in these at risk patient populations versus post-relapse and I guess given the rebranding efforts. Is the messaging here to essentially make this a frontline drug of choice for these at risk patients and I think the analogy to the re-launch of ENTEREG I think that was kind of coupled with a price increase shortly thereafter. And I’m just kind of wondering with the understanding that you guys don’t forecast price increases, but just wonder understanding if there if that’s something that might be in the cards to once you feel like you have nailed down the appropriate patient population of the messaging.

Michael W. Bonney

Steve its Mike, a couple of things here. First, we are only two months into the re-launch as Rob said, it’s premature to do a full study on what the distribution of patients is, but our positioning is frankly not first line its fragile patients who had a relapse. So we would not expect to see a lot of first line use of DIFICID at this stage in the re-launch that maybe something out in the future, but at this stage that’s unlikely to be the case.

With ENTEREG we did have if memory serves you may remember better than I do, we did see a price increase. At this point what we are trying to do give the history of DIFICID is change the conversation from price to where does the data suggest that there is value for the customer and so what we are trying to do is key price off the table. And you can decide what that means in terms of our future activity, but what we're really trying to do is to back to basics and say look for certain patients this – if the inability to get a sustained cure is very damaging to not only their help but also to the cost of the institution that's where you ought to be trying this drug.

Stephen Willey – Stifel Nicholas

Okay and then maybe just a quick financial question for Mike. I know that you guys have inherited some NOLs from both of these acquisitions you've obviously used some of these in this off shoring and of the IP but I guess as we look towards 2015 and I think as may be a greater percentage of the revenue gets – is subject to a more favorable tax rate would you be more inclined to provide tax guidance going into 2015. so I guess as I look at the model that's seemingly the one lever that I feel I have the least amount of visibility I don't know if that's just meet or not?

Michael W. Bonney

Now, I understand where you're coming from the transactions that we've done recently our level of profitability and are taking of NOLs has led us to call sort of a near zero cash taxes for this year and very low cash taxes for next year. That's not commenting on rate, but that's basically the cash impacted taxes will be very low and we said that on a recent call.

And another thing that we decided is going forward; we expect a larger portion of our profits to come from Europe. We’re expecting mid-30s U.S. rates and low-teens international profits rates and so you could use that kind of guidance within your models based on the ramps that you believe you'll see for international U.S. profits to forecast declining rate over time.

Stephen Willey – Stifel Nicholas

Okay, that’s helpful. Thank you.

Operator

Your next question comes from the line of [indiscernible]. Your line is open.

Michael W. Bonney

Madam we go to the next questioner.

Operator

Your next question is a follow-up question from Liisa Bayko.

Liisa A. Bayko – JMP Securities LLC

Thanks for the follow-up. Just kind of returning to my earlier question. Can you maybe characterize the sort of current size of the overall hospital market? I know last year it came down a little have to come down again just so we can kind of get our market shares in order?

Michael W. Bonney

Yes, the total size of the Gram-positive market in the U.S. we are actually U.S. used about 45 million days. Its 45 U.S. alone.

Michael W. Bonney

Yes.

Michael J. Tomsicek

So 45 million days in the U.S. alone.

Liisa A. Bayko – JMP Securities LLC

I heard it was more like 35.

Michael J. Tomsicek

Its 35 if you don’t include pneumonia, is 45 if you don’t include pneumonia, Liisa, and because of SIVEXTRO will have an indication that known are used in pneumonia we would characterize the market as roughly $45 million for the Gram-positive portfolio we have.

Liisa A. Bayko – JMP Securities LLC

Okay and then but the hospital and that's total for hospital and all pad altogether?

Michael J. Tomsicek

Is the total for that which runs through hospital associated – it's actually a very complex formula to get to those days.

Liisa A. Bayko – JMP Securities LLC

Yes.

Michael J. Tomsicek

It’s basically anything that is not retail. All the drug that runs through non retail converted from tons of drug today of therapy based on average daily dosing you get to about 45 million days.

Liisa A. Bayko – JMP Securities LLC

Okay and you think that I mean should we just assume that sort of that's sort of flat? I know you had talked about it there were some shift from hospital to outpatient and that have affected last year and I am just wondering I know you said that was sort of a trend that’s continuing so just what those numbers are evolving to be?

Michael J. Tomsicek

There is two different items in your question Liisa and perhaps everyone completely clear. The total market for Gram-positive agents in the U.S. as measured by days of therapy is declining. We saw a modest decline last year the first quarter of this year but a little bit higher the.

Liisa A. Bayko – JMP Securities LLC

Okay.

Michael J. Tomsicek

Second part of the question was inpatient versus outpatient. What's happening, this is a different data set up his tracks to answer that question we track the address to which we shipped CUBICIN.

Liisa A. Bayko – JMP Securities LLC

Okay.

Michael J. Tomsicek

And what we are saying the areas more and more hospitals are developing hospital outpatient pharmacies where the ship to addresses the same where the drug is whether the drug is inpatient or outpatient. So outpatient looks a little bigger than what we originally thought because more and more hospitals we are actually buying it to the hospitals pharmacy but it ministering at and infusion clinic as an outpatient drug..

Liisa A. Bayko – JMP Securities LLC

Okay. So it seems like may be needed somewhat stable.

Michael J. Tomsicek

Yes. it appears to what's this quarter has been relatively stable terms of that mix although again it’s a little bit okay to us we rely more on anecdote then any kind of quantitative data set to be able this preciously.

Liisa A. Bayko – JMP Securities LLC

Fair enough. Thanks a lot.

Michael J. Tomsicek

We did see more growth in outpatient this quarter then we did in the inpatient.

Liisa A. Bayko – JMP Securities LLC

Okay thank you.

Michael W. Bonney

Okay.

Operator

Thank you. I would now like to turn the call back over to Mike Bonney for closing remarks.

Michael W. Bonney

Thank you, operator and thanks for you attention today folks. This year of execution against value creating milestones for Cubist’s continues. And we look forward to updating you again on our July call. Have a great evening.

Operator

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

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