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Cubist Pharmaceuticals Inc. (NASDAQ:CBST)

Q3 2007 Earnings Call

October 17, 2007, 5:00 a.m. ET

Executives

Michael Bonney - President and Chief Executive Officer

Rob Perez - Chief Operating Officer

David McGirr - Chief Financial Officer

Chris Guiffre - General Counsel

Analysts

Rachel McMinn – Cowen & Company

Matt Duffy - BDR Research

Jason Kantor - RBC Capital Markets

Greg Wade - Pacific Growth Equities

Howard Liang - Leerink Swan & Company

Kevin Wenck - Polynous Capital Management

Eun Yang - Jefferies & Company

Franz Tudor - Shulton Feltz

Operator

Greeting, ladies and gentlemen, and welcome to the Cubist Pharmaceuticals Third Quarter 2007 Earnings Conference Call.

It is now my pleasure to introduce your host, Michael Bonney, President and CEO. Thank you Mr. Bonney, you may begin.

Michael Bonney

Thank you operator. Good afternoon everyone and thanks for joining us. With me for the call today are Rob Perez, our Chief Operating Officer, David McGirr, the Chief Financial Officer, and Chris Guiffre, the General Counsel. We will focus today on our third quarter 2007 financial results and business developments. But before we begin, Chris will read the Safe Harbor Statement.

Chris Guiffre

Thanks, Mike. Forward-looking statements may be made during this call relating to, among other things, projected product revenues, company financial performance, and our products and pipeline. These statements are neither promises, nor guarantees, and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected or suggested today. Such risks and uncertainties are detailed in the Company's periodic filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and also in today's quarterly earnings press release.

Cubist is providing this information as of the date of today's call and does not undertake any obligation to update any forward-looking statements made during this call or contained in the slides to follow, as a result of new information, future events, or otherwise. During this call, in order to provide greater transparency regarding Cubist's operating performance, we will be referring to certain non-GAAP financial measures that involve adjustments to GAAP figures.

In particular, we will present information on non-GAAP net income and net income per share. Any non-GAAP financial measures discussed 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 disclosed are reconciled to the most directly comparable GAAP financial measure in a table included in our press release issued this afternoon 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 press release.

I will now turn the call back over to Mike.

Michael Bonney

Thanks, Chris. I will begin today by providing some high level perspective on the quarter and the year-to-date. David will take you through the financial results for another quarter with strong results on both the top line and the bottom line. Rob will provide a deeper dive on CUBICIN and its continued growth in both the U.S. and as a global brand. I will then comment on our pipeline building activities, review our progress against 2007 milestones, and then open up the call to your questions.

CUBICIN, our IV antibiotic, now has been used in the treatment of more than 400,000 patients. Positive therapeutic results, as well as our commercial success with CUBICIN, reflect the determined, unflagging focus of individuals and teams across the Cubist organization, as well as many in the infectious disease community, clinical research organizations and commercial and scientific partners across the globe.

We are empowered by this network of expertise and excellence as we continue to execute our growth plans for CUBICIN. In that same determined spirit, we plan to leverage and strategically enhance this network, as we begin to build a pipeline behind CUBICIN.

Later in the call, Rob will discuss our plans to grow our acute care sales organization in the U.S. This decision is driven by the CUBICIN opportunity ahead of us, but also positions us well to leverage our commercial organization across a range of therapeutic areas in the future. At this point one year ago, we were one quarter into the U.S. launch of the expanded label for CUBICIN based on our landmark trial study Staph aureus bacteremia and endocarditis.

At that time, some of you were disappointed when you did not see an immediate acceleration in the historic revenue growth trend for CUBICIN. We cautioned you then that the education of infectious disease and other internal medicine specialists on the new CUBICIN label and the data from that landmark trial would take time, but behavior change would follow. The momentum of the last couple of quarters provides evidence that noticeable change of prescribing habits is beginning to occur and the medical need is growing. Methicillin-resistant Staphylococcus aureus, or MRSA, continues to be a serious problem for patients and the physicians who treat them, both inside and increasingly outside hospitals in the U.S. and elsewhere.

More virulent strains of MRSA in the community are increasing the need for faster diagnosis and treatment with effective agents. As patients with these strains enter the hospital, the bacteria are mingling with nosocomial strains, in what some refer to as an emerging perfect storm. The agents that physicians have reached for to treat MRSA for decades, vancomycin, is no longer reliable therapy in many situations. Experience with CUBICIN is growing and the scientific and pharmaco-economic data are building support for its use earlier in the treatment paradigm.

In July, we announced that we now expect peak sales for CUBICIN in the U.S. alone of more than $750 million. At that time, we also raised our U.S. net product revenue guidance for 2007 to a range of between $265 million and $280 million. Today, we are raising our 2007 guidance a second time. Our guidance for U.S. net product revenue for 2007 is now a range of between $275 million and $285 million.

David will present a more detailed view of guidance, as he now provides financial details for Q3. David?

David McGirr

Thanks, Mike. As you have seen in the press release issued this afternoon, our U.S. net product revenue for Q3 totals $75.4 million. Total net product revenue, including just under $1 million in international revenue recognized for the quarter, is $76.3 million, up 52% from Q3 2006.

Total revenues for the quarter, which includes a milestone payment of $3 million from Novartis based on the September approval of the expanded label in the EU, was $79.8 million, up 58% year-over-year.

Turning to costs, we will start with the costs of goods sold and therefore gross margin. We have been able to lower our cost of goods sold throughout the quarter. The gross margin was 77.5% for Q3 and the year-to-date figure is 75.8%, in line with guidance. As before, R&D, sales and marketing, and G&A expenses all reflect FAS 123(NYSE:R) costs.

R&D expense for Q3 was $17.9 million, and that includes our Phase 2 work studying high dose short duration dosing for skin infections and comparative dosing for prosthetic joint infections, as well as the accelerating work in non-CUBICIN pre-clinical programs.

Sales and marketing expenses of $18 million are in line with guidance. G&A at $8.5 million for the quarter is slightly higher than our trend in the first half of the year, reflecting our growing business.

On R&D, we thought it might be helpful to picture the share of the research costs associated with CUBICIN. As shown here, currently 40% of the costs identified as R&D are for costs associated with our accelerating non-CUBICIN pre-clinical programs.

EPS for Q3 fully diluted is $0.32. The inputs for the dilution calculation are, again, included as a slide for reference. We also have included a non-GAAP calculation that shows the effect of FAS 123(R) on EPS. Non-GAAP diluted EPS is $0.36.

Our cash and equivalents balance has increased to $368 million at the quarter end.

Now, let me take you through guidance. As you heard from Mike, we are today raising our U.S. net revenue guidance to $275 million to $285 million. We are also focusing our guidance for international revenues to around $6 million. Before we leave the discussion of revenues, let me remind you that in Q3 2007, we included $3 million from the Novartis milestone. This will not be repeated in Q4, so think of that as you build your year-end models.

Our guidance for costs and other items are shown here. Gross margin is trending towards the higher end of our previous guidance range, and we now expect it to be around 76%. As a result of the Illumigen option announcement yesterday and our funding of an IND-enabling study of Illumigen's IB657, R&D now is expected to be in the range of $77 million to $79 million.

Sales and marketing is now expected to be in the range of $67 million to $69 million. As Rob will discuss, this reflects our decision to increase the size of the U.S. acute care sales organization. G&A will be higher, around $32 million, as a result of our growing business. Other income is expected to be around $8 million, as long as interest rates remain stable through the end of the year.

As always, we will finish with cash. Cash generation, which is subject to change based on the pace and success of our pipeline building activities, is now expected to be about $80 million. This figure also reflects the Illumigen option payment.

Now, I will turn the call over to Rob.

Rob Perez

Thanks, David. I will start this afternoon with an updated look at the market opportunity for CUBICIN in the U.S. Some of you have seen previous versions of this slide, so I should point out that we have updated some calculations to provide a bit more precision. The total opportunity based on the latest inputs from AMR for the 12 months ended in June, is based on an overall market size of 32 million days, 8 million of those outside of the hospital.

Last quarter, we told you that we now anticipate peak year sales for CUBICIN in the U.S. of more than $750 million. Our peak year expectations assume no additional indications are added to the CUBICIN label. As shown here, almost 70% of the market opportunity is in areas where we have labeled indications.

CUBICIN momentum is being driven by several factors. First, MRSA is back and community associated MRSA is making things worse. This was underscored just this week in the JAMA article and editorial, which has received widespread coverage in the media. The author of the JAMA editorial, Elizabeth Bancroft from the LA County Department of Public Health, characterized the rate of invasive MRSA reported in this issue as “astounding”.

As we heard reported at IDSA this month, there is increasing encroachment of community-acquired MRSA into the mainstream of healthcare, with significant proportions of hospital-based infections now caused by these more virulent strains.

Second, the issues surrounding the clinical efficacy of vancomycin continue to gain traction, particularly in the ID community. This increasing concern is leading to a faster switch to CUBICIN, and in some circumstances more first line use. I will provide some updates on new data coming out of the Fall meetings that have added to these concerns later in the call.

Third, awareness of the attributes of CUBICIN is growing amongst physicians outside of infectious disease, whom we began targeting in the second half of last year.

Fourth, increasingly, CUBICIN is being adopted as a therapy that fits well in the outpatient setting, as evidenced by the higher growth rate we continue to experience outside of the hospital.

And finally, our market research suggests that physicians are very comfortable with the CUBICIN safety profile. With more than 400,000 patients treated, the safety profile of CUBICIN remains consistent with our clinical trials.

Now, let us move to some other market dynamics. As shown in this slide, from Q2 to Q3, CUBICIN had inpatient growth in the U.S. of 10% and outpatient growth of about 11.5%.

Outpatient now represents about 43% of CUBICIN revenues in the U.S. Overall in a growing market, CUBICIN has about an 8% share of treatment days. Vancomycin, on the other hand, continues to present a huge market opportunity with a rolling three-month share of days of 74%, which is down from 84% back in 2004. As the vancomycin hold on the market continues to weaken, there will be plenty of room for CUBICIN, as well as other Gram-positive agents, to gain share at its expense.

Let me spend a few minutes now going over some of the insights that came out of the just concluded Fall Conferences. One of the key takeaways was the broad recognition that vancomycin at higher MICs within its susceptibility range is not producing favorable outcomes for patients. There was also growing awareness and concern that clinical microlabs using automated systems may be missing vancomycin MIC creep, heteroGISA and tolerance.

One highly anticipated presentation at IDSA included evidence that when vancomycin dosing is pushed to achieve trough levels of 15 to 20 micrograms per ml in order to boost its efficacy, the unfortunate, unintended result that this strategy can lead to is often unacceptable nephrotoxicity. There was additional data showing the inferiority of vancomycin to beta-lactams for treatment of MSSA infections, confirming once again that vancomycin is a poor choice when methicillin-susceptible Staph aureus is suspected or confirmed.

Finally, we were very excited to see the pharmaco economic data from the Phase 3 Staph aureus bacteremia trial presented in a poster at IDSA. The poster compared the relative cost of treatment with CUBICIN and vancomycin during the trial. This analysis showed that when total costs of inpatient care were considered, there was no statistical difference in cost of treatment between the two groups. A sensitivity analysis showed that this would be true even if the acquisition cost of vancomycin was zero.

The main reasons for this finding were differences in response rates and the costs associated with treatment failures, which favored CUBICIN over the vancomycin- containing regimen. These data add to the conclusions reached by other prominent investigators that the overall cost to the institution of using CUBICIN is similar to the cost of using vancomycin, despite significantly different costs to acquire the drug.

Against this backdrop of growing medical need and the inadequacies of vancomycin, the Fall Conferences also included impressive evidence of the continued efficacy and favorable safety profile of CUBICIN. Given the higher dose regimens we are exploring in Phase 2 research, it was good to see for example, in a retrospective chart review from New York Hospital in Queens, that CUBICIN was found to be well tolerated at higher doses of seven to nine milligrams per kilogram for 14 or more days. In this review, CUBICIN was not associated with CPK elevations or other adverse events leading to discontinuation, even at these higher doses.

We continue to be bullish about the potential upside for CUBICIN. Today, we are announcing that we will increase the size of our U.S. sales organization. We will recruit an additional 30 clinical business managers, as well as a handful of additional regional access managers who focus on the outpatient opportunity. Our analysis shows that there is additional value to be gained both through increased reach to physicians, and more importantly by being able to increase frequency with those we already call on.

Finally, this quarter also had some important milestone accomplishments for CUBICIN as a global brand. I want to congratulate the team at Novartis in the EU and Oryx in Canada, on the approval of labels based on the data from our landmark Staph aureus bacteremia and endocarditis trial. Members of the Cubist scientific and regulatory teams also worked very hard in support of these successful filings. It is quite satisfying to see the care that the regulatory authorities outside the U.S. have now taken; as they, like the FDA, recognized the significant unmet need for proven therapy for the treatment of very serious, often life threatening infections caused by Staph aureus.

We know that it is not easy to review data from a trial that involves such seriously ill patients, with a variety of comorbidities. Each time a label based on this rigorously designed, conducted, and analyzed trial is approved; it is a tribute to the scientific, medical and regulatory teams at Cubist; to the many external advisors and dedicated investigators involved, and to our friend, the late Frank Tally, whose ever-present spirit remains a part of everything we do here at Cubist.

Now, back to Mike.

Michael Bonney

Thanks, Rob. Before we leave the discussion of CUBICIN today, I wanted to spend a minute or two on the CUBICIN patent state. We believe that CUBICIN is protected by valid and enforceable patents. As you know, we are seeking a technical correction in one patent; and have taken that one, the patent covering pharmaceutical competition, out of the Orange Book until the correction is handled with the Patent Office.

Based on the Hatch Waxman rules, as many of you know, one year prior to the expiration of the five years of data exclusivity granted when a new chemical entity is initially approved by the FDA, a generic company can file an Abbreviated New Drug Application or ANDA. If a generic company files an ANDA for CUBICIN, they would need to include a Paragraph IV certification, indicating that they plan to challenge the patents that were listed in the Orange Book. Today, we have two dosing patents in the Orange Book that could be asserted in response to a Paragraph IV filing. We also have other patents that are not listed in the Orange Book.

To provide some clarity, we have prepared this slide that shows the timeline for a 30 month stay triggered by our suit, should we be notified that an ANDA filing has occurred prior to the expiration of the five-year data exclusivity. If we are presented with a Paragraph IV certification during the five-year exclusivity period, then the stay will begin on September 12, 2008, and run until March of 2011. If we are presented with a Paragraph IV certification after five years from our first approval, or after September 12, 2008, the 30 month stay will begin from the date Cubist is notified that the Paragraph IV challenge has been made. During that time, the FDA would not act on an ANDA filing.

As of today we have no knowledge of any ANDA filing. Let me repeat that; as of today, we have no knowledge of any ANDA filing. If we are notified of such a filing, we will advise the market, and we will be very well prepared to take appropriate action.

Now to milestones. In the past quarter, we have made further progress on our milestones for 2007. As I reported on a conference webcast a few weeks ago, we now have complete enrollment in the CUBICIN Phase 2 high dose short duration complicated skin infection trial. We are on track to have data from this trial in the first half of next year.

We can report today that our manuscript has been submitted for publication of the MRSA subset data from our Staph aureus bacteremia trial. An additional subset analysis from this trial, focused on patients who had bone and joint infections, also is now submitted for publication.

Still ahead are go/no-go decisions we plan to make on two of our pre-clinical IND effective pipeline programs by the end of this calendar year. Rob mentioned the additional regulatory approvals for CUBICIN received in the EU and in Canada. I can also report that in Q3, AstraZeneca filed the equivalent of an IND in China.

We remain committed to our strategy both to optimize CUBICIN, which has considerable growth opportunity ahead, and to leverage the organization and capabilities we have built to create a pipeline behind CUBICIN. As Chief Operating Officer, Rob is now leading the charge on the optimization of CUBICIN; and devoting considerable time and energy to decision points we will be approaching for our Gram-positive and Gram-negative antibiotic programs; and for our research collaboration with Ilypsa for non-anti-infective approach to C. difficile infection or C. difficile associated diarrhea.

In addition, yesterday we announced that we have negotiated an option to acquire Illumigen. Cubist will fund pre-IND enabling studies of Illumigen's IB657, a protein therapeutic in development as an interferon replacement for the treatment of infections caused by the Hepatitis C virus.

We continue to aggressively seek out candidates for in-licensing, acquisition, or co-promote arrangements. Our focus is acute care including but not limited to anti-infectives. Our objective is to create additional revenue growth opportunity through our proven, and as Rob indicated, soon to be enhanced acute care commercial organization; as well as by leveraging our development and regulatory expertise.

We are very pleased with the results we continue to deliver, and I look forward to your questions this evening. Operator, why do not you open the line up for questions?

Question-and-Answer Session

Operator

Our first question comes from the line of Rachel McMinn with Cowen. Please proceed with your question.

Rachel McMinn - Cowen

Hi, thanks very much. I apologize in advance for the background noise. Congrats on a good quarter. I wanted to ask, first question is just on the guidance. What could happen in the fourth quarter that would actually get you to the low end of guidance? And I guess with that, was there any stocking or, you know, kind of one-time impact from the VA addition that happened last quarter?

David McGirr

Well, as you know, Rachel, we really do not suffer from stocking because of the drop ship model that we look at. So we think, you know, we see just in time ordering from all the users, so you should not worry about that as you look at the fourth quarter. What we always do when we give you a range for guidance is we have a range of internal assumptions. We kind of have a typical bell-shaped curve, and we give you the likely outcomes, but there is a lot of inputs to these. That is why we give you a range.

Rachel McMinn - Cowen

Okay, and then in terms of the sales force expansion, can you give us a little bit more color on when you expect the sales force to be in place, and I guess more importantly, when they would be trained, and actually start contributing to revenue increases?

Rob Perez

Sure, Rachel, this is Rob. Yes, we are going to start the sales force expansion, start work on it at the end of this year; but really will not have it in place until the end of the first quarter or so next year. That has been the usual kind of timing for doing this type of process. So that should give you some idea of when we will be ready to go.

Rachel McMinn - Cowen

And then the focus, you said, would be across both outpatient, and just expanding reach right now? Any other details you can provide us there?

Rob Perez

We go through, as you know, an analysis of our overall commercial infrastructure pretty much every year, to insure that we are where we think we should be, based on the prior year's assumptions. In this year, we looked at it and really felt like the opportunity was there for us to be a little bit more aggressive with CUBICIN, and to add both in the hospitals as well as to our outpatient force.

So this is going to allow us to get to a few more hospitals, but more importantly, it is going to allow us to get to more people within the hospitals. In particular, those folks who are outside of ID, and to get more frequency on those customers that we really need to see on a regular basis.

Operator

Thank you. Our next question comes from the line of Matt Duffy, with BDR Research. Please proceed with your question.

Matt Duffy - BDR Research

Hi, thanks for taking my call. Nice quarter, guys. Couple of quick things on the U.S. market. Pfizer obviously has had some trouble with ZYVOX with the Gram-negative infection issue. Can you let us know how they have tried to respond to that, or if they have responded at all?

Rob Perez

Yes. Essentially they have made the point that it was with Gram-negative, Gram-negative bugs, and that it really it was not any indication on what was going on with ZYVOX in the Gram-positive space, where it is likely to be used.

Now I would say that they have done a good job of making sure that the market knows their story, and knows kind of their positioning on this issue. So they have definitely been responding to it, and pointing out what they feel was the reason for this result.

Matt Duffy - BDR Research

Okay, and you mentioned last quarter that Cubist, or CUBICIN was added to the VA formulary. How big is that market relative to the overall U.S. market?

Rob Perez

I do not have numbers in front of me, Matt. But I can tell you that it is a significant market opportunity, but it is not huge. And it also is not a kind of a quick, I think Rachel was referring to this as well, kind of a big stocking all at one time. It is basically a group of hospitals that are represented within our A hospital targeting, that we have been unable to really get into, particularly with sales force effort, because we were not on the formulary prior to last quarter. So this allows us to get access, where we did not have much access before. But it is not going to be a huge order in one quarter that is going to have a material impact on our results.

Matt Duffy - BDR Research

Okay, and one last one and I will jump back into queue. You mentioned that awareness amongst non-infectious disease docs was increasing. Are you seeing restrictions on use outside of ID sort of being reduced at all, now that CUBICIN has been on the market for as long as it has?

Rob Perez

Slowly, but surely, Matt. We are starting to see, see some, both infectious disease physicians who are willing to kind of let the controls be reduced a little bit with CUBICIN, as well as other specialties like hospital lists, for example, who are gaining more access to CUBICIN. So I would not say that it is widespread or it is happening every day. But slowly but surely, we are seeing non-ID physicians getting more access to CUBICIN.

Plus, as you know, in the outpatient setting where our business continues to move very nicely, there the access issues really are less of a concern, if not for some physicians, not a concern at all. So the more physicians get used to using it in the outpatient setting, the more access becomes, you know, kind of less of an issue.

Matt Duffy - BDR Research

Very good. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Jason Kantor with RBC. Please proceed with your question.

Jason Kantor - RBC Capital Markets

Hey, thanks a lot, and also congratulations on a great quarter. I have several questions. If I could just first start with the sales trajectory, you know, you have repeatedly pointed to this kind of linear growth, and not a hockey stick and all that. It sounded at the beginning of the call that you stated that you are seeing some kind of meaningful change in prescribing habits. I guess the question is, should we really expect a new slope to the sales, the linear sales growth here, or is this last two quarters something of an anomaly?

Michael Bonney

No, we think what is going on here, Jason, is that the conversation around where CUBICIN needs to be used, has moved from conversation over the last six or eight months to actual behavior change, and we think we are on, again, we do not think there is going to be a hockey stick-like response. But we think we are seeing the start of, and now I think it is more than the start of, it is a confirmed movement to position CUBICIN within the hospital environment. In particular as a very important alternative to vancomycin; particularly in those circumstances where the hospital either sees a large percentage of strains that have relatively high MICs to vanc or whether they are actually doing MIC90 testing and they can identify individual patients who are affected by these strains. So we do think there is a movement from conversation to behavior change, if you will.

Rob Perez

I would also add that we have said for a long time that this market does not move in kind of hockey stick type movements. It is a slow and steady market. We have been very, very pleased with the momentum that we are seeing. But you are unlikely to see with CUBICIN, or any other drug for that matter, the kind of absolutely exponential change in growth.

So we are very fortunate to be four years in now to having this kind of momentum. People are getting comfortable. For many physicians, we are still new, four years into the market. So I would say keep that in mind as new competition enters the market and has to go through that same kind of growth curve.

Jason Kantor - RBC Capital Markets

Can you say anything about the intra-quarter sales in terms of, were there any trends or was this sort of straight up and can you give us some sense of where you ended the quarter in terms of average daily sales?

Michael Bonney

We certainly saw average daily sales in Q3 increase over Q2. The trends that we saw within the quarter are pretty standard for the third quarter of the year.

David McGirr

And they were 63 days, 1.2 million per day.

Jason Kantor - RBC Capital Markets

And where did you end the quarter in terms of (Voice Overlap)

Michael Bonney

Well, we are not going to get into that level of detail, Jason.

Jason Kantor - RBC Capital Markets

All right. I will jump back into queue. Thanks.

Operator

Thank you. Our next question comes from the line of Greg Wade with Pacific Growth. Please proceed with your question.

Greg Wade - Pacific Growth

Thanks and let me add my congratulations to a great quarter. A couple of questions. With respect to the addition of the sales force, Rob, you made a few comments about reach and call density. I was wondering if you could provide us a little more granularity in terms of, on a percentage basis? In terms of call density, how much increase you are going to see? And then on a reach basis in terms of how many more bodies or call points you are going to hit,? And then (Voice Overlap)

Rob Perez

Okay.

Greg Wade - Pacific Growth

One other quick question. David, if you could just provide us some insight into how things are shaping up in the month of October for business. Thanks.

Rob Perez

Greg, I could take the first one. Unfortunately, I am not going to get too deep into kind of the metrics that we use to grow our sales force; particularly now when you have other companies thinking about sales forces and how to try to do what we have done. So, I think, we have given quite enough information on our sales force expansion and I prefer not to go further than that.

David McGirr

And on October sales, I would suggest you seek out the great movie by one of my countrymen, Sean Connery’s “The Hunt For Red October” for guidance.

Greg Wade - Pacific Growth

Thanks for your answers. Bye.

Operator

Thank you. Our next question comes from the line of Howard Liang with Leerink Swan. Please proceed with your question.

Howard Liang - Leerink Swan

Thanks very much. If I could have a couple of questions regarding the patent that was delisted. Have you refiled that application with the PTO?

Michael Bonney

Yes. We are not going to provide a lot of detail, Howard, on the strategy here. But we are progressing, making the correction to that patent.

Howard Liang - Leerink Swan

Okay. If the patent is relisted, obviously, if it is relisted, obviously you can assert it against the potential generic filer. My question is, does that also have an impact on the 30-month stay? So in other words, if the patent is not listed in the Orange Book at the time of generic filing, does that matter to the 30-month stay?

Michael Bonney

If the patent is not relisted by the time we are notified of an ANDA Paragraph IV assertion, if you will, then we do not assert that unlisted patent. However, the 30-month stay is kind of, if we get notification of an ANDA filing with a Paragraph IV certification between now and September 12 of 2008, the 30-month stay is driven by the September 12, 2008, the fifth anniversary of the first approval. However, if we do not receive any notification of it between now and September 12, 2008, but we receive notification after September 12, 2008, then we would, the 30-month stay starts at the date in which we are notified that an ANDA with a Paragraph IV certification is there.

I know it is rather confusing here. Let me try and summarize here. The 30-month stay is driven by September 12, 2008, if we are notified before then. It is driven by the date of notification, if the date of notification is later than September 12, 2008. We assert only those patents that are listed in the Orange Book at the time the ANDA is filed; in order to activate that 30-month stay, if you will.

Howard Liang - Leerink Swan

Okay.

Michael Bonney

I hope that is more clear.

Howard Liang - Leerink Swan

Yes, that is very helpful. If I could also just ask a couple of questions regarding the antiviral compound that you licensed. Can you talk about the cost of, I know it is $1 million to do the pre-clinical trial, but I think you also incurred the operating costs for that company. What is the operating cost for Illumigen?

Michael Bonney

Howard, actually the $1 million is kind of an aggregate of the operating costs and the trial.

Howard Liang - Leerink Swan

Okay. And what is the option period that you have to acquire the company?

Chris Guiffre

Yes, the option period extends until after -- this is Chris. The option period extends until after the completion to our satisfaction of a 28-day GLP rat study.

Howard Liang - Leerink Swan

Okay. So that is sometime next—

Chris Guiffre

I am not using a date because the point here is that we will run the study. We will run the study. We will pay for the study. At the end of the study, we will either exercise our option or we actually have the option to run another study to our satisfaction.

Howard Liang - Leerink Swan

Okay. So, I guess, is there a time projection for when you might acquire the company? Your timeline?

Michael Bonney

No, it is not driven by time, Howard. It is driven by the satisfactory completion of the study that Chris is talking about.

Howard Liang - Leerink Swan

Okay, great. Just one last question, what antiviral data is there on this compound?

Rob Perez

There are a variety of in vitro data in replicating assays, so-- HCV in particular, for technical reasons, this particular compound is not appropriate to test on the replicon assay. But in replicating assay, it has shown to be nicely effective against replicating HCV. There is also some early in vitro data in a variety of other RNA viruses as well. But our focus in the near term is to progress the IND study, the IND-enabling study that will allow us to move into HCV.

Howard Liang - Leerink Swan

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Kevin Wenck with Polynous Capital Management. Please proceed with your question.

Kevin Wenck - Polynous Capital Management

Concerning the guidance for the year for R&D, unless I misheard something or misunderstood something, it implies that Q4 R&D could be somewhere $26 million, $28 million. How much of that is what I would call real ongoing spending? How much of that is possibly, you know, a charge that you are taking against the, or you are taking immediately against the investment?

David McGirr

Yes, the $4.7 million that we are spending to buy the option will go out in Q4 as a charge, and the $1 million to sort of run the trial and fund the company will be spent. So that is getting close to $6 million of money going out on Illumigen, which was not there before. So that is what is going on.

Kevin Wenck - Polynous Capital Management

Okay. And then if you give us some color as to the remaining $4 million or so increase, as to, you know, the split of that.

David McGirr

Well, I think that we gave you the split, the 60/40 split, which we look at between CUBICIN and non-CUBICIN.

Kevin Wenck - Polynous Capital Management

Okay. I just wanted to clarify that.

David McGirr

I think that is as a reasonable place to be.

Kevin Wenck - Polynous Capital Management

Okay. All right, thanks for your help.

Operator

Thank you. Our next question comes from the line of Eun Yang with Jefferies. Please proceed with your question.

Eun Yang - Jefferies & Company

Thanks. You know, you guys mentioned that CUBICIN sales in the US, about 43% is coming from outpatient. But how about in terms of indications? Since the approval of new indication in bacteremia and endocarditis, I am just wondering whether the sales in that indication are contributing to increases in CUBICIN sales we are seeing recently? And if you can just comment on how much of CUBICIN recent sales are coming from bacteremia and endocarditis versus the skin infections?

Rob Perez

Yes, we just got data from AMR, Eun, which looks at inpatient use of CUBICIN for the first half of '07, so this is the most recent data on how the product is being used. And what that showed was that 46% of CUBICIN use inpatient was in skin; and 36% was in systemic/cardiovascular; 8% was osteo and 10% was other.

There was 35% growth in CUBICIN use in systemic and cardiovascular use inpatient. We do not have this level of data in the outpatient segment. One would expect that we would see higher percentage of skin use in the outpatient settings; and also osteo in the outpatient setting. But AMR is really only inpatient. So that is the most recent data on how the product is being used based on AMR.

Eun Yang - Jefferies & Company

Okay, thanks. And then the second question is in the outpatient settings. The sales growth, is it coming from home infusion largely or is it coming from kidney dialysis centers?

Rob Perez

It is coming across the board in outpatient, but dialysis centers are a very small percentage of our outpatient business, and home infusion is about two-thirds of our outpatient business. So, that would represent the lion's share of not only the overall business opportunity, but also the growth.

Eun Yang - Jefferies & Company

Okay. Thank you.

Operator

Thank you. Our next call comes from the line of Jason Kantor with RBC. Please proceed with your question.

Jason Kantor - RBC Capital Markets

Yes, I wanted to get a little better understanding of the ex-US opportunity. You have had some successes in terms of getting the drug approved, but yet there does not seem to be a lot of pull-through. And Novartis seems to make those comments about this market opportunity, but, again not a lot of drug coming from you to them. So when would we likely begin to see that contributing in some kind of meaningful way and how meaningful could it be?

Michael Bonney

Well, you are right that you are not seeing a lot of drug going from us to Novartis as of yet, and I could tell you a couple of things. One is we remain very confident in their commitment. Novartis has a lot of people on this. They have a significant presence coming up in at Acmed next year that they are preparing for.

You recognize they just got approval of the Staph aureus bacteremia label when associated with skin infections and endocarditis. So they are preparing launch meetings with not only their field force, but also with customers coming up at the end of this year. So they are moving forward, they are committed to it. Right now it has not taken off like, like we all want it to, but they are confident and we remain confident that it is going to.

Jason Kantor - RBC Capital Markets

What gives you that confidence and what do you ascribe, you know, what reasons do you guys ascribe to the fact that it is not selling outside the US significantly?

Michael Bonney

Well, things are, things move slower there because it is a country-by-country launch. And in some countries, it took them longer to, you know, to get over the Chiron acquisition and to change over the infrastructure needed. In other countries, they are doing pretty well. So each country has different obstacles. I am confident because I think they are good people; and I have seen their commitment and seen what they are doing for the product and it is similar to what we would do. And so I think it is going to happen. It is just going to take time.

Rob Perez

I think it is instructive, Jason, if you look at the split of ZYVOX sales, which would be the most recent analog, in terms of both profile of the drug as well as the expense of the drug relative to competition, that ZYVOX sells substantially less in the EU than it does in the US.

And you know, the structure of the market there is also different in that you have two glycopeptides that are approved, vancomycin and teicoplanin; so there is a more competitive environment there. In addition, as you know the MRSA rates were growing at a rate very similar to what we have seen in the US, are quite variable, with southern Europe having rates that are similar to the US and northern Europe having rates of MRSA in the hospitals that are substantially less than what we see in the U.S. So there is this gradient. UK of course is an outlier to that general statement of north/south gradient.

But it is a different marketplace. There is no question about it. We do think that they are highly committed and that they have got very good people on this. They are well trained, and we have just got to give them some time for this new label to actually get some traction in those markets in Europe that they are launching it.

Jason Kantor - RBC Capital Markets

Okay. You are not going to give us any sense of how much time we should be considering in that?

Rob Perez

No, it is really, the nature of these relationships are that they are responsible for forecasting and executing on it. So I think that that is a question that is actually most appropriately answered with the level of detail I think you are looking for from Novartis or our other partners rather than by us.

Jason Kantor - RBC Capital Markets

And the added sales force, what is the cost to you on that, or as a percentage of sales? How should we think about the cost structures in 2008?

David McGirr

Well, generally a fully loaded sales person is just a touch over $200,000.

Jason Kantor - RBC Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Franz Tudor with Shulton Feltz. Please proceed with your question.

Franz Tudor - Shulton Feltz

Hey, guys. Quick question. I got on late, I do not know if you have addressed this. But maybe you can talk about the competitive landscape here with Theravance and Pfizer, I guess coming in the latter part of this year, early next year? What impact you think that could have and how the markets could potentially split out?

Rob Perez

Sure. It is, as of right now, the situation is unchanged from previous quarters. We are still expecting that we will see competition. But they are not here yet, and we will see when and if they do. As you all know, the Televancin has a PDUFA date coming up, or depending upon who you talk to, it passed or is coming up very soon. And so we should be hearing something very soon on that drug.

We remain confident that we can compete with it; that a four-year lead, with 400,000 patients and a safety profile that is becoming a real strength for our drug, is a big, big obstacle for them to overcome. Particularly when, at least the reports, we will have to see what kind of label they get if they get approved. But reports are that there may be some potential safety differences between that product and ours. I believe the renal toxicity comparison of Televancin and vancomycin showed the Televancin is actually even worse than vancomycin, and vancomycin is thought to be a fairly harsh drug on the kidney.

So Televancin is a drug we are confident that we can compete with. Remember we have the only product approved for Staph aureus bacteremia. While they likely will challenge in the lung with ZYVOX and others, and will compete a bit on skin, we still remain very differentiated in Staph aureus bacteremia.

As far as Dalbavancin, we are still on the wait and see mode. You guys probably know more than we do. The last communication from Pfizer, I believe, said that it was pushed again to the first half of '08. We will have to see whether that turns out to be true or whether it is pushed once again.

The last thing I would just say is that, as I mentioned in the call, everyone should keep in mind that the big prize here is vancomycin, and vancomycin has 74% market share. So while I do not doubt that we will have our skirmishes with both new and old competition, there is plenty of room for new competitors, and there is some benefit to having more companies highlighting the inadequacies of vancomycin. So while I look forward to competing with the new competition; I also am kind of looking forward to them talking about what is going on with vancomycin because that is the real issue. If vancomycin continues to erode, we are all going to be happy.

Franz Tudor - Shulton Feltz

And I am sorry, one last question, even despite the pricing difference between generic vancomycin and CUBICIN, do you foresee opportunities to increase pricing?

Rob Perez

We look at pricing all the time. We do not talk about it in advance on conference calls. But right now, as you know, that we have raised price in the past. Vancomycin is significantly less than CUBICIN from an acquisition cost standpoint. But as I said, the overall cost of the two products are very similar. In some analysis the overall cost to the institution if CUBICIN is actually less than vancomycin, when you consider cost of treatment failure, cost of infusion, adverse events, et cetera. So we feel very good about the value that we provide at the cost, the acquisition cost that we have for CUBICIN.

Franz Tudor - Shulton Feltz

I understand you can not talk about pricing going forward. But when was the last price increase and how much was it?

Michael Bonney

It was the beginning of January 2007 and it was about 6.25%, 6.5%.

Franz Tudor - Shulton Feltz

Should we expect sort of annual price increases in the 2.5% to 5%, 6% range going forward?

Michael Bonney

We do not make forward-looking statements regarding price. The history of the drug is that we have taken four price increases in the time that we have been on the market. They have been variable in terms of the timing and the percentages have generally been between 6% and 6.5%.

Franz Tudor - Shulton Feltz

Great. Thank you, guys. Great quarter.

Operator

Thank you. Our final question comes from the line of Rachel McMinn from Cowen. Please proceed with your question.

Rachel McMinn - Cowen

Yes, just one last question about deals going forward. I guess, what is the most attractive part about Illumigen that you can point us to thinking about as a proxy for other deals you might get in the future?

Michael Bonney

Yes, I think that there are a couple of things here, Rachel. One is that while clearly this is not an antibacterial, it is in anti-infectives, so it is an area where we have good expertise internally from a biology standpoint, from a clinical development standpoint, et cetera. It is also a marketplace that we think is very large and pegylated interferon is about a $2 billion market today. We expect that will continue to grow and yet there are shortcomings with interferon that we think this product may have the opportunity to address. Understand, it is very early.

So we like the leverage of our capabilities aspect of this. We also like the fact that it represents a very significant marketplace with real unmet medical need. The early data, and I reiterate it is very early data; but the early data looked very promising here. So we see the opportunity to have an important addition, if it makes its way through the development path and makes it to market.

I think the key thing here is that what we are trying to do is to leverage the infrastructure we have built. So whether it is running acute anti-infective trials --some say Hep C is not acute; in my definition, you know, a 24 to 48 retreatment course is relatively acute-- and that leverages our commercial infrastructure, which we think is really top notch and gives us a real competitive advantage to take additional acute care products into the hospital and the outpatient infusion environment.

Rachel McMinn - Cowen

Okay. Thanks very much.

Michael Bonney

Operator, that is the last of the questions, is that correct?

Operator

Yes, sir, thank you. There are no further questions at this time.

Michael Bonney

Great. Well, thank you all for joining us today. Mark your calendars now. The yearend fourth quarter earnings call is going to be scheduled for January 23 at 5:00 p.m. Thanks a lot. Take care.

Operator

Thank you. Ladies and gentlemen, this concludes tonight's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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