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Executives

MichaelBonney - President and Chief Executive Officer

Rob Perez- Chief Operating Officer

David McGirr- Chief Financial Officer

ChrisGuiffre - General Counsel

Analysts

RachelMcMinn – Cowen & Company

Matt Duffy- BDR Research

JasonKantor - RBC Capital Markets

Greg Wade -Pacific Growth Equities

HowardLiang - Leerink Swan & Company

Kevin Wenck- Polynous Capital Management

Eun Yang -Jefferies & Company

Franz Tudor- Shulton Feltz

CubistPharmaceuticals Inc. (CBST) Q3 2007Earnings Call October 17, 2007 5:00 AM ET

Operator

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

It is now my pleasure tointroduce 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 todayare Rob Perez, our Chief Operating Officer, David McGirr, the Chief FinancialOfficer, and Chris Guiffre, the General Counsel. We will focus today on ourthird quarter 2007 financial results and business developments. But before we begin, Chris will read the SafeHarbor Statement.

Chris Guiffre

Thanks, Mike. Forward-looking statements may be made duringthis call relating to, among other things, projected product revenues, companyfinancial performance, and our products and pipeline. These statements are neither promises, norguarantees, and are subject to a variety of risks and uncertainties that couldcause actual results to differ materially from those projected or suggestedtoday. Such risks and uncertainties aredetailed in the Company's periodic filings with the Securities and ExchangeCommission, including our most recent Annual Report on Form 10-K and QuarterlyReports on Form 10-Q and also in today's quarterly earnings press release.

Cubist is providingthis information as of the date of today's call and does not undertake anyobligation to update any forward-looking statements made during this call orcontained in the slides to follow, as a result of new information, futureevents, 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 involveadjustments to GAAP figures.

In particular, we willpresent information on non-GAAP net income and net income per share. Any non-GAAP financial measures discussedshould not be considered an alternative to measures required by GAAP and areunlikely to be comparable to non-GAAP information provided by other companies. Any non-GAAP financial measures disclosed arereconciled to the most directly comparable GAAP financial measure in a tableincluded in our press release issued this afternoon and available in the newssection of our website. A furtherdiscussion of why we feel these measures are important to investors and thereasons for which our management uses these measures is also included in thepress release.

I will now turn thecall back over to Mike.

Michael Bonney

Thanks, Chris. I will begin today by providing some highlevel perspective on the quarter and the year-to-date. David will take you through the financialresults for another quarter with strong results on both the top line and thebottom line. Rob will provide a deeperdive on CUBICIN and its continued growth in both the U.S. and as a global brand. I will then comment on our pipeline buildingactivities, review our progress against 2007 milestones, and then open up thecall to your questions.

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

We are empowered bythis network of expertise and excellence as we continue to execute our growthplans for CUBICIN. In that samedetermined spirit, we plan to leverage and strategically enhance this network,as we begin to build a pipeline behind CUBICIN.

Later in the call, Robwill discuss our plans to grow our acute care sales organization in the U.S. Thisdecision is driven by the CUBICIN opportunity ahead of us, but also positionsus well to leverage our commercial organization across a range of therapeuticareas in the future. At this point oneyear ago, we were one quarter into the U.S. launch of the expanded label for CUBICIN basedon our landmark trial study Staph aureus bacteremia and endocarditis.

At that time, some ofyou were disappointed when you did not see an immediate acceleration in thehistoric revenue growth trend for CUBICIN. We cautioned you then that the education ofinfectious disease and other internal medicine specialists on the new CUBICINlabel and the data from that landmark trial would take time, but behaviorchange would follow. The momentum of thelast couple of quarters provides evidence that noticeable change of prescribinghabits 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 whotreat them, both inside and increasingly outside hospitals in the U.S. and elsewhere.

More virulent strainsof MRSA in the community are increasing the need for faster diagnosis andtreatment with effective agents. Aspatients with these strains enter the hospital, the bacteria are mingling withnosocomial strains, in what some refer to as an emerging perfect storm. The agents that physicians have reached forto treat MRSA for decades, vancomycin, is no longer reliable therapy in manysituations. Experience with CUBICIN isgrowing and the scientific and pharmaco-economic data are building support forits use earlier in the treatment paradigm.

In July, we announcedthat 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 arange of between $265 million and $280 million. Today, we are raising our 2007 guidance a secondtime. Our guidance for U.S. net product revenue for 2007 is now a range ofbetween $275 million and $285 million.

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

David McGirr

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

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

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

R&D expense for Q3was $17.9 million, and that includes our Phase 2 work studying high dose shortduration dosing for skin infections and comparative dosing for prosthetic jointinfections, as well as the accelerating work in non-CUBICIN pre-clinicalprograms.

Sales and marketingexpenses of $18 million are in line with guidance. G&A at $8.5 million for the quarter isslightly higher than our trend in the first half of the year, reflecting ourgrowing business.

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

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

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

Now, let me take youthrough guidance. As you heard fromMike, we are today raising our U.S. net revenue guidance to $275 million to $285million. We are also focusing our guidancefor 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 Novartismilestone. This will not be repeated inQ4, so think of that as you build your year-end models.

Our guidance for costsand other items are shown here. Grossmargin is trending towards the higher end of our previous guidance range, andwe now expect it to be around 76%. As aresult of the Illumigen option announcement yesterday and our funding of anIND-enabling study of Illumigen's IB657, R&D now is expected to be in therange of $77 million to $79 million.

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

As always, we willfinish with cash. Cash generation, whichis subject to change based on the pace and success of our pipeline buildingactivities, is now expected to be about $80 million. This figure also reflects the Illumigen optionpayment.

Now, I will turn thecall over to Rob.

Rob Perez

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

Last quarter, we toldyou that we now anticipate peak year sales for CUBICIN in the U.S. of more than $750 million. Our peak year expectations assume noadditional indications are added to the CUBICIN label. As shown here, almost 70% of the market opportunityis in areas where we have labeled indications.

CUBICIN momentum isbeing driven by several factors. First, MRSAis back and community associated MRSA is making things worse. This was underscored just this week in theJAMA article and editorial, which has received widespread coverage in themedia. 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 atIDSA this month, there is increasing encroachment of community-acquired MRSAinto the mainstream of healthcare, with significant proportions ofhospital-based infections now caused by these more virulent strains.

Second, the issuessurrounding the clinical efficacy of vancomycin continue to gain traction,particularly in the ID community. Thisincreasing concern is leading to a faster switch to CUBICIN, and in somecircumstances more first line use. Iwill provide some updates on new data coming out of the Fall meetings that haveadded to these concerns later in the call.

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

Fourth, increasingly, CUBICINis being adopted as a therapy that fits well in the outpatient setting, asevidenced by the higher growth rate we continue to experience outside of thehospital.

And finally, our marketresearch suggests that physicians are very comfortable with the CUBICIN safetyprofile. With more than 400,000 patientstreated, the safety profile of CUBICIN remains consistent with our clinicaltrials.

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

Outpatient nowrepresents about 43% of CUBICIN revenues in the U.S. Overallin a growing market, CUBICIN has about an 8% share of treatment days. Vancomycin, on the other hand, continues topresent a huge market opportunity with a rolling three-month share of days of74%, which is down from 84% back in 2004. As the vancomycin hold on the market continuesto weaken, there will be plenty of room for CUBICIN, as well as other Gram-positiveagents, to gain share at its expense.

Let me spend a fewminutes now going over some of the insights that came out of the just concludedFall Conferences. One of the keytakeaways was the broad recognition that vancomycin at higher MICs within its susceptibilityrange is not producing favorable outcomes for patients. There was also growing awareness and concernthat clinical microlabs using automated systems may be missing vancomycin MIC creep,heteroGISA and tolerance.

One highly anticipatedpresentation at IDSA included evidence that when vancomycin dosing is pushed toachieve trough levels of 15 to 20 micrograms per ml in order to boost itsefficacy, the unfortunate, unintended result that this strategy can lead to isoften unacceptable nephrotoxicity. Therewas additional data showing the inferiority of vancomycin to beta-lactams fortreatment of MSSA infections, confirming once again that vancomycin is a poorchoice when methicillin-susceptible Staph aureus is suspected or confirmed.

Finally, we were veryexcited to see the pharmaco economic data from the Phase 3 Staph aureusbacteremia trial presented in a poster at IDSA. The poster compared the relative cost oftreatment with CUBICIN and vancomycin during the trial. This analysis showed that when total costs ofinpatient care were considered, there was no statistical difference in cost oftreatment between the two groups. Asensitivity analysis showed that this would be true even if the acquisitioncost of vancomycin was zero.

The main reasons forthis finding were differences in response rates and the costs associated withtreatment failures, which favored CUBICIN over the vancomycin- containingregimen. These data add to theconclusions reached by other prominent investigators that the overall cost tothe institution of using CUBICIN is similar to the cost of using vancomycin,despite significantly different costs to acquire the drug.

Against this backdropof growing medical need and the inadequacies of vancomycin, the FallConferences also included impressive evidence of the continued efficacy andfavorable safety profile of CUBICIN. Giventhe higher dose regimens we are exploring in Phase 2 research, it was good tosee for example, in a retrospective chart review from New York Hospital inQueens, that CUBICIN was found to be well tolerated at higher doses of seven tonine milligrams per kilogram for 14 or more days. In this review, CUBICIN was not associatedwith CPK elevations or other adverse events leading to discontinuation, even atthese higher doses.

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

Finally, this quarteralso had some important milestone accomplishments for CUBICIN as a globalbrand. I want to congratulate the teamat Novartis in the EU and Oryx in Canada, on the approval of labels based on the datafrom our landmark Staph aureus bacteremia and endocarditis trial. Members of the Cubist scientific andregulatory teams also worked very hard in support of these successful filings. It is quite satisfying to see the care thatthe 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 ofvery serious, often life threatening infections caused by Staph aureus.

We know that it is noteasy to review data from a trial that involves such seriously ill patients, witha variety of comorbidities. Each time alabel based on this rigorously designed, conducted, and analyzed trial isapproved; it is a tribute to the scientific, medical and regulatory teams atCubist; to the many external advisors and dedicated investigators involved, andto our friend, the late Frank Tally, whose ever-present spirit remains a partof everything we do here at Cubist.

Now, back to Mike.

Michael Bonney

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

Based on the Hatch Waxmanrules, as many of you know, one year prior to the expiration of the five yearsof data exclusivity granted when a new chemical entity is initially approved bythe FDA, a generic company can file an Abbreviated New Drug Application orANDA. If a generic company files an ANDAfor CUBICIN, they would need to include a Paragraph IV certification,indicating that they plan to challenge the patents that were listed in theOrange Book. Today, we have two dosingpatents in the Orange Book that could be asserted in response to a Paragraph IVfiling. We also have other patents thatare not listed in the Orange Book.

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

As of today we have noknowledge of any ANDA filing. Let merepeat that; as of today, we have no knowledge of any ANDA filing. If we are notified of such a filing, we willadvise the market, and we will be very well prepared to take appropriateaction.

Now to milestones. In the past quarter, we have made furtherprogress on our milestones for 2007. AsI reported on a conference webcast a few weeks ago, we now have completeenrollment in the CUBICIN Phase 2 high dose short duration complicated skininfection trial. We are on track to havedata from this trial in the first half of next year.

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

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

We remain committed toour strategy both to optimize CUBICIN, which has considerable growthopportunity ahead, and to leverage the organization and capabilities we havebuilt to create a pipeline behind CUBICIN. As Chief Operating Officer, Rob is now leading the charge on theoptimization of CUBICIN; and devoting considerable time and energy to decisionpoints we will be approaching for our Gram-positive and Gram-negativeantibiotic programs; and for our research collaboration with Ilypsa for non-anti-infectiveapproach to C. difficile infection or C. difficile associated diarrhea.

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

We continue to aggressivelyseek out candidates for in-licensing, acquisition, or co-promote arrangements. Our focus is acute care including but notlimited to anti-infectives. Ourobjective 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 pleasedwith the results we continue to deliver, and I look forward to your questionsthis evening. Operator, why do not youopen the line up for questions?

Question-and-Answer Session

Operator

Our first questioncomes 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 backgroundnoise. Congrats on a good quarter. I wanted to ask, first question is just on theguidance. What could happen in thefourth quarter that would actually get you to the low end of guidance? And I guess with that, was there any stockingor, you know, kind of one-time impact from the VA addition that happened lastquarter?

David McGirr

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

Rachel McMinn - Cowen

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

Rob Perez

Sure, Rachel, this isRob. Yes, we are going to start thesales force expansion, start work on it at the end of this year; but really willnot have it in place until the end of the first quarter or so next year. That has been the usual kind of timing fordoing this type of process. So that should give you some idea of when we willbe ready to go.

Rachel McMinn - Cowen

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

Rob Perez

We go through, as youknow, an analysis of our overall commercial infrastructure pretty much everyyear, to insure that we are where we think we should be, based on the prioryear's assumptions. In this year, welooked at it and really felt like the opportunity was there for us to be alittle bit more aggressive with CUBICIN, and to add both in the hospitals aswell as to our outpatient force.

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

Operator

Thank you. Our next question comes from the line of MattDuffy, with BDR Research. Please proceedwith your question.

Matt Duffy - BDR Research

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

Rob Perez

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

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

Matt Duffy - BDR Research

Okay, and you mentionedlast quarter that Cubist, or CUBICIN was added to the VA formulary. How big is that market relative to the overallU.S. market?

Rob Perez

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

Matt Duffy - BDR Research

Okay, and one last oneand I will jump back into queue. Youmentioned that awareness amongst non-infectious disease docs was increasing. Are you seeing restrictions on use outside ofID sort of being reduced at all, now that CUBICIN has been on the market for aslong 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 controlsbe reduced a little bit with CUBICIN, as well as other specialties likehospital lists, for example, who are gaining more access to CUBICIN. So I would not say that it is widespread or itis happening every day. But slowly butsurely, we are seeing non-ID physicians getting more access to CUBICIN.

Plus, as you know, inthe outpatient setting where our business continues to move very nicely, therethe access issues really are less of a concern, if not for some physicians, nota concern at all. So the more physiciansget used to using it in the outpatient setting, the more access becomes, youknow, 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 JasonKantor with RBC. Please proceed with your question.

Jason Kantor - RBC Capital Markets

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

Michael Bonney

No, we think what isgoing on here, Jason, is that the conversation around where CUBICIN needs to beused, has moved from conversation over the last six or eight months to actualbehavior change, and we think we are on, again, we do not think there is goingto be a hockey stick-like response. Butwe think we are seeing the start of, and now I think it is more than the startof, it is a confirmed movement to position CUBICIN within the hospitalenvironment. In particular as a veryimportant alternative to vancomycin; particularly in those circumstances wherethe hospital either sees a large percentage of strains that have relativelyhigh MICs to vanc or whether they are actually doing MIC90 testing and they canidentify individual patients who are affected by these strains. So we do think there is a movement fromconversation to behavior change, if you will.

Rob Perez

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

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

Jason Kantor - RBC Capital Markets

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

Michael Bonney

We certainly sawaverage daily sales in Q3 increase over Q2. The trends that we saw within the quarter are pretty standard for thethird 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 endthe quarter in terms of (Voice Overlap)

Michael Bonney

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

Jason Kantor - RBC Capital Markets

All right. I will jumpback into queue. Thanks.

Operator

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

Greg Wade - Pacific Growth

Thanks and let me addmy congratulations to a great quarter. Acouple of questions. With respect to theaddition of the sales force, Rob, you made a few comments about reach and calldensity. I was wondering if you couldprovide us a little more granularity in terms of, on a percentage basis? In terms of call density, how much increase youare going to see? And then on a reachbasis 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 quickquestion. David, if you could justprovide us some insight into how things are shaping up in the month of Octoberfor business. Thanks.

Rob Perez

Greg, I could take thefirst one. Unfortunately, I am not goingto 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 andhow to try to do what we have done. So,I think, we have given quite enough information on our sales force expansionand I prefer not to go further than that.

David McGirr

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

Greg Wade - Pacific Growth

Thanks for youranswers. Bye.

Operator

Thank you. Our next question comes from the line ofHoward Liang with Leerink Swan. Pleaseproceed with your question.

Howard Liang - Leerink Swan

Thanks very much. If I could have a couple of questionsregarding the patent that was delisted. Haveyou 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 areprogressing, making the correction to that patent.

Howard Liang - Leerink Swan

Okay. If the patent isrelisted, obviously, if it is relisted, obviously you can assert it against thepotential 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 listedin the Orange Book at the time of generic filing, does that matter to the30-month stay?

Michael Bonney

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

I know it is ratherconfusing here. Let me try and summarizehere. The 30-month stay is driven by September 12, 2008, if weare notified before then. It is drivenby the date of notification, if the date of notification is later than September 12, 2008. We assert only those patents that are listedin the Orange Book at the time the ANDA is filed; in order to activate that30-month stay, if you will.

Howard Liang - Leerink Swan

Okay.

Michael Bonney

I hope that is moreclear.

Howard Liang - Leerink Swan

Yes, that is veryhelpful. If I could also just ask acouple 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 theoperating costs for that company. Whatis the operating cost for Illumigen?

Michael Bonney

Howard, actually the $1million 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 toacquire the company?

Chris Guiffre

Yes, the option periodextends until after -- this is Chris. Theoption period extends until after the completion to our satisfaction of a28-day GLP rat study.

Howard Liang - Leerink Swan

Okay. So that issometime next—

Chris Guiffre

I am not using a datebecause 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 eitherexercise our option or we actually have the option to run another study to oursatisfaction.

Howard Liang - Leerink Swan

Okay. So, I guess, is there a time projection forwhen you might acquire the company? Yourtimeline?

Michael Bonney

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

Howard Liang - Leerink Swan

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

Rob Perez

There are a variety of invitro data in replicating assays, so-- HCV in particular, for technicalreasons, this particular compound is not appropriate to test on the replicon assay. But in replicating assay, it has shown to benicely effective against replicating HCV. There is also some early in vitro data in a varietyof other RNA viruses as well. But ourfocus in the near term is to progress the IND study, the IND-enabling study that will allowus to move into HCV.

Howard Liang - Leerink Swan

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of KevinWenck with Polynous Capital Management. Pleaseproceed with your question.

Kevin Wenck - Polynous Capital Management

Concerning the guidancefor the year for R&D, unless I misheard something or misunderstoodsomething, it implies that Q4 R&D could be somewhere $26 million, $28million. How much of that is what Iwould call real ongoing spending? Howmuch 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 millionthat 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 ofmoney going out on Illumigen, which was not there before. So that is what isgoing on.

Kevin Wenck - Polynous Capital Management

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

David McGirr

Well, I think that wegave 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 toclarify that.

David McGirr

I think that is as areasonable place to be.

Kevin Wenck - Polynous Capital Management

Okay. All right, thanksfor your help.

Operator

Thank you. Our nextquestion 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 CUBICINsales in the US, about 43% is coming from outpatient. But how about in terms of indications? Since the approval of new indication inbacteremia and endocarditis, I am just wondering whether the sales in thatindication are contributing to increases in CUBICIN sales we are seeing recently? And if you can just comment on how much of CUBICINrecent sales are coming from bacteremia and endocarditis versus the skininfections?

Rob Perez

Yes, we just got datafrom 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 CUBICINuse inpatient was in skin; and 36% was in systemic/cardiovascular; 8% was osteoand 10% was other.

There was 35% growth inCUBICIN use in systemic and cardiovascular use inpatient. We do not have this level of data in the outpatientsegment. One would expect that we wouldsee higher percentage of skin use in the outpatient settings; and also osteo inthe outpatient setting. But AMR is reallyonly inpatient. So that is the most recent data on how the product is beingused based on AMR.

Eun Yang - Jefferies & Company

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

Rob Perez

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

Eun Yang - Jefferies & Company

Okay. Thank you.

Operator

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

Jason Kantor - RBC Capital Markets

Yes, I wanted to get alittle better understanding of the ex-US opportunity. You have had some successes in terms ofgetting the drug approved, but yet there does not seem to be a lot ofpull-through. And Novartis seems to makethose comments about this market opportunity, but, again not a lot of drugcoming from you to them. So when wouldwe likely begin to see that contributing in some kind of meaningful way and howmeaningful could it be?

Michael Bonney

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

You recognize they justgot approval of the Staph aureus bacteremia label when associated with skininfections and endocarditis. So they are preparing launch meetings with notonly their field force, but also with customers coming up at the end of thisyear. So they are moving forward, theyare committed to it. Right now it hasnot taken off like, like we all want it to, but they are confident and weremain confident that it is going to.

Jason Kantor - RBC Capital Markets

What gives you thatconfidence and what do you ascribe, you know, what reasons do you guys ascribeto 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 theinfrastructure needed. In othercountries, they are doing pretty well. Soeach country has different obstacles. Iam confident because I think they are good people; and I have seen theircommitment and seen what they are doing for the product and it is similar towhat we would do. And so I think it isgoing to happen. It is just going totake time.

Rob Perez

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

And you know, the structureof the market there is also different in that you have two glycopeptides thatare approved, vancomycin and teicoplanin; so there is a more competitiveenvironment there. In addition, as youknow the MRSA rates were growing at a rate very similar to what we have seen inthe 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 substantiallyless than what we see in the U.S. So thereis this gradient. UK of course is an outlier to that generalstatement of north/south gradient.

But it is a differentmarketplace. There is no question aboutit. We do think that they are highlycommitted and that they have got very good people on this. They are well trained, and we have just got togive them some time for this new label to actually get some traction in thosemarkets in Europe that they are launching it.

Jason Kantor - RBC Capital Markets

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

Rob Perez

No, it is really, thenature of these relationships are that they are responsible for forecasting andexecuting on it. So I think that that isa question that is actually most appropriately answered with the level ofdetail I think you are looking for from Novartis or our other partners ratherthan by us.

Jason Kantor - RBC Capital Markets

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

David McGirr

Well, generally a fullyloaded 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 FranzTudor with Shulton Feltz. Please proceedwith your question.

Franz Tudor - Shulton Feltz

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

Rob Perez

Sure. It is, as of right now, the situation is unchangedfrom previous quarters. We are stillexpecting 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 PDUFAdate coming up, or depending upon who you talk to, it passed or is coming upvery soon. And so we should be hearingsomething very soon on that drug.

We remain confidentthat we can compete with it; that a four-year lead, with 400,000 patients and asafety profile that is becoming a real strength for our drug, is a big, bigobstacle for them to overcome. Particularlywhen, at least the reports, we will have to see what kind of label they get ifthey get approved. But reports are thatthere may be some potential safety differences between that product and ours. I believe the renal toxicity comparison ofTelevancin 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 drugwe 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 lungwith ZYVOX and others, and will compete a bit on skin, we still remain verydifferentiated in Staph aureus bacteremia.

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

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

Franz Tudor - Shulton Feltz

And I am sorry, onelast question, even despite the pricing difference between generic vancomycinand CUBICIN, do you foresee opportunities to increase pricing?

Rob Perez

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

Franz Tudor - Shulton Feltz

I understand you cannot talk about pricing going forward. But when was the last price increase andhow much was it?

Michael Bonney

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

Franz Tudor - Shulton Feltz

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

Michael Bonney

We do not makeforward-looking statements regarding price. The history of the drug is that we have takenfour price increases in the time that we have been on the market. They have been variable in terms of the timingand 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 ofRachel McMinn from Cowen. Please proceed with your question.

Rachel McMinn - Cowen

Yes, just one lastquestion about deals going forward. Iguess, what is the most attractive part about Illumigen that you can point usto thinking about as a proxy for other deals you might get in the future?

Michael Bonney

Yes, I think that thereare 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 expertiseinternally from a biology standpoint, from a clinical development standpoint,et cetera. It is also a marketplace thatwe think is very large and pegylated interferon is about a $2 billion markettoday. We expect that will continue togrow and yet there are shortcomings with interferon that we think this productmay have the opportunity to address. Understand,it is very early.

So we like the leverageof our capabilities aspect of this. Wealso like the fact that it represents a very significant marketplace with realunmet medical need. The early data, andI reiterate it is very early data; but the early data looked very promisinghere. So we see the opportunity to havean important addition, if it makes its way through the development path andmakes it to market.

I think the key thinghere is that what we are trying to do is to leverage the infrastructure we havebuilt. So whether it is running acuteanti-infective trials --some say Hep C is not acute; in my definition, youknow, a 24 to 48 retreatment course is relatively acute-- and that leveragesour commercial infrastructure, which we think is really top notch and gives usa real competitive advantage to take additional acute care products into thehospital and the outpatient infusion environment.

Rachel McMinn - Cowen

Okay. Thanks very much.

Michael Bonney

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

Operator

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

Michael Bonney

Great. Well, thank youall for joining us today. Mark yourcalendars now. The yearend fourthquarter earnings call is going to be scheduled for January 23 at 5:00 p.m. Thanks alot. Take care.

Operator

Thank you. Ladies and gentlemen, this concludes tonight'steleconference. You may disconnect yourlines at this time. Thank you for yourparticipation.

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