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Cubist Pharmaceuticals Inc. (NASDAQ:CBST)

Q4 2007 Earnings Call

January 23, 2008 5:00 pm ET

Executives

Michael Bonney - President and CEO

Chris Guiffre - SVP, General Counsel and Secretary

David McGirr - SVP and CFO

Rob Perez - EVP and COO

Analysts

Tom Shrader - Rodman & Renshaw

Biren Amin - Stanford Group

Howard Liang - Leerink Swann

Rachel McMinn - Cowen & Company

Tom Russo - Robert W. Baird & Company

Greg Wade - Pacific Growth

Michael Yee - RBC Capital Markets

Eun Yang - Jefferies & Company

Brian Lian - Oppenheimer

Operator

Welcome to the Cubist Pharmaceuticals Incorporated Fourth Quarter and Fiscal Year End 2007 Earnings Call. (Operator Instructions).

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, Chief Financial Officer; and Chris Guiffre, the General Counsel. We will focus today on fourth quarter 2007 and full year 2007 financial results and business developments.

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 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'll begin today by reviewing results and milestones for 2007, including the announcement of some pipeline development decisions we made at year end. David will take you through the financial results for last year. Rob will provide more perspective on Cubist and in terms of drivers for the excellent results we've reported and for the continued growth ahead of us. I'll then provide you with some important milestones for the company in 2008, before opening the call to your questions.

What a year we've had! Again, in many ways, the best is yet to come. We've proven that CUBICIN momentum is real. Year-to-year revenue growth in the US of 50% in the fourth full year since launch of our first-in-class IV antibiotic is very impressive. The trajectory we are on with this potent therapy continues to be fueled by the market need, as well as a differentiating label and product attributes of CUBICIN, something Rob will talk more about later.

We also had our first full year as a GAAP profitable company, an important milestone. Today, I'm pleased to report on the start of ACT II for Cubist as a growing acute care biopharmaceutical company. We are making investments this year which will enable us to make important progress on some exciting programs.

We're also setting aside some programs consistent with the disciplined decision-making that has become a hallmark of the Cubist culture. As reported in late December, we have acquired a promising Hepatitis C program which plans for an IND filing in 2008. We also have made important decisions on our preclinical programs with at least one additional IND slated for this year.

Here is how our pipeline beyond CUBICIN is shaping up at the start of 2008. First, our Hepatitis C therapy candidate, IB657 acquired with the purchase of Illumigen Biosciences in December. To remind you, IB657 is a protein therapeutic, which is an optimized oligoadenylate synthetase or OAS. IB657 has potent antiviral activity against HCV and other viruses and has the potential to be a safe and effective mainstay of therapy for Hepatitis C.

We have valued the compound as an add-on to current HCV therapy where it could act as an interferon-sparing agent. This program is moving forward in pre-IND mode. We will create GMP or good manufacturing process quality materials and assemble an IND dossier, while also beginning to work on CRO logistics. So we'll be prepared to move quickly into the clinic, following the acceptance of the IND. We have also set an objective, an IND filing in the second half of this year with a goal of proceeding rapidly to Phase I research.

Next, our programs for Gram-positive infections. I'll lead here by talking about an internal program we have not discussed previously. Cubist scientists have been working on an antibiotic agent for the treatment of Clostridium difficile-associated diarrhea, or CDAD. We have identified an extremely interesting lead molecule with exquisite activity and preclinical efficacy against CDAD.

Unlike other marketed agents for CDAD, this candidate is rapid recital, which could give the compound advantages in the treatment of infections caused by C. difficile. We are focusing attention on this antibiotic CDAD program, and are moving aggressively towards our goal of an IND filing by the end of this year.

We have talked to you in the past of our two other programs targeting Gram-positive infections, our lipopeptide program for a CUBICIN-like therapy with activity in the lung and our toxin-binding C. difficile research collaboration with Ilypsa. We have decided to shell our lipopeptide pneumonia program, at least for now. We're deploying our resources against the programs with the greatest near-term IND potential, and the antibiotic CDAD program has a decided edge. In the fourth quarter, we also ended our CDAD toxin-binding research collaboration with Ilypsa.

Finally, you have heard us speak with enthusiasm about our lipopeptide program for pan-resistant Gram-negative bacteria. We've been working in animal models of infections caused by a variety of Gram-negative pathogens, and we have made great progress in assessing potency, efficacy, pharmacokinetics and safety of the molecules we're developing. We're not yet ready to commit to an IND filing this year, but stay tuned for future developments.

With this report on the decisions reached late in the year on several of our preclinical programs, we can check another box on our 2007 milestones. We are pleased with the progress we have made on all fronts in the past year. Highlights include the completion of agreement that paves the way for CUBICIN to become a global brand, the completion of enrollment in the CUBICIN high-dose short duration Phase II complicated skin study, and the initiation of a comparative dosing Phase II study of CUBICIN for the treatment of prosthetic joint infections. 2007 was a very busy and productive year as CUBICIN revenues continued to grow in historic fashion.

Now, David will review our financial results for the year.

David McGirr

Thanks, Mike. We will begin with a review of the 2007 financials, an excellent year of Cubist. US net product revenues were at the high-end of the twice revised upwards guidance, over 50% year-over-year growth. International revenues at $5.3 million are disappointing.

Gross margin at 76.3% reflects the excellent job our technical operations team has done in managing our manufacturing costs. All expense items are on our guidance range.

R&D, adjusted for the Illumigen acquisition in December, was $84 million, including $14 for Illumigen. Sales and marketing was $67.7 million against guidance of a range of $67 million to $69 million. G&A was $31.5 million. Other income settled at $8.6 million. That's a joy of having cash in the bank.

There are two EPS numbers to look at. Diluted GAAP EPS for the year is $0.85, and that figure is after the $14 million in-process research and development charge for the Illumigen acquisition. The non-GAAP diluted EPS is $1.20 and the non-GAAP calculation is in today's press release. The cash balance at the end of the year was $398 million, up $89 million over the year.

Now, to 2008 guidance. We will look at this in pieces. First, revenues, we expect US net product revenues to be between $370 million and $385 million. International revenues are projected to be around $6.5 million. We project cost of goods sold for 2008 to be in the range of 23% to 22%, yielding a gross margin in the range of 77% to 78%.

Our guidance for operating expenses is broken down as follows; between $100 million and $110 million for R&D, between $78 million and $83 million for sales and marketing; and around $38 million for G&A. The growth on the R&D line reflect both ongoing CUBICIN expenses as well as the pre-IND work on the pipeline programs Mike discussed earlier in the call.

The R&D spend in 2008 will be around 45% per CUBICIN which is down from 60% in 2007, 25% for the programs heading for 2008 IND, and about 30% for all other programs, including our works in the Gram-negative arena. Other income should come in at around $5 million reflecting our expectation of lower interest rate in 2008 over 2007.

Finally to cash flow, for 2008 net cash flow should be around $75 million. Two major items affect this number and bring it down from 2007. The Illumigen cash went out in January 2008, even though the P&L date was in 2007. And during 2008, we expect to complete the construction of approximately 30,000 square feet of state-of-the-art laboratory space at our campus in Lexington, Massachusetts, and we will also refurbish some general office space at a building adjacent to our lab building.

The capital expenditure on these projects and our normal capital expenditure activity will be around $24 million, which reduces the net cash flow. Without these items and without Illumigen, cash flow would have been projected at about $110 million for 2008.

Now, I want to give you a heads up about some difficulties you may have in modeling provisions for taxes. This is because Cubist is a newly profitable company that has not demonstrated the ability to generate and sustain profitability for a sufficient period. We regularly review our tax position with outside advisors.

To-date and for the fiscal year ending December 31, 2007, we have booked a tax provision based on amounts owed for federal alternative minimum tax and miscellaneous state taxes. And we've maintained a tax valuation allowance on our balance sheet against our deferred tax asset. At some point, companies that have sustainable profits reverse their tax valuation allowance on their balance sheet. Following the tax valuation allowance reversal, the company would reflect a more traditional tax provision. Until we get past all of this, and we cannot predict when that will be, pre-tax income, while a non-GAAP figure may be a more predictable reference point.

I will hand you over to Rob for some much more interesting stuff.

Rob Perez

Thanks David. Let me start by discussing CUBICIN quarterly growth. I love this slide. For those of you who are viewing the slide, you will notice that in the past three quarters, we've seen an acceleration in the growth of CUBICIN. This is really remarkable for a product that has just begun its fifth year on the market. What has been a historic launch thus far is now poised for even greater success in the years ahead.

We believe that there are several drivers for this which should continue to fuel CUBICIN growth going forward. First, the market is growing. In our peak year sales projection of $750 million in CUBICIN revenues in the US alone, we model as a double-digit growth in the acute care Staph therapy market will moderate to under 10%, even though there is no evidence today that the growth is slowing. For the first 11 months of 2007, we saw growth in anti-Staph days of 18% versus the comparable 2006 period.

One driver of market growth is community MRSA. In these days, it's hard to access any news source without hearing about an outbreak as who were on a sports team. This graph shows the bump in media coverage about MRSA in the fourth quarter of last year with the spike just after the October report in JAMA about the high influence of its base is MRSA.

The next driver is the erosion of confidence in Vancomycin, which has about 75% of the anti-Staph days, down from 84% when we launched. Over the past year in particular, we've seen prescribing behavior starting to change due to concern with the clinical efficacy of Vancomycin, especially when the MIC90 is one or greater. Even if competitors find a path to enter this market, there is plenty of room for additional therapies and we'll all benefit from the added noise level about the clinical challenges associated with Vancomycin.

Another important driver is the outpatient segment of the market. The attributes of CUBICIN have made it a very well received therapy for outpatient infusion. In the fourth quarter of 2007, we continue to see differential growth for CUBICIN in settings outside of the hospital, largely home infusion. As you know, this was a focus area for us in 2007, and clearly, the market is responding to this additional attention.

And finally, after four years on the market and 460,000 patients treated, CUBICIN has become an accepted part of the infectious disease armamentarium. In this conservative market, a therapy is often considered new for many years, while physicians determine how it fits into their treatment paradigm. Physicians now know what to expect from CUBICIN, in both its reliable efficacy and predictable safety profile, which further enhances their comfort and prescribing it for appropriate patients.

We are excited about our continued historic rate of growth and have high expectations for the year as you've seen in our 2008 guidance for revenue. I will remind you, however, that we expect to see the usual seasonal pattern of softness for CUBICIN and the market as a whole in the first quarter, which we believe is a result of lower hospital census and a relative increase in respiratory infections in the winter month.

I talked a minute ago about the behavioral change we're starting to see because of concerns about Vancomycin. In addition to the data looking at outcomes at higher MICs, there is also growing data about the pharmacoeconomic burden that is tied to poor clinical outcomes with Vancomycin.

You may have seen the December study published in Pharmacology concerning the total cost of treatment when using Vancomycin in comparison with CUBICIN for a complicated skin infection. At IDSA last fall, a poster presentation detailed the relative cost of treatment from our Staph aureus bacteremia trial. Both analyses provide compelling evidence that Vancomycin can no longer be viewed as a lower cost therapy. Length of stay, as well as the cost of treating failures and adverse events, wipe out the savings one could expect from the low acquisition cost of generic Vancomycin.

In our October call, we talked about our plans to increase our US acute care sales force. This hiring is well underway. It's clear from the reaction we're getting from potential candidates that Cubist is considered to be a topnotch highly desirable organization to join. I know we are getting similar reactions in the hiring process from some of our new scientific physicians in the company as well.

We expect to have all of our new clinical business managers in place by the end of the quarter. The addition of 29 CBMs will give us 164 sales people calling on acute care physicians. This increases our depth and call frequency for CUBICIN and also physicians as an organization ready to sell additional acute care products in the future.

There is still much to learn about CUBICIN. As you know, in 2007, we completed enrollment in a Phase II trial to study CUBICIN at a higher dose, 10 milligrams per kilogram at shorter duration therapy for serious skin infections. I have some topline information to share from this study.

This was a hypothesis generating Phase II study where we investigated the feasibility of shorter duration CUBICIN therapy for complicated skin and skin structure infection. We also assessed the safety profile of a higher dose, 10 milligrams per kilogram for four days versus standard of care therapy, generally, Vancomycin, for 7 to 14 days. We enriched the study population for MRSA and allows for this freedom of outpatient therapy. The fact that we overenrolled the study, 102 patients, and completed it early speaks to the participating investigators enthusiasm around CUBICIN.

So: what have we learnt from the study? First, four days of CUBICIN therapy at 10 milligrams per kilogram per day resulted in cure rates consistent with what we saw in the pivotal studies. This is despite the fact that more patients in this trial had MRSA infections, which are more difficult to treat. The trial was not sized for statistical significance versus standard of care therapy. There was a slightly higher numerical success rate for the longer up to two weeks standard of care therapy.

Second, a dose of 10 milligrams per kilogram per day for complicated skin and skin structure infections was well tolerated with safety findings consistent with what we've seen in our pivotal skin trial and with CUBICIN use in the field. And finally, a majority of CUBICIN patients in the study were treated as outpatients, which again demonstrate the convenience of a once a day treatment for MRSA.

We're pleased with these results from both a safety and efficacy standpoint. We expect to have one or more manuscripts submitted for publication in appropriate peer reviewed journals. We may consider additional studies regarding shorter duration therapy, but would likely want to make refinements based on the learning from this study.

The benefit of higher doses of CUBICIN, such as 10 milligrams per kilogram may be more important in more serous infections, such as bactoremia, and its quite likely that we'll do some work there. We're completing discussions with key opinion leaders and you should expect to see more activity this year.

Higher doses of CUBICIN are being investigated in a number of settings, both by Cubist and outside investigators. As you know, one of these studies was our comparative dosing prosthetic joint infections Phase II trial. Here, we are comparing 6 milligram and 8 milligrams per kilogram of CUBICIN for six weeks against standard therapy, either Vancomycin or Teicoplanin.

This is a test to enroll trial given the population, generally older, sicker population who will not always qualify for this study based on the entry criteria. We'll keep a close watch on enrollment to determine if we need to seek loosening of the entry criteria. But for now, we're still working towards data from this trial in 2009.

An important study, which will begin to enroll this year, is our pediatric safety and efficacy trial in complicated skin. This is a regulatory commitment and represents an area of growing unmet need and an opportunity to optimize the utility of CUBICIN. We plan to enroll 225 children, age of 7 to 17, with about 150 receiving CUBICIN therapy.

Dosing in this trial, based on learning from our pharmacokinetics study, will be 5 milligrams per kilogram for 12 to 17 year old and 7 milligrams per kilogram for 7 to 11 year old. Dosing is higher than with adults as children clear the drug faster. The study should take about a year, so we'd expect data in 2009. We will also begin a PK study in younger children to the 6 year old. This should begin enrolling in Q3, but we expect slower enrollment with data expected in 2010.

Other development for CUBICIN this year includes progressing our work with renally impaired patients. We have a PK study underway in patients receiving hemodialysis or chronic ambulatory peritoneal dialysis. And after we get these results, most likely in the third quarter, we'll review them with FDA, and then prepare for a Phase IV safety and efficacy study in renally impaired patients with complicated skin infection.

An additional post-approval regulatory commitment is a study to examine CUBICIN as part of a combination therapy for infective endocarditis. Here, we'll compare the safety and efficacy of CUBICIN at 6 milligrams per kilogram with and without Gentamicin. This exploratory Phase II study should begin enrollment in the first half of the year.

Before I turn this back to Mike, a few words about CUBICIN outside of the US. We are pleased that in 2007 we completed the alliances that will make it possible for CUBICIN to become a global therapy. As we begin 2008, our partner in the EU, Novartis is well positioned with a broaden and differentiating label approved in September of 2007. To-date, sales in the EU have been below our expectations, and we're working with Novartis to achieve better results. We expect additional approvals this year in a number of countries in Central and South America, and several smaller countries in Asia.

Back to you, Mike.

Michael Bonney

Thanks, Rob. Before we open up the call for questions, I'll take you through some important milestones we've set for 2008. As I discussed earlier, we're targeting an IND filing for our Hepatitis C therapy candidate, IB657, as well as a second IND for a CDAD antibiotic candidate.

As Rob mentioned, we have a number of Phase IV and Phase II studies moving forward for CUBICIN. Based on the previous PK study, we are initiating a safety and efficacy complicated skin study for 7 to 17 year old. We will also initiate a study of combination therapy for infected endocarditis.

Separately, we will finalize our additional research plans for additional studies of CUBICIN at higher doses such as 10 milligrams per kilogram. We expect to initiate a Phase II trial, likely in bactoremia this year. International approvals of CUBICIN will continue to come in over the course of 2008, and we'll stay active on the business development front.

It should be clear from our discussion this afternoon that we are committed to a pivotal year of activity across the Cubist organization. We'll continue to invest in the optimization of CUBICIN, both through the continued excellence of our execution commercially and the development of additional data in our Phase II and Phase IV work. We also will invest in long-term value creation by advancing at least two preclinical programs to IND filing this year. It will be a busy and accelerating leap year for all of us here at Cubist.

With that, let's open the lines up for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Tom Shrader with Rodman & Renshaw. Please proceed with your question.

Tom Shrader - Rodman & Renshaw

Good afternoon.

Michael Bonney

Hey, Tom.

Tom Shrader - Rodman & Renshaw

I'm just wondering, it's a nice quarter, it's a nice increment. We're all bracing now for the dismal first quarter. Is there any chance that endocarditis is less seasonal, and especially because it can come from respiratory, could there be a little more glimmer of hope there? What is the data look like?

Michael Bonney

Tom, we always are hopeful. We wouldn't be in this business if we weren't. That said, if you look at the marketplace overall of IV antibiotics, what you do see is a flattening in Q1 of revenue. We think that perhaps it's magnified a little bit because of the differential mix in the first quarter relative to the rest of the year, we see more in pneumonia. But our guidance is consistent with what Rob said which is we should expect to see some softness in the first quarter.

Rob Perez

Tom, we had a phenomenal Q4. So I wouldn't say dismal Q1, but we did see in 2007 the same seasonal patterns despite the fact that we did have a label for bacteremia and endocarditis. So, that's why we are making sure that folks are aware of that.

Tom Shrader - Rodman & Renshaw

i meant from current expectations.

Rob Perez

I know, I know.

Tom Shrader - Rodman & Renshaw

And just one quick question, probably for David. With the pediatric trial, a pediatric extension gives you six months more patent license, is that right? And can you talk about the timing with respect to an ANDA filing, just how all that would work?

Michael Bonney

This is Mike, Tom. We are pursuing a path that we expect to ultimately lead to a pediatric extension. When that will occur will be dependent upon the rate at which we can execute these various commitments that we've made to the FDA in terms of -- an ANDA filing or a sNDA filing?

Tom Shrader - Rodman & Renshaw

No, I mean where does the ANDA process has to be for you to get an extension, obviously, if generic can't be approved, and then you get an extension. Once the ANDA for generic is filed, does that end the chance to get an extension?

Michael Bonney

No, it doesn't, because it would really be dependent upon the lawsuit that would result from us concerning our patents in the face of a generic filing. And it's really not until a generic is actually on the market that there would be an issue, if you will, with the pediatric extension.

Tom Shrader - Rodman & Renshaw

For the window to close for the pediatric extension, the generic has to be approved.

Michael Bonney

That's my understanding, yes, Tom.

Tom Shrader - Rodman & Renshaw

Okay, good. Thank you.

Operator

Thank you. Our next question comes from the line of Biren Amin with Stanford Group. Please proceed with your question.

Biren Amin - Stanford Group

Yeah, hi. Thanks for taking my question. I wanted to find out if guidance for 2008 takes into account any competitive entries? And if so, which? And also does US revenue guidance for CUBICIN, does that include any potential price increases for the year?

Rob Perez

Hey, Biren, it's Rob. As far as competitive entries, yes, we have assumed that competitors will enter the market. We're not going to give specifics on when we have that in our forecast. And the second part of your question was on price increases. As I think everyone knows we did take a price increase at the beginning of the year on January 1 of 8%. Other than that, we don't comment on future pricing until it happens.

Biren Amin - Stanford Group

Okay. And also, how does the company view the potential consideration by seeing that CMS to not reimburse for hospital-acquired infection?

Rob Perez

Well, you're seeing it as a very broad issue and it's really not that broad. There are certain subsets of infections that CMS was talking about. We think ultimately what that will lead to is a desire by the hospital community to deal with infections to develop as quickly as possible and to get patients up, so that they minimize their costs. So we don't see it as a huge threat. It should and appropriately in certain circumstances it may improve infection control, but we think that would be a good thing overall for both patients and for the hospitals.

Michael Bonney

I think the picture that's emerging, Biren, is that CUBICIN and the cost of using CUBICIN versus the total cost of using Vancomycin is very different in favor of CUBICIN. And as I mentioned in the call there are more and more studies coming out suggesting that the cost of failure with Vancomycin and the amount of time that a patient has to stay in the hospital in a real world setting, it makes Vancomycin more expensive.

So regardless of where the CMS comes out, I would imagine that hospitals would want to use the most effective therapy and the one that cost them the least overall.

Biren Amin - Stanford Group

Great, thanks.

Operator

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

Howard Liang - Leerink Swann

Thanks very much. Just regarding your topline revenue guidance, I think, Rob, you said the growth is accelerating. I think you showed the quarterly quarter-over-quarter growth. If I'm doing my math, I think for '08 over '07 you are projecting an increment of $85 million to $100 million. In '07 the growth was I think around $96 million.

I guess if your growth is accelerating, why is the range towards the lower end of that growth?

David McGirr

Well, we're not predicting faster growth and acceleration in 2008. I think what we are saying is that the business is very sound, it's very healthy, and we believe that revenues are going to come in where we suggested with guidance.

Howard Liang - Leerink Swann

Why are you not expecting acceleration of growth in '07/'08?

David McGirr

Whenever you are trying to predict the future, particularly in a marketplace where there's complex decision making as it occurs in the hospital around IV antibiotics, Howard, you want to be I think careful not to get out in front of yourself. We're very comfortable with the guidance that we've provided. We think it will show if we deliver within this range significant growth this year in the market and if the momentum that we have experienced in 2007 continues, who knows what will happen.

But we are very comfortable that given what we know about the future which, of course, is imperfect, the 370 to 385 is a very appropriate range for us to be shooting for this year.

Howard Liang - Leerink Swann

Okay, great. On the high dose trial, what was your goal for that trial, and so what's next for that --

Michael Bonney

Really, the intent of that trial was to assess the feasibility of a high dose short course of CUBICIN in complicated skin infections. And I'd say, based on what we've seen of the data, we have demonstrated that it is feasible to think about a shorter course of CUBICIN at a higher dose for the treatment of complicated skin.

We didn't see, as Rob mentioned, an increase in CPK beyond what we're seeing in the marketplace, and the efficacy results look pretty good, like you could actually get to a shorter dose. We have some optimization to do as we said in the scripted part of the call. We expect that we will learn more as we go through the data from this study. We also know that there is a lot of opinion leader interest in exploring higher doses of Daptomycin in more serious infections such as bacteremia, et cetera.

So, our cost guidance assumes that we will be initiating another study looking at higher doses of Daptomycin in 2008. We haven't made a final decision as to the nature of those trials at this point.

Howard Liang - Leerink Swann

Thank you very much.

Operator

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

Rachel McMinn - Cowen & Company

Thanks. Just to extend a little bit on Howard's question on the topline guidance, if we just take your fourth quarter number, apply the 8% price increase, and then annualize that. At the very worst, if there was absolutely no growth, you are talking about $362 million. So you just felt the low end of guidance. It means unless you are going to come to a screeching halt, which everything says that you shouldn't, but it just seems overly conservative. Am I thinking about it in a wrong way? Was there anything one-time in the fourth quarter that would make that number unrealistic to see again in the first quarter?

David McGirr

No, I think you get an A for you math, Rachael.

Rachel McMinn - Cowen & Company

Thank you.

David McGirr

I think, as I said in response to the previous question, really my thinking hasn't changed in a few minutes in between this. What we are predicting out into the future, there is a possibility that there will be additional competitors. We've built that into our forecast. We are, of course, stay very closely tuned to the regulatory developments there.

But we haven't faced new competitors historically and we don't know exactly what kind of impact the new competitor or most of the new competitors would have on the market. We think that given what we know about 2008 as we sit here on January 23rd the 370, 385 that only represents historic growth, but it represents a range that we're very comfortable with.

Rachel McMinn - Cowen & Company

Okay. And then, just I guess to press you on the expense side just here a little bit, maybe just starting with the sales and marketing expense. I am a little bit confused I guess why would be as low as that is. You haven't completed hiring. The $18.7 million that you spent in the fourth quarter should actually be higher than that as a run rate for the first quarter. It basically implies from there that you won't have any real growth in that first quarter numbers. Is that the way to think on this?

David McGirr

Yeah, we haven't completed hiring. We've made an awful lot of good progress on hiring. So the guidance insisted that we are pulled by the end of the first quarter and that we actually stay full for the balance of this year. There is a little bit of room in this range, if you will, to accommodate that, and we are very comfortable given our track record that we predicted very carefully what this total sales and marketing spend is going to be. Rob, do you have anything to add?

Rob Perez

No. I would just say that I think what you see is as we've talked about the sales force expansion, I think we are being disciplined about not adding cost throughout the sales and marketing department. We think that adding additional sales people is the right lever to be able to hit our guidance and that we don't need to go up significantly in the marketing and other areas.

Rachel McMinn - Cowen & Company

Okay. So I guess thinking about it throughout the year, whatever you come out with for 1Q should be your general kind of number that we should be thinking about for the rest of the year?

Michael Bonney

We didn't give the guidance quarterly. So I really don't know that we can guide in that range. We have given it to you on a yearly basis here.

David McGirr

And certainly, if one believe that we had completed all of the recruiting on January 1 and we are paying the extended sales organization for the full quarter, then what you said is true, if there was no other variability in our spend. But of course, there is variability in the spend because the non-personnel costs do vary over the course of the year.

Cost of attending the major infectious disease conference is as an example lumpy cost. They are not evenly distributed over the course of the year. So I would caution not only you Rachel but everyone who has a model not to just extrapolate the first quarter numbers on a straight-line basis into the full year. There will be lumpiness in sales and marketing. There always is.

Rachel McMinn - Cowen & Company

Yeah. I guess I'm just not getting. Maybe I'll just ask you offline, because I am not getting to numbers as low as your range of coming up with numbers that are higher than that because I am assuming that throughout the year you should actually have higher expenses. But maybe if I just ask you on the R&D side, the numbers are a little bit higher here. So, can you just remind me, I know you've given out very specific numbers, how much did you send in 2007 related to CUBICIN? Is there actual CUBICIN related expenses a major driver or you're feeling the IND spending that's driving most of the growth here?

David McGirr

Last year, Rachel, 60% of our R&D spend was directed towards CUBICIN. And we showed that we had R&D expense of $84 million. So that gives you the answer. This year roughly 45% of the expanded R&D spend will be on CUBICIN and 25% will be on the IND programs and 30% will be on all the other stuff we do in R&D.

Rachel McMinn - Cowen & Company

Okay. And then just last question for me. Mike, you mentioned that you didn't see elevations in the CPK beyond what we're seeing in the marketplace. Can you just expand on that because I would (inaudible) that the overall percentage of CPK elevation would be higher than what's in your registration trials at lower doses?

Michael Bonney

It's not really significant different, Rachel, at all. Remember that this is only a four days of therapy.

Rachel McMinn - Cowen & Company

Okay.

Michael Bonney

As opposed to what was in our registration trials, but the average duration of therapy was seven or eight days in the skin studies, and obviously substantially longer in bacteremia and endocarditis. So we've learned a lot over the toxicokinetics of this drug. And the models predicted that we wouldn't see a huge difference and in fact we didn't see a huge difference from what's been experienced in the marketplace where we've seen a previous clinical work.

Rachel McMinn - Cowen & Company

So what is it then that you need to further optimize? I guess I'm a little bit confused.

Rob Perez

I think one of the key issues is that in many infections and certainly in skin infections, as an example, that the way you really deal with those infections is you give the patient an antibiotic and you expose him to some steel. And you drain the abscesses, you excise necrotic tissue, et cetera. And if you have a very short course of antibiotics, the physicians have far less time to exercise the field part of that regimen.

So one of the things we want to look at is how do we optimize care with a shorter course of therapy not just optimize the antibiotic.

Rachel McMinn - Cowen & Company

I see. That's helpful. Thanks very much.

Operator

Thank you. Our next question comes from the line of Tom Russo with Robert W. Baird & Company. Please proceed with your question.

Tom Russo - Robert W. Baird & Company

Congrats on the strong quarter. I was just wondering if you could comment on either anecdotally or what you are seeing and hearing. Has there been any new rollout of tools within the hospital to distinguish MICs less than two, in other words to be able to see Vancomycin MIC if one versus just less than two?

Rob Perez

Well, the way that many hospitals view this is through Etest, and we have seen increases in Etest use. I mean hospitals can do this, but the issue has been their willingness and desire to look for an MIC, because it does take more work and more time. But what we are seeing increasingly is more hospitals putting actual protocols in place, and usually it's for bacteremia, but one more serious infection where they will put protocols in place that say, if you got a Vancomycin MIC greater than one, then you have act, and most often you have to act by switching the patient to CUBICIN.

So, we are seeing this in both small community hospitals, we are also seeing at large academic institutions. And it's one of the reasons why we are so bullish on the future because it is happening one by one.

Michael Bonney

I think what's embedded in that comment, Tom, is that more hospitals because of the growing database around the lack of efficacy or the questionable efficacy of Vancomycin with MICs of one or greater, more hospitals are actually ordering MIC90 test or using the Etest as a way to assess the MIC90.

Tom Russo - Robert W. Baird & Company

Okay. Thanks. And I'm also wondering how can you guys specifically leverage the pharmacoeconomic data that was presented at IDSA? Is that something that you can point to or talk about proactively?

Rob Perez

Well, it hasn't been published. The IDSA data have not been published yet. But it is from our Staph aureus bacteremia trial. So it's from our Phase III trial. So our assumption is that once it gets published, we will be able to use it.

Tom Russo - Robert W. Baird & Company

Okay. And lastly, could you comment at all on how we should think about future business development initiatives and whether you are kind of out there actively looking right in different areas? Thanks.

Michael Bonney

You should think about it as a key corporate priority for 2008 and for the foreseeable future. We are active in the marketplace currently. We are looking at broadly defined acute care therapeutics. We think our most highly leveragable capability is our development of regulatory and commercial expertise when decisions are made to initiate therapy, in or around the hospital.

As our outpatient numbers show, I think we're developing a very strong capability in that transition from inpatient to outpatient as well. So we have broadened our view, if you will, and we are looking at a broader range of acute care opportunities. As I say, it is a very, very high priority for the organization in 2008 to execute on this and to generate some leverage for those parts of the organization that we built over the last four, five years.

Tom Russo - Robert W. Baird & Company

Okay. Thanks a lot for answering the questions.

Michael Bonney

Thanks, Tom.

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. My questions for David. David, with respect to the money allocated to the R&D line for CUBICIN, how much of that is targeted at programs to grow the product versus just maintaining the product at the marketplace? And also, could you estimate what's you SFAS is, what your three charges for next year would be? And then, lastly, if you could provide us a little more color on typical rules of thumb with respect to the tax changes that you discusses in your prepared comments? Thanks.

David McGirr

The FAS 123(NYSE:R) number is on the guidance slide, and we're estimating it an around $12 million for 2008. So, a little ahead of where we came in this year at about $10.5 million.

On the CUBICIN spend, we've not given any more detail than 60% of the spend is going to be on CUBICIN. But what we do remind people is that it's a broad range of activities. It is the clinical trials of Phase IIs to Phase IVs. It is the clinical science liaison teams that we have in the field. It's a technical operations team who are working on improving the productivity of manufacturing. So, it is a broad range of activity. Every single part of that I believe is to enhance and optimize CUBICIN. So, I think its one bucket, but many different labels within that bucket.

Michael Bonney

Yeah, and I can follow-up that. Even though some of the work that we're doing won't result in a label absolutely next, all of that data helps to provide the infectious disease community with more information about CUBICIN and that's all going to be helpful down the road with helping people to determine where the products can be used.

David McGirr

Then on the tax, a significant piece to remember is that when you reverse a tax valuation allowance, you actually have a tax credit. And a tax is a negative number, and if you have a negative, negative number you have a positive number in that period. So get very screwy tax numbers.

Greg Wade - Pacific Growth

Great. And I guess what I'm looking for with respect to the R&D spend on the CUBICIN line is the product growing approximately $100 million per year, and you're investing roughly $50 million, $60 million a year. What point is the diminishing return on that investment, and I don't have any picture as to what sort of a fixed cost to manage the product and what's investing in growth to try to better understand that calculation?

David McGirr

Well, I think one of the things you have to keep in mind that we're obviously acutely aware of how much investment we make on CUBICIN and what kind of return we think we can generate on that. But I think one thing to keep in mind is that a great deal of the work we'll be undertaking in 2008 is a regulatory commitment.

So you can think of them as further investments, try and grow it, and we're trying to design those and get to agreeing with the FDA in ways that we think will provide important information to the clinical community. But it's also frankly cost of doing business. In fact, that we have this drug approved for both skin and bacteremia right-sided endocarditis carries with it a commitment to further understand how it works in kid, how it works in patients on various types of dialysis, and how it works in combination in bacteremia and endocarditis. And those are significant portions of the total spend on CUBICIN in 2008.

Greg Wade - Pacific Growth

Lastly, one last question. With respect to the European efforts and environment, I'm sure you don't want to comment on what Novartis might not be doing right. But would you comment on the European environment for MRSA related drugs and whether you would anticipate any changes that would make that environment more favorable here in the near or mid-term? And thanks for taking my question.

Rob Perez

Well, the European environment for MRSA drugs certainly is different. It's a very kind of regional phenomenon. In some markets the MRSA rates are similar to the US; in some markets the MRSA rates are very, very small. But I think that the thing to look for in going forward with Novartis is that you have to keep in mind that they're still launching really in some markets. In some markets they are really just getting started, and they just got the Staph aureus bacteremia label in September of '07.

So I think the biggest difference to look forward to is them having a chance to really launch with a differentiated label that we had for a while longer.

Greg Wade - Pacific Growth

Thanks.

Operator

Thank you. Our next question comes from the line of Michael Yee with RBC Capital Markets. Please proceed with your question.

Michael Yee - RBC Capital Markets

Good afternoon. Michael Yee for Jason Kantor. Couple of questions. Those are pretty healthy price increase in the first quarter. How do you guys think about how much pricing power you had and could have? And when you go back and look at your sales, are you seeing a sort of sensitivity there because some of the feedback from some docs who don't use the drug is perhaps because of price?

Michael Bonney

Michael, we really don't talk about our pricing strategy going forward. We look at price often and make decisions on price that we think obviously is in the best interest of the business. But we really don't talk about our pricing strategy. Thus far we've been able to be fairly aggressive with pricing, and we haven't seen a lot of tradeoffs in demand. But that's about as far as I'll go.

Rob Perez

I just think it is fair to add that in 2007 some of our competitors were more aggressive than we were. A couple of the newer products in this marketplace took price increases in total 13% to 14% in 2007.

Michael Yee - RBC Capital Markets

In your first quarter, are you assuming that your price increase is more than offset your seasonal volume weakness? And then, when you think about your average daily sales, recently submission that this has been steadily growing over the past couple of months and they are coming out into Q1 above Q4.

David McGirr

In terms of average daily sales, sales did grow nicely in Q4, average daily sales, compared to Q3. Again, we haven't changed our view since we read the script regarding Q1. We do expect there will be softness. We've seen it every year. We see it in the market overall, not just in CUBICIN. As I said before, we think it maybe a bit magnified because of the inappropriate use of CUBICIN for pneumonia and the relative mix change that you see in Q1.

Michael Yee - RBC Capital Markets

Okay. Great, thanks.

Operator

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

Eun Yang - Jefferies & Company

Thanks very much. David, I know that you mentioned that it's hard to predict the tax rate going forward. But in '07 it was less than 5%. So I am just wondering if you can provide us some range for '08. And with that, what is the accumulated loss that you can carry-forward for tax credit going forward?

David McGirr

As I say, predicting our tax rate for 2008 and beyond will be tricky until we get through this period as defined by the rule. So, I really can't give you any help as to what number to think of which is why we suggested you maybe have to look at our pre-tax line. In terms of what drives all of NOLs that have being built up over the many, many years when we incurred expenses and didn't have any profits and you have to work those through the systems.

Eun Yang - Jefferies & Company

How much of NOL got into it? What's the level?

David McGirr

I haven't seen the final number yet because that will be published in the 10-K, but it will be somewhere around $380 million of NOLs, something of that order.

Eun Yang - Jefferies & Company

Okay. And next question is on the royalty from European sales. It seems to me the guidance kind of indicated is a slight increase, and so I'm just wondering what do you think of European, how the European sales will be growing, and whether it's growing slow than you anticipated?

David McGirr

Well, the short answer is yes. The sales are going slower than we anticipated. You got to keep in mind that we get paid in a couple of different ways on international sales. One is on a transfer price when the partner orders the product, if you will, and then there is a true-of following their sale of the product where we get our royalty. So that's one of the reasons why you can see kind of a choppiness in quarterly results internationally, because there are different times when the sale is kind of recognized.

But I mean the short answer to your first question is we'd like to see more sales internationally. We still have a great relationship with our partners at Novartis, and we're working together to see what we can do about growing those sales.

Eun Yang - Jefferies & Company

Did you breakout percentage of '08 guidance that came from the transfer price through Novartis?

David McGirr

No. We just gave you the overall number, the $5.3 million. It's just the aggregate of those two.

Eun Yang - Jefferies & Company

Okay, thanks.

Operator

Thank you. Our next question is from the Brian Lian of Oppenheimer. Please proceed with your question.

Brian Lian - Oppenheimer

Hi. Thanks for taking my question. Rob, can you give us an update on percent days of therapy data in the various indications?

Rob Perez

Percent days of therapy data. Do we have that? I don't think we have updated data on that, Brian. The most recent data we have, Brian, is from the first half of 2007. We don't get the second half of 2007 generally until the first quarter call. So in the first half of 2007, we were at about 45% or 46% of CUBICIN use was in skin. About 36% was in bacteremia and endocarditis, and then 18% was in osteomyelitis and other, and that was pretty evenly divided, if you will.

Brian Lian - Oppenheimer

We should -- the AMR data for the back half of '07 should be available in the next.

Rob Perez

Historically, what we have done is report on that in the first quarter call in April. That gives us chance to get that data and take a look at it and figure out. It's a fair amount of calculation that has to go on once you get the AMR data to figure this out.

Brian Lian - Oppenheimer

Okay. And then, in the outpatient versus inpatient breakdown, I know you had a slide showing growth in each of those. Do you have the actual numbers, the percent of each?

Rob Perez

Yeah. The outpatient for Q4 was approximately 44%, 45% of our overall business.

Brian Lian - Oppenheimer

Okay. And then, I am not sure if I missed it in the prepared comments or not, but is there any update on what you're hearing as far as Paragraph IV filings? Is there any, have any been filed or anything like that?

Rob Perez

No. This is something that we've committed to historically that we do believe that when we're notified and if we are notified of Paragraph IV filing, that would be material to Cubist shareholder. So we would announce that. The fact that we haven't announced, it means we haven't learned anything.

Brian Lian - Oppenheimer

Okay. Thanks a lot.

Operator

Thank you. We do have a final follow-up from the question of Eun Yang. Please proceed with your question.

Eun Yang - Jefferies & Company

Thanks. Just one last question. I think that you mentioned that you would complete the sales increased by the end of the first quarter this year. Can you tell us what the headcount would be at that point?

Rob Perez

Sure, there will be 164 sales representatives and then additional management and other field-based infrastructure. But the number will grow from 135 to 164.

Eun Yang - Jefferies & Company

Okay. So when you added more people into first quarter, where you're adding those people specifically?

Rob Perez

This is really throughout the country, Eun. We've run a model that helps us to determine the appropriate locations and then we place on there.

Eun Yang - Jefferies & Company

Okay. Thanks very much.

Rob Perez

Sure.

Operator

Thank you. Ladies and gentlemen, there are no further questions. Gentlemen, do you have any closing comments?

Michael Bonney

Only I'd like to thank everyone for joining us for today's call and remind you that we'll be having the same call to review our Q1 earnings on April 17th at 5 p. m. Thanks everybody.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Cubist Pharmaceuticals Q4 2007 Earnings Call Transcript
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