Executives
Michael Bonney - President and CEO
David McGirr - CFO
Rob Perez - COO
Steven Gilman - Chief Scientific Officer
Tamara Joseph - General Council
Analyst
Tom Shrader - Rodman
Greg Wade - Pacific Growth
Rachel McMinn - Cowen
Biren Amin - Stanford
Howard Liang - Leerink Swann
Kevin Degeeter - Oppenheimer
Alan Carr - Needham
Brian Scorney - SIG
Michael Wu - RBC Capital Markets
Steven Willey - Thomas Weisel Partners.
Matt Duffy - BDR Research
Cubist Pharmaceuticals Inc. (CBST) Q2 2008 Earnings Call July 17, 2008 5:00 PM ET
Operator
Welcome to the Cubist Pharmaceuticals Inc. second quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Michael Bonney, President and Chief Executive Officer for Cubist Pharmaceuticals. Thank you Mr. Bonney, you may begin.
Michael Bonney
Thanks, operator. Good afternoon everyone, and thank you for joining us. With me for the call today are Rob Perez, Cubist's Chief Operating Officer, David McGirr, Chief Financial Officer, and Tamara Joseph, GC, and Steven Gilman our Chief Scientific Officer who will be available for the Q&A period.
We will focus today on second quarter 2008 financial results and business developments. Before we begin, I will ask Tamara to read the Safe Harbor statement and describe the context for the use of non-GAAP financial measures.
Tamara Joseph
Thanks, Bonney. 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. 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 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 to Mike.
Michael Bonney
Thanks, Tamara. We've made tremendous progress this past quarter against both our strategic and financial goals. Here are the highlights of what we have accomplished in the three months since our call in April.
First, the in-licensing of the ecallantide for surgical indications from Dyax. This provides us with a Phase II clinical candidate in an area of high unmet medical need and an opportunity assuming approval to leverage our acute care commercial organization.
Second, an agreement with Astra Zeneca for Cubist to immediately assume responsibility for selling AZ's established carbapenem antibiotic MERREM I.V in U.S. hospitals. We delivered our first quarter with more than $100 million in revenues, and we've maintained profitability while making important additions and advances to our product pipeline.
We are executing well against our corporate strategy of building long term value by both optimizing CUBICIN, and building a clinical pipeline of additional acute care therapies. Our first quarter with more than $100 million in revenue was a milestone worth noting. Rob will provide further color on this result later in the call.
Based on the momentum we have seen in the U.S. here to date, we are raising our guidance for 2008 CUBICIN U.S. net product revenues to a range of $395 million to $405 million. We also are restating our CUBICIN will achieve peek U.S. sales in excess of $750 million annually. We believe the continued growth of CUBICIN along with the agreement with AstraZeneca will provide us the financial means to support advancing pipeline programs, while continuing to generate profits.
For some perspective and the progress we have made in the pipeline, I am putting up a slide showing what the Cubist pipeline looks like just one year ago. At that time, we had CUBICIN in the market and a very early stage pipeline with two antibiotic programs in early lead optimization; across that, what we have today.
We recently added MERREM I.V. in the U.S. worth roughly $20 million per year an additional revenue and immediately accretive, which leverage our best-in-class acute care organization.
Next, the ecallantide program for surgical indications. As announced earlier in this quarter, we have in-licensed this Phase II product candidate, ecallantide pipe for development and commercialization and surgical indications in North America and Europe.
The initial indication though is a therapy to prevent blood loss during cardiothoracic surgery or CTS. Each year in the US, more than 500,000 patients undergo on-pump CTS, which includes CABG, or coronary artery bypass graft, and heart valve replacement or repair procedures
During such procedures, when a patient's blood comes in contact with the artificial surface of the cardiopulmonary bypass machine and tubing, serious complications can result, including blood loss, and the systemic inflammatory response syndrome (SIRS), a whole body inflammatory state that compromises heart and lung function in already fragile patients.
The successful in-clinic development of this product can play an important role in reducing the need for transfusions, and ultimately help to produce better outcome for patients requiring on-pump cardiothoracic surgery and, potentially, other high risk surgeries.
We have already taken important steps to move this program forward since announcing the in-licensing in late April. We have met with investigators, who have been involved in earlier clinical trials for ecallantide for this indication. We consulted with opinion leaders in CTS to get their important input into the design of definitive dose-ranging phase II trial.
We believe this trial will provide us with the information needed to determine what dose to take into phase III. We plan to get the dose-ranging trial into the field by yearend this year. Our goal is to have and Phase II meeting with FDA as early in 2010 as we can.
Our success with in-licensing ecallantide for surgical indications demonstrates both our ability to continue to execute our strategy and the financial discipline, which restructure our business development transaction.
Next, I would like to quickly review our most advanced pre-clinical programs. We have a bit of horse race underway right now among the three most advance disease. Our objective is two INDs by yearend. We may decide to move our rapidly accelerating Gram-negative program into one of those two IND slots, so stay tuned.
Here the programs we are concentrating on for the two IND candidates. First, our Hepatitis C therapy candidate, which we now call CB-183872. This is the compound we acquired with the purchase of Illumigen Biosciences late last year.
To remind you, 872 is a protein therapeutic, which is a full human truncated derivative of oligoadenylate synthetase or OAS. It has demonstrated significant in vitro anti-viral activity against HCV and other RNA viruses.
Next, our C. difficile program that some of you know. CDAD is a severe disease caused by infection of the lower gastrointestinal tract by C. difficile and anaerobic spore-forming bacterium. CDAD rates and severity are increasing, due in part to the spread of a new strain of CDAD with increased variance. Cubist scientists have been working on antibiotic agents for the treatment of CDAD. We've discovered an extremely interesting lead molecule with treatment efficacy against this bacterium. Unlike other marketed agents for CDAD, this candidate is rapidly cidal, which could provide advantages in the treatment of infections caused by CDAD.
Our preclinical program for the treatment of multi drug resistant gram-negative bacteria also continues to progress rapidly. This is an area of high and growing unmet medical need, and there is very little development targeting this space today. Cubist scientists have been working on a novel proprietary IV administer gram-negative lipopeptide. The lead compound is demonstrated in enviable efficacy against important gram-negative pathogens including Pseudomonas, Acinetobacter and Klebsiella.
Both the CDAD and gram-negative programs represent work done by Cubist scientists. While we're excited about the potential achieving our first IND filings from internally developed programs, the most important aspects of these programs are the promising preclinical data developed to support nominations for leads taken into the clinic.
I'll now the turn the call over to David, who'll review financial results for the quarter and provide the full update to guidance for the year.
David McGirr
Thank you, Mike. We'll begin with the review of revenues. Total quarterly revenue of 101.8 million is up 46% from Q2, 2007. U.S. net product revenue of $99.4 million is a new quarterly high representing 46% growth over Q2, 2007, and is ahead of our internal forecast for Q2. International product revenue of $2 million is also slightly ahead of forecast, and up 63% from the Q2, 2007. Gross margin was 78.2% for Q2, an improvement over Q1.
A few observations on operating expenses. R&D at $45.2 million reflects our ongoing programs and the cost of around $90 million associated with the in-licensing of the Ecallantide program, of which $17.5 million comes from the up front of $50 million and the milestone payments of $2.5 million that we've discussed previously.
Sales and marketing at $22.2 million for the quarter includes the full costs of our very successful and expanded U.S. sales team. G&A at $10.5 million is in line with our expectations and reflects a very active period for business development. The other income line is at break even, reflecting the return we now have on our cash balance.
Cash and cash equivalents in investments at quarter end was $358 million, which gives us net cash of around $58 million, which is up $27 million from the end of Q1. GAAP net income of $1.6 million and diluted EPS of $0.03 per share reflect the one time charges associated with the Ecallantide.
Now, let's turn to the non-GAAP numbers. These are always important to review, and this quarter, adjust for the Ecallantide one-time payments in addition to the FAS 123R numbers. Non-GAAP pro forma net income is $21.2 million for Q2 and the EPS is $0.35 fully diluted, both are up 25% from Q2 2007.
Now, on to our guidance, updated guidance for 2008. Mike has already discussed the U.S. net product revenues for CUBICIN for which our guidance is increasing to a range of $395 million to $405 million. CUBICIN net international revenue increases to a range around $7 million. We are adding our line for MERREM.
In 2008 the revenues to Cubist are expected to be around $9 million, to reflect the start date of our selling activity, which is July 21. This next point is important for those of you who have financial models. Only $1.5 million of the $9 million is expected to be booked in Q3 2008, in accordance with GAAP, and the balance will be booked in Q4. This is a pattern that will be repeated over the four quarters of 2009.
The guidance for gross margin and COGS are not being changed. Operating expenses are now expected to be as follows. R&D narrows through a range of around a $135 million to reflect our plans for ecallantide and the progress we are making on our march to IND, which Mike reviewed earlier.
Sales and marketing increases through a range of $82 - $85 million, consistent with the increase in our revenue line. G&A now looks like it will come in a range of $41 million. The change here comes from the successful business development activity we have seen, which increases legal expenses and add support for new programs.
We have a new way of displaying cash [and debt]. This shows that we expect to end 2008 with around $410 million of cash, subject, of course, to additional success in our business development activities and other anticipated one-time events.
I will turn the call over to Rob.
Rob Perez
Thanks, David. As Mike discussed at the top of the call, it's been a very productive quarter for both the CUBICIN and this development front. Today, I'll highlight some very positive developments in the quarter for commercial operations.
First CUBICIN. We now estimate that more than 520,000 patients have been treated with CUBICIN in the U.S alone. The strong revenue performance in the U.S., a quarter-to-quarter increase in U.S net product revenues of 15.5% and growth versus Q2 a year ago of 46%, reflects the infectious disease communities acceptance of CUBICIN as an important anti-staph therapy. In the growing anti-staph market CUBICIN continued to see growth in share of days. And we believe we have seen an inflection point in the declining use of Vancomycin.
Looking at our share calculations on a monthly basis, you can see that, since January, Vancomycin has seen a steeper decline with a net loss over the period of just of over two points, virtually all of this occurring to CUBICIN. Additional data continue to emerge about poor clinical outcomes with Vancomycin at higher MIC90's.
In research published in the current issue of Antimicrobial Agents and Chemotherapy lead author Tom Lodise of the Albany College of Pharmacy concludes that patients with MRSA blood stream infections having Vancomycin MIC value greater than or equal to 1.5 milligrams per liter, respond poorly to Vancomycin, and that alternative anti MRSA therapies should be considered for these patients.
This could be a lower susceptibility breakpoint than the less than or equal to Q that the FDA has opted for Vancomycin on May 2nd. On the competitive front, we also saw some news this quarter regarding ZYVOX, the only other widely used gram positive competitor to Vancomycin. The FDA became aware of cases of fatal arrhythmias among patients who received ZYVOX in a Phase IV complicated skin trial. The agency considers these cases of atrial arrhythmias to be new safety information as defined by the FDA and the clinical trial will be conducted to assess the risk.
As Mike mentioned, we continue to be very comfortable with our projection of greater than $750 million in peak annual sale of CUBICIN in the U.S. alone. If and when new competitors overcome regulatory challenges and arrive on the market, CUBICIN likely will have an advantage of more than five years of clinical experience along with a differentiated label and unique attributes.
Additionally, with added voices pointing to the deficiencies of vancomycin in a still growing market, it would not be surprising for new competition to accelerate the reduction in vancomycin’s use, creating a huge market opportunity for CUBICIN, as well as the new competitor.
Finally, we see no evidence of IND filing to challenge the CUBICIN patent is now more than 10 months since such a filing was possible. Should a filing come, we are well prepared to assert our patent, which we believe will provide very strong IP protection for CUBICIN till September of 2019.
Among the factors contributing to CUBIC IN’s growth is its acceptance for use in out-patient infusion setting. Growth in this setting outpaced the continued momentum in in-patients sales this quarter. Just to be clear about this relative growth though, we continue to see inpatients as our largest arena for growth. Here we are focusing both on driving faster second line use for skin infection, and on encouraging earlier use of CUBICIN for MRSA bacteremia.
Another opportunity area for our commercial team is ensuring that the correct 6 milligram per kilogram CUBICIN dosing is used for bacteremia and endocarditis. We are getting more use here, but continue to see some evidence of underdosing in our market research.
We continue to invest in important research for CUBICIN use of higher doses and for specific patient population. We plan to initiate the high dose MRSA bacteremia trial later this year, comparing treatment with 10 milligrams per kilogram of CUBICIN versus treatment with vancomycin alone.
We continue to enroll patients in the prosthetic joint infection Phase II trial, which will evaluate treatment with CUBICIN at 6 and at 8 milligrams per kilogram versus standard of care therapy. Other trials underway are beginning this year, reflecting regulatory commitments are listed on the slide.
Outside the US, we see signs of progress. To provide some perspective on the EU launch, we have included a comparison of the results to-date of the launch of CUBICIN in the EU for the results of Zyvox IV at a similar point in its launch. As you can see the results are very similar, this chart shows cumulative end user sales in the top five European markets as measured by IMS.
Europe is a smaller potential market than the US, and results for both agents reflect that. Among the differences, are somewhat lower rates of MRSA as a percent of stuff, ranging from 20% to 45% across the European Union, versus greater than 50% incidences, we see in the US. There is also lesser impact in the EU, thus far, of community MRSA.
Novartis is currently selling CUBICIN in 18 major markets across the EU, and since getting the expanded label including blood stream infections last fall, it seems good growth in country such as Spain, Italy, the UK, Germany and Greece. In addition, Novartis has now secured regulatory approval for CUBICIN in some additional countries, and is planning to launch within the next 12 months in Turkey, Russia, Mexico, Brazil and Australia and New Zealand.
This month, Novartis filed data with the EMEA in support of an alternative [2 ml] injection for CUBICIN. This alternative administration is desirable in European practice and may have some application in the U.S. as well. The estimate for an action date by the EMEA is September of 2009.
Earlier this month, as Mike referenced, we announced our agreement with AstraZeneca to handle hospital sales for their established broad spectrum antibiotic MERREM I.V. in the U.S. This is a terrific opportunity to immediately leverage our acute care field organization. When we increased the sales organization early this year, we took into consideration the possibility of this type of opportunity. With smaller territories and increased selling time in each institution, our clinical business managers can continue to support increasing demand for CUBICIN, while promoting the continued growth of MERREM I.V.
MERREM is a complementary therapy to CUBICIN and gets a large percentage of its use in infections caused by gram-negative pathogens such as intra-abdominal infection. We are pleased by the recognition of our best-in-class acute care commercial organization which this deal signals. Since we announced the AstraZeneca agreement, we have been asked if our business development work is now complete. The answer to that is no. We continue to see some room both financially and operationally for the addition of a late-stage or in-market program or two.
With that, I'll turn it back to Mike.
Michael Bonney
Thanks, Rob. Another quarter of outstanding performance for the Cubist organization right across the board. We have important work ahead of us in the back half of 2008, but based on accomplishments over the past three months, I think we can check out some of our 2008 milestones. We hit our first $100 million revenue quarter. We've opened sites on schedule for the dual therapy, endocranitis Phase II study. Our marketing partner Novartis has received additional regulatory approvals in South American and elsewhere, and we've grown our late stage pipeline dramatically by bringing in the Phase II stage ecallantide for surgical indications, and have leveraged our commercial infrastructure by obtaining the rights of MERREM I.V. in the US. We are making great progress against our goals for the short and long-term, and at a challenging time in the capital markets, Cubist is very well-positioned. We continue to success in our growth as an acute care focused bio-pharmaceutical company.
Operator, I'd now like to open the lines up for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from the line of Tom Shrader with Rodman. Please go ahead.
Tom Shrader - Rodman
Good afternoon. You hear me right? Hello?.
Operator
Yes, Mr. Shrader you're live.
Tom Shrader - Rodman
Yeah, but I don't think they can hear me. I don’t think they can hear you. Good afternoon.
Operator
Excuse me, Mr. Bonney. Can you hear me?
Michael Bonney
I can hear you. We are having some technical difficulties and are not able to hear any questions at this point. If you hang with us for just a minute, we are trying to clear this out.
Tom Shrader - Rodman
Can you hear me now, Mike?
Michael Bonney
Yeah, this is Mike Bonney, we are not hearing any questions on the line.
Operator
Can you hear me now, Mike?
Michael Bonney
I can hear you, I can’t hear Tom. So I am wondering if we can get a little bit more color on the MERREM opportunity, you keep mentioning $20 million. I think it’s about a $150 million drug in the US, growing pretty healthily. Is this – is that all accessible to you, or is the royalty all accessible to you? How do we think about this? Is this $20 million p.a. or just what can you say?
Rob Perez
Sure, Tom, this is Rob. Essentially, it is a $20 million negotiated fee to meet a pre-specified forecast. So that number can go up or down, based on whether we exceed or don't meet the forecast. We have not said what the incentives are above $20 million, but that just gives you some sense. So, where we are essentially paid a fee to deliver the forecast for MERREM, and we have incentives in place to be able to exceed that forecast, and penalties if we were not able to meet the forecast.
Tom Shrader - Rodman
And is that pegged to sales from the current level? Is that how we should think about it?
Rob Perez
Yes. It’s pegged based on its current growth rate and expectations of what's happening in the market place as well.
Tom Shrader - Rodman
Okay. And just on another front, what's the MERREM [IP state] like. How much is left on those patents, and what patents protect it?
Michael Bonney
It does have a composition in matter of patents that expires in 2010, I believe. June of 2010, if I'm not mistaken. So that would give you an idea. I could tell you also that carbapenems have been historically rather difficult to make.
Tom Shrader - Rodman
Right.
Michael Bonney
So that's the patents [state].
Rob Perez
I think one of the reasons that question comes up, Tom, is because there are a lot of patents listed in the Orange Book for MERREM at this stage, and that's a legacy of a change in the FDA requirements that occurred in 1997, and I'm not quoting from the FDA. All applications for drugs that contain an antibiotic that was subject to any marketing application received by the [secretary] on or before November 20th '97 were exempt from the patent-listing patent certification and exclusivity provisions in section 505. So there is an intact enforceable composition of matter patents. It's just that MERREM was approved before the requirement in antibiotics list in the Orange Book was put into place.
Tom Shrader - Rodman
Okay, and then just one quick question. I was struck by one of your bar graphs. It looks like all of your seasonality is in your outpatient use. Is that real, or is that just for the three bars you just showed in the graph? Really it's pretty striking in the slides you showed.
Michael Bonney
I don't think all of it is in the outpatient. I think what you see is that the skin business tends to be softer in the winter months and larger in the summer months, and because of that, the outpatient is a little more dear to skin. So, it's probably that phenomena is being reflected in the outpatient versus inpatient seasonality.
Tom Shrader - Rodman
Okay. Yeah, there it is. Okay, thanks a lot, guys.
Operator
Thank you. Our next question comes from Greg Wade with Pacific Growth. Please go ahead.
Greg Wade - Pacific Growth
Good afternoon. Congratulations on a great quarter.
Michael Bonney
Thanks Greg.
Greg Wade - Pacific Growth
Rob, I was just wondering if you might be able to go through with some of the observations that you may have made with respect to ordering pattern within the various institutions, and whether you've got any relationship between those that you are aware of doing more aggressive MIC testing for vancomycin versus lest what that might say for the potential growth of the product?
Rob Perez
Sure, Greg. We definitely see that when institutions take a closer look at the vancomycin use, that tends to reduce vancomycin use and increase use of CUBICIN and other agents. In some instances, the way they take the closer look is through increased MIC testing, and what means is, they still do susceptibility testing previously, but now they're increasingly getting an actual MIC to vancomycin, which helps them to signal when they want to either switch off vancomycin, or even use another agent first line.
So, in other instances they take a closer look by putting protocols in place. That determines in what type of patients they are going to use vancomycin, and in what type of patients they are not. So, overall, we are seeing institution increasingly looking at the vancomycin use, and as mentioned in the call, we're starting to see, I think, the early days of the decline of vancomycin. We are really starting to see some changes occurring one by one.
Greg Wade - Pacific Growth
But what number of institutions would you estimate that, on a standard basis, are in the new category for more aggressive testings?
Rob Perez
Yes, I don't really have that, Greg. I don't really know. It's still not the majority, by any means. It's still sporadic, but it's enough to make a difference.
Greg Wade - Pacific Growth
And then, a couple of quick questions for David. David, I just wonder if you might review for us the metric, what's going into the other income line, obviously a big decrease from last quarter. Are you using a little bit less aggressive cash management approaches that reduce your interest income? And if you could just sort of go through, from your forecasting perspective, where are you guys were at the beginning of the year, when you were just projecting 3% unit growth off of the fourth quarter, where the year looks like it's going to turnout and where the forecasting for the [ledger is spread] Thanks.
David McGirr
Well, the interest income is, I think we've all noticed interest rate have come down a fraction, the ability for us who are on the healthy spreads. We were running over the 2.25% of bond processes largely gone, but, and you can see by the break-even, we are basically washing our face, what we are paying in interest, what we earned in interest. So, that's the difference there.
We don't know obviously what the future for interest rates hold, but we are at pretty comfortable position that we just level at the moment. In terms of our forecasting, I think our forecasting is great. When we exceed forecast, I regard that as though, of course, the variance and not a bad place to be. So, I'm not concerned about our forecasting at all.
Michael Bonney
I think the key issue here, Greg, is that the inflection point of vancomycin is not something that we expect to see as dramatically, I guess, as we are seeing, and as it illustrated by the monthly share charts. I think that's been a little bit more aggressive this year than what we had anticipated at the beginning of the year.
Greg Wade - Pacific Growth
Right. And then just lastly I mean you haven't taken up your expectations for peak sales, so as, you're just, you 're just expecting to get there quicker, or Vancomycin does go by the wayside. Wouldn't it be a higher number than the 750 that you're now projecting? And then, thank you.
David McGirr
Certainly, our number of in excess of 750, as we said many times, is still an unclear assumption, and is not overly aggressive in my view, in terms of the share that would be necessary in this marketplace in order for us to achieve. So if we do see continued erosion in Vancomycin, then one could imagine that there might be a greater opportunity for daptomycin as well.
Greg Wade - Pacific Growth
Thanks very much.
Operator
Thank you. Our next question comes from the line of Rachel McMinn with Cowen. Please go ahead.
Rachel McMinn - Cowen
Thanks very much. I wanted to ask a couple of financial questions. I guess, it's on the MERREM here, David. You said that we're going to see just a little bit of revenue from MERREM in 3Q, but then a lot in 4Q. So when we try to replicate that for quarterly estimates in '09, is it just -- is it every other quarter, or how should we think about that?
David McGirr
No, if I was modeling this and you are modeling this 20 million, I would model 1.5, 1.5, 1.5, 15.5.
Rachel McMinn - Cowen
Oh, I see. Okay, all right. That's very helpful. And then, in terms of operating profits from MERREM, is it literally, all of that 20 million coming down to the bottom line, or is there extra marketing expenses that are going to be buried in the selling and marketing line?
Michael Bonney
Very little extra marketing expenses here, very little.
Rachel McMinn - Cowen
Okay.
Michael Bonney
We'll put this right back into our commercial organization.
Rachel McMinn - Cowen
Okay. That's very helpful. And, I guess when we think about new business development efforts as you mentioned, there could be one, there could be two. Should we be thinking about more MERREM like deals, where you can find kind of niche products that you can layer into the bag?
Michael Bonney
Yeah, I think we do think that. We have an exceptionally capable and talented commercial organization and they actually can walk to town and maybe even skip rope at the same time. So, we do think that there is room. It's, of course, product dependent and call point dependent, but we do think there is room for more in-marketed products within our current commercial organization.
Rachel McMinn - Cowen
I guess, what I mean, if it makes sense, is that they can do more than just two products and more. Say from, strategically, is that really the direction that we should be thinking about? Is it peaking, or is it more the direction of the Dyax sale?
Michael Bonney
Well, what we are trying to communicate, Rachel, was that we're interested in both, and by leveraging the commercial infrastructure, we actually create some financial capacity to handle the operational expenses of some late stage, some additional late stage assets
Rachel McMinn - Cowen
Okay. That’s very helpful. And then in terms of R&D for this year, can you talk a little bit, and not even just this, you get, but overall for the Dyax program? I am trying to understand how much of the R&D for this year is really is going towards that program, and then when you get to that end of phase II meeting, maybe you can just walk through the milestones? You mentioned something about year end, but then end of phase II meeting in 2010, and then just like what are phase II program will cost, if we're assuming success in our model, how should be thinking about the extent line?
Michael Bonney
Well, just advance of this year, we said earlier that we were expecting to book about $30 million of expenses for Ecallantide of which 17.5 was booked, plus a little bit more than that in Q2, though we still have some ways to go. Now whether we actually spend all of that because of the timing of when we'll feel the new phase II trials is not clear, but it probably won't exceed that type of number, Rachel.
Rachel McMinn - Cowen
Okay, that’s helpful. And then, in phase II, the program presumably would be significantly more than the 30 minus 17.5?
Michael Bonney
Well it is likely, in total, it would be more than that. One would envision that a Phase III program would entail more patience than Phase II, but the other aspect that one has to think of, and I think it is premature for clarity, is over what period of time would approval occur of the patients in the Phase III program. So the individual hit in a individual year may be similar, maybe something less, maybe something more, depending upon approval rate for Phase III
Rachel McMinn - Cowen
I see. Okay. And one last question, just on the Auction Rate Security. How should we think about that, where there is additional write-down for this quarter?
David McGir
There was slight movement in the evaluation, but not a lot in this period. So we are pretty well carrying them, same as the way we had them in the last quarter. We are still getting, they are still fully performing. We are getting interest on all $58 million.
Rachel McMinn - Cowen
Okay, so how do we think about that, I guess that particular $58 million, can't get back, does that eventually kind of comes back in, you are just writing it down for fair value?
David McGir
Yeah, it's written down on the balance sheet, and that's reflective when I gave you the $358 million number for cash and investment, that includes the written down value of ARS.
Rachel McMinn - Cowen
Okay. Thank you very much.
Operator
Thank you. Your next question comes from the line of Biren Amin with Stanford Group.
Biren Amin - Stanford
Yeah, Hi. Thanks for taking my questions. I guess this question is for Mike. I noticed on clinical trials that Phase II Kalahari trials was recently terminated. And the explanation given is experience gained from the study to efficiently design and facilitate the follow-on study. So I was wondering if you might be able to share, I guess, or could you confirm the reason for this termination? And B, could you maybe share some of the results for some of the experiences that you have learnt from this trial?
Michael Bonney
Well, we do believe that the patients recruiting Kalahari 1 to date would provide us sufficient information once the database was cleaned, locked in, and the tables and listings are developed to help guide the design of the definitive Phase II dose-ranging study that we expect to field later this year.
We were a bit opportunistic here, quite candidly, and that the CRO that has been executing this trial announced a few weeks before we canceled this that they are going out of business. Then, we thought that was an opportune moment to shut this down and really start focusing on what the definitive Phase II dose-ranging study will look like. So we're in the process now of transferring the database to the appropriate people and getting the data cleaned and locked, so that we can learn what we can from the Kalahari 1.
Biren Amin - Stanford
And can you confirm if all 150 patients were enrolled in the trial? And if they weren't, then how many were enrolled?
Michael Bonney
No, the study did not fully accrue and I don't remember off the top of my head, but we think we have enough. I think we have enough that, enough patients accrued in the study at the various dose groups, so to be able to learn something from it.
Biren Amin - Stanford
All right, great, thank you.
Operator
Thank you. Our next question comes from Howard Liang with Leerink Swann. Please go ahead.
Howard Liang - Leerink Swann
Thanks very much. Just a follow-up on the previous question, just on the spending side. So the remaining spending for CDA I think was about $12 million or so. So that since I think you shut down the on-going trial, should we assume for the dose-ranging study that will be started. So if you don't like to start, have a start up date now, there will be no spending for the remainder of the year?
Rob Perez
Well, this Rob Perez, let's be careful about the language. Here you start spending when you start engaging, probably just as we already have on the design and the study, and you start the contracting process and so forth. So, it is not quite as binary as you make that time, Howard.
Howard Liang - Leerink Swann
Okay
Michael Bonney
I do expect that they will be spending this year. How much spending there will be, depends upon how quickly we can get the study designed and negotiate the contracts with the institutions that will just pay extra to group patients.
David McGirr
And I just add, Howard, remember in the guidance we used to have $130 million to $140 million for R&D spend for 2008. We just tightened that to around $135 million. I think that will help your model.
Howard Liang - Leerink Swann
Okay. And I guess, also I would like to get a sense of what you will be spending for that program in 2009, just the Phase II portion of that?
Michael Bonney
We will provide our guidance, as we had historically, in January at our yearend conference call for what our cost base will look like in 2009, Howard.
Howard Liang - Leerink Swann
I guess, can I ask you, from the top, down from your venture point, Mike, when you do these deals, if your goal to have a net positive economy, however neutral when you do, when you look at MERREM plus the Dyax deal is that, should we think about that way that you’re not increasing the spending overall?
Michael Bonney
The way we think about it is that MERREM helps offset the cost of adding to our pipeline, no question about it, but it is not always priced as a one to one. The way to think about it is, we have a couple of, I think, strategic objectives that we are trying to execute with this series of business development deals. One is to add to our pipeline and the other is to ensure that we are able to continue to grow profit. So, that’s how we’re trying to go about this over a long-term period is that we generate, not incremental gross margin, that we can build the pipeline and grow profit.
Howard Liang - Leerink Swann
Okay. Thanks very much
Operator
Our next question comes from the line of Kevin Degeeter with Oppenheimer. Please go ahead.
Kevin Degeeter - Oppenheimer
Hey, good afternoon, guys. Most of my questions have been answered. I guess, maybe, just one housekeeping item. You mentioned the gram-negative program moving a little faster towards IND, still on track for two IND files this year. Of the other two programs, which would seem to be the stronger candidate here, how do I handicap the three moving into the clinic in the next 12 months or so?
Michael Bonney
I am going to move that over to Steve to answer.
Steve Gilman
Well, I think they are all exciting candidates and we are just trying to sort out which, logistically, we have the best opportunities to take advantage of the IND filing and get all the paper work we need to done. These are complicated filings. And so, I don’t really rank them in that way. I rank them all as great opportunities, and it is really a matter of kinetics right now, who is going to win the race in this year.
Kevin Degeeter - Oppenheimer
And, just once again, is a housekeeping item. And in your guidance for 2008, do we assume some manufacturing for Phase I studies for one for multiple program or are we kind of just doing the enabling work in the manufacturing to be in ‘09?
Michael Bonney
We are gearing our manufacturing as well; so that once the INDs are filed that we can move into Phase I studies assuming those INDs are not commented on by the FDA.
Kevin Degeeter - Oppenheimer
Sure, terrific. And one last question, if I may, just the ongoing question with regard to more kind of fully taxed basis, what is the current thinking on taxes here, and when is there any kind of evolution in your audit with outlook.
Michael Bonney
No, we continue to have those active debates with TWC and it is a quarterly discussion as to whether this is the time to be thinking about reversing the valuation allowance. We obviously decided it wasn’t appropriate Q2, and there is no said time, but at some point we will reverse that. We just don’t have a said time.
Kevin Degeeter - Oppenheimer
Thanks so much, guys. Great quarter.
Michael Bonney
Thank you.
Operator
Thank you. Our next question comes from the line of Alan Carr with Needham. Please go ahead.
Alan Carr - Needham
Hi, good afternoon, everyone.
Michael Bonney
Hi.
Alan Carr - Needham
I wonder if you could give us perhaps some more details on how things are going in Europe? What's your assessment there? What sort of trials do you think are remaining here to try those sales up over there?
Rob Perez
Well, I think, Alan, what we have tried to show today in the call is that it is still very early in the EU launch of CUBICIN. And the -- they have -- as we said before, Novartis had the challenge of launching right at the time when they were acquiring Chiron, which may be launched early and kind of complicated. And they really only got the staphylococcus aureus bacteremia label last fall.
So they are in a very early stage of the launch, but the good news is they are seeing some momentum and this is a country-by-country launch, and as they start adding more markets, and getting more established in the markets they are getting more and more comfortable with CUBIC IN’s success. So, they are getting more encouraged, as are we, that this product is going to have a kind of similar growth curve as other successful I.V. products have been in Europe. So, so far we're getting encouraged. Novartis has maintained their view that this is a $150 to $200 million product end-user sales in the EU, just against early days.
Alan Carr - Needham
Is it launched in all major markets there? Are there still some countries that--
Rob Perez
By the end of last year, they had pricing approvals in the major markets and now they are going to the -- some of the -- somewhat smaller markets and are working through those as well.
Alan Carr - Needham
Okay. Thanks very much.
Operator
Thanks. Your next question comes from the line of Brian Scorney with SIG. Please go ahead.
Brian Scorney - SIG
Hi, good afternoon, guys. Congratulations on a great quarter. Just wondering, if you can go little more detail as far as the Ecallantide program and what we might start thinking about as far as Phase II, Phase III trail designs go? A mere FDA guidance would do right now, given the broad study, but do you think that this would be an opportunity to do this as a placebo control study, or do you anticipate non-inferiority in the lysine analog, or do you have to do a superiority for lysine analog? Would that just be on blood loss, or a secondary end point of mortality?
Michael Bonney
Yeah, it's all great questions and we are actually working through all of those issues right now with the family it is in, and so forth. I think, it's probably fair to say that it's likely to be a lysine analog plus, compared to lysine analogs alone. It is likely that at least in Phase II, we would have as a primary end point transfusion volume of some sort. Phase III, I think, it wouldn't, it's not, it doesn’t move us to speculate what Phase III will be until we actually have an opportunity to complete the Phase II and sit down with the FDA and see what our heads are supplying. And how we, probably, this is thinking about this as well, because it's clear, it's very clear that the well the [broad] study has raised some very important points. It's also very clear that the cardiothoracic surgery community is quite anxious to have an alternative equipment and this looks to be the best alternative that's available in any kind of a visible future. So there is some interesting dynamics here that will evolve as we get more data from a infinitive Phase II study.
Brian Scorney - SIG
Great. Thanks it's very helpful.
Operator
Thank you our next question comes from the line of Jason Kantor with RBC Capital Markets. Please go ahead.
Michael Wu - RBC Capital Markets
Hey, it's [Michael Wu] for Jason. Two questions, your growing cash balance you have set over $400 million at the end of the year. Can you kind of comment since you said you are pretty active in BD. But what you are thinking about in terms of in-licensing? And then, are you focused on late stage or early stage. I know you're surely focused on [getting to off] period. So what you are thinking there?
Michael Bonney
Yeah, we are focused more in late stage at this point. We do look at some early stage programs and we want to make sure we have a robust pipeline as our financial capacity grows. But our focus is rather set, and really the priority of in-marketed products and late stage products that would if successful leverage the commercial structure that is built in.
Michael Wu - RBC Capital Markets
Okay and then with that cash, are you are thinking that buying back more of the debt or is that just an opportunistic one-time...
Michael Bonney
David, why don’t you.
David McGir
Yeah, that was much in opportunistic trade when we saw the debts come down in the low 90's, then we could buy some back at a good price, and obviously take some share that are [in recent] calculation permanently. So having being opportunistic once, I wouldn’t rule out being opportunistic again, but the priority now is BD and building the pipeline, and building the company, but at times we may do that again.
Michael Wu - RBC Capital Markets
Okay thank you.
Operator
(Operator Instructions) our next question is from the line of Steven Willey with Thomas Weisel Partners. Please go ahead.
Steven Willey - Thomas Weisel Partners.
All my question have been answered. Thanks for that.
Michael Bonney
Thank you.
Operator
Thank you our next question from the line of Matt Duffy with BDR Research. Please go ahead.
Matt Duffy - BDR Research
Hi, thanks taking my question, nice quarter. Rob, I just want to ask you in terms of the MIC testing vancomycin, I think lots of it’s being done sort of manually by e-test. And now, whenever institutions that are interested in getting more specific in Vanco, what kind of timeframe do you think that might be, or in its is there development in the works to get some of the automated testing systems to look at more than just greater than or equal or two or one with Vanco.
Rob Perez
Yeah, there are changes occurring in the automated systems to get more specific MICs for vancomycin. One of them and it's not biotech, the other one. I was wrong, but one of them does currently offer an automated MIC. So, that is, I think, a potential driver, as one of the things we may see this year at [ACAC] is more and more institutions that all of a sudden are getting this kind of more specific MIC data for vancomycin and realizing that maybe they have a bigger problem than they thought, because they really weren't doing MIC testing previously. So, either through Etest or through automated systems providing MICs, it can provide institutions with insight into their vancomycin MIC distribution that they didn't have before. And usually when that happens they're surprised.
Matt Duffy - BDR Research
Okay. Thanks. And then, on the bacteremia trial, can you talk about the some of the entry criteria there and the exact end points you're using and how those have evolved if they have from the original endocarditis bacteremia trial?
Steve Gilman
That's, so just to be clear [Matty]. The study that we've initiated today is the combination study looking at daptomycin plus, or gentamicin and it's really designed to be a safety study. The entry criteria looked pretty similar to what they were in the original [SAVIE] study.
Matt Duffy - BDR Research
Okay. I was actually thinking about when you getting ready to start this quarter.
Steve Gilman
You are talking about the high dose endocarditis bacteremia trial?
Matt Duffy - BDR Research
High dose endocarditis bacteremia trial, yes.
Michael Bonney
So you want to add that.
Steve Gilman
Okay. That ones the, I don't have all the entry criteria in front of me Matt, but it is a CUBICIN at 10 milligrams per kilogram versus vancomycin. I know that they are continuing to work on getting that study launched and getting the protocol finalize. So, I don’t have in front of me that, but--
Matt Duffy - BDR Research
Do you know, if the dosing Vanco, are there specific drop levels across the trial?
Rob Perez
I assume that they will be – that there will be trough targets, and they will be consistent with the most aggressive use of vancomycin. And what we want to show is that CUBICIN at these higher doses is both safe, and then have some look compared to vancomycin, but predominantly we want show that 10 mg per kilogram used for a longer period of time is safe, that's the major reason for doing the trial.
Matt Duffy - BDR Research
Okay, thanks very much.
Operator
Thank you. There are no further question in the queue at this time. So, let's turn the floor back over to Mr. Bonney for any closing comments.
Michael Bonney
Thanks operator, and thank you all for joining us today. Mark your calendars for the third quarter call, which will take place on October 16th at 5 o'clock in the evening. Thanks very much and have a good evening. Take care.
Operator
Ladies and gentleman this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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