Cubist Pharmaceutical's Management Discusses Q3 2012 Results - Earnings Call Transcript

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Cubist Pharmaceuticals, Inc. (CBST) Q3 2012 Earnings Call October 18, 2012 5:00 PM ET

Executives

Eileen C. McIntyre - Senior Director of IR

Michael W. Bonney - CEO and Director

Michael Tomsicek – Deputy CFO

Robert J. Perez - President and COO

Steven C. Gilman - CSO and EVP of Research & Development

Analysts

Terence Flynn – Goldman Sachs

Steve Byrne - BofA Merrill Lynch

Eun K. Yang - Jefferies & Company, Inc.

Greg Wade - Wedbush

David Friedman – Morgan Stanley

Ken Cacciatore – Cowen & Co.

Chris Holterhoff – Oppenheimer

Howard Liang – Leerink Swan

Adnan S. Butt - RBC Capital Markets, LLC

Greg Wade - Wedbush

Operator

Good day. My name is Nicky and I will be your event manager today. At this time, I would like to welcome everyone to the third quarter earnings call. (Operator Instructions)

At this time, I would like to turn today’s program over to Eileen McIntyre. Eileen, you may begin.

Eileen McIntyre – Senior Director of IR

Good afternoon and thank you for joining us for our review of third quarter 2012 business performance and financial results for Cubist Pharmaceuticals. Before introducing our speakers, I will read the Safe Harbor Statement and describe the context for use of non-GAAP financial measures. Today’s presentation includes forward-looking statements relating to our business, including those set forth on this slide. We may also make forward-looking statements during the Q&A session following our prepared remarks. These statements are neither promises nor guarantees, and there are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in these forward-looking statements. These and other risk factors are described in the slide shown, and the risk factors section of our most recent quarterly report on form 10-Q filed with the SEC. Forward-looking statements are made as of today’s date and we do not undertake any obligation to update any forward-looking statements. We will also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Cubist’s operating performance. Please refer to the slide being shown regarding our use of non-GAAP financial measures, as well as additional slides on the Investor Relations page of our website, which contain the reconciliations between our non-GAAP financial measures and GAAP financial measures.

Speakers on today’s call will include Cubist’s CEO Mike Bonney, President and Chief Operating Officer Rob Perez, Chief Scientific Officer Steve Gilman and our Deputy Chief Financial Officer, Mike Tomsicek. Our CFO David McGirr, who has traveled to Scotland for a family wedding, will join us for the Q&A portion of today’s call. You will first hear from Mike Bonney. Mike?

Michael Bonney – CEO and Director

Thanks, Eileen. Before we review the specific results for the quarter, I’d like to provide some perspective. In June, we shared with you some aspirational goals for Cubist in the next five years. These goals provide a framework that motivates our employees to meet or exceed some challenging objectives we set for this year. Cubist’s building blocks of growth also guide our leaders across the organization in making decisions as new opportunities are discovered and as unexpected challenges confront us. As you might expect, in Q3, we’ve seen some of both, and the progress we continue to make reflects well on the strength of the organization we’ve built.

As you’ve seen in the release we issued this afternoon, we’ve delivered another strong quarter of topline growth for Cubist. Total net revenues were up 18% versus Q3 in 2011. Contributing to these results are a second consecutive quarter with more than 200 million in Cubicin U.S. net revenues, and another solid quarter for international Cubicin revenues. Continued progress with our relaunch of Entereg, profit sharing revenue of $3.5 million added to our base service revenue from Optimer, reflecting over performance versus revenue goals in the first-year sales period of our co-promote for the launch of Dificid.

Non-GAAP adjusted operating income is $77.7 million for Q3, which is up 9.2% from 71.2 million for Q3 of last year. Our GAAP operating income for Q3 is $70.4 million. Non-GAAP diluted EPS for Q3 is $.68 per share, and our GAAP fully-diluted EPS for Q3 is $.55 per share. As you will recall, during the year, we’ve raised both our revenue and operating income guidance. Today, we are bringing guidance for both total revenues and operating income to the top end of the higher ranges we’ve provided earlier this year.

Now Mike Tomsicek will take you through a more detailed financial report on the quarter, including our updated guidance for this year. Mike?

Michael Tomsicek – Deputy CFO

Thanks, Mike. I will start by providing perspective on our strong topline performance for the first nine months of 2012. First on Cubicin. We’ve continued to experience momentum for Cubicin, both in the United States and internationally. Cubicin U.S. net revenues for the first nine months of this year, at $593 million, are up 17% versus the first nine months of 2011. Also, international revenues received from our ex-U.S. Cubicin partners at $36 million for the first nine months of this year are up 39% versus the first nine months of 2011.

The first nine months of net revenues for Entereg this year, at $29 million, are up 24% compared with Adolor’s net product revenues for Entereg for the first nine months of last year, when Entereg was co-promoted by Adolor and GSK.

As you may recall, in Q2, we recorded a $500 million bonus from Optimer for the achievement of target revenues for Dificid for the first year’s sales period of a two-year agreement. In Q3, we booked an additional $3.5 million for the profit share we earned on sales exceeding the revenue target. This means that for the first year’s sales period, which ended July 31st, the total revenues Cubist turned were $23.8 million. We are very pleased with this financial result.

Rob will be providing more color on our Q3 revenue results in a few minutes. Now, turning to the expense side. Gross margins for Q3 were right where we expected, and are improved versus the prior two quarters. For the first nine months of the year, gross margins came in at 74%. As a reminder, the cost of goods we report also includes amortization of Entereg intangible assets to the tune of $4.6 million for Q3, and $13.8 million year-to-date. R&D costs for Q3 and year-to-date reflect a slower-than-planned initial ramp in site openings for our ongoing clinical trials for ceftolozane tazobactam, but are still around 50% higher spend than a year ago, due almost entirely to development activities. Steve will provide a fuller update on our late-stage clinical trials later in the call.

SG&A continues to track to plan, growing less than 10% year-to-date versus 2011, and providing impressive operating leverage. GAAP operating income for the first nine months of 2012, at $192 million, is up 115% versus last year, as the first nine months of 2011 included $85 million of contingent consideration expense, significantly higher than the current year, as a result of positive Phase 2 data in our ceftolozane tazobactam program received in Q2 of 2011.

GAAP EPS for the first nine months’ period is also up year-over-year, from $.41 per share to $1.59 per share. For the first nine months of this year, non-GAAP adjusted operating income is up $46.1 million to $220.3 million, or 26% versus the same period last year. Non-GAAP EPS has risen to $2.18 per share through September, versus $1.86 per share for the same period last year. Book tax is at a rate of 33% this quarter, and 28% for the first nine months of the year, as a result of a one-time state manufacturing tax benefit we recorded in Q2 of 2012. Book tax for the year is expected to be around 30%.

Having closed the third quarter, we have a good sense of how the whole year is shaping up. Based on that visibility, I will take you through our improved financial guidance for the year. As Mike mentioned, we are bringing total revenue guidance for 2012 to the top end of our previous range. Our total revenue guidance for 2012 is now a range of between $915 and 930 million. This change reflects the following updates to our product and service revenue guidance.

Our guidance for Cubicin U.S. net revenues is now tightened at the high end of our prior guidance, in a range of $800 million to 815 million. We are raising our guidance for Cubicin international revenues to a range of between $45 and 50 million. For Entereg, our updated guidance for 2012 net revenues is around $40 million, which is at the lower end of the range provided earlier in the year. For service and other revenues, our guidance remains at around $25 million.

For gross margin, we expect the full year to come in at around 75%, unchanged from the guidance we provided last quarter. Within the operating costs line, we are bringing R&D expense for the full year down to a range of between $265 and 275 million. Contingent consideration should come in at around $10 million as originally expected, and guidance for SG&A is around $170 million, at the midpoint of the range previously provided. As a result of these changes, for 2012 operating income we are raising guidance to a range of between $240 and 255 million.

For non-GAAP adjusted operating income, our guidance for the full year is now between $270 and 285 million. Finally, income expense increases to, other income expense increases to around $37 million in expense.

Now turning to convertible debt and cash. On October 16th, we issued a redemption notice for the $35 million outstanding principal amount of our 2013 convertible debt, which we will settle in cash. The terms of these bonds allowed us to call them at stock price threshold that we have now surpassed. We expect to complete execution of the bond redemption in November. As you’ll recall, the debt buyback we executed in Q2 had reduced the potential for dilution by 2.4 million shares, which now is reflected in the weighted average shares for Q3.

Once we complete execution of the current redemption, we expect to further reduce the potential for dilution by another 1.1 million shares. [inaudible] for the resulting cash, cash equivalents and investments guidance, we expect to end the year around $930 million, assuming no [inaudible] use of cash this quarter. The cash used to retire the debt is offset by a shift in payment timing for one contingent milestone payment from Q4 to early next year, as well as stronger-than-expected operating cash flows. For convertible debt, we now expect to end the year with a $450 million principal balance.

Summarizing these financials, we see Cubist is increasing revenues across three products in the U.S., and for Cubicin internationally as well. Growing margins continue to outstrip spending, even in light of our rapidly increasing Phase 3 development costs that advance our late stage [inaudible]. As a result, our profits and cash flow are strong, allowing us the opportunity to retire debt early at favorable rates, and reducing potential dilution while still leaving us in a solid position to execute strategic business development. All told, these are very positive results for 2012 through September.

Now Rob will provide some perspective on our operating results for the quarter. Rob?

Robert Perez – President and COO

Thanks, Mike. Q3 was another strong quarter in what is shaping up to be an excellent year for Cubist. As you’ve heard, year-to-date total net revenues are up 26% over this point in 2011, reflecting continued momentum in our business as we celebrate our nine year anniversary as a commercial team. U.S. Cubicin revenues are up 17% year-to-date, and year-to-date vial growth at 6.3%, in spite of an ever-increasing denominator, continues to outpace the vial growth we saw through three quarters of 2011, which was 5.9%. International revenues to Cubist are up 39% compared to the first three quarters of last year.

For the quarter, U.S. Cubicin net revenues increased 12% compared to Q3 2011. Vials sold increased by 1.3% versus a very strong Q3 last year. International revenues to Cubist increased 22% for the quarter versus the same quarter last year. Inpatient sales were a greater driver of growth this quarter than in the past, with inpatient net revenue growth of 15% versus Q3 last year, and outpatient growth of 7.8% versus Q3 2011. While it’s always good to see strength in our inpatient business, since a large majority of even our outpatient starts initiate in the hospital, this is a small snapshot in time and we don’t believe that it represents a shift in our business.

There are a couple of impressive drivers of the U.S. Cubicin business in the quarter, in addition to those I’ve spoken about previously. We grew share on a days of therapy basis for Cubicin in the latest rolling three-month period. This increase, from 13.3% for the three months ended in May, to 14.9% for the three months ended in August, is a larger gain than we’ve seen in recent history. It’s important to note that market share data is imprecise due to the many uses of anti-MRSA agents in areas where Cubicin cannot be used, and that some of this growth may have been fueled by sporadic shortages of Vancomycin this summer. That being said, it’s good to see that Cubicin continues to solidify its position as the leading Vancomycin alternative, and that sales growth can still be driven by market share gains in addition to price and market growth.

The changes in the way healthcare is delivered in the U.S. appear to be breaking in our direction, and our team is doing a terrific job of working with integrated networks and individual hospitals to help them understand the overall value that Cubicin can provide. I was able to attend all of our regional sales meetings recently, and continue to be impressed with our commercial organization. The dialogue that this team is having with our customers is in many cases different than what these customers experience with other pharma companies, large and small. This really sets Cubist apart as a company that understands that products must provide safety, efficacy and value in order to benefit patients and hospitals in today’s healthcare environment.

Now on to Entereg. We continue to gain traction on the Entereg re-launch, and we are starting to see some results from our increased targeting efforts that were initiated in Q3. Entereg sales in the quarter of $10 million were up 29% versus the Q3 2011 Entereg sales as reported by Adolor. These results reflect both continued uptake in the initial beachhead accounts, where we promoted Entereg in the initial six months of the re-launch, and some volume growth, though on a smaller base, in the newer opportunistic accounts added in Q3.

The Entereg call universe today, of just under 1,100 hospitals, represents more than 60% of the bowel resection market. In the newer accounts that we just added, almost 75% have now registered for the Entereg [inaudible] program, known as EASE, and just over half of the newer accounts have now ordered Entereg more than once. What we’ve seen in the institutions we added this quarter is consistent with what we reported on the beachhead account experience last quarter. Colorectal surgeons are enthusiastic about the benefits Entereg delivers, and in some cases are actively involved as we work to institutionalize adoption of Entereg for appropriate surgical procedures in a given hospital.

For general surgeons, who represent the majority of the potential for Entereg, Entereg’s benefits are appreciated but less top-of-mind. It takes more effort to engage them. However, the logistical barriers to getting their patients on Entereg therapy are being identified and overcome by our CBMs each and every day. The bottom line here is that our hospital sales professionals are quite enthusiastic about overall receptivity to Entereg. We will continue to drive toward our ultimate goal of $100 million in peak-year sales, while balancing our CBMs’ efforts here with their important work on Cubicin and Dificid.

I also want to take some time this evening to congratulate our commercial team for an outstanding job in contributing to the above-target revenue results for the launch year of Dificid. The profit sharing service revenues we booked in Q3, on top of the bonus booked last quarter, underscored the unique value of the acute care commercial organization we’ve built in the U.S. As you likely have heard, Optimer recently announced a strategic pricing initiative to facilitate greater patient access to Dificid in hospitals. This initiative will have no impact on Cubist’s service revenues from Optimer in 2012.

Our success to-date in the co-promote with Optimer, as well as the momentum we’ve seen thus far in the re-launch of Entereg, are important proof points about the leveragability of our U.S. acute care sales organization.

Finally, as you may have heard, we recently announced that we’ve appointed Patrick Vink to head up our international organization. Patrick comes to us with significant experience commercializing successful products and building organizations in Europe. He will be focused on preparing Cubist for an E.U. launch of ceftolozane tazobactam, assuming clinical and regulatory success. In the near term, he will also oversee our business development efforts in the E.U. as we look for potentially accretive assets that may allow us to fast forward our plans to build a commercial team in the major markets of Europe.

Now Steve will provide an update on our progress in the clinic. Steve?

Stephen Gilman – CSO and EVP of Research and Development

Thanks, Rob. Before getting into an update regarding our late stage development programs, I’d like to brief you on some progress on our radical cystectomy supplemental NDA filing for Entereg. We had a very positive pre-SNDA conference on September 12th with the FDA, and believe we have alignment with the agency on the submission package. We continue to expect to file the supplemental NDA by the end of 2012.

Turning to ceftolozane tazobactam, our IV antibiotic in Phase 3 for certain serious infections caused by gram-negative bacteria, we now expect to begin first patient dosing in the ventilator-associated bacterial pneumonia, or VABP trial, in the first half of next year, rather than by the end of this year. This shift in timing is designed to ensure that we have the drug supplies needed to accommodate the higher dose we will use for pulmonary patients. We will start these smaller, open-label VABP trials first, with the registration trial to begin a few months later.

As you will recall, we expect the registration trial to run about four years, although we should have data from the open-label trial available in 2014. With respect to the ongoing Phase 3 studies in complicated urinary tract infections, or CUTI, and complicated inter abdominal infections, or CIAI, we have continued to experience delays in opening clinical trial sites outside of the U.S., due primarily to unexpected local regulatory issues. As we mentioned in July, we instigated mitigation plans to limit potential timeline impacts of these slower-than-expected site openings. For example, we added an additional CRO to the program to add more than 40 additional sites to our CUTI trials, and about 25 additional sites to our CIAI trials. We expect these additional sites ultimately will contribute up to 200 patients to the trials.

The good news here is that our experience tells us that once approved and launched, our international sites are enrolling patients at or above our expected enrollment rates. Hence, the overall enrollment rate should be less of a concern once the sites are up and running. On their own, the continued international site delays we’ve encountered since July put some pressure on our original objective of filing an NDA by year-end 2013. However, there is some quite positive news from the FDA, which has the potential of lessening this timeline pressure. As you may have seen, in September, the FDA issued an updated draft guideline for registration trials in complicated inter abdominal infections. Our overall trial design for CIAI is consistent with the new draft guideline, as expected, given that we have extensive discussions with the agency on this protocol prior to beginning our Phase 3 program. However, we were quite pleased with one important change the FDA proposed. The new guideline indicates that a single trial in CIAI plus a single trial in another indication, such as CUTI, may support approval for both indications, rather than the more traditional replicate trials in each indication. If this is confirmed with the agency, we believe that we may be able to amend our overall submission plan for both CIAI and CUTI to enroll a smaller number of patients. After the draft guidance was distributed last month, we immediately initiated discussions with the FDA on this topic. If we can reach agreement with the agency, this could have an important positive impact on the timing of trial completion and NDA submission.

We expect to have completed discussions with the agency around amended protocols, with potentially smaller enrollment requirements, in early 2013, and at that point we will be able to provide a more detailed timeline update.

Another positive development concerning ceftolozane tazobactam is that we submitted to the FDA an application for QIDP, or qualified infectious disease product designation, under the GAIN Act. This designation, which we expect will be granted given the high medical need in gram-negative infections, would qualify ceftolozane tazobactam for priority review by the FDA, cutting four months from the normal NDA review timelines. Approved QIDPs are also given a five-year extension of [inaudible] exclusivity and are eligible for fast-track status. We expect to get a response from the agency on our QIDP application by the end of the year.

Briefly some updates on our two other late stage development programs. Our Phase 3 program to evaluate CB-315 for the treatment of [inaudible]-associated diarrhea is underway as we reported in July. We have also submitted a QIDP application for CB-315. Hereto, we’d expect a response from the agency by year-end, and anticipate that this product would also qualify for QIDP designation under the GAIN legislation.

As you may have seen, our CB-5945 safety trial in opioid-induced constipation was posted to clinical trials as of earlier this month. We expect the first patient in for this long-term safety study by the end of the year. This one-year safety trial is the rate-determining step to the program. The three shorter-in-duration Phase 3 efficacy studies are now scheduled to get underway in the first quarter of next year. Now back to Mike.

Michael Bonney – CEO and Director

Thanks, Steve. In addition to our strong financial performance through the first nine months of the year, we’re starting to tick off some of our non-financial milestones for the year as well. I can now report that we’ve entered into a supply agreement with a third [inaudible] provider for Cubicin. The technical transfer processes have now begun and we’d expect to incorporate this facility into our supply chain late next year.

To recap some of the highlights we’ve shared with you this evening, based on our results for the first nine months of the year, we’ve now moved our total revenue and income guidance for 2012 to the top end of the range as provided last quarter. We plan to redeem or expect holders to convert into cash the remainder of our 2013 convertible debt in the fourth quarter, and have updated our guidance for year-end cash and debt to reflect this. Based on positive news from a recently-released FDA draft guidance, we will be meeting with the agency concerning our proposed changes to our Phase 3 trial protocols for ongoing CUTI and CIAI Phase 3 trials for ceftolozane tazobactam. We should have an answer from the FDA by early next year, and will provide an update at that time on the clinical development and regulatory filing timeline for ceftolozane tazobactam. We have now filed QIDP applications for the FDA for both ceftolozane tazobactam and CB-315, and believe that both of these programs will qualify for incentives provided under legislation signed into law this summer.

As we now move confidently through the fourth quarter of the year, 2012 is shaping up as an important year of execution for Cubist across the board, setting the stage for important progress against our five-year building blocks of growth goals. Now Operator, let’s open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions).

And your first question comes from the line of Terrence Flynn – Goldman Sachs

Terrence Flynn – Goldman Sachs

Thanks for taking the questions. Congrats on a nice a nice quarter. Was just wondering if you could expand a little bit on the CXA delays I guess. Was wondering first on the drug supply issue for the VABP trial? Was wondering what led to, you know, what led to the push out on that front? Have you run into difficulties manufacturing? And then on the second front, with respect to the II and UTI front, was wondering if you can kind of frame for us the potential change in size of the trials if you do have – if post your discussions with FDA, what kind of a change would be in terms of patient enrolment? Thanks.

Michael Tomsicek – Deputy CFO

Sure Terrance. I’ll handle the drug supply part of this, and then Steve will talk to you a little bit about the implications of the new draft guidance, as we understand them today.

On the drug supply side, we did have a problem with a contract manufacturing organization filling some vials that were intended to be used for this trial. In our typical fashion, we believed that we’d need to have the vials in hand and cleared for use before we start enrolling patients in this trial, so we’re trying to be cognizant of the fact that we want to have a nice inventory in place before we actually enrolling patients in these trials. So, one of the worse things that can happen is you start a trial, and then you have to hit the pause button while you supply it. So we want to make sure we have plenty of vials to provide this trial. The issue was really a filling issue for the vials. The contract manufacturer wasn’t able to hit the targets on the fills, so those vials were no good and we’ll have to rerun the batches.

Steve, you want to talk about the guidance?

Steven C. Gilman – CSO and EVP of Research & Development

Yeah, well again, until we have those discussions I’m a little hesitant to give you quantitative numbers. But we do think that our proposal that we’re going to float, and we think will be accepted, will be to substantially reduce the number, and again I’d hate to give too much guidance. But, certainly hundreds of patients would seem to be in play here. And so, at his point that’s pretty much as far as I’d like to go, because I don’t want to mislead anybody, and we don’t know until we have those discussions with the agency. But it could be quite a substantial number of patients, and help the timeline quite a bit.

Michael Tomsicek – Deputy CFO

Recognize Terrance that our current program has two CUTI studies of essentially identical design two CIAI studies of essentially identical design. And the draft guidance indicates that in certain circumstances one of each would be sufficient.

Terrence Flynn – Goldman Sachs

Okay. And then I guess just a follow-up, I know you mentioned NDA filing timelines, but how about data release timelines? Are you still comfortable under either scenario with the second half ’13 data, or is that also – does that also have a potential to be pushed out?

Michael Tomsicek – Deputy CFO

I think it probably makes sense for us to wait until we’ve had the final conversations with the FDA before we reiterate that. Clearly we’re doing everything we can to accrue patients of high quality as quickly as we can into the trials, and will continue to do that. But until we know the actual ends, it’s pretty hard to predict when the data will be available.

Terrence Flynn – Goldman Sachs

Okay, thanks.

Operator

And your next question comes from the line of Steve Byrne – BofA Merrill Lynch.

Steve Byrne – BofA Merrill Lynch

Drill into the hospital market a little bit, following some of your remarks. I was just wondering whether you’re seeing some of your hospital customers get increased concern about MIC (Cre) with Vancomycin, and are they shifting that break-point down any?

Michael Tomsicek – Deputy CFO

Hi Steve, we’re really not seeing any change in the velocity of people looking at Vancomycin, and the issues with its MIC. I mean it’s a concern, the concern continues, but it’s not like we’ve seen a shift in it being more of a concern than it was a quarter ago or two quarters ago. I think it’s a steady challenge to the use of Vancomycin, I think the good news is CUBICIN continues to be seen as the alternative.

Steve Byrne – BofA Merrill Lynch

And then on another front, given the outlook for potentially increased scrutiny from Medicare on hospital readmissions, how do you think that might affect some of the market dynamics in treating MRSA? Just recalling last quarter you had talked about this phenomenon of ER to out-patient. Is that something that you might see increased?

Michael Tomsicek – Deputy CFO

We’re definitely seeing a tremendous amount of attention to things like readmission rates, and obviously length of stay. You know, when I speak about a value, a drugs impact on those metrics, increasingly are important and increasingly are part of the dialogue now with hospitals. And I think one of the things that we do well on that, that I think we’re kind of ahead of in terms of maybe the other companies is our ability to work with hospitals, to be able to look at the CUBICIN data and show them, you know, basically how the impact that CUBICIN can provide beyond just acquisition costs. So, I definitely think those kinds of things Steve, are as I said, breaking in our direction and they’re forcing hospitals to look at a holistic view of the drugs impact, not just at acquisition cost.

Steve Byrne – BofA Merrill Lynch

And then just one last one for you. The script trends for DIFICID have been fairly flat in recent months, what’s your view on how much of that is seasonality versus the potentially – the price that it was set at, and how does that affect your outlook for your own C-DIF drug?

Michael Tomsicek – Deputy CFO

Yes, so as far as the impact on DIFICID, I’m going to let Optimer comment on that, just because I think it’s more appropriate for them to comment on their drug. I think ultimately we still believe that the CDAD market is a robust one. We still believe in the 4 to 500 million dollar global peak year sales number for 315. The one thing I will say is hospital products do go through a kind of slow and steady cycles, and you do have quarters – even if you look back on the CUBICIN launch, there were quarters and even sometimes multiple quarters where sales eight accelerated or slowed down a little bit. So, these things are not necessarily unexpected, and it doesn’t necessarily say anything about the long-term prospects of the market.

Steve Byrne – BofA Merrill Lynch

Okay, thank you.

Operator

Okay, your next question comes from the line of Eun K. Yang – Jefferies & Company, Inc.

Eun K. Yang – Jefferies & Company, Inc.

I don’t know if you can share your view of what’s going on with the [inaudible]. Anything that you can share with us?

Michael Tomsicek – Deputy CFO

Well, I mean it’s part of the bag of tools that generic challengers have. There’s a 350 milligram vial that we produced for our international partners. So, you know, we weren’t terribly surprised that Hospira pulled this one out. It’s subject to the same patent challenges if you will and we are in the process of suing them on this one as well. And there will be a 30-month stay associated with that. But it’s just part of the bag of tricks there.

Eun K. Yang – Jefferies & Company, Inc.

Do you know what the dosing regimen and their application for Daptomycin use?

Michael Tomsicek – Deputy CFO

I’m sorry, in what application use?

Eun K. Yang – Jefferies & Company, Inc.

Dosing regimen. So in skin and soft tissue injection you have a [inaudible] once daily, and about [inaudible] and I’m just wondering if there was applied [inaudible] same dosing regimen or different?

Michael Tomsicek – Deputy CFO

So the way a generic filer works basically is, they rely on the innovators label to represent how the drug is to be used. And remember that part of our patent state here maps directly into the label with how you dose Daptomycin. So that is one of the patents that is the subject of this lawsuit. It’s actually two of the patents that are subject to this lawsuit.

Eun K. Yang – Jefferies & Company, Inc.

Yes, exactly yes. And then now that you started do CB-5945 trial, any update on partnership discussions?

Michael Tomsicek – Deputy CFO

Well, you know we’ve had a series of partnership discussions, they continue and we will be deliberate as we look for the appropriate both structure and partnership to optimize this asset.

Eun K. Yang – Jefferies & Company, Inc.

Okay, and then last questions is to Rob. I don’t know if you ever mentioned on the call earlier, did you mention the percentage of vial growth year-over-year for CUBISIN in the 3rd quarter, and growth and net adjustment?

Robert J. Perez – President and COO

So, vial growth year-to-date over year-to-day Eun was 6.3%. So that’s the first nine months of 2012 versus 2011. Quarter-over-quarter Q3 over Q3 was 1.3%. And gross to net adjustment was 13% for the quarter.

Eun K. Yang – Jefferies & Company, Inc.

Okay, so did you say that gross to net adjustment continue to go down quarter-over-quarter because it was down last quarter as well?

Michael Tomsicek – Deputy CFO

Eun, this is Mike. We don’t see decrease in gross to net as a continuing trend. There were a couple of one-time adjustment to gross to net. So it’s clear that it’s no longer accelerating as fast as it was.

Operator

And your next question comes from the line of Greg Wade.

Greg Wade – Wedbush

Thanks, the question if for Mike Bonney. Mike, I was just wondering if you could expand upon your plans for commercial presence in Europe. Is it your preference to buy a commercial infrastructure in a product there or build your own? What's the anticipated timing you see for setting something like that in place? And can you maybe just describe what the commercial infrastructure would look like in either setting? Thanks.

Michael W. Bonney - CEO and Director

We believe that if we were able to buy the appropriate, and I underscore appropriate commercial infrastructure in advance of the launch of ceftolozane/tazobactam assuming clinical and regulatory success that that could have the impact of accelerating the uptake of ceftolozane/tazobactam. But the key issue there is appropriate. We are not believers that just buying specialty or hospital based products and sales and marketing infrastructure necessarily results in that acceleration. So we're going to be quite discriminating on how good a fit it is.

Should that not be the case, that is to say that we're not able to buy it, we are fully prepared to build. Within Patrick's experience, within my experience, and Rob's, and some other people in the business, we have either done this or contributed to doing this historically. We feel very confident that what we've learned about marketing drugs in the U.S. while not 100% applicable is largely applicable to the environment that ceftolozane/tazobactam would launch in the E.U. And we're quite confident that we can build an effective organization. It is likely, but this is not a commitment that we would start with the largest markets. And then as we developed revenue to support the growth, we would expand to the smaller markets in the E.U. as well.

Greg Wade – Wedbush

What does the rate commercial footprint look like in Europe in order to address the hospital marketplace there?

Michael W. Bonney - CEO and Director

Yeah, it [inaudible]. I'm not going to put real hard stakes in the ground because Patrick needs a little bit more than a month on the job to get firm on this. But it's not too far off of what we've built in the U.S. so far. It could be in fact a little bit less than that. It will be structured similarly, but there will likely be some differences. And as we get closer to either the launch of ceftolozane/tazobactam or the build, we'll provide you more detail on that.

I think it is important to understand that if we end up in the build scenario, we won't start building in any kind of significant way until we've seen the data from the Phase 3 study. So we're not going to build at risk. We believe that we can most effectively manage the risk by holding off until we see those data and we have certainty around or at least closer to certainty around the approvability of the drug and how it would be positioned in the E.U. At which point, we'll be then starting to build that infrastructure. From seeing that data until an EMA approval is likely somewhere close to two years. And we think that's sufficient time to build a presence in those markets to launch this drug.

Greg Wade – Wedbush

I just trouble the other Mike, Mike Tomsicek, it looks like the gross margin in the quarter was a little ahead of expectations at 24% by my calculation. Did something go extra right in the quarter that we should not anticipate will continue through or am I just doing my math wrong? Thanks, Mike.

Michael Tomsicek – Deputy CFO

No, I wouldn’t say that. Generally, you see in later quarters where we have a little bit stronger U.S. [inaudible]. U.S. sales in later quarters are higher. That will bring the margins up because the U.S. sales percentage margins are higher than the international. But there are no unusual event. We did have a good quarter from a quality standpoint.

Greg Wade – Wedbush.

Thank you.

Operator

And your next question comes from the line of David Freidman.

David Freidman – Morgan Stanley

Hi, thanks for taking the question. We wanted to get if possible a little more clarity around some of the various permutations with CXA201. First, for the abdominal infections where you talked about basically leveraging a UTI study. Is it still that you would need two complicated UTI studies and then potentially one abdominal infection study? And or is it that you could do potentially one of each?

And then just a follow-up question around some of the numbers.

Steven C. Gilman – CSO and EVP of Research & Development

The guidance as written today and what we will discuss with the agency suggests that one trial in each of those two indications would be sufficient collectively to get approval in both of those indications.

David Freidman – Morgan Stanley

Okay, and given that you've started two studies in each, I just wonder how you're going to think though the issues of either having two smaller studies versus one larger one? And how small can you go in terms of your powering assumptions to still give you a good margin of comfort around having a positive outcome?

Steven C. Gilman – CSO and EVP of Research & Development

Yes, so let me just make sure we all understand that we're not going to risk powering assumptions to make the trial or quality to make the trial smaller. We'll make the trial smaller if those maps still show up that we have a good confidence, a good power. And those are conversations of course we have to have with the agency.

And the other point just to throw out to make sure that this all U.S. centric. We're not intending to have any impact on our approval ability power and the like in Europe.

So on the exact plan that we're going to put forward to the agency, I'd like to not sort of get into those details because frankly, there are other people in this area doing similar trials. And I would hate to tell them what we're trying to do, so it's a little bit of a competition or competitive stuff. We will certainly provide clarity once we get through the discussions and we have an agreement. But I think there's a little bit of a risk in us sort of tipping our hand to other people that are in the same area. So I apologize for that.

David Freidman – Morgan Stanley

Okay, that's, all right, and just one last question. You have four studies open. Do they have to be the same sizes? Meaning do the two UTI studies have to be the same size and the abdominal infection studies similarly? Or is having sort of discordance sized trials acceptable just conceptually?

Steven C. Gilman – CSO and EVP of Research & Development

I think they're conceptually either – any size makes sense conceptually. There are plenty of things you can do. You can pool them. You can look at them separately. You know, there's a variety of permutations you can take. Here and again, I'd rather not get into those at this point and time.

And just again to go back to what Mike said, just to remind people, we have two trials in UTI at 776 patients per trial. And two II's at 908 patients per trial. So we think we have some very significant amount numbers of patients that if we get the conclusion that we think we should base on the guidance from the agency that we ought to be able to have a material impact on the number of patients required.

David Freidman – Morgan Stanley

Great, thanks a lot.

Operator

And your next question comes from the line of Ken Cacciatore.

Ken Cacciatore – Cowen & Company

Hey, guys, thanks a lot. Just a quick question around the Hospira filing strategy. If for some reason they were able to secure an approval, does Teva's first to file blocked and block the ability for them to launch? Or I should say block the ability for them to get a final approval? Thanks.

Steven C. Gilman – CSO and EVP of Research & Development

So this is a more complex question than that which you have asked. First of all, we don’t know. The only person that can have first filer status is Teva. So the issue then becomes how much of 180 – you know, do they have an approved ANDA, which we have not seen any evidence of to date. They would have to have an approved ANDA in order to launch.

Then the question is one of size, of vial. A 500 milligram vial, if they got an approved ANDA with first filing status, they would have 180 days of exclusivity. If the patents were overturned, the 350 milligram vial and the 350 milligram was approved by the FDA, then it is possible that the 350 milligram vial could be launched without the 180-day delay.

Ken Cacciatore – Cowen & Company

Okay. Thank you.

Operator

And your next question comes from the line of Chris Holterhoff.

Chris Holterhoff – Oppenheimer

Hi, guys. Thanks. Most of my questions have been answered. Just one question on the P&L. I know, you know, R&D guidance was lower for the year and just kind of wondering if that’s only due to slower enrollment in some of these trials or was there something else larger going on? Thanks.

Robert J. Perez – President and COO

Really the answer to that, Chris, is slower in developmental. It is the slower trial that’s driving the slower cost there.

Chris Holterhoff – Oppenheimer

Okay. I appreciate the answer. Thanks a lot.

Operator

And your next question comes from the line of Howard Liang.

Howard Liang – Leerink Swan

Thanks very much. Just a follow up on the hypothetical situation of if Hospira were able to launch their 505B2 Product first. What, under your agreement with Teva, how did that affect Teva’s ability to launch their product?

Steven C. Gilman – CSO and EVP of Research & Development

There is nothing in our Teva agreement about a 350 milligram vial.

Howard Liang – Leerink Swan

Okay. And the – you said 350 milligram is the version that you supplied your international collaborators, so does that mean [inaudible] very similar to your U.S. product?

Steven C. Gilman – CSO and EVP of Research & Development

It’s exactly the same, it’s just less in a vial than what we fill a 500 milligram vial with.

Howard Liang – Leerink Swan

Okay, great.

Steven C. Gilman – CSO and EVP of Research and Development

Subject to all of the same patents that are already embedded in this lawsuit.

Howard Liang – Leerink Swan

Great. I think you mentioned that there’s a Vancomycin shortage. Can you talk about whether that had any impact on your CUBICIN sales in the quarter?

Steven C. Gilman – CSO and EVP of Research and Development

Not really, Howard. What we’ve seen in the past, and this happens sporadically and it’s happened over the last few years. When Vancomycin – some Vancomycin suppliers go into shortage, it doesn’t mean that the hospital can’t get Vancomycin, it means that there’s less of it available. And what tends to happen with the market is uses of Vancomycin that are not used – other branded agents aren’t used in that area, so you don’t see a one-to-one kind of move when Vancomycin’s not used and a branded product is used. Basically the market size comes down but you don’t really see an impact in terms of uptake – increased uptake of the branded products. So essentially a lot of the empiric and less restrictive use of Vancomycin gets reduced but it doesn’t really change how our product or really the other brands are used.

Howard Liang – Leerink Swan

Thanks very much.

Operator

And your next question comes from the line of Adnan Butt.

Adnan S. Butt - RBC Capital Markets, LLC

Hi, everybody. Thanks for taking my question. My first question on CUBICIN, I think I heard you correctly, the vial growth is a bit less this quarter even though sales growth is very robust versus prior quarters. Is that something – I’m trying to think about the CUBICIN market. Is it hospitalizations? Can you shed some light on that? And then secondly, the share of the [inaudible] injection versus other CUBICIN if you have that please?

Steven C. Gilman – CSO and EVP of Research and Development

Yeah, Adnan. First of all, the biogrowth of 1.3% really is not a concern. It really represents more kind of buying patterns of where the vials fall from quarter over quarter. But I think what you can say is that we, again, we tighten guidance to the high end of our range so that gives you a sense of our confidence in the business and the underlying demand. As far as the two-minute infusion, we don’t get data on how the product is used once it kind of leaves the distributor. So we really can’t tell you what percentage of use if happening with the two-minute infusion and whether that’s changing.

Adnan S. Butt - RBC Capital Markets, LLC

And then going forward, do you expect outpatient to be a driver for growth?

Steven C. Gilman – CSO and EVP of Research and Development

Asolutely. I mean, I think the increased inpatient growth this quarter, again, was more a function of kind of buying patterns that, you know, we’ve been taking price increases pretty consistently on the same dates and I think some of our more savvy outpatient customers, I think are predicting that a little bit. So I think that’s skewed some of the vial growth and inpatient-outpatient numbers. But overall, we feel very confident that the business is fundamentally in the same basin and fundamentally strong.

Adnan S. Butt - RBC Capital Markets, LLC

Sure, thanks. And if I could ask a pipeline question. In terms of two-to-one, there were a bunch of question that were asked, I guess my question is when exactly do you expect to hear back from the FDA about trial design. And secondly, would you repeat back from Europe as well before you can decide how to change the trial? And lastly, was there anything you built into the trials so there’s an [inaudible] and you could upsize that for powering if needed?

Steven C. Gilman – CSO and EVP of Research and Development

So as I said, we expect to have the conversations with the agency completed by first quarter of next year. Obviously if that happens more quickly we can [inaudible] that, but that’s what we think is a reasonable timeframe to get through these discussions. We’ve already initiated those but to get them through the first quarter. I also tried to say that whatever we do in the U.S. should have no impact on the – on Europe. We’ve already had all the guidance we need from Europe, the European guidance hasn’t changed. We know what Europe needs to get a chance for approval. And the third one was about [inaudible]. In order to do an interim look, you sacrifice a lot of power and that means you need to do a longer trial and once you even take a peak. So there’s no intention in this – at this stage to do an interim look at the data, the idea is to do a lot less patients or substantially less patients and get the data quicker, as quick as we can.

Adnan S. Butt - RBC Capital Markets, LLC

Thanks, Steven. This – but you’ll still continue to have more centers open to continue – to [inaudible] these studies basically?

Steven C. Gilman – CSO and EVP of Research and Development

Yeah, nothing’s changed. We’re going to forward like we’re going to have to recruit all 3,000 patients, whatever it is, so we’re not – until that’s different, we’ve got the gas pedal to the floor .

Operator

And we do have a follow-up question from the line of Greg Wade.

Greg Wade – Wedbush

Your comment regarding the potential for pull-ahead on CUBICIN demand from some of your more savvy customers, can you just remind us when the company took a price increase or when was it expected in the quarter? And if you have any idea about the potential magnitude in terms of dollars that there might have been this pull-ahead, could you also tell us that, please?

Steven C. Gilman – CSO and EVP of Research and Development

Yeah, I don’t have an idea of any magnitude, Greg. I don’t think it was – keep I mind that once again, we don’t cell through wholesalers so you’re not looking at it from hospitals and – as I said, I think it – what you’re looking at in terms of vial numbers is, again, very large numbers that impact one quarter over the next and if vials end up in one day in Q2 versus Q3, it can skew the percentages a bit. But our price – list price increase was 5.5% on July 1st, so that was the most recent.

Greg Wade – Wedbush

Great. Thanks for taking my follow-up question.

Operator

We have no further audio questions at this time.

Michael W. Bonney

Okay, thank you, operator, and thanks all of your for joining us today. Please mark your calendars now for our year-end 2011 earnings call which is scheduled to take place at 5:00 p.m. Eastern Time, Wednesday, January 23rd. Thank you.

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