Management Q&A

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A: Since the founding of the company in 1992, Cubist has taken bold and deliberate steps to build a different model for a successful biopharmaceutical company. Our focus continues to be on areas of clear unmet medical need in acutely ill patients, including those with multi-drug-resistant infections.

Equally important is our determination to advance our clinical pipeline while growing operating income. This requires both strategic focus and financial discipline. Our financial model differs from mature pharmaceutical or biotech companies by generating greater leverage within SG&A - we target SG&A to be ~25% of revenues versus 32-35% for other companies, thereby allowing us to invest more in R&D, for example ~25% versus 16-18% for others.

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A: Our focus is on growing long-term shareholder value. The company's strategic intent is to become the leading global company focused on discovering, developing and commercializing therapies for acutely-ill patients. Our operating model can be characterized as optimizing CUBICIN and expanding the product portfolio while maintaining strong financial discipline. Our policy is to first dedicate a share of the annual revenues toward growing net operating income and then use the remainder to grow the business, mainly through R&D, but also we anticipate using some of our cash to create additional value by seeking to acquire or in-license one or more additional acute care assets that would be accretive in the near term—that is, prior to the anticipated launch of CXA-201. This ties in with our objective of continuing to grow net operating income while we increase investment in our clinical stage pipeline.

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A: We are pleased that CUBICIN, now in its eighth year on the market, continues to show growth, even though at a more modest pace than we experienced in previous years. We can achieve peak year sales of at least $1 Billion for CUBICIN with its current labeled indications and assuming successful resolution of the ANDA litigation with Teva with compound-annual-growth-rate of only around 6%; our goal is to exceed this rate of growth.

A: As of December 31, 2010, we had $910 million of cash, cash equivalents and investments. We plan to continue to maintain a strong cash balance so that if business development opportunities present themselves, we're well-positioned to be a credible acquirer. While our acquisition of Calixa Therapeutics Inc. in December 2009 sets the bar high, our standard is to look for an asset and deal structure that has the potential to generate an appropriate return for our shareholders.

We plan to keep the majority of our cash and investments liquid and have invested it conservatively in money market funds, bank deposits, U.S. Treasuries, U.S. government agencies, and high-quality corporate notes.

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A: The Centers for Disease Control and Prevention estimates that hospital-acquired infections (HAIs), from all types of bacteria, afflict roughly 1.7 million patients per year in the U.S. and contribute to nearly 100,000 deaths. Estimates of the annual cost of HAIs in the U.S. range from $4.5 billion per year to over $11 billion per year. Gram-negative bacteria are associated with many of the most frequent types of HAIs in the U.S., including 71% of urinary-tract infections, 65% of pneumonia, and 34% of surgical site infections. In Europe, Gram-negative infections are estimated to account for two-thirds of the 25,000 deaths each year caused by some of the most troublesome HAIs.

The most common Gram-negative organism isolated from all sites between 1989-1998 was pseudomonas. Pseudomonas was responsible for 16.1% of all cases of hospital-acquired pneumonia in the U.S. Pseudomonas was the second most common isolated organism, with only S. aureus occurring more frequently, at 16.8%. More recently (publications in 2006 and 2008) the reported incidence in hospital-acquired pneumonia in the U.S. has ranged from 11 to 19%. In complicated urinary tract infections and complicated intra-abdominal infections, the incidence of pseudomonas varies by geography and institution, but reports of 10% or more in the U.S. have not been uncommon in recent years.

Given its Gram-negative activity, particularly its potency against pseudomonas and assuming success in clinical development and regulatory approval, at launch, CXA-201 would be entering a market with a value based on total days of therapy of > $5 billion in "branded product" dollars in the U.S. We see a peak sales opportunity of > $500 million for CXA-201 in the U.S., and potential peak sales of $1 billion in the U.S. and EU combined.

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A: CXA-201 is the I.V. combination of our novel anti-pseudomonal cephalosporin, CXA-101, and the beta-lactamase inhibitor tazobactam. CXA-201 is being developed as a potential first-line therapy for the treatment of certain serious Gram-negative bacterial infections in the hospital, including those caused by multi-drug resistant (MDR) pseudomonas aeruginosa. CXA-101 demonstrated excellent activity against a panel of greater than 900 MDR pseudomonas strains, including strains resistant to cefepime, ceftazidime, and imipenem. This data indicates the expected susceptibility of pseudomonas to CXA-201 to be 99%, as compared to the currently available cephalosporins or carbapenems, which were in the range of 78%-85%. Additionally, the susceptibility of pseudomonas to Zosyn^® was only 75% in this strain collection. This potent activity against MDR pseudomonas aeruginosa is a key differentiation feature for our novel cephalosporin, relative to other currently available cephalosporins.

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A: This is an exciting program because Clostridium difficile can cause severe and sometimes life-threatening diarrhea in acutely ill patients and is becoming more and more prevalent in hospitals. Yet there are currently, in our opinion, not enough effective treatments available. In addition, developing and commercializing a new treatment for this condition is a good fit with Cubist's corporate strengths.

According to a report released in November 2008 by the Association of Professionals in Infection Control, C. difficile hospital infections afflict 13 out of every 1,000 hospital patients in the U.S. This is 6.5 to 20 times higher than previous estimates and translates into an incidence of some 7,000 hospitalized patients in any one day who are infected with C. difficile, suggesting that infection rates may be increasing in the U.S.

In 2008, we filed an IND for our novel, bactericidal antibiotic CB-183,315, which had demonstrated safety and efficacy against C. difficile infections in animal models. We believe the key differentiator for '315 is its more rapid cidality, compared with vancomycin (which is known as Vancocin^® in the oral form used for CDAD). Then in 2009, we completed both single- and multiple-dose Phase 1 clinical studies in healthy human volunteers. Based on the safety data from these studies, we began a Phase 2 clinical trial in 2010, which will provide us our first opportunity to assess the efficacy of '315 in humans suffering from C. difficile infections. This trial initiation in 2010 was an important milestone for Cubist as it marked the first time that a drug that originated in our research labs had entered a Phase 2 clinical trial.

There are compounds in development by other companies for the treatment of CDAD. At each step of our development program we plan to assess both the data on CB-183,315, and what is happening externally with other CDAD product candidates, but given the size of the unmet medical need and the trend toward increasing infection rates, we believe there is room in the market for multiple new entrants.

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A: Our total R&D spending guidance for 2011 is $180-190 million, which includes milestone payments. This figure includes labor, overhead, external R&D, non-cash stock-based compensation expenses and upfronts and milestone payments. It breaks down by program as shown in this slide.