XNAS:CBST Cubist Pharmaceuticals Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:  0-21379

 

CUBIST PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

22-3192085

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

65 Hayden Avenue, Lexington, MA 02421

(Address of Principal Executive Offices and Zip Code)

 

(781) 860-8660

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on July 23, 2012: 63,837,982.

 

 

 



Table of Contents

 

Cubist Pharmaceuticals, Inc.
Form 10-Q
For the Quarter Ended June 30, 2012

 

Table of Contents

 

Item

 

Page

 

 

 

 

PART I. Financial information

 

 

 

 

 

 

1.

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011

 

3

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011

 

4

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

 

5

 

Notes to the Condensed Consolidated Financial Statements

 

6

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

3.

Quantitative and Qualitative Disclosures About Market Risk

 

34

4.

Controls and Procedures

 

34

 

 

 

 

PART II. Other Information

 

 

 

 

 

 

1.

Legal Proceedings

 

35

1A.

Risk Factors

 

35

2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

3.

Defaults Upon Senior Securities

 

58

4.

Mine Safety Disclosures

 

58

5.

Other Information

 

58

6.

Exhibits

 

58

 

Signatures

 

59

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

(in thousands, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

134,665

 

$

197,618

 

Short-term investments

 

676,546

 

670,077

 

Accounts receivable, net

 

90,126

 

87,800

 

Inventory

 

38,941

 

34,890

 

Deferred tax assets, net

 

14,384

 

16,189

 

Prepaid expenses and other current assets

 

36,882

 

36,700

 

Total current assets

 

991,544

 

1,043,274

 

Property and equipment, net

 

168,763

 

168,425

 

In-process research and development

 

311,400

 

311,400

 

Goodwill

 

122,133

 

122,133

 

Other intangible assets, net

 

164,543

 

174,980

 

Long-term investments

 

43,207

 

 

Other assets

 

59,068

 

67,243

 

Total assets

 

$

1,860,658

 

$

1,887,455

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

23,013

 

$

32,584

 

Accrued liabilities

 

133,608

 

144,794

 

Short-term deferred revenue

 

4,997

 

4,008

 

Short-term contingent consideration

 

38,981

 

67,999

 

Short-term debt, net

 

32,621

 

 

Other current liabilities

 

3,000

 

3,000

 

Total current liabilities

 

236,220

 

252,385

 

Long-term deferred revenue

 

32,245

 

27,516

 

Long-term deferred tax liabilities, net

 

132,226

 

143,177

 

Long-term contingent consideration

 

184,776

 

180,235

 

Long-term debt, net

 

360,782

 

454,246

 

Other long-term liabilities

 

28,161

 

30,039

 

Total liabilities

 

974,410

 

1,087,598

 

Commitments and contingencies (Notes C, D, G, L and M)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares; no shares issued and outstanding

 

 

 

Common stock, $.001 par value; authorized 150,000,000 shares; 63,751,433 and 62,640,902 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

 

64

 

63

 

Additional paid-in capital

 

914,744

 

904,281

 

Accumulated other comprehensive loss

 

(175

)

(185

)

Accumulated deficit

 

(28,385

)

(104,302

)

Total stockholders’ equity

 

886,248

 

799,857

 

Total liabilities and stockholders’ equity

 

$

1,860,658

 

$

1,887,455

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3



Table of Contents

 

CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

U.S. product revenues, net

 

$

209,886

 

$

168,575

 

$

404,035

 

$

322,291

 

International product revenues

 

11,363

 

7,747

 

24,017

 

16,047

 

Service revenues

 

8,665

 

 

12,329

 

 

Other revenues

 

653

 

516

 

1,878

 

1,031

 

Total revenues, net

 

230,567

 

176,838

 

442,259

 

339,369

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

58,891

 

38,976

 

112,843

 

75,553

 

Research and development

 

67,206

 

41,871

 

118,378

 

82,287

 

Contingent consideration

 

2,694

 

81,816

 

5,523

 

82,914

 

Selling, general and administrative

 

40,255

 

38,341

 

84,035

 

78,505

 

Total costs and expenses

 

169,046

 

201,004

 

320,779

 

319,259

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

61,521

 

(24,166

)

121,480

 

20,110

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

742

 

631

 

1,416

 

1,404

 

Interest expense

 

(8,902

)

(7,754

)

(17,909

)

(15,707

)

Other income (expense)

 

(3,113

)

162

 

(3,293

)

535

 

Total other income (expense), net

 

(11,273

)

(6,961

)

(19,786

)

(13,768

)

Income (loss) before income taxes

 

50,248

 

(31,127

)

101,694

 

6,342

 

Provision (benefit) for income taxes

 

7,125

 

(10,512

)

25,777

 

4,372

 

Net income (loss)

 

$

43,123

 

$

(20,615

)

$

75,917

 

$

1,970

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

$

0.68

 

$

(0.34

)

$

1.20

 

$

0.03

 

Diluted net income (loss) per common share

 

$

0.58

 

$

(0.34

)

$

1.04

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

Shares used in calculating:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

63,498,953

 

60,517,553

 

63,250,165

 

59,991,068

 

Diluted net income (loss) per common share

 

81,166,329

 

60,517,553

 

81,001,476

 

61,828,807

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

43,102

 

$

(20,774

)

$

75,927

 

$

1,828

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4



Table of Contents

 

CUBIST PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

75,917

 

$

1,970

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on debt repurchase, including write-off of debt issuance costs

 

3,542

 

 

Depreciation and amortization

 

16,548

 

6,046

 

Amortization of premiums and accretion of discounts on investments

 

3,791

 

3,590

 

Amortization of debt discount and debt issuance costs, excluding write-off of debt issuance costs

 

10,379

 

9,968

 

Deferred income taxes

 

(7,993

)

(736

)

Stock-based compensation

 

12,492

 

8,494

 

Contingent consideration expense

 

5,523

 

82,914

 

Payment of contingent consideration

 

(17,408

)

 

Premium paid for convertible subordinated debt repurchase

 

(26,945

)

 

Inventory write-off

 

4,386

 

 

Other non-cash

 

2,232

 

1,580

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(2,326

)

(8,817

)

Inventory

 

(6,684

)

306

 

Prepaid expenses and other current assets

 

(182

)

(20,981

)

Other assets

 

5,449

 

(3,761

)

Accounts payable and accrued liabilities

 

(14,922

)

6,770

 

Deferred revenue and other long-term liabilities

 

3,296

 

4,911

 

Total adjustments

 

(8,822

)

90,284

 

Net cash provided by operating activities

 

67,095

 

92,254

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(12,093

)

(25,747

)

Purchases of investments

 

(718,738

)

(682,580

)

Proceeds from investments

 

665,249

 

575,203

 

Net cash used in investing activities

 

(65,582

)

(133,124

)

Cash flows from financing activities:

 

 

 

 

 

Payment of contingent consideration

 

(12,592

)

 

Issuance of common stock, net

 

17,348

 

25,794

 

Excess tax benefit on stock-based awards

 

5,482

 

12,018

 

Repurchase of convertible subordinated debt

 

(74,704

)

 

Net cash (used in) provided by financing activities

 

(64,466

)

37,812

 

Net decrease in cash and cash equivalents

 

(62,953

)

(3,058

)

Effect of changes in foreign exchange rates on cash balances

 

 

511

 

Cash and cash equivalents at beginning of period

 

197,618

 

372,969

 

Cash and cash equivalents at end of period

 

$

134,665

 

$

370,422

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5



Table of Contents

 

CUBIST PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

A.            BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation

 

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Cubist Pharmaceuticals, Inc. (“Cubist” or the “Company”) in accordance with accounting principles generally accepted in the United States of America, or GAAP, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

 

The year-end condensed consolidated financial statements were derived from audited financial statements, but do not include all disclosures required by GAAP. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011, which are contained in Cubist’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 27, 2012.

 

The accompanying condensed consolidated financial statements include the accounts of Cubist and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company’s results of operations for the three and six months ended June 30, 2012, include the results of Adolor Corporation, or Adolor, which Cubist acquired in December 2011.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the extensive use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The most significant assumptions are employed in estimates used in determining values of: inventories; investments; acquisition-date fair value and subsequent impairment of long-lived assets, including goodwill, in-process research and development, or IPR&D, and other intangible assets; accrued clinical research costs; contingent consideration; income taxes; accounting for stock-based compensation; product rebate, chargeback and return accruals; restructuring charges; as well as in estimates used in accounting for contingencies, debt and revenue recognition. Actual results could differ from these estimates.

 

Fair Value Measurements

 

On January 1, 2012, the Company adopted amended guidance for fair value measurement and disclosure, which requires Cubist to disclose quantitative information about unobservable inputs used in the fair value measurement within Level 3 of the fair value hierarchy. See Note D., “Fair Value Measurements,” for additional information.

 

The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. This standard classifies these inputs into the following hierarchy:

 

Level 1 Inputs—Quoted prices for identical instruments in active markets.

 

Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 Inputs—Instruments with primarily unobservable value drivers.

 

6



Table of Contents

 

The fair value hierarchy level is determined by asset class based on the lowest level of significant input. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified between Level 1 and Level 2 or between Level 2 and Level 3. During the six months ended June 30, 2012, there were no transfers between Level 1, Level 2 or Level 3.

 

The carrying amounts of Cubist’s cash and cash equivalents, accounts receivable, net, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these amounts. Short-term and long-term investments primarily consist of available-for-sale securities as of June 30, 2012 and December 31, 2011, and are carried at fair value.

 

Concentration of Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments and accounts receivable. The Company’s cash and cash equivalents are held primarily with five financial institutions in the United States, or U.S. Investments are restricted, in accordance with the Company’s investment policy, to a concentration limit per institution.

 

Cubist’s accounts receivable at June 30, 2012 and December 31, 2011, primarily represent amounts due to the Company from wholesalers, including AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation. Cubist performs ongoing credit evaluations of its key wholesalers, distributors and other customers and generally does not require collateral. For the three and six months ended June 30, 2012 and 2011, Cubist did not have any significant write-offs of accounts receivable, and its days sales outstanding has not significantly changed since December 31, 2011.

 

 

 

Percentage of Total Accounts
Receivable Balance as of

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

AmerisourceBergen Drug Corporation

 

21

%

22

%

Cardinal Health, Inc.

 

20

%

22

%

McKesson Corporation

 

19

%

19

%

 

 

 

Percentage of Total
Net Revenues for
the Three Months Ended
June 30,

 

Percentage of Total
Net Revenues for
the Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

AmerisourceBergen Drug Corporation

 

19

%

23

%

19

%

24

%

Cardinal Health, Inc.

 

19

%

22

%

19

%

22

%

McKesson Corporation

 

17

%

17

%

17

%

18

%

 

IPR&D

 

IPR&D acquired in a business combination is capitalized on the Company’s condensed consolidated balance sheets at its acquisition-date fair value. Until the underlying project is completed, these assets are accounted for as indefinite-lived intangible assets, subject to impairment testing. Once the project is completed, the carrying value of the IPR&D is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the acquired IPR&D are expensed as incurred.

 

IPR&D is tested for impairment on an annual basis, in the fourth quarter, or more frequently if impairment indicators are present, using projected discounted cash flow models. If IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to its revised fair value with the related impairment charge recognized in the period in which the impairment occurs. If the fair value of the asset becomes impaired as the result of unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing the Company’s programs, Cubist could incur significant charges in the period in which the impairment occurs. The valuation techniques utilized in performing impairment tests incorporate significant assumptions and judgments to estimate the fair value. The use of different valuation techniques or different assumptions could result in materially different fair value estimates.

 

7



Table of Contents

 

Revenue Recognition

 

Principal sources of revenue are: (i) sales of CUBICIN® (daptomycin for injection) and ENTEREG® (alvimopan) in the U.S.; (ii) revenues derived from sales of CUBICIN by Cubist’s international distribution partners; and (iii) service revenues derived from Cubist’s agreement with Optimer Pharmaceuticals, Inc., or Optimer, for the promotion and support of DIFICID® (fidaxomicin) in the U.S. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered and collectibility of the resulting receivable is reasonably assured.

 

U.S. Product Revenues, net

 

Cubist maintains a drop-ship program under which orders are processed through wholesalers, but shipments are sent directly to the end users, who are generally hospitals and acute care settings. The Company generally does not allow wholesalers to stock CUBICIN or ENTEREG. All revenues from product sales are recorded net of applicable provisions for returns, chargebacks, Medicaid rebates, Medicare coverage gap discount program rebates, wholesaler management fees and pricing discounts in the same period the related sales are recorded.

 

Gross U.S. product revenues are offset by provisions for the three and six months ended June 30, 2012 and 2011, as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

Gross U.S. product revenues

 

$

241,900

 

$

192,911

 

$

466,024

 

$

367,352

 

Provisions offsetting U.S. product revenues:

 

 

 

 

 

 

 

 

 

Contractual adjustments

 

(14,085

)

(11,362

)

(26,980

)

(20,834

)

Governmental rebates

 

(17,929

)

(12,974

)

(35,009

)

(24,227

)

Total provisions offsetting product revenues

 

(32,014

)

(24,336

)

(61,989

)

(45,061

)

U.S. product revenues, net

 

$

209,886

 

$

168,575

 

$

404,035

 

$

322,291

 

 

Certain product sales qualify for rebates or discounts from standard list pricing due to government-sponsored programs or other contractual agreements. Contractual adjustments in the table above include pricing and early payment discounts extended to the Company’s external customers, as well as provisions for returns and wholesaler distribution fees. Governmental rebates in the table above represent estimated amounts for Medicaid rebates, Medicare coverage gap discount program rebates and chargebacks related to 340B/Public Health Service and Federal Supply Schedule drug pricing programs. Estimates and assumptions for reserves are analyzed quarterly.

 

Service Revenues

 

Service revenues for the three and six months ended June 30, 2012, represent (i) the ratable recognition of the quarterly service fee earned in accordance with the co-promotion agreement with Optimer, which was entered into in April 2011 to promote and provide medical affairs support for DIFICID in the U.S.; and (ii) an additional $5.0 million recognized in June 2012 upon achieving an annual sales target under the terms of the co-promotion agreement with Optimer. Cubist is also eligible to receive, under the terms of the co-promotion agreement, a portion of Optimer’s gross profits on net sales of DIFICID above the annual sales targets, if any, in 2012 and 2013, as well as an additional $12.5 million in 2013 if a specified sales target is achieved. The initial two-year term of the co-promotion agreement ends in July 2013.

 

Basic and Diluted Net Income (Loss) Per Share

 

Basic net income (loss) per common share has been computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted net income (loss) per share has been computed by dividing diluted net income (loss) by the diluted number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net income (loss) per share has been computed assuming the conversion of convertible obligations and the elimination of the interest expense related to the Company’s 2.25% convertible subordinated notes, or 2.25% Notes, and 2.50% convertible senior notes, or 2.50% Notes, the elimination of the loss on the partial repurchase of the Company’s 2.25% Notes, discussed below, the exercise of stock options and the vesting of restricted stock units, or RSUs, as well as their related income tax effects.

 

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Table of Contents

 

In June 2012, Cubist repurchased $74.7 million of its 2.25% Notes, in privately-negotiated transactions, which reduced Cubist’s fully-diluted shares of common stock outstanding by 2,427,738 shares. See Note G., “Debt,” for additional information.

 

The following table sets forth the computation of basic and diluted net income (loss) per common share:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands, expect share and per share amounts)

 

Net income (loss), basic

 

$

43,123

 

$

(20,615

)

$

75,917

 

$

1,970

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Interest on 2.50% Notes, net of tax

 

1,808

 

 

3,610

 

 

Debt issuance costs related to 2.50% Notes, net of tax

 

239

 

 

477

 

 

Debt discount amortization related to 2.50% Notes, net of tax

 

2,201

 

 

4,358

 

 

Net income (loss), diluted

 

$

47,371

 

$

(20,615

)

$

84,362

 

$

1,970

 

 

 

 

 

 

 

 

 

 

 

Shares used in calculating basic net income (loss) per common share

 

63,498,953

 

60,517,553

 

63,250,165

 

59,991,068

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Options to purchase shares of common stock and RSUs

 

2,243,221

 

 

2,327,156

 

1,837,739

 

2.50% Notes convertible into shares of common stock

 

15,424,155

 

 

15,424,155

 

 

Shares used in calculating diluted net income (loss) per common share

 

81,166,329

 

60,517,553

 

81,001,476

 

61,828,807

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share, basic

 

$

0.68

 

$

(0.34

)

$

1.20

 

$

0.03

 

Net income (loss) per share, diluted

 

$

0.58

 

$

(0.34

)

$

1.04

 

$

0.03

 

 

Potential common shares excluded from the calculation of diluted net income (loss) per share, as their inclusion would have been antidilutive, were:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Options to purchase shares of common stock and RSUs

 

3,091,164

 

1,215,120

 

2,775,786

 

2,137,434

 

2.25% Notes convertible into shares of common stock

 

2,909,940

 

3,549,377

 

3,229,658

 

3,549,377

 

2.50% Notes convertible into shares of common stock

 

 

15,424,155

 

 

15,424,155

 

 

Subsequent Events

 

Cubist considers events or transactions that have occurred after the balance sheet date of June 30, 2012, but prior to the filing of the financial statements with the SEC on this Quarterly Report on Form 10-Q to provide additional evidence relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been evaluated through the date of the filing with the SEC of this Quarterly Report on Form 10-Q. There were no subsequent events that occurred after June 30, 2012.

 

Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board issued amended accounting guidance for testing indefinite-lived intangible assets for impairment. The amendments permit a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, a company concludes it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds its carrying value, then the company is not required to take further action. A company also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. A company will be able to resume performing the qualitative assessment in any subsequent

 

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period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public company’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption to have any impact on its consolidated financial statements.

 

B.            INVESTMENTS

 

The following table summarizes the amortized cost and estimated fair values of the Company’s available-for-sale investments:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

Balance at June 30, 2012:

 

 

 

 

 

 

 

 

 

Bank deposits

 

$

60,000

 

$

 

$

 

$

60,000

 

U.S. Treasury securities

 

100,002

 

2

 

(12

)

99,992

 

Corporate and municipal notes

 

499,924

 

82

 

(245

)

499,761

 

Total

 

$

659,926

 

$

84

 

$

(257

)

$

659,753

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011:

 

 

 

 

 

 

 

 

 

Bank deposits

 

$

92,001

 

$

 

$

 

$

92,001

 

U.S. Treasury securities

 

114,061

 

39

 

(7

)

114,093

 

Federal agencies

 

39,408

 

1

 

(6

)

39,403

 

Corporate and municipal notes

 

364,752

 

1

 

(173

)

364,580

 

Total

 

$

610,222

 

$

41

 

$

(186

)

$

610,077

 

 

The following table contains information regarding the range of contractual maturities of the Company’s short-term and long-term investments:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(in thousands)

 

Within 1 year

 

$

616,754

 

$

616,546

 

$

610,222

 

$

610,077

 

1-2 years

 

43,172

 

43,207

 

 

 

Total

 

$

659,926

 

$

659,753

 

$

610,222

 

$

610,077

 

 

Certain short-term debt securities with original maturities of less than 90 days are included in cash and cash equivalents on the condensed consolidated balance sheets and are not included in the tables above. In addition, a $60.0 million certificate of deposit included within short-term investments was not deemed an available-for-sale security and is not included in the tables above.

 

C. BUSINESS COMBINATIONS AND ACQUISITIONS

 

Acquisition of Adolor

 

On December 12, 2011, Cubist acquired 100% of the outstanding shares of common stock of Adolor for $4.25 in cash for each share owned by Adolor’s former stockholders, plus, contingent payment rights, or CPRs, as described below, upon which Adolor became a wholly-owned subsidiary of Cubist. The Company’s acquisition of Adolor provided an existing commercialized product, ENTEREG, as well as rights to an additional late-stage product candidate, CB-5945, among other assets. CB-5945 is an oral, peripherally-acting mu-opioid receptor antagonist currently in development for the treatment of chronic opioid-induced constipation.

 

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The following table summarizes the fair value of total consideration at December 12, 2011:

 

 

 

Total
Acquisition-
Date
Fair Value

 

 

 

(in thousands)

 

Cash

 

$

220,838

 

Contingent consideration

 

110,200

 

Total consideration

 

$

331,038

 

 

The contingent consideration relates to the achievement of certain regulatory milestones, sales milestones or a combination of both, with respect to CB-5945, and in which Cubist granted non-transferable CPRs to the former stockholders of Adolor. The CPRs represent the right to receive additional payments above the upfront purchase price, up to a maximum of $4.50 for each share owned by Adolor’s former stockholders upon achievement of such milestones. The CPRs may not be sold, assigned, transferred, pledged, encumbered or disposed of, subject to limited exceptions. See Note D., “Fair Value Measurements,” for additional information.

 

The acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

 

December 12,
2011

 

 

 

(in thousands)

 

Cash

 

$

20,179

 

Investments

 

2,000

 

Inventory

 

40,800

 

IPR&D

 

117,400

 

ENTEREG intangible asset

 

164,600

 

Deferred tax assets

 

56,031

 

Goodwill

 

60,674

 

Other assets acquired

 

7,351

 

Total assets acquired

 

469,035

 

Deferred tax liabilities

 

(108,078

)

Payable to Glaxo Group Limited

 

(18,900

)

Other liabilities assumed

 

(11,019

)

Total liabilities assumed

 

(137,997

)

Total net assets acquired

 

$

331,038

 

 

The allocation of the purchase price to acquired assets and liabilities has been prepared on a preliminary basis and is subject to change as additional information becomes available, including the finalization of the fair value of acquired assets and certain tax matters. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from December 12, 2011, the acquisition date.

 

The difference between the purchase price and the fair value of the assets acquired and liabilities assumed of $60.7 million was allocated to goodwill. None of this goodwill is expected to be deductible for income tax purposes.

 

The Company recorded $40.8 million of ENTEREG inventory that was acquired from Adolor. See Note I., “Inventory,” for additional information.

 

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Restructuring Activities

 

In connection with the acquisition of Adolor, Cubist committed to a restructuring program in the fourth quarter of 2011, which included severance benefits to former Adolor employees and execution of a lease termination agreement with respect to Adolor’s operating lease for its facility in Exton, Pennsylvania, which was vacated in June 2012. The lease termination payment was made in June 2012, and the remaining severance payments will be made through the first half of 2013.

 

The following table summarizes the activity within the restructuring liability:

 

 

 

Employee-
Related
Severance

 

Early
Termination
of Leased
Facilities

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2011

 

$

8,089

 

$

1,190

 

$

9,279

 

Less: payments made during the period

 

(3,606

)

 

(3,606

)

Balance at March 31, 2012

 

4,483

 

1,190

 

5,673

 

Less: payments made during the period

 

(1,728

)

(1,190

)

(2,918

)

Balance at June 30, 2012

 

$

2,755

 

$

 

$

2,755

 

 

D.            FAIR VALUE MEASUREMENTS

 

The following tables set forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:

 

 

 

June 30, 2012

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents: (1)

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

18,178

 

$

 

$

 

$

18,178

 

Corporate and municipal notes

 

 

11,044

 

 

11,044

 

Short-term and long-term investments: (2)

 

 

 

 

 

 

 

 

 

Bank deposits

 

 

60,000

 

 

60,000

 

U.S. Treasury securities

 

99,992

 

 

 

99,992

 

Corporate and municipal notes

 

 

499,761

 

 

499,761

 

Total assets

 

$

118,170

 

$

570,805

 

$

 

$

688,975

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

223,757

 

$

223,757

 

Total liabilities

 

$

 

$

 

$

223,757

 

$

223,757

 

 

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Table of Contents

 

 

 

December 31, 2011

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents: (1)

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

831

 

$

 

$

 

$

831

 

Corporate and municipal notes

 

 

18,455

 

 

18,455

 

Short-term and long-term investments: (2)

 

 

 

 

 

 

 

 

 

Bank deposits

 

 

92,001

 

 

92,001

 

U.S. Treasury securities

 

114,093

 

 

 

114,093

 

Federal agencies

 

39,403

 

 

 

39,403

 

Corporate and municipal notes

 

 

364,580

 

 

364,580

 

Total assets

 

$

154,327

 

$

475,036

 

$

 

$

629,363

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

248,234

 

$

248,234

 

Total liabilities

 

$

 

$

 

$

248,234

 

$

248,234

 

 


(1)  Excludes $105.4 million and $178.3 million of cash at June 30, 2012 and December 31, 2011, respectively.

(2)  Excludes a $60.0 million certificate of deposit not deemed a security at June 30, 2012 and December 31, 2011.

 

Marketable Securities

 

The Company classifies its bank deposits and corporate and municipal notes as Level 2 under the fair value hierarchy based on the lowest level of significant input. These assets have been valued using information obtained through a third-party pricing service at each balance sheet date, using observable market inputs that may include trade information, broker or dealer quotes, bids, offers, or a combination of these data sources.

 

Debt

 

The Company estimates the fair value of its 2.50% Notes and 2.25% Notes by using quoted market rates in an inactive market, which are classified as Level 2 inputs. See Note G., “Debt,” for additional information.

 

Payable to Glaxo

 

In connection with the acquisition of Adolor in December 2011, Cubist assumed the obligation to pay Glaxo Group Limited, or Glaxo, annual payments aggregating to $22.5 million as a result of Adolor’s termination of its collaboration agreement with Glaxo in September 2011, which was recorded at its estimated fair value of $18.9 million. At June 30, 2012, the carrying value of the remaining six annual payments to Glaxo of $19.4 million approximates its fair value. The fair value estimate utilizes a discount rate, which is classified as a Level 3 input.

 

Contingent Consideration

 

Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the condensed consolidated statements of comprehensive income.

 

Contingent consideration expense may change significantly as development progresses and additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates.

 

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Table of Contents

 

Level 3 Disclosures

 

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs:

 

 

 

Fair Value as
of June 30,
2012

 

Valuation Technique

 

Unobservable Input

 

Range 
(Weighted
Average)

 

 

 

(in thousands)

 

 

 

 

 

 

 

Adolor

 

 

 

 

 

 

 

 

 

Contingent Consideration

 

$

113,406

 

Probability-adjusted discounted cash flow

 

Probabilities of success

Period in which milestones are expected to be achieved

 

54% - 63% (58%)

2015

 

 

 

 

 

 

 

Discount rate

 

5.3%

 

 

 

 

 

 

 

 

 

 

 

Calixa Therapeutics Inc.

 

 

 

 

 

 

 

 

 

Contingent Consideration

 

$

110,351

 

Probability-adjusted discounted cash flow

 

Probabilities of success

Periods in which milestones are expected to be achieved

 

29% - 100% (57%)

2012 - 2018

 

 

 

 

 

 

 

Discount rate

 

5.3%

 

 

The significant unobservable inputs used in the fair value measurement of Cubist’s contingent consideration are the probabilities of successful achievement of development, regulatory and sales milestones, the period in which these milestones are expected to be achieved and a discount rate. Significant increases or decreases in any of the probabilities of success would result in a significantly higher or lower fair value measurement, respectively. Significant increases or decreases in the discount rate and/or the period in which milestones will be achieved would result in a significantly lower or higher fair value measurement, respectively.

 

The table below provides a rollforward of fair value balances that used Level 3 inputs:

 

 

 

Contingent
Consideration

 

 

 

(in thousands)

 

Balance at December 31, 2011

 

$

248,234

 

Contingent consideration expense

 

5,523

 

Contingent consideration payment

 

(30,000

)

Balance at June 30, 2012

 

$

223,757

 

 

 

 

 

 

Adolor

 

The fair value of contingent consideration relating to amounts payable by the Company to the former stockholders of Adolor upon the achievement of certain regulatory milestones, sales milestones or a combination of both, with respect to CB-5945, was estimated to be $113.4 million and $110.5 million as of June 30, 2012 and December 31, 2011, respectively. The change in fair value for the three and six months ended June 30, 2012, is due to the time value of money. The aggregate, undiscounted amount of contingent consideration that Cubist could pay under the merger agreement ranges from zero to approximately $233.8 million.

 

Calixa

 

The fair value of contingent consideration relating to amounts payable by the Company to the former stockholders of Calixa Therapeutics Inc., or Calixa, upon the achievement of certain development, regulatory and sales milestones with respect to ceftolozane/tazobactam, or CXA-201, was estimated to be $110.4 million and $137.7 million as of June 30, 2012 and December 31, 2011, respectively. The change in fair value for the three months ended June 30, 2012, is due to the time value of money. The change in fair value for the six months ended June 30, 2012, is primarily due to a $30.0 million milestone payment that Cubist made to the former stockholders of Calixa in January 2012, which was triggered by first patient enrollment in a Phase 3 clinical trial for complicated intra-abdominal infections, or cIAI, which occurred in December 2011. This was partially offset by contingent consideration expense related to the time value of money. Cubist

 

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may be required to make up to an additional $220.0 million of undiscounted payments to the former stockholders of Calixa under the merger agreement. CXA-201 is being developed as a potential treatment for hospital-acquired bacterial pneumonia, or HABP, ventilator-associated bacterial pneumonia, or VABP, complicated urinary tract infections, or cUTI, and cIAI.

 

E.              PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following at:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Land and buildings

 

168,314

 

166,899

 

Laboratory equipment

 

 

34,387

 

 

29,463

 

Furniture and fixtures

 

 

3,182

 

 

2,504

 

Computer hardware and software

 

 

25,248

 

 

23,252

 

Construction-in-progress

 

 

903

 

 

3,467

 

 

 

 

232,034

 

 

225,585

 

Less:  accumulated depreciation

 

 

(63,271

)

 

(57,160

)

Property and equipment, net

 

168,763

 

168,425

 

 

Depreciation expense was $3.1 million and $2.3 million for the three months ended June 30, 2012 and 2011, respectively, and $6.1 million and $4.8 million for the six months ended June 30, 2012 and 2011, respectively.

 

F.              GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Indefinite-Lived Assets

 

The Company’s goodwill balance as of June 30, 2012, remained unchanged from the goodwill balance as of December 31, 2011. As of June 30, 2012, there were no accumulated impairment losses. Goodwill has been assigned to the Company’s single reporting unit, which is the single operating segment by which the chief decision maker manages the Company. See Note K., “Segment Information,” for additional information.

 

As of June 30, 2012, the Company’s IPR&D consisted of $117.4 million related to CB-5945, which was acquired through the Company’s acquisition of Adolor in December 2011, and $194.0 million related to CXA-201, which was acquired through the Company’s acquisition of Calixa in December 2009. The IPR&D value of CXA-201 as a potential treatment for HABP and VABP had an estimated fair value of $174.0 million, and the IPR&D value of CXA-201 as a potential treatment for cUTI and cIAI had an estimated fair value of $20.0 million as of the acquisition date. Cubist has not recorded any impairment charges related to the IPR&D since the acquisition of the assets.

 

Other Intangible Assets

 

Other intangible assets, net consisted of the following at:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Patents

 

$

2,627

 

$

2,627

 

Acquired technology rights

 

193,100

 

193,100

 

 

 

195,727

 

195,727

 

Less:

accumulated amortization — patents

 

(2,400

)

(2,368

)

 

accumulated amortization — acquired technology rights

 

(28,784

)

(18,379

)

Intangible assets, net

 

$

164,543

 

$

174,980

 

 

Amortization expense was $5.2 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively, and $10.4 million and $1.3 million for the six months ended June 30, 2012 and 2011, respectively. The increase in amortization expense during the three and six months ended June 30, 2012, as compared to the three and six months ended June 30, 2011, was primarily due to the ENTEREG technology rights acquired in connection with the acquisition of Adolor in December 2011.

 

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The estimated aggregate amortization of intangible assets as of June 30, 2012, for each of the five succeeding years and thereafter is as follows:

 

 

 

(in thousands)

 

Remainder of 2012

 

$

10,438

 

2013

 

20,874

 

2014

 

20,874

 

2015

 

20,874

 

2016

 

19,594

 

2017 and thereafter

 

71,889

 

Total

 

$

164,543

 

 

G.    DEBT

 

Debt is comprised of the following amounts at:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Total 2.50% Notes outstanding at the end of the period

 

$

450,000

 

$

450,000

 

Unamortized discount

 

(89,218

)

(96,007

)

Net carrying amount of the liability component of the 2.50% Notes

 

360,782

 

353,993

 

 

 

 

 

 

 

Total 2.25% Notes outstanding at the end of the period

 

34,514

 

109,218

 

Unamortized discount

 

(1,893

)

(8,965

)

Net carrying amount of the liability component of the 2.25% Notes

 

32,621

 

100,253

 

 

 

 

 

 

 

 

 

Total carrying amount of the liability components of the 2.50% Notes and 2.25% Notes

 

$

393,403

 

$

454,246

 

 

2.25% Notes

 

As of June 30, 2012, the Company had $34.5 million aggregate principal outstanding of 2.25% Notes, which are due June 2013 and are recorded as short-term debt in the condensed consolidated balance sheet. The Company repurchased $74.7 million of the original principal amount of the 2.25% Notes, in privately-negotiated transactions, in June 2012, as further discussed below. The 2.25% Notes are convertible at any time prior to maturity into common stock at an initial conversion rate of 32.4981 shares of common stock per $1,000 of the 2.25% Notes principal, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $30.77 per share of common stock. Cubist may deliver cash or a combination of cash and common stock in lieu of shares of common stock, at Cubist’s option. Cubist retains the right to redeem all or a portion of the 2.25% Notes at 100% of the principal amount plus accrued and unpaid interest if the closing price of Cubist’s common stock is greater than 150% of the conversion price for at least 20 trading days (whether or not consecutive) out of 30 consecutive trading days. The shares attributable to the 2.25% Notes, if converted, could potentially dilute the Company’s shares of common stock outstanding. Interest is payable on June 15th and December 15th of each year. As of June 30, 2012, the “if-converted value” exceeded the principal amount of the 2.25% Notes by $8.0 million. The fair value of the outstanding 2.25% Notes was estimated to be $45.5 million as of June 30, 2012.

 

In June 2012, the Company repurchased, in privately-negotiated transactions, $74.7 million of the principal amount of its 2.25% Notes, reducing the outstanding amount from $109.2 million to $34.5 million. Cubist repurchased the 2.25% Notes at an average price of approximately $136.07 per $100 par value of debt plus accrued interest and transaction fees, resulting in a cash outflow of $102.6 million. The repurchase resulted in a net loss of $3.7 million, primarily comprised of a $3.3 million difference between the net carrying value and the fair value of the $74.7 million principal at the time of repurchase, which was recorded to other income (expense). The net carrying value of the equity portion of the 2.25% Notes was $15.7 million as of June 30, 2012, which includes a reduction of approximately $26.8 million to additional-paid-in-capital, net of deferred taxes of $1.2 million.

 

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2.50% Notes

 

As of June 30, 2012, the Company had $450.0 million aggregate principal outstanding of 2.50% Notes, which are due November 2017. These 2.50% Notes are convertible into common stock at an initial conversion rate of 34.2759 shares of common stock per $1,000 of principal, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $29.18 per share of common stock. Holders of the 2.50% Notes may convert them at any time prior to the close of business on the business day immediately preceding May 1, 2017, if one of the following criteria is met: (i) during the calendar quarter immediately following any calendar quarter in which the last reported sale price of the common stock is greater than or equal to 130% of the conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) out of 30 consecutive trading days; (ii) during the five business day period immediately following any five consecutive trading days in which the trading price per $1,000 of the 2.50% Notes’ principal for each trading day was less than 98% of the last reported sale price of Cubist’s common stock multiplied by the conversion rate on each such trading day; or (iii) upon the occurrence of certain specified corporate events. Upon conversion by a note holder, Cubist may deliver cash, common stock or a combination of cash and common stock, at Cubist’s option. The shares attributable to the 2.50% Notes, if converted, may potentially dilute the Company’s shares of common stock outstanding.  Interest is payable to the note holders on May 1st and November 1st of each year. As of June 30, 2012, the “if-converted value” exceeded the principal amount of the 2.50% Notes by $134.7 million. The fair value of the outstanding 2.50% Notes was estimated to be $648.3 million as of June 30, 2012.

 

In accordance with accounting guidance for debt with conversion and other options, Cubist separately accounted for the liability and equity components of each of the 2.50% Notes and 2.25% Notes in a manner that reflected its non-convertible debt borrowing rate of similar debt. The equity component of each of the 2.50% Notes and 2.25% Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the convertible notes and the fair value of the liability of each note at the date of issuance. The debt discount is amortized to interest expense using the effective interest method over the expected life of a similar liability without an equity component. The Company determined this expected life to be equal to the original seven-year term of each of the 2.50% Notes and 2.25% Notes, resulting in an amortization period ending November 1, 2017, and June 15, 2013, respectively. Subsequent to the partial repurchase of the 2.25% Notes in June 2012, the Company determined the effective interest rate to be 8.2% for these notes.

 

Payable to Glaxo

 

The acquisition-date fair value of the payable to Glaxo assumed in connection with the acquisition of Adolor in December 2011 was allocated between current and non-current liabilities within the condensed consolidated balance sheets based on the contractual payment dates, and imputed interest on the payable to Glaxo is recorded as interest expense within the condensed consolidated statements of comprehensive income. See Note D., “Fair Value Measurements,” for additional information.

 

The table below summarizes the interest expense the Company incurred on its 2.50% Notes, 2.25% Notes and the payable to Glaxo for the periods presented:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

Contractual interest coupon payment

 

$

3,328

 

$

3,436

 

$

6,754

 

$

6,863

 

Amortization of discount on debt

 

4,654

 

4,569

 

9,481

 

9,054

 

Interest expense on payable to Glaxo

 

249

 

 

546

 

 

Amortization of the liability component of the debt issuance costs

 

671

 

457

 

1,128

 

914

 

Capitalized interest

 

 

(708

)

 

(1,124

)

Total interest expense

 

$

8,902

 

$

7,754

 

$

17,909

 

$

15,707

 

 

Credit Facility

 

In December 2008, Cubist entered into a $90.0 million revolving credit facility with RBS Citizens National Association, or RBS Citizens, for general corporate purposes. Cubist terminated the revolving credit facility with RBS Citizens in June 2012. There were no outstanding borrowings under the credit facility as of December 31, 2011.

 

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H.           ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following at:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Accrued royalty

 

$

62,208

 

$

62,741

 

Accrued Medicaid and Medicare rebates

 

18,773

 

14,877

 

Accrued clinical trials

 

18,186

 

9,231

 

Accrued bonus

 

6,657

 

17,289

 

Accrued benefit costs

 

4,750

 

4,285

 

Accrued incentive compensation

 

2,852

 

6,162

 

Accrued restructuring

 

2,755

 

9,279

 

Other accrued costs

 

17,427

 

20,930

 

Accrued liabilities

 

$

133,608

 

$

144,794

 

 

Accrued clinical trials increased as of June 30, 2012, as compared to December 31, 2011, as a result of clinical trial activity primarily related to CXA-201 and CB-315. Accrued bonus decreased at June 30, 2012, as compared to December 31, 2011, due to payment of annual performance-based bonuses during the six months ended June 30, 2012.

 

I.                INVENTORY

 

Inventories consisted of the following at:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Raw materials

 

$

6,342

 

$

6,015

 

Work-in-process

 

4,643

 

14,506

 

Finished goods

 

27,956

 

14,369

 

Inventory

 

38,941

 

34,890

 

Included in other assets:

 

 

 

 

 

Raw materials

 

30,445

 

35,110

 

Work-in-process

 

1,906

 

 

Finished goods

 

1,130

 

 

Total

 

$

72,422

 

$

70,000

 

 

Inventory included in other assets within the condensed consolidated balance sheets as of June 30, 2012, and December 31, 2011, represents the amount of ENTEREG inventory held that is in excess of the amount expected to be sold within one year. In connection with the acquisition of Adolor in December 2011, Cubist recorded the acquired ENTEREG inventory at its fair value, which required a step-up adjustment to recognize the inventory at its expected net realizable value. The inventory step-up is recorded to cost of product revenues within the condensed consolidated statements of comprehensive income as the related inventory is sold, which is expected to be over a period of approximately eight years.

 

J.              EMPLOYEE STOCK BENEFIT PLANS

 

Summary of Stock-Based Compensation Plans

 

In June 2012, the Company’s stockholders approved, and the Company adopted the 2012 Equity Incentive Plan, or 2012 EIP, which replaced the Company’s 2010 Equity Incentive Plan, or 2010 EIP, and the Company’s Amended and Restated 2002 Directors’ Equity Incentive Plan, or Directors’ EIP, and is the only existing equity compensation plan from which the Company may make equity-based awards to employees, directors and consultants. Under the 2012 EIP, the Company has reserved 5,000,000 shares of common stock for grant to employees, officers, directors and consultants in the form of stock options, restricted stock, RSUs, performance units, stock grants and stock appreciation rights, plus the number of shares of common stock subject to stock options and RSUs granted and outstanding under the 2010 EIP, the Directors’ EIP and the Amended and Restated 2000 Equity Incentive Plan as of June 7, 2012, which become available for grant upon the

 

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forfeiture, cancellation, expiration or termination of those awards after June 7, 2012. Vesting conditions of the Company’s equity awards did not change as a result of the adoption of the 2012 EIP. At June 30, 2012, there were 4,984,006 shares remaining available for grant under the 2012 EIP.

 

Summary of Stock-Based Compensation Expense

 

Stock-based compensation expense recorded in the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2012 and 2011, is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

Stock-based compensation expense allocation:

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

$

85

 

$

48

 

$

172

 

$

94

 

Research and development

 

2,391

 

1,474

 

4,353

 

2,800

 

Selling, general and administrative

 

4,249

 

3,107

 

7,967

 

5,600

 

Total stock-based compensation

 

6,725

 

4,629

 

12,492

 

8,494

 

Income tax effect

 

(2,402

)

(1,759

)

(4,475

)

(3,228

)

After-tax effect of stock-based compensation expense

 

$

4,323

 

$

2,870

 

$

8,017

 

$

5,266

 

 

General Option Information

 

A summary of option activity for the six months ended June 30, 2012, is as follows:

 

 

 

Number of
shares

 

Weighted
Average
Exercise Price

 

Outstanding at December 31, 2011

 

8,238,838

 

$

22.60

 

Granted

 

1,520,390

 

$

41.91

 

Exercised

 

(801,324

)

$

19.36

 

Canceled

 

(171,326

)

$

28.57

 

Outstanding at June 30, 2012

 

8,786,578

 

$

26.12

 

 

 

 

 

 

 

Vested and exercisable at June 30, 2012

 

4,927,437

 

$

20.24

 

 

 

 

 

 

 

Weighted average grant-date fair value of options granted during the period

 

 

 

$

14.41

 

 

RSU Information

 

A summary of RSU activity for the six months ended June 30, 2012, is as follows:

 

 

 

Number of
shares

 

Weighted
Average Grant
Date Fair Value

 

Nonvested at December 31, 2011

 

642,236

 

$

28.38

 

Granted

 

305,646

 

$

42.02

 

Vested

 

(187,600

)

$

26.63

 

Forfeited

 

(37,750

)

$

28.02

 

Nonvested at June 30, 2012

 

722,532

 

$

34.62

 

 

K.           SEGMENT INFORMATION

 

Cubist has one operating segment, the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. The Company’s entire business is managed by a single

 

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management team, which reports to the Chief Executive Officer. For both of the three months ended June 30, 2012 and 2011, the Company generated approximately 95% of revenues within the U.S., and for the six months ended June 30, 2012 and 2011, the Company generated approximately 94% and 95% of revenues, respectively, within the U.S.

 

L.            INCOME TAXES

 

Cubist’s federal statutory rate for the three and six months ended June 30, 2012 and 2011, was 35.0%. The effective rate differs from the statutory rate as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Federal

 

35.0

%

35.0

%

35.0

%

35.0

%

State

 

1.6

%

3.3

%

1.8

%

6.4

%

Non-deductible expenses

 

0.7

%

0.8

%

0.7

%

0.3

%

Federal and state credits

 

0.0

%

-0.4

%

0.0

%

-2.0

%

Section 199 Deduction

 

-2.9

%

0.0

%

-2.9

%

0.0

%

Contingent consideration

 

1.3

%

-4.7

%

1.3

%

25.9

%

Reversal of uncertain tax positions

 

-21.7

%

0.0

%

-10.7

%

0.0

%

Other

 

0.2

%

-0.2

%

0.1

%

3.3

%

Effective tax rate

 

14.2

%

33.8

%

25.3

%

68.9

%

 

The decrease in the effective tax rate for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, is primarily due to the reversal of $16.9 million of gross uncertain tax positions, or $11.0 million net of federal tax benefit, during the three months ended June 30, 2012. In 2011, the Company established a reserve for uncertain tax positions upon making a decision to file amended state income tax returns for the years ended December 31, 2008 and 2009, and to file its 2010 and 2011 state income tax returns using the same filing positions as the amended 2008 and 2009 returns. During the three and six months ended June 30, 2012, the Company reached agreement with the Massachusetts tax authorities related to its state income tax filing positions and reversed its uncertain tax positions, resulting in an increase of $12.8 million in available state tax credit carryforwards and a reduction of its liability for uncertain tax positions.

 

As of December 31, 2011, the Company had federal, foreign and state net operating loss, or NOL, carryforwards of $157.1 million, $2.3 million and $32.9 million, respectively. Included in the NOLs and credit carryforwards are state NOLs and credit carryforwards of $2.2 million attributable to excess tax benefits from the exercise of non-qualified stock options. The tax benefits attributable to these NOLs and credit carryforwards are credited directly to additional paid-in capital when realized. These NOLs and credit carryforwards expire between 2012 and 2030. Of the total federal NOLs, approximately $149.0 million relate to NOLs that were acquired in connection with the acquisition of Adolor. These NOLs are subject to limitation under the Internal Revenue Code, Section 382. The Company expects to utilize approximately $33.1 million of Adolor’s federal NOLs by the end of 2012.

 

As of June 30, 2012, the Company had $13.1 million of uncertain tax positions, a decrease of $14.6 million from December 31, 2011, which was primarily the result of the agreement reached related to the filing of the amended state tax returns, as discussed above. Of the total uncertain tax positions as of June 30, 2012, $11.4 million was included in other long-term liabilities within the condensed consolidated balance sheet.

 

M. LEGAL PROCEEDINGS

 

In February 2012, the Company received a Paragraph IV Certification Notice Letter from Hospira, Inc., or Hospira, notifying Cubist that it had submitted an Abbreviated New Drug Application, or ANDA, to the U.S. Food and Drug Administration, or FDA, seeking approval to market a generic version of CUBICIN. Hospira’s notice letter advised that it is seeking FDA approval to market daptomycin for injection prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, U.S. Patent No. RE39,071, which expires on June 15, 2016, U.S. Patent No. 8,058,238, which expires on November 28, 2020, and U.S. Patent No. 8,003,673, which expires on September 4, 2028. In May 2012, the Company received a second Paragraph IV Certification Notice Letter from Hospira notifying Cubist that it had submitted to the FDA an amendment to its ANDA. Hospira’s second notice letter advised that it is seeking FDA approval to market daptomycin for injection prior to the expiration of U.S. Patent No. 8,129,342, which expires on November 28,

 

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2020. Each of these patents is listed in the FDA’s list of “Approved Drug Products with Therapeutic Equivalence Evaluations” (commonly referred to as the “Orange Book”). Both notice letters further stated that Hospira is asserting that each claim in the referenced patents is invalid, and/or unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the drug product described by Hospira’s ANDA, as amended. On March 21, 2012, Cubist filed a patent infringement lawsuit against Hospira in response to its initial ANDA filing. On July 9, 2012, Cubist filed a new complaint against Hospira to allege infringement of U.S. Patent No. 8,129,342 in response to Hospira’s amendment to its ANDA. The complaints, which were both filed in the U.S. District Court for the District of Delaware, respectively allege infringement of U.S. Patent Nos. 6,468,967; 6,852,689; RE39,071; 8,058,238; and 8,129,342. The complaints seek (i) an order preventing the effective date of the FDA’s approval of Hospira’s ANDA until the expiration of the patents in the respective lawsuits; (ii) an order preventing Hospira from making, using, selling, offering for sale, marketing, distributing or importing Hospira’s generic version of CUBICIN until the expiration of the patents in the respective lawsuits and; (iii) an award of attorney’s fees. By statute, the FDA is automatically prohibited from approving Hospira’s ANDA for 30 months from Cubist’s receipt of Hospira’s first Paragraph IV notification letter unless the court enters a judgment finding the patents invalid, unenforceable or not infringed before expiration of the 30-month period or otherwise shortens the 30-month period. The Company cannot predict the outcome of this matter. Any final, unappealable adverse result in the litigation would likely have a material adverse effect on the Company’s results of operations and financial condition.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains and incorporates by reference “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. In some cases, these statements can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “would,” “expect,” “anticipate,” “continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are based on current expectations and are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including the risks and uncertainties described or discussed in Item 1A under the heading “Risk Factors” in Part II of this report. The forward-looking statements contained and incorporated herein represent our judgment as of the date of this Quarterly Report on Form 10-Q, and we caution readers not to place undue reliance on such statements. The information contained in this Quarterly Report on Form 10-Q is provided by us as of the date of this Quarterly Report on Form 10-Q, and, except as required by law, we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

 

Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding our expectations with respect to:

 

(i)             our financial performance, including revenues, expenses, capital expenditures, gross margin and income taxes and our expected available cash and use of cash, including for the repayment of the outstanding amount of our 2.25% convertible subordinated notes, or 2.25% Notes, in June 2013;

 

(ii)          the commercialization and manufacturing of CUBICIN® (daptomycin for injection) and ENTEREG® (alvimopan) and the commercial success of DIFICID® (fidaxomicin);

 

(iii)       the strength of our intellectual property portfolio protecting CUBICIN and our ability to enforce this intellectual property portfolio; and

 

(iv)      our expectations regarding our drug candidates, including the anticipated timing and results of our clinical trials, timing of our meetings with, and submissions to, regulatory authorities, including the timing of our submission of a supplemental New Drug Application, or sNDA, seeking label expansion for the use of ENTEREG, and the development, regulatory filing and review and commercial potential of our drug candidates and the costs and expenses related thereto.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the condensed consolidated financial statements and accompanying notes to assist readers in understanding our results of operations, financial condition and cash flows. We have organized the MD&A as follows:

 

·                  Overview: This section provides a summary of our financial highlights, business developments and product and product pipeline updates for the three and six months ended June 30, 2012.

 

·                  Results of Operations: This section provides a review of our results of operations for the three and six months ended June 30, 2012 and 2011.

 

·                  Liquidity and Capital Resources: This section provides a summary of our financial condition, including our sources and uses of cash, capital resources, commitments and liquidity.

 

·                  Commitments and Contingencies: This section provides a summary of our material legal proceedings and commitments and contingencies that are outside our normal course of business, as well as our commitment to make potential future milestone payments to third parties as part of our various business agreements.

 

·                  Critical Accounting Policies and Estimates: This section describes our critical accounting policies and the significant judgments and estimates that we have made in preparing our condensed consolidated financial statements.

 

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·                  Recent Accounting Pronouncements: This section provides a summary of recently issued accounting pronouncements.

 

Overview

 

We are a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. Such products and product candidates are used, or are being developed to be used in hospitals and other acute care settings, including home infusion and hospital outpatient clinics. Cubist has two marketed products, CUBICIN and ENTEREG. We acquired ENTEREG in connection with the acquisition of Adolor Corporation, or Adolor, in December 2011. We also co-promote DIFICID in the United States, or U.S., under our co-promotion agreement with Optimer Pharmaceuticals, Inc., or Optimer. In addition, Cubist has three late-stage drug candidates and several pre-clinical programs, each being developed to address areas of significant medical needs.

 

CUBICIN is a once-daily, bactericidal, intravenous antibiotic with proven activity against methicillin-resistant Staphylococcus aureus (S. aureus), or MRSA. CUBICIN is approved in the U.S., the European Union, or EU, Japan and many other countries for the treatment of certain infections caused by Gram-positive bacteria, including treatment for certain bloodstream infections. ENTEREG is approved in the U.S. to accelerate upper and lower gastrointestinal, or GI, recovery following partial large or small bowel resection surgery with primary anastomosis. ENTEREG is not approved for marketing outside of the U.S. DIFICID is approved in the U.S. for the treatment of Clostridium difficile-associated diarrhea, or CDAD.

 

Financial Highlights

 

The following table is a summary of our financial results for the periods presented:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions, except per share data)

 

U.S. CUBICIN revenues, net

 

$

200.2

 

$

168.6

 

$

384.9

 

$

322.3

 

U.S. ENTEREG revenues, net

 

9.7

 

 

19.1

 

 

International product revenues

 

11.4

 

7.7

 

24.0

 

16.1

 

Total worldwide product revenues, net

 

$

221.3

 

$

176.3

 

$

428.0

 

$

338.4

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

43.1

 

$

(20.6

)

$

75.9

 

$

2.0

 

Basic net income (loss) per common share

 

$

0.68

 

$

(0.34

)

$

1.20

 

$

0.03

 

Diluted net income (loss) per common share

 

$

0.58

 

$

(0.34

)

$

1.04

 

$

0.03

 

 

Business Developments

 

The following is a summary of significant business developments that occurred during the six months ended June 30, 2012, or that impacted the period thereof. For additional 2011 developments or for a more comprehensive discussion of certain developments discussed below, see our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission, or SEC, on February 27, 2012, or 2011 Form 10-K.

 

ANDA Notification/Patent Litigation in U.S.

 

In February 2012, we received a Paragraph IV Certification Notice Letter from Hospira, Inc., or Hospira, notifying us that it had submitted an Abbreviated New Drug Application, or ANDA, to the U.S. Food and Drug Administration, or FDA, seeking approval to market a generic version of CUBICIN. Hospira’s notice letter advised that it is seeking FDA approval to market daptomycin for injection prior to the expiration of U.S. Patent Nos. 6,468,967 and 6,852,689, which expire on September 24, 2019, U.S. Patent No. RE39,071, which expires on June 15, 2016, U.S. Patent No. 8,058,238, which expires on November 28, 2020, and U.S. Patent No. 8,003,673, which expires on September 4, 2028. In May 2012, we received a second Paragraph IV Certification Notice Letter from Hospira notifying us that it had submitted to the FDA an amendment to its ANDA. Hospira’s second notice letter advised that it is seeking FDA approval to market daptomycin for injection prior to the expiration of U.S. Patent No. 8,129,342, which expires on November 28, 2020. Each of these patents is listed in the FDA’s list of “Approved Drug Products with Therapeutic Equivalence Evaluations,” or the Orange Book. Both notice letters further stated that Hospira is asserting that each claim in the referenced patents is invalid, and/or unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the drug product described by Hospira’s ANDA,

 

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as amended. On March 21, 2012, Cubist filed a patent infringement lawsuit against Hospira in response to its initial ANDA filing. On July 9, 2012, Cubist filed a new complaint against Hospira to allege infringement of U.S. Patent No. 8,129,342 in response to Hospira’s amendment to its ANDA. The complaints, which were both filed in the U.S. District Court for the District of Delaware, respectively allege infringement of U.S. Patent Nos. 6,468,967; 6,852,689; RE39,071; 8,058,238; and 8,129,342. The complaints seek (i) an order preventing the effective date of the FDA’s approval of Hospira’s ANDA until the expiration of the patents in the respective lawsuits; (ii) an order preventing Hospira from making, using, selling, offering for sale, marketing, distributing or importing Hospira’s generic version of CUBICIN until the expiration of the patents in the respective lawsuits; and (iii) an award of attorney’s fees. By statute, the FDA is automatically prohibited from approving Hospira’s ANDA for 30 months from Cubist’s receipt of Hospira’s first Paragraph IV notification letter unless the court enters a judgment finding the patents invalid, unenforceable or not infringed before expiration of the 30-month period or otherwise shortens the 30-month period. Any final, unappealable adverse result in the litigation would likely have a material adverse effect on our results of operations and financial condition. We are confident in our intellectual property portfolio protecting CUBICIN, including the patents listed in the Orange Book.

 

Acquisition of Adolor

 

In December 2011, we completed our acquisition of Adolor. Under the terms of the agreement and plan of merger, we paid Adolor’s former stockholders $4.25 in cash for each share of Adolor common stock, or approximately $220.8 million, in aggregate,  which we funded from our existing cash balances. Adolor’s former stockholders also received one non-transferable contingent payment right, or CPR, which represents the right to receive up to an additional $4.50 in cash for each share of Adolor common stock owned, or up to approximately $233.8 million in aggregate, which Cubist will pay upon achievement of certain regulatory milestones, sales milestones or a combination of both, related to CB-5945. The fair value of the purchase price was estimated to be $331.0 million and was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. See Note C., “Business Combinations and Acquisitions,” in the accompanying notes to condensed consolidated financial statements for additional information.

 

Repurchase of Convertible Subordinated Notes

 

In June 2012, we repurchased $74.7 million aggregate principal amount of our outstanding 2.25% Notes, in privately-negotiated transactions, which we funded from our existing cash balances. Cubist repurchased the 2.25% Notes at an average price of approximately $136.07 per $100 par value of debt plus accrued interest and transaction fees, resulting in a cash outflow of $102.6 million. The repurchase resulted in a net loss of $3.7 million for the three and six months ended June 30, 2012. See Note G., “Debt,” in the accompanying notes to condensed consolidated financial statements for additional information.

 

Product and Product Pipeline Updates

 

In July 2012, we announced first patient enrollment in a Phase 3 clinical trial of CB-315, which we are developing for the treatment of CDAD. We are also developing CB-5945 for the treatment of chronic opioid-induced constipation, or OIC, and we expect to initiate a Phase 3 clinical trial by the end of 2012.

 

In April 2012, we announced that a Phase 4 clinical study of ENTEREG in patients undergoing radical cystectomy met its primary endpoint of time to achieve recovery of both upper and lower GI function. We expect to submit an sNDA seeking label expansion for the use of ENTEREG to accelerate the time to upper and lower GI recovery in patients undergoing this procedure by the end of 2012.

 

We are developing ceftolozane/tazobactam, or CXA-201, as a potential therapy for the treatment of certain serious Gram-negative bacterial infections in the hospital, including those caused by multi-drug-resistant Pseudomonas aeruginosa. First patient enrollment in a Phase 3 clinical trial of CXA-201 for the treatment of complicated intra-abdominal infections, or cIAI, occurred in December 2011, which triggered a $30.0 million milestone payment that we made to the former stockholders of Calixa Therapeutics Inc., or Calixa, in January 2012. We also have an ongoing Phase 3 clinical trial of CXA-201 for the treatment of complicated urinary tract infections, or cUTI. We plan to file a New Drug Application, or NDA, for cUTI and cIAI indications by the end of 2013 and a subsequent filing of a marketing authorization application outside the U.S., assuming positive Phase 3 clinical trial results in both cUTI and cIAI. We also are planning to pursue the development of CXA-201 as a potential treatment for hospital-acquired bacterial pneumonia, or HABP, and ventilator-associated bacterial pneumonia, or VABP, and expect to begin Phase 3 clinical trials of CXA-201 for VABP in the second half of 2012.

 

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Table of Contents

 

In addition, we continue to seek opportunities to build our pipeline of acute care therapies through our business development efforts and to progress compounds into clinical development that we have developed internally.

 

Results of Operations for the Three Months Ended June 30, 2012 and 2011

 

Revenues

 

The following table sets forth net revenues for the periods presented:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2012

 

2011

 

% Change

 

 

 

(in millions)

 

 

 

U.S. product revenues, net

 

$

209.9

 

$

168.6

 

25

%

International product revenues

 

11.4

 

7.7

 

47

%

Service revenues

 

8.7

 

 

N/A

 

Other revenues

 

0.6

 

0.5

 

27

%

Total revenues, net

 

$

230.6

 

$

176.8

 

30

%

 

Product Revenues, net

 

Cubist’s net U.S. product revenues included $200.2 million of sales of CUBICIN and $9.7 million of sales of ENTEREG for the three months ended June 30, 2012, as compared to $168.6 million of net U.S. product revenues from sales of CUBICIN for the three months ended June 30, 2011. We did not have any ENTEREG revenues for the three months ended June 30, 2011, because we had not yet acquired Adolor. Gross U.S. product revenues totaled $241.9 million and $192.9 million for the three months ended June 30, 2012 and 2011, respectively. The $49.0 million increase in gross U.S. product revenues was due to: (i) price increases of 5.5% for CUBICIN in both July 2011 and January 2012, which resulted in $23.5 million of additional gross U.S. product revenues; (ii) an increase of approximately 8.0% in vial sales of CUBICIN in the U.S., which resulted in higher gross U.S. product revenues of $15.3 million; and (iii) revenues related to the addition of ENTEREG to our product portfolio in December 2011.

 

Gross U.S. product revenues are offset by provisions for the three months ended June 30, 2012 and 2011, as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(in millions)

 

Gross U.S. product revenues

 

$

241.9

 

$

192.9

 

Provisions offsetting U.S. product revenues:

 

 

 

 

 

Contractual adjustments

 

(14.1

)

(11.3

)

Governmental rebates

 

(17.9

)

(13.0

)

Total provisions offsetting product revenues

 

(32.0