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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 PERIOD ENDED JUNE 30, 2002
OR
/ / 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, MASSACHUSETTS 02421
(Address of principal executive offices)
(781) 860-8660
(Registrant's telephone number, including area code)
(Former name, former address and former
fiscal year, if changed since last report)
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 / /
As of August 13, 2002 there were 28,563,321 shares outstanding of
Cubist's common stock, $0.001 per value per share.
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CUBIST PHARMACEUTICALS, INC.
INDEX
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001................... 3
Consolidated Statements of Operations for the six months ended June 30, 2002 and 2001
and for the three months ended June 30, 2002 and 2001................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001... 5
Notes to the Consolidated Unaudited Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
2
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30, DECEMBER 31,
2002 2001
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 63,950,758 $ 120,322,157
Short-term investments................................................ 98,098,547 68,514,144
Accounts receivable, prepaid expenses and other current assets........ 1,253,579 1,502,334
----------------- ----------------
Total current assets................................................ 163,302,884 190,338,635
Property and equipment, net............................................ 48,954,714 48,056,157
Intangible assets, net................................................. 4,665,372 5,632,659
Restricted cash........................................................ 3,250,000 3,250,000
Long-term investments.................................................. 32,770,863 54,298,378
Other assets .......................................................... 13,568,181 13,258,366
----------------- ----------------
Total assets........................................................ $ 266,512,014 $ 314,834,195
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 1,060,092 $ 7,336,002
Accrued clinical trial expenses....................................... 4,750,842 6,409,682
Accrued expenses...................................................... 6,870,843 7,156,775
Accrued interest...................................................... 2,054,819 2,143,309
Deferred revenue...................................................... 3,100,000 5,600,000
Current portion of long-term debt..................................... 2,011,112 3,206,760
Current portion of capital lease obligations.......................... 50,990 473,725
----------------- ----------------
Total current liabilities........................................... 19,898,698 32,326,253
Deferred revenue....................................................... 4,000,078 4,300,080
Long-term debt, net of current portion................................. 209,342,021 208,707,284
----------------- ----------------
Total liabilities................................................... 233,240,797 245,333,617
Stockholders' equity:
Preferred stock, non-cumulative; convertible, $.001 par value;
Authorized 5,000,000 shares; no shares issued and outstanding 2002
and 2001........................................................... -- --
Common stock, $.001 par value; authorized 50,000,000 shares;
28,563,321 and 28,298,566 shares issued and outstanding as of June
30, 2002 and December 31, 2001, respectively....................... 28,563 28,298
Additional paid-in capital.......................................... 251,942,746 247,508,469
Accumulated deficit................................................. (218,700,092) (178,036,189)
----------------- ----------------
Total stockholders' equity......................................... 33,271,217 69,500,578
----------------- ----------------
Total liabilities and stockholders' equity............... $ 266,512,014 $ 314,834,195
================= ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS.
3
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------------- ---------------- ----------------- ----------------
Research and development revenue $ 1,689,625 $ 2,743,643 $ 3,147,477 $ 4,298,261
Related party research and development
revenue 637,500 605,000 1,499,376 1,429,747
----------------- ---------------- ----------------- ----------------
Total revenue 2,327,125 3,348,643 4,646,853 5,728,008
Operating expenses:
Research and development 14,700,047 16,576,087 27,473,476 32,989,663
General and administrative 6,876,893 4,407,984 14,451,198 8,917,730
----------------- ---------------- ----------------- ----------------
Total operating expenses 21,576,940 20,984,071 41,924,674 41,907,393
Interest income 1,523,130 1,943,230 3,000,432 4,322,070
Interest expense (3,534,346) (1,095,673) (6,789,437) (2,198,735)
Other income (expense) 84,996 (44,087) 402,923 (378,561)
----------------- ---------------- ----------------- ----------------
Net loss $ (21,176,035) $ (16,831,958) $ (40,663,903) $ (34,434,611)
================= ================ ================= ================
Basic and diluted net loss per common
share $ (0.74) $ (0.60) $ (1.43) $ (1.23)
================ =============== ================= ================
Weighted average number of common shares
for basic and diluted net loss per
common share 28,519,475 28,026,075 28,463,255 27,970,886
================= ================= ================= ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS.
4
CUBIST PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
2002 2001
---- ----
Cash flows used for operating activities:
Net loss....................................................... $ (40,663,903) $ (34,434,611)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Loss (gain) on the sale of equipment........................... 4,109 (2,000)
Gain on the sale of investments................................ -- (83,835)
Depreciation and amortization.................................. 2,978,412 2,236,623
Amortization of debt issuance costs............................ 482,895 132,620
Amortization of deferred compensation.......................... 287,291 392,775
Stock based compensation....................................... 767,086 --
Forgiveness of note receivable related to Common Stock......... 168,750 --
Realized foreign exchange (gain) loss, net..................... (69,875) 378,561
Changes in assets and liabilities:
Accounts receivable.......................................... 106,353 143,329
Prepaid expenses and other current assets.................... 158,575 1,145,650
Other assets................................................. (792,709) (3,130,759)
Accounts payable and accrued expenses........................ (6,340,281) 3,770,881
Deferred revenue............................................. (2,800,002) 10,200,000
------------------ -----------------
Total adjustments.......................................... (5,049,396) 15,183,845
------------------ -----------------
Net cash used for operating activities....................... (45,713,299) (19,250,766)
------------------ -----------------
Cash flows from investing activities:
Purchases of property and equipment............................ (2,913,576) (4,209,166)
Proceeds from the sale of equipment............................ 3,800 2,000
Purchases of investments....................................... (66,455,244) (4,805,272)
Maturities of investments...................................... 58,398,356 27,483,686
------------------ -----------------
Net cash (used for) provided by investing activities......... (10,966,664) 18,471,248
------------------ -----------------
Cash flows from financing activities:
Issuance of Common Stock and warrants, net..................... 1,392,037 947,731
Repayments of long term debt................................... (1,250,154) (577,095)
Proceeds from long-term debt................................... 685,182 --
Principal payments of capital lease obligations................ (423,155) (313,816)
------------------ -----------------
Net cash provided by financing activities.................... 403,910 56,820
------------------ -----------------
Net decrease in cash and cash equivalents........................ (56,276,053) (722,698)
Effect of changes in foreign exchange rates on cash balances..... (95,346) (119,270)
Cash and cash equivalents, beginning of period................... 120,322,157 46,940,277
------------------ -----------------
Cash and cash equivalents, end of period......................... $ 63,950,758 $ 46,098,309
================== =================
Supplemental non-cash investing and financing activities:
Issuance of common stock upon conversion of long-term debt....... -- 2,171,004
Issuance of common stock......................................... $ 2,000,000 --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS.
5
CUBIST PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is a specialty pharmaceutical company
focused on the research, development and commercialization of novel
antimicrobial drugs to combat serious and life-threatening bacterial and fungal
infections. Cubist has established multiple technology licenses and
collaborations and has established a network of advisors and collaborators.
Cubist is headquartered in Lexington, Massachusetts.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements include
the accounts of Cubist and its wholly-owned subsidiaries. All significant
intercompany amounts and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation are reflected in the interim
periods presented. These unaudited consolidated financial statements do not
include all information and footnote disclosures required by accounting
principles generally accepted in the United States of America and therefore
should be read in conjunction with Cubist's audited financial statements and
related footnotes for the year ended December 31, 2001 which are included in
Cubist's Annual Report on Form 10-K. Such Annual Report on Form 10-K was filed
with the Securities and Exchange Commission on March 29, 2002.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed using the weighted average number
of shares of common stock outstanding. Diluted net loss per share does not
differ from basic net loss per share since potential common shares from stock
options and warrants are antidilutive for all periods presented and are
therefore excluded from the calculation. At June 30, 2002 and 2001 options to
purchase 4,152,091 and 3,973,493 shares of common stock, respectively, warrants
to purchase 1,478,359, and 1,578,359 shares of common stock, respectively, and
convertible debt and notes payable convertible into 4,106,450 and 610,687 shares
of common stock, respectively, were not included in the computation of diluted
net loss per share since their inclusion would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002". SFAS No. 145 eliminates SFAS No. 4 "Reporting
Gains and Losses from Extinguishment of Debt", which required companies to
classify gains or losses from the extinguishment of debt as an extraordinary
item, net of tax. As a result of this new SFAS, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occuring Events and Transactions". We
are currently evaluating the impact of adoption of this statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue No.
94-3 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is
incurred, whereas EITF No. 94-3 had allowed the liability to be recorded at
the commitment date of an exit plan. The Company is required to adopt the
provisions of SFAS 146 effective for exit or disposal activities initiated
after December 31, 2002 and is currently evaluating the impact of adoption of
this statement.
C. RESEARCH AND DEVELOPMENT AGREEMENTS
In June 2000, Cubist entered into a services agreement with DSM, an
affiliated company of DSM Capua, pursuant to which DSM agreed to provide
supervisory and advisory services to Cubist relating to the equipping of the
manufacturing facility at DSM Capua. Cubist also entered into a manufacturing
and supply agreement with DSM Capua pursuant to which DSM Capua agreed to
manufacture and supply to Cubist bulk daptomycin drug substance for commercial
purposes. Under the terms of the manufacturing and supply agreement, DSM Capua
is required to prepare its manufacturing facility in Italy to manufacture bulk
daptomycin drug substance in accordance with good manufacturing practices, or
GMP, standards. Under the terms of the services agreement, Cubist will make a
series of scheduled payments to DSM over a five-year period beginning in 2000 in
order to reimburse DSM for certain costs of approximately $8.2 million to be
incurred by DSM Capua in connection with the scale-up and construction of its
manufacturing facility. Through June 30, 2002, Cubist has reimbursed $5,995,000
of these costs to DSM Capua. These costs are being recorded as other assets and
will begin to be amortized upon completion of the facility and commencement of
manufacturing daptomycin for commercial purposes. In addition, in consideration
for the implementation of the Cubist technology in the facility by DSM Capua,
Cubist agreed to make milestone payments of $1,400,000 to DSM if specific phases
of technical development of the scaled up manufacturing process to be used in
this manufacturing facility are completed within specified periods of time.
This obligation has been fully accrued for as of June 30, 2002 and Cubist has
incurred expenses of $164,000 and $164,000 in the six months ended June 30, 2002
and 2001, respectively. Upon completion of the preparation of DSM Capua's
manufacturing facility and a determination by the FDA that the manufacturing
facility complies with GMP standards, Cubist will purchase minimum annual
quantities of bulk daptomycin drug substance from DSM over a five-year period.
On February 3, 1999, Cubist entered into a research and license
agreement with Novartis to use Cubist's proprietary VITA functional genomics
technology to validate and develop assays for antiinfective targets and to
identify new compounds for development as antiinfective agents. In exchange for
the license, Novartis funded a research program for a period of three years. If
certain scientific and development milestones are achieved, Novartis will make
milestone payments to Cubist. In addition, Novartis will be required to pay
royalties to Cubist on worldwide sales of any drug developed and commercialized
from any products derived from this collaboration. Cubist recorded revenue of
$1,499,000 and $1,377,000 in the six months ended June 30, 2002 and 2001,
respectively, for certain research and development revenues and milestone
payments in accordance with the agreement. Upon the signing of the research and
license agreement, Novartis was issued 797,448 shares of common stock for a
total purchase price of $4.0 million in cash. In February 2002, Cubist announced
the extension by one year of the collaborative research agreement with Novartis.
D. STOCKHOLDERS' EQUITY
NOTES RECEIVABLE FROM RELATED PARTIES
In September 1999, Cubist accepted a promissory note from a Senior
Vice President in consideration for 50,000 shares of restricted common stock
issued to him. The aggregate principal amount of this note at December 31, 2001
is $168,750 and is reflected in stockholders' equity as a reduction to
paid-in-capital. This note had an annual interest rate of 4% and was to become
due on September 25, 2002. The terms of the note provide for the note to be
forgiven in three equal annual installments of $168,750, commencing September
2000 contingent upon the Senior Vice President's continued employment. As part
of the Senior Vice President's termination of employment on March 15, 2002, the
third installment was forgiven and the note was cancelled. In addition, unvested
stock options were accelerated, and we recognized an associated expense of
$767,000 in the six months ended June 30, 2002.
E. INTANGIBLE ASSETS
In June 2001, FASB issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets, collectively referred to as the
"Standards". SFAS 141 supersedes APB No. 16, Business Combination. The
provisions of SFAS 141 (i) require that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001, (ii) provide
specific criteria for the initial recognition and measurement of intangible
assets apart from goodwill, and (iii) require that amortized negative goodwill
be written off immediately as an extraordinary gain instead of being deferred
and amortized. SFAS 141 also requires that upon adoption of SFAS 142, a company
reclassify the carrying amounts of certain intangible assets into or out of
goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible
Assets, and is effective for fiscal years beginning after December 15, 2001.
SFAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of SFAS 142 (i) prohibit
the amortization of goodwill
7
and indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangibles assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (iii)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (iv) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
SFAS 142 requires that goodwill be tested annually for impairment
using a two-step process. The Company does not have any goodwill at June 30,
2002. We reviewed intangible assets subject to amortization in accordance
with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" and determined that certain patents
relating to the Canadian operation should be written-off as these patents had
no realizable value due to lack of usefulness. As a result, an associated
expense of $202,000 has been included in general and administrative expense
for the six months ended June 30, 2002.
Intangible assets at June 30, 2002 are comprised of patents in the
amount of $3,734,498, net of accumulated amortization of $1,133,446 and other
intangibles in the amount of $930,874, net of accumulated amortization of
$4,456,757. Intangible assets at December 31, 2001 are comprised of patents
in the amount of $4,102,445, net of accumulated amortization of $1,006,169
and other intangibles in the amount of $1,530,216, net of accumulated
amortization of $3,228,124.
F. SUBSEQUENT EVENTS
On July 29, 2002, Cubist announced the achievement of a fourth
milestone in the ongoing collaboration with Novartis for the delivery of another
validated target and high-throughput screening assay to be used in antiinfective
drug discovery and expects to receive a milestone payment of $250,000 in the
third quarter of 2002.
On July 31, 2002, Cubist entered into a license agreement with
Biochemie GmbH, for the exclusive worldwide rights to CAB-175, a proprietary
compound, for the purpose of developing and commercializing CAB-175. In
consideration for such license, Cubist made an upfront license fee payment of
$1.5 million upon execution of the license agreement which will be recorded
as an expense in the third quarter of 2002 and could pay up to $27.5 million
if certain clinical and regulatory milestones are achieved. In addition,
Cubist will be required to pay royalties to Biochemie on worldwide sales of
any drug developed and commercialized from any products derived from this
license.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS
QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, BUT NOT LIMITED TO, (i) OUR
ABILITY TO SUCCESSFULLY COMPLETE PRODUCT RESEARCH AND DEVELOPMENT, INCLUDING
PRE-CLINICAL AND CLINICAL STUDIES AND COMMERCIALIZATION, (ii) OUR ABILITY TO
OBTAIN REQUIRED GOVERNMENTAL APPROVALS, (iii) OUR ABILITY TO ATTRACT AND/OR
MAINTAIN MANUFACTURING, SALES, DISTRIBUTION AND MARKETING PARTNERS, (iv) OUR
ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS BEFORE OUR COMPETITORS, (v)
OUR FUTURE CAPITAL REQUIREMENTS AND THE EXPECTED TIME PERIOD DURING WHICH OUR
EXISTING FINANCIAL RESOURCES WILL MEET THESE CAPITAL REQUIREMENTS, (vi) OUR
EXPECTATIONS REGARDING BUSINESS CONDITIONS GENERALLY AND GROWTH IN THE
BIOPHARMACEUTICAL INDUSTRY AND OVERALL ECONOMY, AND (vii) CERTAIN STATEMENTS
IDENTIFIED OR QUALIFIED BY WORDS SUCH AS "LIKELY", "WILL", "SUGGESTS", "MAY",
"WOULD", "COULD", "SHOULD", "EXPECTS", "ANTICIPATES", "ESTIMATES", "PLANS",
"PROJECTS", "BELIEVES", OR SIMILAR EXPRESSIONS (AND VARIANTS OF SUCH WORDS OR
EXPRESSIONS). YOU ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS 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, BUT NOT LIMITED
TO, THE RISKS AND UNCERTAINTIES DESCRIBED OR DISCUSSED IN THE SECTION "RISK
FACTORS" IN CUBIST'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN REPRESENT
CUBIST'S JUDGMENT AS OF THE DATE OF THIS QUARTERLY REPORT ON FORM 10-Q, AND
CUBIST CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS.
OVERVIEW
Since our incorporation on May 1, 1992 and commencement of operations
in February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections. We have a limited history of
operations and have experienced significant net losses since inception. We had
an accumulated deficit of $218.7 million through June 30, 2002. We expect to
incur significant additional
8
operating losses over the next several years and expect cumulative losses to
increase due to expanded research and development efforts, pre-clinical testing
and clinical trials, and the development of manufacturing, marketing and sales
capabilities.
In June 2000, Cubist entered into a services agreement with DSM, an
affiliated company of DSM Capua, pursuant to which DSM agreed to provide
supervisory and advisory services to Cubist relating to the equipping of the
manufacturing facility at DSM Capua. Cubist also entered into a manufacturing
and supply agreement with DSM Capua pursuant to which DSM Capua agreed to
manufacture and supply to Cubist bulk daptomycin drug substance for commercial
purposes. Under the terms of the manufacturing and supply agreement, DSM Capua
is required to prepare its manufacturing facility in Italy to manufacture bulk
daptomycin drug substance in accordance with GMP standards. Under the terms of
the services agreement, Cubist will make a series of scheduled payments to DSM
over a five-year period beginning in 2000 in order to reimburse DSM for certain
costs of approximately $8.2 million to be incurred by DSM Capua in connection
with the scale-up and construction of its manufacturing facility. Through June
30, 2002, Cubist has reimbursed $5,995,000 of these costs to DSM Capua. These
costs are being recorded as other assets and will begin to be amortized upon
completion of the facility and commencement of manufacturing daptomycin for
commercial purposes. In addition, in consideration for the implementation of the
Cubist technology in the facility by DSM Capua, Cubist agreed to make milestone
payments of $1,400,000 to DSM if specific phases of technical development of the
scaled up manufacturing process to be used in this manufacturing facility are
completed within specified periods of time. Cubist has incurred expenses of
$164,000 and $164,000 in the six months ended June 30, 2002 and 2001,
respectively. Upon completion of the preparation of DSM Capua's manufacturing
facility and a determination by the FDA that the manufacturing facility complies
with GMP standards, Cubist will purchase minimum annual quantities of bulk
daptomycin drug substance from DSM over a five-year period.
On January 7, 2001, we and Gilead Sciences, Inc. signed a licensing
agreement for the exclusive rights to commercialize Cidecin and an oral
formulation of daptomycin in 16 European countries following regulatory
approval. Gilead has paid us an up-front licensing fee of $10.0 million for
Cidecin and $3.0 million for an oral formulation of daptomycin, which were
recorded to deferred revenue and are being recognized over the life of the
development period of 2 years and 5 years, respectively. Accordingly, revenue of
$2,800,000 was recognized in the six months ended June 30, 2002 and 2001.
On April 10, 2001, we achieved the first milestone in our
collaboration with Gilead following the successful completion of Study 9901, our
pivotal Phase III trial examining the safety and efficacy of Cidecin in the
treatment of complicated skin and soft tissue, or cSST, caused by Gram-positive
bacteria. On April 23, 2001, Gilead paid us $1.25 million for meeting the
primary endpoint of the clinical trial. This milestone was recognized as revenue
in the six months ended June 30, 2001.
While we do not currently maintain cost accounting systems to
accurately track costs on an individual project basis, based on an estimated
average full-time equivalent basis, we estimate that in the six months ended
June 30, 2002, we incurred costs in an approximate aggregate amount of
$1,646,000 in connection with all of our research collaborations which generated
approximately $1,499,000 of revenue in the aggregate in the six months ended
June 30, 2002; and based on an estimated average full-time equivalent basis, we
estimate that in the six months ended June 30, 2001, we incurred costs in an
approximate aggregate amount of $1,131,000 in connection with all of our
research collaborations which generated approximately $1,377,000 of revenue in
the aggregate in the six months ended June 30, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
RESEARCH AND DEVELOPMENT REVENUES. Total research and development
revenues in the three months ended June 30, 2002 were $1,690,000 compared to
$2,744,000 in the three months ended June 30, 2001, a decrease of $1,054,000 or
38.4%. The revenue earned in the three months ended June 30, 2002 consisted of
$1,400,000 in license fee revenue from Gilead and $290,000 in funding from SBIR
grants. The research and development revenues earned in the three months ended
June 30, 2001 consisted of $1,400,000 in license fee revenue from Gilead,
$1,250,000 in milestone revenue from Gilead and $94,000 in funding from SBIR
grants.
9
RELATED PARTY RESEARCH AND DEVELOPMENT REVENUES. Total related party
research and development revenues in the three months ended June 30, 2002 were
$638,000 compared to $605,000 in the three months ended June 30, 2001, an
increase of $33,000 or 5.5%. The related party research and development revenues
earned in the three months ended June 30, 2002 consisted of $638,000 in research
support funding from the Novartis collaboration. The related party research and
development revenues earned in the three months ended June 30, 2001 consisted of
$563,000 in research support funding from the Novartis collaboration and $42,000
in research support funding from the Xenova collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the three months ended June 30, 2002 were $14,700,000 compared to
$16,576,000 in the three months ended June 30, 2001, a decrease of $1,876,000 or
11.3%. The decrease was largely due to decreased clinical trial costs related to
daptomycin development due to the completion of our Phase III trials for the
treatment of cSST infections and community-acquired pneumonia.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the three months ended June 30, 2002 were $6,877,000 compared to
$4,408,000 in the three months ended June 30, 2001, an increase of $2,469,000
or 56.0%. The increase was largely due to increased staffing levels, expanded
senior management team, training and consulting totalling $1,451,000 or 58.8%
of the increase, and increased pre-marketing costs of $1,018,000 or 41.2% of
the increase associated with our anticipated commercial product launch.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended
June 30, 2002 was $1,523,000 compared to $1,943,000 in the three months ended
June 30, 2001, a decrease of $420,000 or 21.6%. The decrease in interest income
was due primarily to significantly lower interest rates during the three months
ended June 30, 2002 as compared to the three months ended June 30, 2001.
Interest expense in the three months ended June 30, 2002 was $3,534,000 as
compared to $1,096,000 during the three months ended June 30, 2001, an increase
of $2,438,000 or 222.4%. The increase in interest expense was primarily due to
increased long-term debt related to the issuance of 5 1/2% convertible
subordinated notes.
OTHER INCOME (EXPENSE). Other income in the three months ended June
30, 2002 was $85,000 compared to other expense of $44,000 in the three months
ended June 30, 2001. The increase in other income was primarily due to
sublease income of $76,000 and no foreign exchange gain or loss recorded for
our Canadian subsidiary due to the closure and relocation of our Vancouver
operations to our corporate headquarters in March 2002.
NET LOSS. The net loss during the three months ended June 30, 2002 was
$21,176,000 compared to $16,832,000 during the three months ended June 30, 2001,
an increase of $4,344,000 or 25.8%. The increase was primarily due to increased
interest expense due to the issuance of 5 1/2% convertible subordinated notes,
decreased interest income due to significantly lower interest rates, and reduced
milestone revenue from Gilead.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
RESEARCH AND DEVELOPMENT REVENUES. Total research and development
revenues in the six months ended June 30, 2002 were $3,147,000 compared to
$4,298,000 in the six months ended June 30, 2001, a decrease of $1,151,000 or
26.8 %. The revenue recognized in the six months ended June 30, 2002
consisted of $2,800,000 in license fee revenue from Gilead and $347,000 in
SBIR grants. In the six months ended June 30, 2001, revenues consisted of
$2,800,000 in license fee revenue from Gilead, $1,250,000 in milestone
revenue from Gilead and $248,000 in funding from SBIR and other grants.
RELATED PARTY RESEARCH AND DEVELOPMENT REVENUES. Total related party
research and development revenues in the six months ended June 30, 2002 were
$1,499,000 compared to $1,430,000 in the six months ended June 30, 2001, an
increase of $69,000 or 4.8%. The related party research and development revenues
earned in the six months ended June 30, 2002 consisted of $1,249,000 in research
support funding and $250,000 in milestone payments from the Novartis
collaboration. The related party research and development revenues earned in the
six months ended June 30, 2001 consisted of $1,125,000 in research support
funding and $250,000 in milestone payments from the Novartis collaboration and
$55,000 in research support funding from the Xenova collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the six months ended June 30, 2002 were $27,473,000 compared to
$32,990,000 in the six months ended June 30, 2001, a decrease of $5,517,000 or
16.7%.
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The decrease was largely due to decreased clinical trial costs related to
daptomycin development due to the completion of our Phase III trials for the
treatment of cSST infections and community-acquired pneumonia.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the six months ended June 30, 2002 were $14,451,000 compared to
$8,918,000 in the six months ended June 30, 2001, an increase of $5,533,000
or 62.0%. The increase was largely due to non-cash stock based compensation
expense of $767,000 or 13.9%, costs related to increased staffing levels,
expanded senior management team, training and consulting totalling $2,292,000
or 41.4%, and increased pre-marketing costs of $2,474,000 or 44.7% associated
with our anticipated commercial product launch.
INTEREST INCOME AND EXPENSE. Interest income in the six months
ended June 30, 2002 was $3,000,000 compared to $4,322,000 in the six months
ended June 30, 2001, a decrease of $1,322,000 or 30.6%. The decrease in
interest income was due primarily to lower average cash, cash equivalents and
investment balances and significantly lower interest rates during the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001.
Interest expense in the six months ended June 30, 2002 was $6,789,000 as
compared to $2,199,000 during the six months ended June 30, 2001, an increase
of $4,590,000 or 208.7%. The increase in interest expense was primarily due
to increased long-term debt related to the issuance of 5 1/2% convertible
subordinated notes.
OTHER INCOME (EXPENSE). Other income in the six months ended June 30,
2002 was $403,000 compared to other expense of $379,000 in the six months ended
June 30, 2001. The increase in other income was primarily due to sublease income
of $318,000 and no foreign exchange gain or loss recorded for our Canadian
subsidiary due to the closure and relocation of our Vancouver operations to our
corporate headquarters in March 2002.
NET LOSS. The net loss during the six months ended June 30, 2002 was
$40,664,000 compared to $34,435,000 during the six months ended June 30, 2001,
an increase of $6,229,000 or 18.1%. The increase was primarily due to increased
interest expense due to the issuance of convertible subordinated notes,
decreased interest income due to significantly lower interest rates, and reduced
milestone revenue from Gilead.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of
equity securities, convertible debt securities, equipment financing, sponsored
research revenues, license revenues and interest earned on invested capital. Our
total cash, cash equivalents and investments balance, excluding restricted cash,
at June 30, 2002 was $194,820,000 compared to $243,135,000 at December 31, 2001.
Net cash used in operating activities was $45.7 million in the first
six months of 2002 and $19.3 million in the first six months of 2001. Our loss
was $40.7 million for the first six months of 2002 and $34.4 million for the
first six months of 2001. For the six months ended June 30, 2002, net cash used
in operating activities reflects the net loss adjusted for non-cash items
totaling $4.6 million, which consisted primarily of depreciation and
amortization expense of $3.0 million and stock based compensation of $0.8
million as well as a decrease in accounts payable and accrued expenses and
deferred revenue totaling $9.1 million. For the six months ended June 30, 2001,
net cash used in operating activities reflects the net loss adjusted for
depreciation and amortization of $2.2 million as well as an increase in other
assets, accounts payable and accrued expenses of $6.9 million and an increase in
deferred revenue of $10.2 million due to an upfront licensing fee payment
received from Gilead.
Net cash used for and provided by investing activities was $11.0
million and $18.5 million in the first six months of 2002 and 2001,
respectively. Net cash used in investing activities in the first six months of
2002 included $8.1 million for purchases of investments, net of proceeds from
maturities and $2.9 million for capital expenditures. During the first six
months of 2001 cash was provided by the net maturity of investments.
During the six months ended June 30, 2002 and 2001, we received
cash proceeds of approximately $1.4 million and $0.9 million, respectively,
from the issuance of common stock upon the exercise of stock options.
11
During March 1999, Cubist entered into a term loan agreement with a
bank under which Cubist is able to borrow up to $1,500,000 to finance fixed
asset purchases. In March 2000, Cubist increased its term loan by an additional
$2,000,000 to finance leasehold improvements and fixed asset purchases. Advances
under this facility are to be repaid over a 36-month period, commencing on March
31, 2000. Interest on the borrowings is at the bank's LIBOR rate (4.29% at June
30, 2002). Borrowings under the facility are collateralized by all capital
equipment purchased with the funds from this term loan. In September 2001, we
increased our term loan by an additional $6,500,000 to finance leasehold
improvements and fixed asset purchases for the new corporate headquarters
building. Advances under this facility are to be repaid over a 48-month period,
commencing on March 29, 2002. Interest on the borrowings is at the bank's LIBOR
rate (4.29% at June 30, 2002). Borrowings under the facility are collateralized
by all capital equipment purchased with the funds under this term loan and a
minimum collateral amount of $3,250,000 through March 31, 2002. This collateral
amount is reflected as restricted cash. In April 2002, the term loans were
consolidated and are being repaid over a 48-month period. At June 30, 2002,
borrowings outstanding totaled $7,541,865. During the six months ended June 30,
2002, Cubist drew down $0.6 million under this facility.
COMMITMENTS AND CONTINGENCIES
Our major outstanding contractual obligations relate to our
convertible notes, our term loans and our facilities leases. Our facilities
leases expense in future years will decrease as we have purchased a new
corporate headquarters in 2000.
The aggregate outstanding total of our convertible notes is $204.0
million. These notes consist of $165.0 million of 5 1/2% convertible
subordinated notes due 2008, and $39.0 million of 8 1/2% senior convertible
notes due 2005. Both the convertible subordinated notes and the senior
convertible notes require semi-annual indirect payments through maturity.
THE FOLLOWING SUMMARIZES CUBIST'S CONTRACTUAL OBLIGATIONS AT JUNE 30, 2002 AND
THE EFFECT SUCH OBLIGATIONS ARE EXPECTED TO HAVE ON ITS LIQUIDITY AND CASH FLOW
IN THE FUTURE PERIODS:
LAST SIX
MONTHS 2008 AND
2002 2003 2004 2005 2006 2007 THEREAFTER
------- ------- ------- ------- ------- ------- ----------
(in millions)
CONTRACTUAL OBLIGATIONS:
Senior convertible notes ........... $ 1.7 $ 3.3 $ 3.3 $ 42.3 $ -- $ -- $ --
Subordinated convertible notes ..... 4.5 9.1 9.1 9.1 9.1 9.1 174.1
Term loan .......................... 1.7 2.3 2.2 2.1 -- -- --
Capital lease obligations .......... 0.1 -- -- -- -- -- --
Operating leases ................... 0.4 0.7 0.5 0.6 0.5 0.6 1.8
--------------------------------------------------------------------------
Total contractual obligations ...... $ 8.4 $ 15.4 $ 15.1 $ 54.1 $ 9.6 $ 9.7 $ 175.9
==========================================================================
COMMERCIAL COMMITMENTS:
Clinical CRO costs ................. $ 11.7 $ -- $ -- $ -- $ -- $ -- $ --
Manufacturing ...................... 0.9 1.1 1.1 1.8 0.75 0.75 2.2
Licenses and collaborations ........ 4.9 1.5 2.5 3.5 -- 5.00 12.0
--------------------------------------------------------------------------
Total commercial commitments ....... $ 17.5 $ 2.6 $ 3.6 $ 5.3 $ 0.75 $ 5.75 $ 14.2
==========================================================================
On July 31, 2002, Cubist entered into a license agreement with
Biochemie GmbH for the purpose of developing and commercializing a certain
proprietary compound. The agreement requires Cubist to make future payments
upon the achievement of certain milestones, including the completion of
clinical trials and the approval of a licensed product by regulatory
authorities. The aggregate maximum future milestone payments under the
contract are $26.0 million and are expected to be paid over the next 7 years.
We believe that our existing cash resources, existing capital
resources, projected interest income and future revenues due under our
collaborative agreements, will be sufficient to fund our operating expenses and
capital requirements as currently planned through the next 18 months. Our actual
cash requirements may vary materially from those now planned and will depend on
numerous factors. We cannot be sure that our existing cash, cash equivalents,
other capital resources, interest income and future revenues due under our
collaborative agreements will be sufficient to fund our operating expenses and
capital requirements during that period.
CRITICAL ACCOUNTING POLICIES
In our Form 10-K for the year ended December 31, 2001, our most
critical accounting policies and estimates upon which our financial
statements were derived were identified as those relating to revenue
recognition, accrued liabilities, investments, intangible and long-lived
assets and income taxes. We reviewed our policies and determined that such
policies remain our most critical accounting policies for the quarter and six
months ended June 30, 2002. We did not make any changes to such policies
during the quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002". SFAS No. 145 eliminates SFAS No. 4 "Reporting
Gains and Losses from Extinguishment of Debt", which required companies to
classify gains or losses from the extinguishment of debt as an extraordinary
item, net of tax. As a result of this new SFAS, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occuring Events and Transactions". We
are currently evaluating the impact of adoption of this statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS146) which nullifies EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other
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Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No. 94-3 had allowed the liability to be recorded at the commitment
date of an exit plan. The Company is required to adopt the provisions of SFAS
146 effective for exit or disposal activities initiated after December 31, 2002
and is currently evaluating the impact of adoption of this statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in information affecting our
market risk since the end of the fiscal year ended December 31, 2001 as
described in Item 7A of our Form 10-K for the year ended December 31, 2001,
filed with the Securities and Exchange Commission on March 29, 2002, and through
June 30, 2002.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 26, 2001, we completed the private placement of $125
million of 5 1/2% convertible subordinated notes (less estimated financing costs
of $4,055,096). The offering was made through initial purchasers to qualified
institutional buyers under Rule 144A of the Securities Act. The notes are
convertible at any time prior to maturity into common stock at a conversion
price of $47.20 per share, subject to adjustment upon certain events. Interest
is payable on each November 1 and May 1, beginning May 1, 2002. In addition, on
December 28, 2001, the initial purchasers exercised their option to purchase
$40.0 million of 5 1/2% convertible subordinated notes (less estimated financing
costs of $827,320). The offering was made through the same initial purchasers to
qualified institutional buyers under Rule 144A of the Securities Act. The notes
are convertible at any time prior to maturity into common stock at a conversion
price of $47.20 per share, subject to adjustment upon certain events. Interest
is payable on each November 1 and May 1, beginning May 1, 2002. The notes mature
on November 1, 2008. The notes are subordinated to our senior indebtedness.
Proceeds from the Rule 144A offering will be used to advance the
clinical trials and commercialization strategy of Cubist's investigational
antibiotic Cidecin, our oral ceftriaxone pre-clinical program, the oral
daptomycin pre-clinical program, the lipopeptide drug discovery program, the
continued development and use of the natural products, VITA functional genomics
and ChemInformatics technologies, and for working capital and general corporate
purposes.
On January 31, 2002, we issued 62,558 shares of common stock to ACS
Dobfar, SpA in connection with a certain manufacturing and supply agreement,
dated as of September 30, 2001. The issuance and sale of such shares of
common stock was made in reliance on Regulation S of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2002 Annual Meeting of Stockholders was held June 13,
2002. The following is a description of the three matters submitted to a vote of
the stockholders at such meeting and the results of the voting.
(a) At the meeting two Class III directors were elected to serve on the
Company's Board of Directors.
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Number of Shares
Number of Shares Voted Against
Director Elected Voted For Or Withheld
---------------- --------- -----------
John K. Clarke 23,587,530 255,406
Scott M. Rocklage 23,765,652 77,284
Dr. Paul Schimmel chose not to stand for re-election as a director.
Therefore, although Dr. Schimmel appeared as a nominee in our proxy statement,
he did not stand for re-election as a Class III director. The Class III director
seat previously held by Dr. Schimmel is currently vacant.
The following directors' terms of office as directors continued after
the meeting: Susan B. Bayh, Barry Bloom, David W. Martin, Jr., Walter Maupay and
John Zabriskie.
(b) The stockholders ratified, adopted and approved the Amended and
Restated 2000 Equity Incentive Plan. This proposal received 15,608,104 votes
for, 8,203,890 votes against, 30,942 shares abstaining and no broker non-votes.
(c) The stockholders ratified, adopted and approved the 2002
Directors' Stock Option Plan. This proposal received 20,977,721 votes for,
2,830,509 votes against, 34,706 shares abstaining and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amended and Restated 2000 Equity Incentive Plan
10.2 2002 Directors' Stock Option Plan
10.3 License Agreement, dated as of July 31, 2002, by and
between Cubist Pharmaceuticals, Inc. and Biochemie
GmbH
99.1 Certification pursuant to 18 U.S.C. Section 1305, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1305, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
A current report on Form 8-K was filed by Cubist with the
Securities and Exchange Commission on June 14, 2002, with respect to
the results of matters submitted to the stockholders for a vote at
Cubist's annual meeting held on June 13, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CUBIST PHARMACEUTICALS, INC.
August 14, 2002 By: /s/ THOMAS A SHEA
--------------------
Thomas A. Shea,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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