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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _________________ to _________________
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.)
24 Emily Street, Cambridge, MA 02139
(Address of principal executive offices and Zip Code)
(617) 576-1999
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-X is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the registrant's common stock, $.001 par
value per share ("Common Stock"), held by non-affiliates of the registrant as of
March 3, 1998 was approximately $30,956,565 based on 5,759,361 shares held by
such non-affiliates at the closing price of a share of Common Stock of $5.375 as
reported on the Nasdaq National Market on such date. Affiliates of the Company
(defined as officers, directors and owners of 10 percent or more of the
outstanding share of Common Stock) owned 4,821,541 shares of Common Stock
outstanding on such date. The number of outstanding shares of Common Stock of
the Company on March 3, 1998 was 10,580,902.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be delivered
to stockholders in connection with the Annual Meeting of Stockholders to be held
on May 21, 1998 are incorporated by reference into Part III hereof. With the
exception of the portions of such Proxy Statement expressly incorporated into
this Annual Report on Form 10-K by reference, such Proxy Statement shall not be
deemed filed as part of this Annual Report on Form 10-K.
CUBIST PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Item Page
- ------ ----
Part I
1 Business......................................................................................... 3
2 Description of Property .........................................................................24
3 Legal Proceedings................................................................................24
4 Submission of Matters to a Vote of Security Holders..............................................24
Part II
5 Market For Registrant's Common Stock and Related Stockholder Matters.............................24
6 Selected Financial Data..........................................................................25
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................................26
7A Quantitative and Qualitative Disclosures About Market Risk.......................................32
8 Financial Statements and Supplementary Data.......................................................32
9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure........................................................................................47
Part III
10 Directors and Executive Officers of the Registrant...............................................48
11 Executive Compensation...........................................................................48
12 Security Ownership of Certain Beneficial Owners and Management...................................48
13 Certain Relationships and Related Transactions...................................................48
Part IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................48
Signatures.......................................................................................51
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Except for the historical information contained herein, this Annual
Report on Form 10-K 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) statements about the
adequacy of the Company's cash, cash equivalents, other capital resources,
interest income, other income and future revenues due under the Company's
collaborative agreements to fund its operating expenses and capital requirements
as currently planned through mid-1999, (ii) statements about the amount of
capital expenditures that the Company expects to incur in 1998, (iii) statements
about the Company's plans to begin clinical trials of daptomycin in the fourth
quarter of 1998 or the first quarter of 1999, and (iv) 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). Investors 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 this
Annual Report on Form 10-K. The forward-looking statements contained herein
represent the Company's judgment as of the date of this Annual Report on Form
10K, and the Company cautions readers not to place undue reliance on such
statements.
PART I
ITEM 1. BUSINESS
The Company
Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a
biopharmaceutical company focused on the discovery, development and
commercialization of novel small molecule antiinfectives to treat drug resistant
pathogens. The acceleration of the Company's process to discover and develop
novel compounds is executed by screening novel genomic target assays to identify
new lead compounds and optimizing these compounds into development candidates,
developing in-licensed drug candidates and balancing risk with pharmaceutical
and technology collaborations.
Overview of Infectious Disease and Drug Resistance
Infectious diseases are caused by bacteria and fungi present in the
environment that enter the body through the skin or mucous membranes of the
lungs, nasal passages or gastrointestinal tract, and overwhelm the body's immune
system. These pathogens then establish themselves in various tissues and organs
throughout the body and cause a number of serious and, in some cases, lethal
infections, including those of the bloodstream, heart, lung, liver and urinary
tract.
Antiinfective drugs have, in many cases, proven highly successful in
controlling the serious morbidity and mortality that accompany these infections.
These drugs work by chemically binding to specific targets in a bacterial or
fungal pathogen, thereby inhibiting a
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cell function essential to its survival. Currently available antiinfective drugs
can be divided into the following four broad categories, according to the type
of essential cell function they inhibit: (i) protein synthesis (e.g.,
tetracyclines, macrolides and aminoglycosides), (ii) cell wall and membrane
synthesis (e.g., penicillins, cephalosporins, carbapenems, glycopeptides and
polyenes), (iii) nucleic acid synthesis (e.g., fluoroquinolones) and (iv) cell
metabolism (e.g., trimethoprim, sulfonamides, azoles and allylamines).
Recently, there has been a rise in the incidence of infectious diseases
caused by bacteria and fungi that have developed resistance to existing
antiinfective drugs. This phenomenon has been well documented in the medical
literature. A number of serious pathogens such as Staphylococcus aureus,
Streptococcus pneumoniae, Enterococcus faecalis, Enterococcus faecium,
Escherichia coli, Haemophilus influenzae, Pseudomonas aeruginosa, Mycobacterium
tuberculosis, Candida albicans, Aspergillus fumigatus and Aspergillus flavus
have shown significant evidence of drug resistance.
The increasing prevalence of antiinfective drug resistance is a natural
outcome of the use and overuse of antiinfective drugs. When bacteria or fungi
are exposed to an antiinfective drug, the drug kills or attenuates the growth of
the susceptible pathogen. However, any variant in the bacterial population that
has spontaneously undergone a genetic change that confers drug resistance will
have a selective growth advantage, which is known in evolutionary terms as
natural selection. Thus, the antiinfective drug does not technically cause the
resistance but creates a situation in which the resistant pathogen can multiply
in the presence of the drug, increasing the population approximately a
millionfold in a day and quickly becoming the predominant microorganism. These
resistant bacteria can then spread rapidly from the infected patient to healthy
individuals.
Bacteria and fungi have evolved multiple resistance mechanisms against
currently available categories of antiinfective drugs. These mechanisms include:
(i) utilization of an enzyme to alter the drug's structure by creating or
destroying chemical bonds, (ii) modification of the cell membrane to block entry
of the drug, (iii) utilization of a protein to pump the drug out of their cells
before the drug binds to the target and (iv) alteration of the target to
significantly limit the ability of the antiinfective drug to bind to the target.
Bacteria and fungi change the target by mutation of the target's protein
sequence, by chemical modification of the target structure or by the acquisition
of a new gene from another pathogen that substitutes for the target function.
Traditional drug discovery approaches have not met the challenge posed
by drug-resistant pathogens. To date, biology-based approaches have attempted to
identify compounds that kill or attenuate the growth of the pathogen using
whole-cell screening assays. This approach is limited because compounds that
could effectively inhibit a target function inside the cell, but are unable to
penetrate cell membranes, are not identified by whole-cell screening assays.
Thus, entire classes of effective inhibitors of intracellular targets, which
could be modified by medicinal chemistry to penetrate cell membranes, have
potentially been overlooked. Chemistry-based approaches have focused on
chemically modifying the molecular structure of existing antiinfective drugs or
combining existing antiinfective drugs with another agent (an antibiotic
potentiator) to circumvent established drug resistance mechanisms. Despite the
introduction of second and third generation
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antiinfective drugs, certain pathogens have developed resistance to all
currently available drugs. Examples include:
Methicillin resistant Staphylococcus aureus ("MRSA"): S. aureus is a
common bacterial pathogen causing skin infections and colonization of the nares
(entrance to the nose). It is also a frequent hospital-borne pathogen, and
routinely acquires characteristics of drug resistance, virulence and toxicity
through bacterial genetic transfer. MRSA strains can cause severe tissue damage
to existing wounds and bacteremia (blood-borne infections), which has a 42%
mortality rate.
Vancomycin resistant enterococci ("VRE"): Vancomycin is regarded by
many medical practitioners as the "last line of defense" against virulent
Gram-positive bacteria species. The emergence of VRE strains in the 1990's has
led to infections for which no approved therapy exists. Vancomycin resistance is
found in both Enterococcus faecium and Enterococcus faecalis. Resulting VRE
bacteremia has a 55% mortality rate.
Vancomycin intermediate susceptible Staphyloccus aureus ("VISA"): The
first reports of S. aureus infections with decreased susceptibility to
vancomycin therapy occurred in 1997. Such bacterial strains have been found in a
wide geographical area throughout Japan and North America. Resistance
progression from VISA is expected to be the emergence of fully drug resistant S.
aureus strains that the medical community has long feared.
Cubist Development Program
Daptomycin
Daptomycin, the Company's lead product, is a novel antiinfective agent
with bactericidal activity against all major Gram-positive bacteria. The
compound has already demonstrated safety and efficacy in Phase II clinical
trials, and is currently being developed in both intravenous ("IV") and oral
formulations to treat infections and colonizations, respectively, in
hospitalized patients. Cubist plans to initiate Phase III clinical trials of IV
daptomycin for the treatment of skin and skin structure and urinary tract
infections in late 1998 or early 1999, subject to Food and Drug Administration
("FDA") approval. Early clinical trials with the oral formulation of daptomycin
for the eradication of VRE from the gastrointestinal tract are planned for 1999.
Daptomycin is an antiinfective agent believed to bind to lipoteichoic acid and
disrupt the cell membrane. Because daptomycin utilizes a novel target for its
antimicrobial activity, there is no "built-in" resistance mechanism in existing
bacterial populations. Daptomycin has already been shown to be effective against
pathogens that have developed resistance to conventional antibiotics.
In February of 1998, the Company contracted with ACS Dobfar of Milan,
Italy to manufacture daptomycin. The Company estimates initial delivery of GMP
daptomycin for clinical trial use in the fourth quarter and plans to begin
clinical trials soon thereafter.
Intravenous Product:
In Phase II clinical studies conducted to date, IV daptomycin has
demonstrated safety and efficacy for the treatment of skin and skin structure
infections caused by Gram-positive
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bacteria such as S. aureus and Streptococcus pyogenes. Approximately 300
subjects have received various doses of IV daptomycin in Phase I and II trials.
Approximately 70% of the multiple dose regimens administered were at a dose of 2
mg/kg per day or higher. No toxicity was experienced at doses between 2 mg/kg
per day and 6 mg/kg per day. Daptomycin was associated with minimal, reversible
muscle toxicity at dose levels of 8 mg/kg per day in 2 of 5 volunteers. All
signs of muscle toxicity subsided within several days of discontinuation of
treatment. Daptomycin has shown promising in vitro activity against
life-threatening drug resistant pathogens, including MRSA, VRE and VISA.
At a dose of 2 mg/kg per day, daptomycin was comparable to conventional
therapy in the treatment of Gram positive infections, particularly skin and skin
structure infections with a 96.8% favorable response and may exhibit greater
efficacy than conventional therapy against resistant bacterial infections. The
Company plans to commence Phase III clinical trials in late 1998 or early 1999
to treat skin and skin structure infections and urinary tract infections,
subject to FDA approval.
Oral Product:
A growing problem in healthcare is the spread of drug resistant
infections from patient to patient within the hospital environment. Transmission
of VRE often leads to bacterial colonization of the gastrointestinal tract in
medical and surgical patients, and can lead to subsequent systemic infections
with high mortality rates.
The Company is developing oral daptomycin to eradicate VRE from the
gastrointestinal tract prior to the occurrence of a potential systemic
infection. The gastrointestinal tract is one of the sources of VRE that can
cause skin, soft tissue and urinary tract infections which can lead to
bacteremia. Cubist plans to enter early clinical trials in 1999, subject to FDA
approval.
The Company estimates between 40,000 and 200,000 hospitalized patients
in the United States require isolation due to VRE colonization each year.
The Cubist Discovery Program
Cubist is identifying novel chemical classes of compounds that inhibit
new targets in bacteria or fungi resulting in impaired cell growth or pathogen
killing. The Company expects that drugs inhibiting these new targets would be
immediately effective against currently drug-resistant bacteria and fungi since
these pathogens have not had an opportunity to evolve resistance specific to
these new drugs. In addition, the Company is developing and implementing novel
technologies to accelerate this process of drug discovery.
To discover novel antiinfectives for clinical development, the Cubist
discovery platform integrates the scientific disciplines and technologies
required for target validation and assay development, high-throughput screening
and medicinal chemistry.
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Target Validation and Assay Development
The genomics explosion has resulted in the identification of a wealth
of novel targets for drug discovery. There is a great need, at the earliest
point in the discovery process to select the best targets from among the many
available. The Company utilizes its proprietary CubeBiotools(TM) bioinformatics
software to process and analyze microbial genomics information for target
identification. Targets are chosen for further development based upon an
evaluation of genetic, biochemical and microbial physiology data. The Company
has developed VITATm, a technology to expeditiously validate targets for
antiinfective drug therapy by analyzing the inhibition of a target during an
established infection in a mouse model system using a method that has analogies
to how an antibiotic inhibits it's target during an infection. The Company is
currently focusing on implementing the technology to validate targets from
clinically relevant pathogens such as Staphylococcus aureus.
To date, the Company has developed over 100 proprietary antiinfective
target assays that are currently being utilized in the discovery and
characterization of lead compounds. The Company has broadened its target
pipeline beyond its initial program based upon the aminoacyl-tRNA synthetase
enzymes to include targets from a variety of functional areas. Some of the
essential functions these targets play a role in include tRNA processing,
protein synthesis, protein secretion, DNA replication, protein targeting and
protein translocation. These assays were developed from organisms including
Staphylococcus aureus, Enterococcus faecalis, Escherichia coli, Streptococcus
pneumoniae, Haemophilus influenzae, Mycobacterium tuberculosis and Helicobacter
pylori bacteria, Candida albicans and Pneumocystis carinii fungi and cultured
human cells. A series of secondary and tertiary screens have also been developed
to analyze compounds for whole cell activity and intracellular mechanism of
action.
High Throughput Screening
Cubist utilizes state of the art technologies in automation, robotics and assay
technologies to perform high-throughput screening of compound libraries to
identify novel inhibitors. Thousands of compounds a day are screened in these
assays. Inhibitors are further characterized using Cubist's secondary screening
assays where increasingly stringent selection criteria are applied to identify
drug candidates with the greatest potential for successful development.
Molecules used in the Cubist screening program currently originate from
four sources: (i) Cubist's proprietary rational design chemistry programs, (ii)
Cubist's proprietary combinatorial chemistry programs, (iii) academic and
industrial collaborations and (iv) commercial sources. Selection of these
compounds was intended to provide broad chemical diversity and include compound
classes which have traditionally yielded antibacterial and antifungal compounds.
The Cubist combinatorial chemistry program generates two types of libraries,
general and lead-specific. The general libraries are designed to provide Cubist
with a diversity of molecular structures which can be used in conjunction with
high-throughput screening to identify novel lead compounds which inhibit
selected targets. Cubist constructs lead-specific libraries based on principles
of rational drug design using structural templates demonstrated to interact with
the target enzymes. A relational database is utilized to manage and analyze the
high-throughput screening data and chemical compound structure information.
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Medicinal Chemistry
Cubist optimizes the pharmaceutical properties of lead compounds, which have
been identified by its high-throughput screening through the iterative use of
medicinal chemistry and in vitro biological assays. The Company's medicinal
chemistry efforts are directed towards increasing the throughput of synthesis of
optimized analogues of specific lead compounds utilizing chemical technologies
including focused arrays, combinatorial libraries and computational chemistry.
Lead compounds enter a high-speed chemical analoging program which generates
large numbers of structurally-related compounds. Analogs are evaluated for
numerous biological properties including (i) spectrum of inhibitory potency
against a given enzyme from a variety of pathogens, (ii) selectivity for the
pathogen target versus the human homolog, (iii) inhibitory potency against
multiple targets from a single pathogen and (iv) spectrum of activity against
whole cells, including drug-resistant strains, to determine potential clinical
indication. Cubist subsequently evaluates, in animal models, drug candidates
exhibiting suitable potency, spectrum and selectivity to determine their
pharmacological and toxicological properties. Novel chemical classes of leads
with potent and selective enzyme activity and whole cell activity have been
selected for focused optimization utilizing these technologies and are the basis
of current medicinal chemistry programs.
The breadth and depth of the target validation and assay development program in
combination with the high throughput screening capacity and medicinal chemistry
optimization technologies provide multiple opportunities to discover novel
chemical classes of antiinfectives.
Collaborative Agreements
The Company has entered into drug discovery and development
collaboration agreements with Bristol-Myers Squibb Company ("Bristol-Myers
Squibb") and Merck & Co., Inc. ("Merck") to discover and develop novel
antiinfectives. In these collaborations, the collaborators' respective compound
libraries are screened against certain Cubist aminoacyl-tRNA synthetase targets.
Chemical compound structures are optimized into pre-clinical and clinical
development candidates. These collaborations have provided the Company with
funding, research and development resources, and access to libraries of diverse
compounds and clinical development, manufacturing and commercialization
capabilities. Through December 31, 1997, these collaborative partners and others
have provided the Company with $8.1 million of funding in the form of research
support payments, technology licensing fees and milestone payments and with a
$4.0 million equity investment.
Bristol-Myers Squibb
In June 1996, Cubist and Bristol-Myers Squibb entered into a
Collaborative Research and License Agreement (the "Bristol-Myers Squibb
Agreement") pursuant to which they agreed to collaborate to discover and develop
novel antiinfective drugs from leads obtained
8
by screening six of Cubist's aminoacyl-tRNA synthetase targets against
Bristol-Myers Squibb's compound library. In connection with the collaboration,
Bristol-Myers Squibb has made a $4.0 million equity investment in Cubist, has
made $1.5 million in milestone payments and has made research support payments
to Cubist. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations." Under the terms of the
Bristol-Myers Squibb Agreement, Cubist is entitled to receive additional
research support payments and, if certain milestones are achieved, additional
milestone payments from Bristol-Myers Squibb. Cubist has granted to
Bristol-Myers Squibb an exclusive worldwide license to commercialize drugs
resulting from this collaboration. The development, manufacture and worldwide
sale of drugs resulting from the collaboration will be conducted by
Bristol-Myers Squibb, and Cubist will be entitled to receive royalties on the
worldwide sales of any drug developed and commercialized from this
collaboration.
Merck
In June 1996, the Company and Merck entered into a Collaborative
Research and License Agreement (the "Merck Agreement") pursuant to which they
agreed to collaborate to discover and develop novel antiinfective drugs from
leads obtained by screening three of Cubist's aminoacyl-tRNA synthetase targets
against Merck's compound library. In connection with the collaboration, Merck
has made research support payments and has paid technology licensing fees to
Cubist. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations." Under the terms of the Merck
Agreement, Cubist is entitled to receive additional research support payments
and, if certain milestones are achieved, milestone payments from Merck. Cubist
has granted Merck an exclusive worldwide license to commercialize drugs
resulting from this collaboration. The development, manufacture and worldwide
sale of drugs resulting from the collaboration will be conducted by Merck, and
the Company will be entitled to receive royalties on the worldwide sales of any
drug developed and commercialized from this collaboration.
Other Collaborations
To obtain access to a diversity of chemical compounds for the Company's
internal drug discovery programs, Cubist has entered into screening agreements
with ArQule, Inc., Genzyme Corporation and Pharmacopeia, Inc. pursuant to which
Cubist screens such party's compound libraries against Cubist's proprietary
targets. Cubist has also entered into a Collaborative Research Agreement with
Novalon Pharmaceutical Corporation, a drug discovery company focused on the
development and application of novel technologies to screen genomics targets and
accelerate lead discovery. The agreement focuses on collaborative research by
Cubist and Novalon to develop and execute specific screens for antiinfective
drug discovery. Cubist will pay Novalon a percent of revenue received by Cubist
that relates to the use of the technology and currently pays a monthly payment
for research funding, salaries and supplies.
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Patents and Proprietary Technology
The Company seeks to protect its cloned targets, assays, organic
synthetic processes, lead compounds, screening technology and certain other
technology by, among other things, filing, or causing to be filed on its behalf,
patent applications. Cubist has three issued U.S. patents, 18 pending U.S.
patent applications and one pending international patent application. To date,
the Company has received a notice of allowance for nine of these U.S.
applications. Cubist has also licensed three U.S. patents. There can be no
assurance that patents will be granted with respect to any of the Company's
pending patent applications or with respect to any patent applications filed by
the Company in the future.
The commercial success of the Company will depend in part on not
infringing patents or proprietary rights of others. There can be no assurance
that the Company will be able to obtain a license to any third-party technology
it may require to conduct its business or that if obtainable, such technology
can be licensed at reasonable cost. Failure by the Company to obtain a license
to technology that it may require to utilize its technologies or commercialize
its products may have a material adverse effect on the Company's business,
operating results and financial condition. In some cases, litigation or other
proceedings may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company, to protect trade secrets, know-how or
other intellectual property rights owned by the Company, or to determine the
scope and validity of the proprietary rights of third parties. Any potential
litigation could result in substantial costs to and diversion of resources by
the Company and could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that any of
the Company's issued or licensed patents would ultimately be held valid or that
efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful. An adverse outcome in any such
litigation or proceeding could subject the Company to significant liabilities,
require the Company to cease using the subject technology or require the Company
to license the subject technology from the third party, all of which could have
a material adverse effect on the Company's business, operating results and
financial condition.
Much of the know-how of importance to the Company's technology and many
of its processes are dependent upon the knowledge, experience and skills, which
are not patentable, of key scientific and technical personnel. To protect its
rights to and to maintain the confidentiality of trade secrets and proprietary
information, the Company requires employees, Scientific Advisory Board members,
consultants and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
These agreements prohibit the disclosure of confidential information to anyone
outside the Company and require disclosure and assignment to the Company of
ideas, developments, discoveries and inventions made by employees, advisors,
consultants and collaborators. There can be no assurance, however, that these
agreements will not be breached or that the Company's trade secrets or
proprietary information will not otherwise become known or developed
independently by others.
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Government Regulation
Overview
The development, manufacture and marketing of drugs (including
antibiotics) developed by the Company or its collaborative partners are subject
to regulation by numerous governmental agencies in the United States,
principally the FDA, by state and local governments, and in some instances by
foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act and
the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the
pre-clinical and clinical trials, safety, effectiveness, manufacture, labeling,
storage, distribution, and promotion of drugs. Product development and approval
within the FDA regulatory framework usually takes a significant number of years,
involves the expenditure of substantial capital resources and is uncertain.
U.S. Regulatory Process
Before testing in the United States of any compounds with potential
therapeutic value in human test subjects may begin, stringent government
requirements for preclinical data must be satisfied. Pre-clinical testing
includes both in vitro and in vivo laboratory evaluation and characterization of
the safety and efficacy of a drug and its formulation. Pre-clinical testing
results obtained from studies in several animal species, as well as from in
vitro studies, are submitted to the FDA as part of an investigational new drug
application ("IND") and are reviewed by the FDA prior to the commencement of
human clinical trials. These pre-clinical data must provide an adequate basis
for evaluating both the safety and the scientific rationale for the initial
(Phase I) studies in human volunteers. Unless the FDA objects to an IND, the IND
becomes effective 30 days following its receipt by the FDA. Once trials have
commenced, the FDA may stop the trials by placing them on "clinical hold"
because of concerns about, for example, the safety of the product being tested.
Clinical trials involve the administration of the drug to healthy human
volunteers or to patients under the supervision of a qualified investigator,
usually a physician, pursuant to an FDA-reviewed protocol. Human clinical trials
are typically conducted in three sequential phases, although the phases may
overlap with one another. Clinical trials must be conducted under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND.
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, biodistribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to
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determine dose tolerance and the optimal dose range and to gather additional
information relating to safety and potential adverse effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for product
labeling. The Phase III clinical development program consists of expanded,
large-scale studies of patients with the target disease or disorder, to obtain
definitive statistical evidence of the efficacy and safety of the proposed
product and dosage regimen. All of the phases of clinical studies must be
conducted in conformance with the FDA's bioresearch monitoring regulations.
All data obtained from a comprehensive development program including
research and product development, manufacturing, pre-clinical and clinical
trials and related information are submitted in a new drug application ("NDA")
to the FDA and the corresponding agencies in other countries for review and
approval. In addition to reports of the trials conducted under the IND
application, the NDA includes information pertaining to the preparation of the
new drug or antibiotic, analytical methods, details of the manufacture of
finished products and proposed product packaging and labeling. Although the FDC
Act requires the FDA to review NDAs within 180 days of their filing, in practice
longer times may be required. The FDA also frequently requests that additional
information be submitted, requiring significant additional review time. Any
proposed product of the Company likely would be subject to demanding and
time-consuming NDA approval procedures in virtually all countries where
marketing of the products is intended. These regulations define not only the
form and content of safety and efficacy data regarding the proposed product but
also impose specific requirements regarding manufacture of the product, quality
assurance, packaging, storage, documentation and recordkeeping, labeling,
advertising and marketing procedures.
The FDA has developed two "fast track" policies for certain new drugs,
one policy for expedited development and review, and one policy for accelerated
approval. The expedited review policy applies to new drug therapies, including
antibiotics, that are intended to treat persons with life-threatening and
severely-debilitating illnesses, especially where no satisfactory alternative
therapy exists. The FDA has defined "severely-debilitating" to mean diseases or
conditions that cause major irreversible morbidity. During the developmental
stage of drugs that qualify, the FDA expedites consultation and review of these
experimental therapies.
The FDA's accelerated approval policy applies to certain new drug or
antibiotic products that have been studied for their safety and effectiveness in
treating serious or life-threatening illnesses and that provide "meaningful
therapeutic benefit to patients over existing treatments." This accelerated
approval, or fast track approach, is generally limited to new drugs or
antibiotics that treat patients that are unresponsive to, or intolerant of,
available therapy, or when there is improved patient response over currently
available therapy. The accelerated approval policy is further limited to drugs
for which the predictive value of the surrogate endpoint, in terms of clinical
outcome, has not been established. At
12
the time of approval, the FDA may grant approval on a surrogate endpoint or an
effect on a clinical endpoint other than survival or irreversible morbidity. The
FDA may impose certain restrictions on distribution, limiting its use to certain
facilities or specialty-trained physicians or making its use contingent on the
performance of certain specified medical procedures. Postmarketing studies
(Phase IV trials) are usually required to further affirm safety and/or efficacy.
However, if an acceptable clinical endpoint has been established, the drug must
be evaluated for approval under the traditional (non-fast track) approach.
The Company is also subject to regulation under other federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
Competition
The biotechnology and pharmaceutical industries are intensely
competitive and subject to rapid and significant technological change.
Competitors of the Company in the United States and elsewhere are numerous and
include, among others, major, multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other research
institutions. Many of these competitors employ greater financial and other
resources, including larger research and development staffs and more effective
marketing and manufacturing organizations, than the Company or its collaborative
partners. Acquisitions of competing companies and potential competitors by large
pharmaceutical companies or others could enhance financial, marketing and other
resources available to such competitors. As a result of academic and government
institutions becoming increasingly aware of the commercial value of their
research findings, such institutions are more likely to enter into exclusive
licensing agreements with commercial enterprises, including competitors of the
Company, to market commercial products. There can be no assurance that the
Company's competitors will not succeed in developing technologies and drugs that
are more effective or less costly than any which are being developed by the
Company or which would render the Company's technology and future drugs obsolete
and noncompetitive.
In addition, some of the Company's competitors have greater experience
than the Company in conducting pre-clinical and clinical trials and obtaining
FDA and other regulatory approvals. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for drug candidates more
rapidly than the Company. Companies that complete clinical trials, obtain
required regulatory agency approvals and commence commercial sale of their drugs
before their competitors may achieve a significant competitive advantage,
including certain patent and FDA marketing exclusivity rights that would delay
the Company's ability to market certain products. There can be no assurance
13
that drugs resulting from the Company's research and development efforts, or
from the joint efforts of the Company and its collaborative partners, will be
able to compete successfully with competitors' existing products or products
under development or that they will obtain regulatory approval in the United
States or elsewhere.
Employees
As of February 20, 1998, the Company had 66 full-time employees, 50 of
whom were engaged in research and development and 16 of whom were engaged in
management, administration and finance. Doctorates are held by 26 of the
Company's employees. The Company's employees are not covered by a collective
bargaining agreement. The Company has never experienced an employment-related
work stoppage and considers its employee relations to be good.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
- ------------------------------- ----- ------------------------------------
Scott M. Rocklage, Ph.D. 43 President, Chief Executive
Officer and Director
Francis P. Tally, M.D. 57 Executive Vice President, Scientific
Affairs
Mark P. Carthy 37 Vice President and Chief Business
Officer
Dennis D. Keith, Ph.D. 54 Vice President, Drug Discovery
14
Name Age Position
- ------------------------------- ----- ------------------------------------
Frederick B. Oleson, Jr., D.Sc. 49 Vice President, Drug Development
Thomas A. Shea 38 Senior Director of Finance &
Administration,
Treasurer
Dr. Rocklage has served as President and Chief Executive Officer and as
a member of the Board of Directors of the Company since July 1994. From 1990 to
1994, Dr. Rocklage served as President and Chief Executive Officer of Nycomed
Salutar, Inc., a diagnostic imaging company. From 1992 to 1994, he also served
as President and Chief Executive Officer and Chairman of Nycomed Interventional,
Inc., a medical device company. From 1986 to 1990, he served in various
positions at Salutar, Inc., a diagnostic imaging company and was responsible for
designing and implementing research and development programs that resulted in
three drug products in human clinical trials, including the approved drugs
Omniscan and Teslascan. Dr. Rocklage received his B.S. in Chemistry from the
University of California, Berkeley and his Ph.D. in Chemistry from the
Massachusetts Institute of Technology.
Mr. Carthy has served as Vice President and Chief Business Officer
since April 1997. Mr. Carthy joined Cubist from Vertex Pharmaceuticals Inc., a
biotechnology company, where he served most recently as Senior Director of
Business Development. Prior to joining Vertex, Mr. Carthy managed the chemical
filtration business for Millipore and was a member of the Mergers and
Acquisitions Department at Shearson Lehman Hutton. Mr. Carthy holds a Masters
Degree in Chemical Engineering from the University of Missouri and a Masters in
Business Administration from Harvard Business School.
Dr. Tally has served as Executive Vice President, Scientific Affairs
since January 1997. From March 1995 to January 1997, he served the Company as
Vice President of Research and Development. From 1986 to 1995, Dr. Tally served
as Executive Director of Infectious Disease, Molecular Biology and Natural
Products Research at the Lederle Laboratories of American Cyanamid/American Home
Products, where he was responsible for worldwide clinical studies for
piperacillin/tazobactam which was registered for sales in Europe in 1992,
approved by the FDA in 1993 and marketed as Zosyn. From 1975 to 1986, he served
as Senior Physician in Infectious Disease at the New England Medical Center and
Associate Professor of Medicine at Tufts Medical Center. Dr. Tally received his
A.B. in Biology from Providence College and his M.D. from George Washington
University School of Medicine.
Dr. Keith has served as Vice President, Drug Discovery since October
1997. Dr. Keith joined Cubist from Hoffman-La Roche Inc. where he served in
various positions from 1971-1997, the most recent of which was Director of
Antiinfective Chemistry. Dr. Keith received his B.S. in Chemistry from Bates
College and his Ph.D. in Organic Chemistry from Yale University.
15
Dr. Oleson has served as Vice President, Drug Development since
November 1997. Prior to joining Cubist, Dr. Oleson served as an independent
consultant from June 1997 to November 1997; Director of Preclinical Research at
AutoImmune, Inc., a biotechnology company, from January 1997 to June 1997;
Director, Toxicology and Preclinical Pharmacology at Biogen, Inc., a
biotechnology company, from 1992 to 1997 and in various positions at
Bristol-Myers Squibb from 1983 to 1992. Dr. Oleson was a key contributor in the
development of the Biogen drug AVONEX and a key consultant in the development of
Hirulog for The Medicines Company. Dr. Oleson received his B.S. in Biochemistry
from Princeton University and a Doctor of Science in Physiology/Radiation
Biology from Harvard University School of Public Health.
Mr. Shea has served as Treasurer and Chief Accounting Officer since
June 1996 and has served as Senior Director of Finance and Administration since
December 1997. Previous to that he was Director of Finance and Administration.
From 1987 to 1993, he served as Manager of Accounting/MIS and Budget and
Financial Analyst at ImmuLogic Pharmaceutical Corporation, a biotechnology
company. Mr. Shea received his B.S. in Accounting/Law from Babson College and
his Masters in Business Administration from Suffolk University.
Risk Factors
Stockholders and prospective purchasers of the Company's Common Stock
should carefully consider the following risk factors, in addition to the other
information appearing in this Annual Report on Form 10-K.
Early Stage of Product Development; No Assurance of Successful
Commercialization. Since inception, the Company has generated no revenue from
product sales. The Company's research and development programs are at an early
stage, and the Company does not expect that any drugs resulting from its
research and development efforts, or from the joint efforts of the Company and
its collaborative partners, will be commercially available for a significant
number of years, if at all. The Company has one drug candidate in preclinical
development and is currently in the process of optimizing lead candidates to
select other drug candidates for preclinical development. To date, the Company
has not, independently or with its collaborative partners, completed the
optimization of any lead candidates. Any drug candidates developed by the
Company will require significant additional research and development efforts,
including extensive preclinical (animal and in vitro data) and clinical testing
and regulatory approval, prior to commercial sale. Only one of the Company's
drug candidates has advanced to any phase of preclinical or clinical trials.
There can be no assurance that the Company's approach to drug discovery, acting
independently or with the efforts of any collaborative partner of the Company,
will be
16
effective or will result in the development of any drug. The Company's drug
candidates will be subject to the risks of failure inherent in the development
of pharmaceutical products based on new technologies. These risks include the
possibilities that any or all of the Company's drug candidates will be found to
be unsafe, ineffective or toxic or otherwise fail to meet applicable regulatory
standards or receive necessary regulatory clearances; that these drug
candidates, if safe and effective, will be difficult to develop into
commercially viable drugs or to manufacture on a large scale or will be
uneconomical to market; that proprietary rights of third parties will preclude
the Company from marketing such drugs; or that third parties will market
superior or equivalent drugs. The failure to develop safe, commercially viable
drugs would have a material adverse effect on the Company's business, operating
results and financial condition.
Uncertainty Due to Unproven Technology. The Company's drug discovery
approach faces technical issues which have not been resolved and requires the
development of multiple novel technologies to create a successful drug
candidate. While the Company has demonstrated that certain compounds have the
ability to inhibit the activity of certain molecular targets, the Company has
not proven that this activity can be utilized clinically as a therapeutic.
Furthermore, there can be no assurance that the inhibitory activity already
demonstrated in primary screening will continue to be encouraging in further
screening or drug discovery studies. The Company has not tested any drug
candidates developed from the Company's drug discovery program in humans, and
there can be no assurance that there will be clinical benefits associated with
any such drug candidates. Furthermore, there can be no assurance that the
Company will successfully address these technological challenges or others that
may arise in the course of development. Any failure of the Company to anticipate
or respond adequately to technological developments will have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to employ its drug
discovery approach successfully.
Dependence on Collaborative Partners and Others. A key element of the
Company's strategy is to enhance certain of its drug discovery and development
programs and to fund its capital requirements, in part, by entering into
collaborative agreements with major pharmaceutical companies. The Company is a
party to collaborative agreements with Bristol-Myers Squibb and Merck
(collectively, the "Collaborative Agreements"). Under the Collaborative
Agreements, each of Bristol-Myers Squibb and Merck is responsible for (i)
providing libraries of compounds for screening against certain of the Company's
aminoacyl-tRNA synthetase targets, (ii) selecting, in collaboration with Cubist,
compounds determined to be leads in the screening for subsequent development,
(iii) conducting preclinical and clinical trials and obtaining required
regulatory approvals of drug candidates, and (iv) manufacturing and
commercializing resulting drugs. As a result, the Company's receipt of revenues
(whether in the form of continued research funding, drug development milestones
or royalties on sales) under the Collaborative Agreements is dependent upon the
decisions made by the manufacturing and marketing resources of its collaborative
partners. The Company's collaborative partners are not obligated to develop or
commercialize any drug candidates resulting from the Collaborative Agreements.
The amount and timing of resources dedicated by the Company's collaborative
partners to their respective collaborations with the Company is not within the
Company's control. Moreover, certain drug candidates discovered by the Company
may be viewed by the Company's collaborative partners as competitive with such
partners' drugs or drug candidates. Accordingly, there can
17
be no assurance that the Company's collaborative partners will elect to proceed
with the development of drug candidates which the Company believes to be
promising or that they will not pursue their existing or alternative
technologies in preference to such drug candidates. There can be no assurance
that the interests of the Company will continue to coincide with those of its
collaborative partners, that some of the Company's collaborative partners will
not develop independently, or with third parties, drugs that could compete with
drugs of the types contemplated by the Collaborative Agreements, or that
disagreements over rights or technology or other proprietary interests will not
occur.
If any of the Company's collaborative partners breaches or terminates
its agreement with the Company, or otherwise fails to conduct its collaborative
activities in a timely manner, the development or commercialization of any drug
candidate or research program under these Collaborative Agreements may be
delayed, the Company may be required to undertake unforeseen additional
responsibilities or to devote unforeseen additional resources to such
development or commercialization, or such development or commercialization could
be terminated. Any such event could materially adversely affect the Company's
financial condition, intellectual property position and operations. In addition,
there have been a significant number of recent consolidations among
pharmaceutical companies. Such consolidations among the companies with which the
Company is collaborating could result in the diminution or termination of, or
delays in, the development or commercialization of drug candidates or research
programs under one or more of the Collaborative Agreements.
Additional Financing Requirements; Uncertainty of Available Funding.
The Company will require substantial additional funds for its drug discovery and
development programs, for operating expenses, for pursuing regulatory
clearances, for the development of manufacturing, marketing and sales
capabilities and for prosecuting and defending its intellectual property rights
before it can expect to realize significant revenues from commercial sales. The
Company intends to seek such additional funding through public or private
financing or collaborative or other arrangements with corporate partners. If
additional funds are raised by issuing equity securities, further dilution to
existing stockholders may result and future investors may be granted rights
superior to those of existing stockholders. There can be no assurance, however,
that additional financing will be available from any of these sources or, if
available, will be available on acceptable or affordable terms. If adequate
funds are not available, the Company may be required to delay, reduce the scope
of or eliminate one or more of its research and development programs or to
obtain funds by entering into arrangements with collaborative partners or others
that require the Company to issue additional equity securities or to relinquish
rights to certain technologies or drug candidates that the Company would not
otherwise issue or relinquish in order to continue independent operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
History of Losses and Expectation of Future Losses; Uncertainty of
Future Profitability. The Company has incurred a cumulative operating loss of
approximately $23.0 million through December 31, 1997. Losses have resulted
principally from costs incurred in research and development activities related
to the Company's efforts to develop target assays, acquisition and chemical
optimization of compounds, automated high throughput screening and from the
associated administrative costs. The Company expects to incur significant
additional operating losses over the next several years and expects
18
cumulative losses to increase substantially due to expanded research and
development efforts, preclinical and clinical trials and development of
manufacturing, marketing and sales capabilities. In the next few years, the
Company's revenues may be limited to research support payments under the
Collaborative Agreements and any amounts received under other research or drug
development collaborations that the Company has established or will establish.
There can be no assurance, however, that the Company will be able to establish
any additional collaborative relationships on terms acceptable to the Company or
maintain in effect the current Collaborative Agreements. The Company's ability
to achieve significant revenue or profitability is dependent on its or its
collaborative partners' ability to successfully complete the development of drug
candidates, to develop and obtain patent protection and regulatory approvals for
the drug candidates and to manufacture and commercialize the resulting drugs.
The Company will not receive revenues or royalties from commercial sales for a
significant number of years, if at all. Failure to receive significant revenues
or achieve profitable operations would impair the Company's ability to sustain
operations. There can be no assurance that the Company will ever successfully
develop, commercialize, patent, manufacture and market any products, obtain
required regulatory approvals or achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Uncertainty of Patents and Proprietary Rights. The Company's success
will depend in part on its ability to obtain U.S. and foreign patent protection
for its drug candidates and processes, preserve its trade secrets and operate
without infringing the proprietary rights of third parties. Because of the
length of time and expense associated with bringing new drug candidates through
the development and regulatory approval process to the marketplace, the
pharmaceutical industry has traditionally placed considerable importance on
obtaining patent and trade secret protection for significant new technologies,
products and processes. There can be no assurance that any additional patents
will issue from any of the patent applications owned by, or licensed to, the
Company. Further, there can be no assurance that any rights the Company may have
under issued patents will provide the Company with significant protection
against competitive products or otherwise be commercially viable. Legal
standards relating to the validity of patents covering pharmaceutical and
biotechnological inventions and the scope of claims made under such patents are
still developing. There is no consistent policy regarding the breadth of claims
allowed in biotechnology patents. The patent position of a biotechnology firm is
highly uncertain and involves complex legal and factual questions. There can be
no assurance that any existing or future patents issued to, or licensed by, the
Company will not subsequently be challenged, infringed upon, invalidated or
circumvented by others. In addition, patents may have been granted, or may be
granted, covering products or processes that are necessary or useful to the
development of the Company's drug candidates. If the Company's drug candidates
or processes are found to infringe upon the patents, or otherwise impermissibly
utilize the intellectual property of others, the Company's development,
manufacture and sale of such drug candidates could be severely restricted or
prohibited. In such event, the Company may be required to obtain licenses from
third parties to utilize the patents or proprietary rights of others. There can
be no assurance that the Company will be able to obtain such licenses on
acceptable terms, or at all. There has been significant litigation in the
industry regarding patents and other proprietary rights. If the Company becomes
involved in litigation regarding its intellectual property rights or the
intellectual property rights of others, the
19
potential cost of such litigation and the potential damages that the Company
could be required to pay could be substantial.
In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees
and consultants. There can be no assurance that these confidentiality agreements
will not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets, proprietary know-how and
technological advances will not otherwise become known or be independently
discovered by others.
Uncertainty Associated with Preclinical and Clinical Testing. Before
obtaining regulatory approvals for the commercial sale of any of the Company's
potential drugs, the drug candidates will be subject to extensive preclinical
and clinical trials to demonstrate their safety and efficacy in humans. The
Company is dependent on its collaborative partners to conduct clinical trials
for the drug candidates resulting from the Collaborative Agreements and may
become dependent on other third parties to conduct future clinical trials of its
internally developed drug candidates. The Company has no experience in
conducting preclinical or clinical trials, and preclinical or clinical trials
have been commenced with respect to only one of the Company's drug candidates
and none of the drug candidates being developed jointly by the Company and its
collaborative partners. Furthermore, there can be no assurance that preclinical
or clinical trials of any drug candidates will demonstrate the safety and
efficacy of such drug candidates at all or to the extent necessary to obtain
regulatory approvals. Companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after demonstrating
promising results in earlier trials. The failure to adequately demonstrate the
safety and efficacy of a drug candidate under development could delay or prevent
regulatory approval of the drug candidate and would have a material adverse
effect on the Company's business, operating results and financial condition.
No Assurance of Market Acceptance. There can be no assurance that any
drugs successfully developed by the Company, independently or with its
collaborative partners, if approved for marketing, will achieve market
acceptance. The antiinfective drugs which the Company is attempting to develop
will compete with a number of well-established antiinfective drugs manufactured
and marketed by major pharmaceutical companies. The degree of market acceptance
of any drugs developed by the Company will depend on a number of factors,
including the establishment and demonstration of the clinical efficacy and
safety of the Company's drug candidates, their potential advantage over existing
therapies and reimbursement policies of government and third-party payors. There
is no assurance that physicians, patients or the medical community in general
will accept and utilize any drugs that may be developed by the Company
independently or with its collaborative partners.
Intense Competition. The biotechnology and pharmaceutical industries
are intensely competitive and subject to rapid and significant technological
change. Competitors of the Company in the United States and elsewhere are
numerous and include, among others, major multinational pharmaceutical and
chemical companies, specialized biotechnology firms and universities and other
research institutions. Many of these competitors employ greater financial and
other resources, including larger research and development staffs and more
20
effective marketing and manufacturing organizations, than the Company or its
collaborative partners. Acquisitions of competing companies and potential
competitors by large pharmaceutical companies or others could enhance financial,
marketing and other resources available to such competitors. As a result of
academic and government institutions becoming increasingly aware of the
commercial value of their research findings, such institutions are more likely
to enter into exclusive licensing agreements with commercial enterprises,
including competitors of the Company, to market commercial products. There can
be no assurance that the Company's competitors will not succeed in developing
technologies and drugs that are more effective or less costly than any which are
being developed by the Company or which would render the Company's technology
and future drugs obsolete and noncompetitive.
In addition, some of the Company's competitors have greater experience
than the Company in conducting preclinical trials and obtaining U.S. FDA and
other regulatory approvals. Accordingly, the Company's competitors may succeed
in obtaining FDA or other regulatory approvals for drug candidates more rapidly
than the Company. Companies that complete clinical trails, obtain required
regulatory agency approvals and commence commercial sale of their drugs before
their competitors may achieve a significant competitive advantage, including
certain patent and FDA marketing exclusivity rights that would delay the
Company's ability to market certain products. There can be no assurance that
drugs resulting from the Company's research and development efforts, or from the
joint efforts of the Company and its collaborative partners, will be able to
compete successfully with competitors' existing products or products under
development or that they will obtain regulatory approval in the United States or
elsewhere.
Impact of Extensive Government Regulation. The FDA and comparable
agencies in foreign countries impose substantial requirements upon the
introduction of pharmaceutical products through lengthy and detailed
preclinical, laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures to establish their safety and
efficacy. All of the Company's drug candidates will require governmental
approvals for commercialization, none of which have been obtained. Preclinical
and clinical trials and manufacturing of the Company's drug candidates will be
subject to the rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. Satisfaction of these requirements
typically take a significant number of years and can vary substantially based
upon the type, complexity and novelty of the product. There can be no assurance
as to when Cubist, independently or with its collaborative partners, might first
submit an IND for FDA or other regulatory review. Government regulation also
affects the manufacturing and marketing of pharmaceutical products.
The effect of government regulation may be to delay marketing of the
Company's potential drugs for a considerable or indefinite period of time,
impose costly procedural requirements upon the Company's activities and furnish
a competitive advantage to larger companies or companies more experienced in
regulatory affairs. Delays in obtaining governmental regulatory approval could
adversely affect the Company's marketing as well as the Company's ability to
generate significant revenues from commercial sales. There can be no assurance
that FDA or other regulatory approvals for any drug candidates developed by the
Company will be granted on a timely basis or at all. Moreover, if regulatory
approval of a drug candidate is granted, such approval may impose limitations on
the indicated use
21
for which such drug may be marketed. Even if initial regulatory approvals for
the Company's drug candidates are obtained, the Company, its drugs and its
manufacturing facilities would be subject to continual review and periodic
inspection, and later discovery of previously unknown problems with a drug,
manufacturer or facility may result in restrictions on such drug or
manufacturer, including withdrawal of the drug from the market. The regulatory
standards are applied stringently by the FDA and other regulatory authorities
and failure to comply can, among other things, result in fines, denial or
withdrawal of regulatory approvals, product recalls or seizures, operating
restrictions and criminal prosecution.
The FDA has developed two "fast track" policies for certain new drugs
(including antibiotics), one policy for expedited development and review and one
policy for accelerated approval. The expedited development and review policy
applies to new drug therapies that are intended to treat persons with
life-threatening and severely debilitating illnesses, especially where no
satisfactory alternative therapy exists. The accelerated approval policy applies
to certain new drugs that are intended to treat persons with serious or
life-threatening illnesses that provide a meaningful therapeutic benefit to
patients over existing treatments. There can be no assurance that any drug
candidate contemplated by the Company will qualify for the FDA's various fast
track or priority approval policies. Nor can there be any assurance that such
policies will remain as currently implemented by the FDA. As with many
biotechnology and pharmaceutical companies, the Company is subject to numerous
environmental and safety laws and regulations. Any violation of, and the cost of
compliance with, these regulations could materially adversely affect the
Company's business, operating results and financial condition. The Company is
subject to periodic inspections and has not received notice of any material
violations of any environmental or safety law or regulation.
Dependence on Key Personnel. The Company is highly dependent upon the
efforts of its senior management and scientific team, including its President
and Chief Executive Officer. Although Dr. Rocklage has entered into an
employment agreement with the Company, the terms of the employment agreement
provide that Dr. Rocklage may terminate his employment with the Company at any
time upon thirty days' written notice. None of the Company's other executive
officers or key employees has entered into an employment agreement with the
Company. The loss of the services of one or more of these individuals might
impede the achievement of the Company's development objectives. Because of the
specialized scientific nature of the Company's business, the Company is highly
dependent upon its ability to attract and retain qualified scientific and
technical personnel. There is intense competition among major pharmaceutical and
chemical companies, specialized biotechnology firms and universities and other
research institutions for qualified personnel in the areas of the Company's
activities. There can be no assurance that the Company will be able to continue
to attract and retain the qualified personnel necessary for the development of
its business. Loss of the services of, or failure to recruit, key scientific and
technical personnel could adversely affect the Company's business, operating
results and financial condition.
Lack of Manufacturing, Marketing and Sales Capability and Experience.
Cubist has not yet made any significant investment in the development of
manufacturing, marketing or sales capabilities. The Company has no experience in
manufacturing of products in accordance with Good Manufacturing Practices
("GMP") as prescribed by the FDA or to
22
produce an adequate supply of compounds to meet future requirements for clinical
trials. If the Company is unable to develop or contract for manufacturing
capabilities on acceptable terms, the Company's ability to conduct preclinical
and clinical trials with the Company's drug candidates will be adversely
affected, resulting in delays in the submission of drug candidates for
regulatory approvals and in the initiation of new development programs, which in
turn could materially impair Cubist's competitive position and the possibility
of achieving profitability.
The Company has no experience in marketing drugs. The Company has
granted marketing rights to its collaborative partners with respect to drugs
developed through the Collaborative Agreements. The Company may seek to
collaborate with a third party to market those drugs for which it has retained
or licensed marketing rights or may seek to market and sell such drugs directly.
If the Company seeks to collaborate with a third party, there can be no
assurance that a collaborative agreement can be reached on acceptable terms. If
the Company seeks to market and sell such drugs directly, the Company will need
to hire additional personnel skilled in marketing and sales as it develops drugs
with commercial potential. There can be no assurance that the Company will be
able to acquire, or establish third-party relationships to provide, any or all
of these capabilities.
Reimbursement and Drug Pricing Uncertainty. The successful
commercialization of, and the interest of potential collaborative partners to
invest in, the development of the Company's drug candidates will depend
substantially on reimbursement of the costs of the resulting drugs and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
elsewhere will be available for any drugs the Company may develop or, if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's drugs, thereby
adversely affecting the Company's business. If reimbursement is not available or
is available only to limited levels, there can be no assurance that the Company
will be able to obtain collaborative partners to manufacture and commercialize
drugs, or would be able to obtain a sufficient financial return on its own
manufacture and commercialization of any future drugs.
Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations such as HMOs, which can
control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for pharmaceutical
products. The cost containment measures that health care providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any health care reform, could materially adversely affect the
Company's ability to sell any of its drugs if successfully developed and
approved. Moreover, the Company is unable to predict what additional legislation
or regulation, if any, relating to the health care industry or third-party
coverage and reimbursement may be enacted in the future or what effect such
legislation or regulation would have on the Company's business.
Potential Product Liability and Availability of Insurance. The
Company's business exposes it to potential liability risks that are inherent in
the testing, manufacturing and
23
marketing of pharmaceutical products. The use of the Company's drug candidates
in clinical trials may expose the Company to product liability claims and
possible adverse publicity. These risks will expand with respect to the
Company's drug candidates, if any, that receive regulatory approval for
commercial sale. Product liability insurance for the biotechnology industry is
generally expensive, if available at all. The Company does not have product
liability insurance but intends to obtain such coverage if and when its drug
candidates are tested in clinical trials. However, such coverage is becoming
increasingly expensive and there can be no assurance that the Company will be
able to obtain insurance coverage at acceptable costs or in a sufficient amount,
at all, or that a product liability claim would not adversely affect the
Company's business, operating results or financial condition.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters and research and development facilities are
located in a 24,000 square foot facility leased by the Company in Cambridge,
Massachusetts at 24 Emily Street. The Company believes that this space will be
adequate for its research and drug development activities for at least the next
year.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the last quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Since October 25, 1996, the effective date of the Company's initial
public offering, the Company's common stock has been traded on the Nasdaq
National Market under the symbol "CBST". Prior to such date, no established
public trading market existed for the Company's common stock. The following
table sets forth, for the period indicated, the high and low sale prices per
share of the Company's common stock as reported by the Nasdaq National Market.
High Low
------- -------
1996
Fourth Quarter (commencing on October 25, 1996) . . . . $ 7.00 $ 5.50
1997
24
High Low
------- -------
First Quarter $13.00 $ 6.00
Second Quarter $10.25 $ 6.00
Third Quarter $ 7.50 $ 5.00
Fourth Quarter $ 8.25 $ 4.88
Holders
As of March 3, 1998, the Company had approximately 150 stockholders of
record. This does not reflect persons or entitles who hold their stock in
nominee or "street" name through various brokerage firms.
Dividends
The Company has not paid dividends on its Common Stock. The Company
anticipates it will continue to reinvest earnings to finance future growth, and
therefore does not intend to pay dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Described below is information regarding all securities of the Company
sold by the Company during the fiscal year ended December 31, 1997, which were
not registered under the Securities Act of 1933, as amended (the "Securities
Act").
In July 1997, the Company issued and sold an aggregate of 979,591
shares of Common Stock to International Biotechnology Trust plc ("IBT") and H&Q
Capital Management ("H&Q") at a purchase price of $6.125 per share. The issuance
and sale of such shares of Common Stock were made in reliance on Section 4(2) of
the Securities Act.
ITEM. 6. SELECTED FINANCIAL DATA
Years ended December 31,
(in thousands, except per share data)
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
Statement of Operations Data:
Total revenues.................................. $ 2,733 $ 4,985 $ 1,271 $ -- $ --
Research and development
expenses ....................................... 9,341 6,871 4,965 3,309 1,169
General and administrative expenses ............. 3,292 1,989 1,708 1,449 547
Other income .................................... 1,833 -- -- -- --
Net loss ........................................ (7,265) (3,799) (5,396) (4,813) (1,688)
Basic and diluted net loss
per share ...................................... $ (0.73) $ (1.49) $ (5.47) $ (7.61) $ (3.50)
Weighted average number of common
shares outstanding ............................. 9,995 2,554 986 633 482
25
Years ended December 31,
(in thousands)
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents and short
and long-term investments ..................... $ 18,116 $ 19,329 $ 3,056 $ 1,221 $ 4,457
Total assets ................................... 21,673 23,452 7,048 4,250 7,241
Long-term obligations .......................... 1,105 1,053 1,257 2,032 1,164
Stockholder's equity ........................... 19,063 20,299 4,895 823 5,488
ITEM. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Since its incorporation on May 1, 1992 and commencement of operations
in February 1993, Cubist has been engaged in the research, development and
commercialization of novel antiinfective drugs to treat infectious diseases
caused by bacteria and fungi, primarily those resistant to existing
antiinfective drugs. The Company has a limited history of operations and has
experienced significant operating losses since inception. The Company expects to
incur significant additional operating losses over the next several years and
expects cumulative losses to increase substantially due to expanded research and
development efforts, pre-clinical and clinical trials and development of
manufacturing, marketing and sales capabilities.
A key element of the Company's strategy is to enhance certain of its
drug discovery and development programs and to fund its capital requirements, in
part, by entering into collaborative agreements with major pharmaceutical
companies. The Company is a party to collaborative agreements based specifically
on its aminoacyl-tRNA synthetase program with Bristol-Myers Squibb Company
("Bristol-Myers Squibb") and Merck & Co., Inc. ("Merck"). Under these
collaborative agreements, the Company is entitled to receive research support
payments and, if certain drug development milestones are achieved, milestone
payments. In addition, the Company will be entitled to receive royalties on
worldwide sales of any drug developed and commercialized from these
collaborations.
On June 20, 1997, the Company's collaborative agreement with Pfizer
expired pursuant to its own terms. Prior to such expiration, the Company had
received all of the research support payments and technology licensing fees that
the Company was entitled to receive under that collaborative agreement. In
accordance with the terms of that collaborative agreement, the Company selected
and licensed from Pfizer one of the chemical compounds that was identified and
characterized during the Company's collaboration with Pfizer. Pursuant to the
terms of that license, the Company may develop and commercialize such licensed
compound without further obligation to Pfizer.
26
On November 7, 1997, the Company entered into a license agreement with
Eli Lilly and Company ("Eli Lilly") pursuant to which the Company acquired
exclusive worldwide rights to develop, manufacture and market daptomycin. In
exchange for such license, the Company has paid to Eli Lilly an upfront license
fee in cash, and if certain drug development milestones are achieved, has agreed
to pay milestone payments by issuing shares of Common Stock to Eli Lilly. In
addition, the Company will be required to pay royalties to Eli Lilly on
worldwide sales of daptomycin. Daptomycin is a novel, natural product being
developed for the treatment of Staphylococcus aureus and enterococcus infections
in humans. The Company anticipates that it will begin clinical trials of
daptomycin in the fourth quarter of 1998 or the first quarter of 1999.
The Company and Novalon Pharmaceutical Corporation ("Novalon") entered
into a collaborative research agreement on May 5, 1997 to accelerate and broaden
the development of technologies to screen genomic targets. On September 29,
1997, the Company extended its collaboration with Novalon through February 2001.
The extended collaboration will focus on utilizing these targets to identify
lead compounds active against the Company's antibacterial and antifungal
targets. In addition, the Company agreed to terminate its option to acquire
Novalon and sold its existing equity position back to Novalon for $2.0 million
resulting in a gain of $1.8 million included in other income. In connection with
such transaction, the Company was granted an option to purchase up to twenty
percent of the outstanding shares of Novalon from existing shareholders. This
option is at a price of $6.00 per share expiring in August of 1998. The Company
will pay Novalon a percent of revenues received by the Company that relates to
the use of the technology and currently pays a monthly fee for research funding
to Novalon.
On September 25, 1997, the Company expanded its research collaboration
with Merck, adding additional aminoacyl-tRNA synthetase targets that are
proprietary to the Company and Merck's natural products compound library to the
drug discovery program. Under the terms of this expansion, Merck will pay the
Company for additional research support beyond the original agreement.
The Company has considered the impact of the year 2000 as it relates to
the programming within the Company's computer and operating systems and does not
believe there is a significant risk to the Company.
Results of Operations
Years Ended December 31, 1997 and 1996
Revenues. Total revenues in the year ended December 31, 1997 were
$2,733,000 compared to $4,985,000 in the year ended December 31, 1996, a
decrease of $2,252,000 or 45.2%. The revenue earned in the year ended December
31, 1997 consisted of $2,025,000 in research support funding from the
Bristol-Myers Squibb, Merck and Pfizer collaborations; a $500,000 milestone
payment from the Bristol-Myers Squibb collaboration; and $208,000 in SBIR
funding. The revenue earned in the year ended December 31, 1996 primarily
consisted of a $1,500,000 technology licensing fee from the Merck collaboration;
$2,116,000 in research support funding from the Bristol-Myers Squibb, Merck and
Pfizer collaborations; $1,000,000 in milestone payments from the Bristol-Myers
Squibb collaboration; and $369,000 in SBIR funding. The decrease in revenues in
the year ended December 31, 1997 as compared to the year
27
ended December 31, 1996 was primarily due to the one-time technology license fee
from Merck in the amount of $1,500,000 in 1996; the decrease of research support
funding primarily due to the termination of the Pfizer collaboration in 1997;
and reduced milestone payments from the Bristol-Myers Squibb collaboration
during 1997.
Research and Development Expenses. Total research and development
expenses in the year ended December 31, 1997 were $9,341,000 compared to
$6,871,000 in the year ended December 31, 1996, an increase of $2,470,000 or
35.9%. The increase was largely due to (i) amortization of the Company's
purchase option in Novalon, (ii) purchases of laboratory research supplies
associated with additional equipment, and (iii) a license fee associated with
worldwide rights to develop, manufacture and market daptomycin and expenses
associated with the development and manufacture of daptomycin from Eli Lilly,
and (iv) increased personnel and related supplies engaged in the research and
development programs.
General and Administrative Expenses. General and administrative
expenses in the year ended December 31, 1997 were $3,292,000 compared to
$1,989,000 in the year ended December 31, 1996, an increase of $1,303,000 or
65.5%. The increase was largely due to (i) increased costs related to additional
executive staff personnel and recruiting, (ii) increased costs of premiums for
directors' and officers' insurance, (iii) increased investor and public relation
expenses and (iv) increased legal expenses primarily associated with licensing
and patent activities.
Interest Income and Expense. Interest income in the year ended December
31, 1997 was $1,039,000 compared to $306,000 in year ended December 31, 1996, an
increase of $733,000 or 239.5%. The increase in interest income was due
primarily to higher average cash, cash equivalent and investment balances during
the year ended December 31, 1997 as compared to the year ended December 31,
1996. Interest expense in the year ended December 31, 1997 was $237,000 as
compared to $229,000 during the year ended December 31, 1996.
Other Income. Other income in the year ended December 31, 1997 was
$1,833,000 and consisted entirely of gain on the sale of the Company's equity
position in Novalon.
Net Loss. The net loss for the year ended December 31, 1997 was
$7,265,000 compared to $3,799,000 during the year ended December 31, 1996, an
increase of $3,466,000 or 91.2%. The increase, which was offset in part by the
gain on the sale of the Company's equity position in Novalon, was primarily due
to (i) a decrease in revenues during the year ended December 31, 1997, as
described above, (ii) an increase in expenses incurred by the Company to support
the advancement of the Company's internal research programs, (iii) an increase
in expenses incurred associated with the licensing of daptomycin from Eli Lilly,
(iv) amortization expense incurred by the Company associated with its investment
in Novalon and (v) increased costs associated with the Company's investor and
public relations program.
28
Results of Operations
Years ended December 31, 1996 and 1995
Revenues. Total revenues in the year ended December 31, 1996 were
$4,985,000 compared to $1,271,000 in the year ended December 31, 1995, an
increase of $3,714,000 or 292.2%. The revenue earned in the year ended December
31, 1996 primarily consisted of $1,500,000 in technology licensing fees from the
Merck collaboration; $2,116,000 in research support funding from the
Bristol-Myers Squibb, Merck and Pfizer collaborations; $1,000,000 in milestone
payments from the Bristol-Myers Squibb collaboration; and $369,000 in SBIR
grants. In the year ended December 31, 1995, revenues consisted of $500,000 in
technology licensing fees and $488,000 in research support funding from the
Pfizer collaboration and $283,000 from SBIR Phase I grant funding.
Research and Development Expenses. Total research and development
expenses in the year ended December 31, 1996 were $6,871,000 compared to
$4,965,000 in the year ended December 31, 1995, an increase of $1,906,000 or
38.4%. The increase was largely due to increased costs related to additional
personnel, purchases of compounds to expand the Company's compound collection
and purchases of laboratory research supplies that are utilized by such
additional personnel.
General and Administrative Expenses. General and administrative
expenses in the year ended December 31, 1996 were $1,989,000 compared to
$1,709,000 in the year ended December 31, 1995, an increase of $280,000 or
16.4%. The increase was primarily due to costs relating to additional personnel
and recruiting, relocation, and legal expenses.
Interest Income and Expense. Interest income in the year ended December
31, 1996 was $306,000 compared to $239,000 in the year ended December 31, 1995,
an increase of $67,000 or 28.0%. The increase in interest income was due to an
increase in the average cash, cash equivalent and investment balance during the
year ended December 31, 1996 as compared to the year ended December 31, 1995.
Interest expense was $229,000 in the year ended December 31, 1996 as compared to
$233,000 during the year ended December 31, 1995.
Net Loss. The net loss for the year ended December 31, 1996 was
$3,799,000 compared to $5,396,000 for the year ended December 31, 1995, a
decrease of $1,597,000 or 29.6%. The decrease was primarily due to the increased
revenues associated with the Bristol-Myers Squibb, Merck and Pfizer
collaborations, which were offset only in part by additional expenses incurred
to support the advancement of the Company's internal research programs.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through the
sale of equity securities, equipment financing, sponsored research revenues,
license revenues and interest
29
earned on invested capital. The Company's total cash, cash equivalent and
investments balance at December 31, 1997 was $18,116,000 compared to $19,329,000
at December 31, 1996.
On July 18, 1997, the Company completed a private equity financing in
which the Company raised $6.0 million before offering expenses of $96,161 by
issuing 979,591 common shares at $6.125 per share.
On September 29, 1997, the Company received a cash payment of $2.0
million from Novalon in connection with the sale of the Company's equity
position in Novalon.
Through December 31, 1997, the Company had invested an aggregate of
$5,893,000 (of which $995,000 was invested during the year then ended) in
property and equipment, primarily in facility renovations an laboratory
equipment under capital leases. The obligations under capital leases at December
31, 1997 were $1,553,000. Minimum annual principal payments due under capital
leases total $559,000 in 1998. Principal payments are scheduled to decline each
year thereafter until expiration in 2001. The Company made principal payments
under its capital lease obligations of $695,000 in the year ended December 31,
1997. The Company expects its capital expenditures in 1998 to be approximately
$1,000,000, consisting of laboratory and other equipment purchases.
The Company believes that its existing capital resources, interest
income and future revenues due under the Bristol-Myers Squibb and Merck
collaborative agreements will be sufficient to fund its operating expenses and
capital requirements as currently planned through mid-1999. The Company's actual
cash requirements may vary materially from those now planned and will depend on
numerous factors. There can be no assurance that the Company's existing cash,
cash equivalents, other capital resources, interest income and future revenues
due under the Bristol-Myers Squibb and Merck collaborative agreements will be
sufficient to fund its operating expenses and capital requirements during such
period. Thereafter, the Company will need to raise substantial additional
capital to fund its operations. The Company intends to seek such additional
funding through public or private financing or collaborative or other
arrangements with corporate partners.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards 128 (SFAS 128) "Earnings per Share", which requires the
disclosure of Basic Earnings per Common Share and Diluted Earnings per Common
Share for all periods presented. At December 31, 1997, the Company had 802,468
options and 86,619 warrants outstanding. Adoption of this statement has not
affected the amounts presented in any period because the effect of including
these equity instruments would be anti-dilutive.
Prior to the adoption of this statement, all common and common
equivalent shares issued during the twelve month period prior to the filing of
the initial public offering ("cheap stock") were included in the calculation of
basic and diluted earnings per share as if they were outstanding for all periods
presented. Adoption of this statement, and the related guidance set
30
out in Securities and Exchange Commission Staff Bulletin No. 98, has eliminated
the inclusion of cheap stock from the calculation of basic and diluted earnings
per share prior to issuance of the securities. Accordingly, basic and diluted
earnings per share in 1996 and 1995 have been restated from $(1.39) and $(3.99),
respectively.
Recent Pronouncements
The FASB recently issued Statement of Accounting Standards No. 130
(SFAS 130) "Reporting Comprehensive Income". This statement requires changes in
comprehensive income to be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company believes the
implementation of this statement will not have a material impact on the
financial statements.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS
CUBIST PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
------
Report of Independent Accountants............................................................................. 33
Balance Sheets as of December 31, 1997 and 1996............................................................... 34
Statements of Operations for the years ended December 31, 1997, 1996 and 1995................................. 35
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................. 36
Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995............ 37
Notes to Financial Statements................................................................................. 40
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cubist Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Cubist
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cubist
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
January 19, 1998
33
CUBIST PHARMACEUTICALS, INC.
BALANCE SHEETS
December 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ...................... $ 2,837,600 $ 19,329,353
Short-term investments ......................... 6,709,623 --
Accounts receivable ............................ 53,333 505,267
Prepaid expenses and other current assets ...... 142,635 286,642
------------ ------------
Total current assets ........................... 9,743,191 20,121,262
Property and equipment .................................. 5,893,101 4,898,538
Less: Accumulated depreciation and
amortization .............................. (2,712,341) (1,741,152)
------------ ------------
Property and equipment, net .................... 3,180,760 3,157,386
Long-term investments ................................... 8,569,107 --
Other assets ............................................ 180,294 173,799
------------ ------------
Total assets .......................... $ 21,673,352 $ 23,452,447
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................... $ 275,260 $ 741,409
Accrued expenses ............................... 492,304 484,732
Deferred revenue ............................... -- 126,900
Current portion of long-term debt .............. 189,730 188,062
Current portion of capital lease obligations ... 548,351 559,767
------------ ------------
Total current liabilities ............. 1,505,645 2,100,870
Long-term debt, net of current portion .................. 100,072 291,683
Long-term capital lease obligation, net of current
portion ........................................ 1,004,969 761,284
------------ ------------
Total liabilities ..................... 2,610,686 3,153,837
------------ ------------
Commitments (Note J)
Stockholders' Equity:
Preferred Stock non-cumulative; convertible, $.001
par value; authorized 5,000,000 shares, 1997 and
1996; issued and outstanding 1997 and 1996 no shares -- --
Common Stock, $.001 par value; authorized
25,000,000 shares, 1997 and 1996;
issued and outstanding 1997 10,580,555 shares;
issued and outstanding 1996 9,544,373 shares ....... 10,581 9,544
Additional paid-in capital .............................. 42,047,966 36,019,608
Accumulated deficit ..................................... (22,995,881) (15,730,542)
------------ ------------
Total stockholders' equity ............ 19,062,666 20,298,610
------------ ------------
Total liabilities and stockholders'
equity ................................ $ 21,673,352 $ 23,452,447
------------ ------------
------------ ------------
The accompanying notes are an integral part of the financial statements.
34
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Sponsored research revenues ...................... $ 2,733,083 $ 4,985,052 $ 1,271,333
Operating expenses:
Research and development ................ 9,340,928 6,871,149 4,964,876
General and administrative .............. 3,292,241 1,989,284 1,708,513
------------ ------------ ------------
Total operating expenses ....... 12,633,169 8,860,433 6,673,389
Interest income .................................. 1,038,532 306,017 239,030
Interest expense ................................. (237,119) (229,305) (232,980)
Other income (Note E) ............................ 1,833,334 -- --
------------ ------------ ------------
Net loss ................................ $ (7,265,339) $ (3,798,669) $ (5,396,006)
------------ ------------ ------------
------------ ------------ ------------
Basic and diluted net loss per common share ...... $ (0.73) $ (1.49) $ (5.47)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares for basic
and diluted net loss per common share ........... 9,994,718 2,553,999 986,255
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
35
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows for operating activities:
Net loss .......................................... $ (7,265,339) $ (3,798,669) $ (5,396,006)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of equity interest ................ (1,833,334) -- --
Amortization of equity interest ................ 833,334 -- --
Depreciation and amortization ................. 1,057,887 740,408 570,556
Changes in assets and liabilities:
Accounts receivable ...................... 451,934 482,733 (988,000)
Prepaid expenses and other current assets 144,007 (219,646) 15,713
Other assets ............................. (6,495) (15,228) (8,390)
Accounts payable and accrued expenses .... (458,577) 911,622 (708,104)
Deferred revenue ......................... (126,900) 126,900 --
------------ ------------ ------------
Total adjustments .................... 61,856 2,026,789 (1,118,225)
------------ ------------ ------------
Net cash used for operating activities ................. (7,203,483) (1,771,880) (6,514,231)
------------ ------------ ------------
Cash flows for investing activities:
Purchase of equipment ............................. (899,810) (640,329) --
Leasehold improvements ............................ (94,753) (423,256) (99,325)
Purchase of equity interest ....................... (1,000,000) -- --
Proceeds from sale of equity interest ............. 2,000,000 -- --
Purchase of short-term investments ................ (22,686,443) -- (3,942,610)
Redemption and maturities of short-term investments 15,976,820 1,006,569 2,936,041
Purchase of long-term investments ................. (8,569,107) -- --
------------ ------------ ------------
Net cash used for investing activities ................. (15,273,293) (57,016) (1,105,894)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of stock ................................. 5,942,697 19,146,448 8,467,928
Proceeds from long-term debt ...................... -- -- 345,500
Repayments of long-term debt ...................... (189,943) (168,565) (141,130)
Proceeds from capital lease financing ............. 927,686 599,593 94,671
Principal payments of capital lease obligations ... (695,417) (468,782) (318,272)
------------ ------------ ------------
Net cash provided by financing activities .............. 5,985,023 19,108,694 8,448,697
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... (16,491,753) 17,279,798 828,572
Cash and cash equivalents at beginning of year ......... 19,329,353 2,049,555 1,220,983
------------ ------------ ------------
Cash and cash equivalents at end of year ............... $ 2,837,600 $ 19,329,353 $ 2,049,555
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............ $ 237,119 $ 229,305 $ 232,980
The accompanying notes are an integral part of the financial statements.
36
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
# of Shares # of Shares # of Shares # of Shares # of Shares $
Preferred A Preferred B Preferred C Preferred D Common Preferred
----------- ----------- ----------- ----------- ----------- -----------
12/31/94 Balance .......... 5,000,000 14,733,370 -- -- 910,027 $ 19,733
--------- ---------- ------- ------------
--------- ---------- ------- ------------
Series C Preferred Stock
par $.001 at $.60 share 15,017,813 $ 15,018
Series C Preferred Stock
Offering Expenses .....
Common Stock par $.007
at $.35 and $.42 share 114,082
Exercise of Common Stock
Options ............... 785
Repurchase of Common
Stock ................. (8,232)
Repayment of Notes
Receivable Preferred
Series B ..............
Notes Receivable Common
Stock .................
Forgiveness of Promissory
Notes .................
Issuance of Stock
Options ...............
Amortization of Deferred
Compensation ..........
Net Loss ..................
--------- ---------- ---------- --------- ------------
12/31/95 Balance .......... 5,000,000 14,733,370 15,017,813 -- 1,016,662 $ 34,751
--------- ---------- ---------- --------- ------------
--------- ---------- ---------- --------- ------------
$
Additional Paid-in Capital $ $
------------------------------------------
$ Issuance of Notes Deferred Accumulated Stockholders'
Common Shares Receivable Compensation Deficit Equity
----------- ------------ ------------ ------------ ------------ ------------
12/31/94 Balance .......... $ 910 $ 7,981,632 $ (632,527) $ (11,030) $ (6,535,867) $ 822,851
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Series C Preferred Stock
par $.001 at $.60 share 8,995,670 9,010,688
Series C Preferred Stock
Offering Expenses ..... (45,787) (45,787)
Common Stock par $.007
at $.35 and $.42 share 114 47,274 47,388
Exercise of Common Stock
Options ............... 1 274 275
Repurchase of Common
Stock ................. (8) (2,873) (2,881)
Repayment of Notes
Receivable Preferred
Series B .............. 435,000 435,000
Notes Receivable Common
Stock ................. (4,989) (4,989)
Forgiveness of Promissory
Notes ................. 23,615 23,615
Issuance of Stock
Options ............... 28,020 (28,020)
Amortization of Deferred
Compensation .......... 4,619 4,619
Net Loss .................. (5,396,006) (5,396,006)
------------ ------------ ------------ ------------ ------------ ------------
12/31/95 Balance .......... $ 1,017 $ 17,004,210 $ (178,901) $ (34,431) $(11,931,873) $ 4,894,773
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
37
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
For the Years Ended December 31, 1997, 1996 and 1995
# of Shares # of Shares # of Shares # of Shares # of Shares $
Preferred A Preferred B Preferred C Preferred D Common Preferred
----------- ----------- ----------- ----------- ----------- -----------
Series D Preferred Stock par
$.001 at $1.42 share, net
of expenses ................ 2,816,902 2,817
Conversion of Preferred Stock
to Common Stock par $.001 (5,000,000) (14,733,370) (15,017,813) (2,816,902) 5,366,849 (37,568)
Exercise of Stock Options ... 58,244
Repurchase of Common
Stock ................... (36,634)
Initial Public Offering, net
of expenses ................ 3,139,252
Forgiveness of Promissory
Notes ...................
Issuance of Common Stock
Options and Warrants .....
Amortization of Deferred
Compensation ............
Net Loss ....................
---------
12/31/96 Balance ............ -- -- -- -- 9,544,373 --
---------
---------
$
Additional Paid-in Capital $ $
------------------------------------------
$ Issuance of Notes Deferred Accumulated Stockholders'
Common Shares Receivable Compensation Deficit Equity
----------- ------------ ------------ ------------ ------------ ------------
Series D Preferred Stock par
$.001 at $1.42 share, net
of expenses ................ 3,941,727 3,944,544
Conversion of Preferred Stock
to Common Stock par $.001 5,367 32,201 0
Exercise of Stock Options ... 58 35,232 35,290
Repurchase of Common
Stock ................... (37) (12,273) (12,310)
Initial Public Offering, net
of expenses ................ 3,139 15,151,343 15,154,482
Forgiveness of Promissory
Notes ................... 24,442 24,442
Issuance of Common Stock
Options and Warrants ..... 101,378 (101,378) 0
Amortization of Deferred
Compensation ............ 56,058 56,058
Net Loss .................... (3,798,669) (3,798,669)
----------- ------------ ----------- ------------ ------------ ------------
12/31/96 Balance ............ $ 9,544 $ 36,253,818 $ (154,459) $ (79,751) $(15,730,542) $ 20,298,610
----------- ------------ ----------- ------------ ------------ ------------
----------- ------------ ----------- ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
38
CUBIST PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
For the Years Ended December 31, 1997, 1996 and 1995
# of Shares # of Shares # of Shares # of Shares # of Shares $
Preferred A Preferred B Preferred C Preferred D Common Preferred
----------- ----------- ----------- ----------- ----------- -----------
Exercise of Stock Option 57,981
Repurchase of Common
Stock .................. (1,390)
Issuance of Common Stock,
net of offering expenses 979,591
Amortization of Deferred
Compensation ...........
Forgiveness of
Promissory Notes ......
Net Loss ................
----------
12/31/97 Balance ........ -- -- -- -- 10,580,555 --
----------
----------
$
Additional Paid-in Capital $ $
------------------------------------------
$ Issuance of Notes Deferred Accumulated Stockholders'
Common Shares Receivable Compensation Deficit Equity
----------- ------------ ------------ ------------ ------------ ------------
Exercise of Stock Option $ 58 $ 119,320 $ 119,378
Repurchase of Common
Stock .................. (1) (519) (520)
Issuance of Common Stock,
net of offering expenses 980 5,902,859 (80,000) 5,823,839
Amortization of Deferred
Compensation ........... 20,000 43,924 63,924
Forgiveness of
Promissory Notes ...... 22,774 22,774
Net Loss ................ (7,265,339) (7,265,339)
------------ ------------ ----------- ----------- ------------ ------------
12/31/97 Balance ........ $ 10,581 $ 42,275,478 $ (191,685) $ (35,827) $(22,995,881) $ 19,062,666
------------ ------------ ----------- ----------- ------------ ------------
------------ ------------ ----------- ----------- ------------ ------------
The accompanying notes are an integral part of the financial statements.
39
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Nature of Business
Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a
biopharmaceutical company founded in May 1992 and is engaged in the research,
development and commercialization of novel classes of antiinfective drugs to
treat infectious diseases caused by bacteria and fungi, primarily those
resistant to existing antiinfective drugs. Cubist has established multiple
technology licenses and collaborations, has established a network of advisors
and collaborators and is located in Cambridge, Massachusetts.
B. Accounting Policies
Basis of Presentation
The accompanying financial statements are stated on an accrual basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to risks common to companies in the
biotechnology industry including, but not limited to, development by its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with FDA government
regulations.
Cash Equivalents
Cash equivalents consist of short-term interest-bearing instruments
(U.S. Government treasuries and money market accounts) with original maturities
of three months or less. These investments are carried at cost which
approximates market value.
Short-term Investments
Short-term investments, with an original maturity of more than three
months and less than one year when purchased, consisted of certificates of
deposit and investment-grade commercial paper at December 31, 1997. Short-term
investments, all of which are held to maturity, are stated at amortized cost
plus accrued interest, which approximates market value.
Long-Term Investments
Long-term investments, with a maturity of more than twelve months when
purchased, consisted of investment-grade corporate debt at December 31, 1997.
Long-term investments, all of which are held to maturity, are stated at
amortized cost plus accrued interest, which approximates market value.
40
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. Accounting Policies (Continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the related
assets, generally three years for computer equipment and five years for
laboratory equipment, furniture and fixtures. Leasehold improvements are stated
at cost and are amortized over the lesser of the life of the lease or their
estimated useful lives. The leasehold improvements are also utilized as
collateral up to a value of $289,802, which relates to the balance of long-term
debt. Maintenance and repairs are charged to expense as incurred, while major
betterments are capitalized. When assets are retired or otherwise disposed of,
the assets and related allowances for depreciation and amortization are
eliminated from the accounts and any resulting gain or loss is reflected in
income.
Research and Development
All research and development costs are expensed as incurred.
Income Taxes
Research and experimentation and other tax credits, when utilized, will
be recorded using the flow-through method of accounting as a reduction of the
current provision for federal and state income taxes.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings Per Share", which requires the
disclosure of Basic Earnings per Common Share and Diluted Earnings per Common
Share for all periods presented. At December 31, 1997, the Company had 802,468
options and 86,619 warrants outstanding. Adoption of this statement has not
affected the amounts presented in any period because the effect of including
these equity instruments would be anti-dilutive.
Prior to the adoption of this statement, all common and common
equivalent shares issued during the twelve month period prior to the filing of
the initial public offering ("cheap stock") were included in the calculation of
basic and diluted earnings per share as if they were outstanding for all periods
presented. Adoption of this statement, and the related guidance set out in
Securities and Exchange Commission Staff Accounting Bulletin No. 98, has
eliminated the inclusion of cheap stock from the calculation of basic and
diluted earnings per share prior to issuance of the securities. Accordingly,
basic and diluted earnings per share in 1996 and 1995 have been restated from
$(1.39) and $(3.99), respectively.
C. Property and Equipment
At December 31, property and equipment consisted of:
1997 1996
----------- -----------
Leasehold improvements ....................... $ 2,584,489 $ 2,489,736
Laboratory equipment ......................... 2,389,683 1,799,587
Furniture and fixtures ....................... 286,197 251,427
Computer equipment ........................... 632,732 357,788
----------- -----------
5,893,101 4,898,538
----------- -----------
Less accumulated depreciation and amortization (2,712,341) (1,741,152)
----------- -----------
Property and equipment, net .................. $ 3,180,760 $ 3,157,386
----------- -----------
----------- -----------
Depreciation and amortization expense was $971,189, $659,908 and $542,322 in
1997, 1996 and 1995, respectively.
41
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
D. Accrued Expenses
At December 31, accrued expenses consisted of:
1997 1996
-------- --------
Payroll and benefits ...................... $218,583 $125,087
Vacation .................................. 67,837 60,019
Construction .............................. -- 46,250
Legal, audit and patent ................... 119,500 68,275
Database .................................. -- 42,200
Annual report ............................. 35,000 60,000
Utilities ................................. -- 76,339
Miscellaneous ............................. 51,384 6,562
-------- --------
Total accrued expenses .................... $492,304 $484,732
-------- --------
-------- --------
E. Collaborative Research Agreements
On December 15, 1995, the Company entered into a collaborative research
agreement with Pfizer, Inc. Under the terms of the agreement, Pfizer paid the
Company a technology licensing fee upon execution and research support payments.
These payments were recognized as income under the terms of the agreement. In
addition, Pfizer reimbursed the Company for expenses related to the screening of
Pfizer compounds against the Company's targets. In accordance with the
agreement, these payments were recognized as revenue as the work was completed.
The Company included in sponsored research revenues $150,000, $587,000 and
$988,000 in 1997, 1996 and 1995, respectively. On June 20, 1997, the Company's
collaborative agreement with Pfizer expired pursuant to its own terms. Prior to
such expiration, the Company had received all of the research support payments
and technology licensing fees that the Company was entitled to receive under
that collaborative agreement. In accordance with the terms of that collaborative
agreement, the Company selected and licensed from Pfizer one of the chemical
compounds that was identified and characterized during the Company's
collaboration with Pfizer. Pursuant to the terms of that license, the Company
may develop and commercialize such licensed compound without further obligation
to Pfizer.
In June 1996, the Company entered into a collaborative research
agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb"). Under the
terms of the agreement, Bristol-Myers Squibb purchased from the Company
$4,000,000 of the Company's Preferred Stock upon execution of the agreement, and
has agreed to make payments to the Company upon the achievement of certain
milestones. These milestone payments are recognized as income as earned under
the terms of the agreement. In addition, Bristol-Myers Squibb will reimburse the
Company a fixed amount for research and development expenses relating to the
production of certain targets and also for expenses relating to the screening of
Bristol-Myers Squibb compounds against the Company's targets over three years,
with an option to fund a fourth year. These reimbursements are to be paid at the
beginning of each calendar quarter in accordance with the agreement. The Company
included in sponsored research revenues $500,000 and $1,000,000 in milestone
payments in 1997 and 1996, respectively; and $1,000,000 and $516,668 in 1997 and
1996, respectively, for certain research and development revenues in accordance
with the agreement.
42
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. Collaborative Research Agreements (Continued)
In June 1996, the Company entered into a collaborative research
agreement with Merck & Co., Inc. ("Merck"). Under the terms of the agreement,
Merck paid the Company a technology licensing fee upon execution and will pay
certain milestone payments. These payments are recognized as income as earned
under the terms of the agreement. In addition, Merck will reimburse the Company
for research and development expenses relating to the production of certain
targets; for expenses relating to the screening of Merck compounds against the
Company's targets; and for expenses relating to compound optimization. These
payments are recognized as revenue as the work is completed. During 1996, the
Company included in sponsored research revenues $1,500,000 for the technology
licensing fee and $875,233 and $1,012,300 in 1997 and 1996, respectively, for
certain research and development revenues in accordance with the agreement.
In May 1997, the Company acquired 333,333 shares of Series B
Convertible Preferred Stock of Novalon Pharmaceutical Corporation ("Novalon"),
together with an option to purchase all of the capital stock of Novalon. The
aggregate purchase price for such shares and such option was $1.0 million. The
Company allocated all of the $1.0 million aggregate purchase price to the option
based on management's estimates of the relative fair values of the option and
the shares of Series B Convertible Preferred Stock acquired. The value of the
option was amortized over the option period resulting in an $833,333 research
and development expense. On September 29, 1997, the Company agreed to terminate
its option to acquire Novalon and sold its equity position back to Novalon for
$2.0 million resulting in a gain of $1,833,333 included in other income. In
connection with this transaction, the Company, at its sole discretion, was
granted a one year option to purchase up to twenty percent of the outstanding
shares of Novalon from existing shareholders at $6.00 per share payable in cash.
The Company will pay Novalon a percent of revenues received by the Company that
relates to the use of the technology and currently pays a monthly fee for
research funding to Novalon.
F. License Agreement
On November 7, 1997, the Company entered into a license agreement with
Eli Lilly and Company ("Eli Lilly") pursuant to which the Company acquired
exclusive worldwide rights to develop, manufacture and market daptomycin.
Daptomycin is a natural product being developed for the treatment of
Staphylococcus aureus and enterococcus infections. In exchange for such license,
the Company has paid an upfront license fee in cash and, if certain drug
development milestones are achieved, has agreed to pay milestone payments by
issuing shares of Common Stock to Eli Lilly. In addition, the Company will be
required to pay royalties to Eli Lilly on worldwide sales of daptomycin.
G. Financing
On July 18, 1997, the Company completed a private equity financing in
which the Company raised $6.0 million before offering expenses of $96,161 by
issuing 979,591 common shares at $6.125 per share. These shares were
subsequently registered with the Securities and Exchange Commission.
43
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
H. Stockholders' Equity
Common Stock
As of December 31, 1997, 1,095,388 shares of Common Stock were issued
to employees, scientific founders and consultants of the Company. At December
31, 1997, 43,514 of these shares issued are subject to repurchase, at the
Company's option, at the original issuance price in accordance with vesting
provisions upon termination of the shareholder's relationship with the Company.
Warrants
Total warrants outstanding at December 31, 1997 were 86,619. On October
23, 1996, the Company amended 17,142 of these warrants issued to both Drs. Rebek
and Schimmel in May 1995 to extend the expiration date of such warrants from the
effective date of the Company's initial public offering to May 15, 2005, and to
provide that the warrants will vest in four equal annual installments commencing
upon the first anniversary of their grant date. As a result of this amendment,
the Company recorded deferred compensation in the amount of $62,000 to be
amortized to the income statement over the remaining vesting period from October
1996 to May 1999.
Notes Receivable from Related Parties
The Company has accepted a promissory note from the Chief Executive
Officer in consideration for the Preferred Stock issued to him. The aggregate
principal amount of this note at December 31, 1997 is $131,685 and is reflected
in stockholders' equity as a reduction to paid-in capital. In 1997, the term of
this note was extended to fall due in equal quarterly installments of $10,000
commencing on March 31, 1998.
The Company has accepted a promissory note from the Chief Business
Officer in consideration for the Common Stock options issued to him. The
aggregate principal amount of this note at December 31, 1997 is $80,000 and is
reflected in stockholders' equity as a reduction to paid-in-capital. This note
has an annual interest rate of 4% and falls due May 19, 2000. The note will be
forgiven in three equal annual installments, contingent upon the Chief Business
Officer's employment, from May 1998 to May 2000.
I. Stock Options
The Company has a stock option plan under which options to purchase
1,500,000 shares of its Common Stock may be granted to employees, directors,
officers or consultants. The options are granted at fair market value on the
date of the grant as determined by the Board of Directors, vest ratably over a
four-year period and expire ten years from the date of grant. In addition, the
Company issued to certain consultants and directors non-qualified stock options
to purchase 87,300 shares of its Common Stock. During 1995 and 1994, the Company
allowed employees and consultants to exercise their full grants to take
advantage of certain favorable tax benefits. The Company reserved the right to
repurchase any unearned shares at the original purchase price if the employee or
consultant does not fulfill their vesting requirement. 1,390, 36,634 and 8,232
shares of previously exercised options were repurchased in 1997, 1996 and 1995,
respectively, because vesting schedules were not fulfilled.
The Company adopted the disclosure provisions of SFAS 123, Accounting
for Stock Based Compensation, in 1996 and has applied APB Opinion 25 and related
Interpretations in accounting for its plans. Had compensation costs for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates as calculated in accordance with SFAS 123, the Company's net
loss and loss per share for the years ended December 31, 1997, 1996 and 1995
would have been increased to the pro forma amounts indicated below:
44
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. Stock Options (Continued)
1997 1996 1995
Basic and Diluted Basic and Diluted Basic and Diluted
Net Loss Loss Per Share Net Loss Loss Per Share Net Loss Loss Per Share
----------- ----------------- ----------- ----------------- ----------- -----------------
As Reported $(7,265,339) $ (0.73) $(3,798,669) $ (1.49) $(5,396,006) $ (5.47)
Pro forma $(7,859,006) $ (0.79) $(4,053,670) $ (1.59) $(5,408,006) $ (5.48)
The fair value of each stock option was estimated on the date of grant
using Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of four (4) years, expected volatility of 87%, a
dividend yield of 0% and a risk-free interest rate of 6.36%. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. Additional awards in future years are anticipated.
A summary of the status of the Company's stock option plan as of
December 31, 1997, 1996, 1995 and changes during each of the years then ended,
is presented below:
1997 1996 1995
WAEP* WAEP* WAEP*
Number per share Number per share Number per share
------- --------- ------- --------- ------- ---------
Balance at January 1 ..................................... 500,760 $ 1.93 159,057 $ .40 42,214 $ .24
Granted .................................................. 438,614 7.06 414,103 2.52 121,442 .42
Exercised ................................................ 56,591 2.06 21,610 .61 785 .35
Canceled ................................................. 80,315 2.29 50,790 .97 3,814 .35
Balance at December 31 ................................... 802,468 $ 4.69 500,760 $ 1.93 159,057 $ .40
------- -------- ------- -------- ------- -------
Options exercisable at
December 31 .............................................. 191,911 $ 2.73 86,560 $ 1.19 25,617 $ .26
------- -------- ------- -------- ------- -------
------- -------- ------- -------- ------- -------
Weighted average grant-date fair value of
options granted during the year .......................... $ 5.41 $ 2.52 $ .42
- -------------------------------------------
* Weighted-Average Exercise Price
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$.007 - $1.96 333,263 8.1 years $ 1.45 145,966 $ 1.29
$5.25 - $7.00 247,905 9.6 years 6.04 18,344 6.13
$8.00 - $10.125 221,300 9.3 years 8.03 27,601 8.04
------- --------- -------- ------- --------
802,468 8.9 years $ 4.69 191,911 $ 2.73
------- --------- -------- ------- --------
------- --------- -------- ------- --------
J. Lease Commitments
The Company leases its facilities under an operating lease agreement
which expires on September 15, 2003 and is renewable at the Company's option for
one additional five-year period. Under the terms of the lease, the Company is
obligated to pay its prorated share of common operating expenses and real estate
taxes as well as base rents. In addition, the Company entered into an agreement
with the landlord under which the landlord provided financing to the Company for
a portion of the buildout cost ($543,393) at an interest rate of 12% per year
payable in equal monthly installments of $12,087 over five years through October
1998. At December 31, 1997, the outstanding principal balance was $114,484. The
Company also provided a security deposit of $100,000 upon execution of the
lease. The security deposit bears interest in a segregated account,
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
J. Lease Commitments (Continued)
45
and is partially refundable ($79,000 plus interest) upon the fifth anniversary,
and fully refundable plus interest within thirty days after the expiration of
the lease, provided no event of default has occurred. The Company also financed
an additional $345,500 during the first quarter of 1995 relating to a 6,510
square foot facility expansion completed during the first week of January 1995.
This additional debt is payable in equal monthly installments of $7,685 over
five years with an annual interest rate of 12% through February 2000. No
additional security deposit was required. At December 31, 1997, the outstanding
principal balance was $175,318.
The Company leases certain equipment under long-term capital leases.
The cost of this equipment included in fixed assets was $3,279,151 at the end of
1997 and $2,320,201 at the end of 1996, with associated accumulated depreciation
of $1,803,995 at December 31, 1997 and $1,042,297 at December 31, 1996. The
Company has an option to purchase all of the lease equipment at a price to be
negotiated at lease end. Future lease payments for non-cancelable leases for the
respective years ended December 31 are as follows:
Operating Leases Capital Leases
---------------- --------------
1998 ............................ $ 171,365 $ 685,135
1999 ............................ 192,364 563,083
2000 ............................ 207,679 406,383
2001 ............................ 207,679 145,598
2002 ............................ 207,679 --
2003 and thereafter ............. 164,413 --
----------- ----------
Total minimum lease payments ............. $ 1,151,179 $1,800,199
----------- ----------
Less amount representing interest payments (246,879)
-----------
Present value of minimum lease payments .. 1,553,320
Less current portion ..................... (548,351)
-----------
Long-term obligation ..................... $ 1,004,969
-----------
-----------
Lease payments under operating leases were $246,498 in fiscal year
1997, $248,784 in fiscal year 1996, and $207,898 in fiscal year 1995.
K. Employee Benefits
The Company instituted a 401(k) savings plan in 1993, in which
substantially all of its permanent employees are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. The Company contributes a matching amount of up
to 1.5% of a participant's total compensation or $500 annually, whichever is
less. The Company contributed $20,165, $16,025 and $14,072, during 1997, 1996
and 1995 respectively.
L. Income Taxes
The Company follows the liability method of accounting for income taxes
in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," whereby a deferred tax liability
is measured by the enacted tax rates which will be in effect when any
differences between the financial statements and tax basis of assets reverse.
The deferred tax liability can be reduced by net operating losses being carried
forward for tax purposes.
CUBIST PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
L. Income Taxes (Continued)
46
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
1997 1996
------------ -----------
Net operating loss carryforwards ... $ 5,780,000 $ 4,376,000
Capitalized research and development 2,690,000 1,700,000
Research and experimentation credits 1,575,000 765,000
Other, net ......................... 377,000 306,000
------------ -----------
Total Deferred Tax Assets .......... $ 10,422,000 $ 7,147,000
------------ -----------
Valuation reserve .................. $(10,422,000) $(7,147,000)
------------ -----------
------------ -----------
The federal and state net operating loss and tax credit carryforwards
begin to expire in the years 2007 and 1997, respectively. Research and
experimentation tax credits of approximately $325,000 begin to expire in 2008.
The net operating loss carryforwards may be subject to an annual limitation as a
result of the change in ownership due to the initial public offering. The
Company has established a valuation reserve against the deferred tax benefit
arising from these carryforwards due to the uncertainty of earning sufficient
taxable income to receive the benefit and accordingly has not given recognition
to these tax benefits in these financial statements. These carryforwards are
also subject to review by the Internal Revenue Service.
M. Recent Pronouncements
The FASB recently issued Statement of Accounting Standards No. 130
(SFAS 130) "Reporting Comprehensive Income". This statement requires changes in
comprehensive income to be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company believes the
implementation of this statement will not have a material impact on the
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
47
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors and compliance with Section 16(a)
of the Securities Exchange Act may be found in the sections captioned "Proposal
No. 1 - Election of Directors", "Executive Compensation" and "Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 21, 1998. Such information is incorporated
herein by reference. Information with respect to Executive Officers may be found
under the section captioned "Executive Officers of the Registrant" in Part I of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required with respect to this item may be found in the
sections captioned "Executive Compensation" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 21, 1998. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required with respect to this item may be found in the
section captioned "Principal Stockholders" and "Proposal No. 1 - Election of
Directors" appearing in the definitive Proxy Statement to be delivered to
Stockholders in connection with the Annual Meeting of Stockholders to be held on
May 21, 1998. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required with respect to this item may be found in the
section captioned "Certain Transactions" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 21, 1998. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents Filed as part of Form 10-K
1. Financial Statements.
The following financial statements and supplementary data are included
in Part II Item 8 filed as part of this report:
- Report of Independent Accountants
- Balance Sheets as of December 31, 1997 and 1996
- Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
- Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
- Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
- Notes to Financial Statements
2. Financial Statement Schedule.
None.
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.
3. List of Exhibits.
Exhibits
- ---------
*3.3 Restated Certificate of Incorporation of the Registrant.
48
Exhibits
- ---------
*3.1 Restated Certificate of Incorporation of the Registrant.
*3.2 Amended and Restated By-Laws of the Registrant, as amended to
date.
*4.1 Specimen certificate for shares of Common Stock.
+*10.1 Patent License Agreement between the Registrant and the
Massachusetts Institute of Technology, dated March 10, 1994.
+*10.2 License Agreement between the Registrant and the Board
of Trustees of Leland Stanford Junior University, dated April
1, 1994.
*10.3 Employment Agreement between the Registrant and Scott M.
Rocklage, dated June 20, 1994.
*10.4 Consulting Agreement between the Registrant and Paul R.
Schimmel, dated May 1, 1992.
*10.5 Amended and Restated 1993 Stock Option Plan.
+*10.6 Collaborative Research Agreement between the Registrant and
Pfizer Inc., dated December 15, 1995.
**** 10.7 Letter Agreement, dated June 26, 1997, between the
Company and Pfizer, Inc.
*10.8 Collaborative Research and License Agreement between the
Registrant and Merck & Co., Inc., dated June 13, 1996.
*10.9 Collaborative Research and License Agreement between the
Registrant and Bristol-Myers Squibb Company and the
Registrant, dated June 25, 1996.
*10.10 Screening Agreement, dated November 28, 1995, between the
Registrant and Monsanto Company.
*10.11 Letter Agreement, dated January 18, 1996, between Pharm-Eco
Laboratories, Inc. and the Registrant.
+ 10.12 Research Collaboration and License Agreement with
ArQule, Inc., dated October 22, 1997.
*10.13 Lease Agreement between Registrant and Stimpson Family Trust
dated April 30, 1993, regarding 24 Emily Street, Cambridge,
MA., as amended by the First Amendment to Lease, dated
September 19, 1994.
*10.14 Form of Employee Confidentiality and Nondisclosure Agreement.
*10.15 Master Lease Agreement between the Registrant and Comdisco,
Inc., dated as of August 30, 1993, as amended February 7,
1995, and as further amended on February 26, 1996.
*10.16 Series B Convertible Preferred Stock Purchase Warrant between
the Registrant and Comdisco, Inc., dated August 30, 1993.
*10.17 Series C Convertible Preferred Stock Purchase Warrants between
the Registrant and Comdisco, Inc., dated February 28, 1995 and
February 26, 1996.
*10.18 Series C Convertible Preferred Stock Purchase Options issued
to Dr. Paul Schimmel and Dr. Julius Rebek in May 1995, as
amended by certain Letter Agreements, dated October 23, 1995,
between the Registrant and each of Dr. Schimmel and Dr. Rebek.
*10.19 Amended and Restated Stockholders Rights Agreement by and
among the Registrant and the parties signatory thereto.
**10.20 Secured Promissory Note, dated as of July 21, 1994, by Scott
M. Rocklage to the Registrant.
**10.21 Amendment to Promissory Note, dated as of July 21, 1996, by
and between the Registrant and Scott M. Rocklage.
10.22 Amendment to Promissory Note, dated as of December 23, 1997,
by and between the Registrant and Scott M. Rocklage
**10.23 Promissory Note, dated as of October 18, 1995, by and between
the Registrant and Scott M. Rocklage.
**+10.24 Compound Library Screening Agreement between the Registrant
and Genzyme Corporation, dated February 24, 1997.
**+10.25 Library Sample Evaluation Agreement between the Registrant and
Pharmacopeia, Inc., dated as of September 11, 1996.
****10.26 Stock Purchase Agreement, dated July 18, 1997, between
International Biotechnology Trust plc and the Company
****10.27 Registration Rights Agreement, dated July 18, 1997, between
International Biotechnology Trust plc and the Company.
****10.28 Registration Rights Agreement, dated July 18, 1997, between
each of H&Q Healthcare Investors and H&Q Life Sciences
Investors and the Company.
***10.29 Incentive Stock Option Agreement, dated as of May 19, 1997,
between Mark Carthy and the Company.
***10.30 Letter Agreement, dated as of May 19, 1997, by Mark Carthy and
the Company.
***10.31 Secured Promissory Note, dated May 19, 1997, by Mark Carthy to
the Company.
***10.32 Stock Pledge Agreement, dated May 19, 1997, between
Mark Carthy and the Company.
10.33 Letter Agreement, dated as of January 9, 1998, by Mark Carthy
and the Company.
10.34 Master Lease Agreement between the Registrant and Transamerica
Business Credit, dated as of February 14, 1997.
23.2 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
- --------------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-6795).
** Incorporated by reference from the Company's Registration Statement on
Form 10K filed with the SEC on March 31, 1997.
*** Incorporated by reference from the Company's Quarterly Report on
Form 10Q filed with the SEC on August 13, 1997.
49
**** Incorporated by reference from the Company's Registration Statement on Form
S-1 filed with the SEC on August 18, 1997 (Registration No. 333-33883) as
amended on Form S-3 filed with the SEC on January 9, 1998.
+ Confidential Treatment requested as to certain portions.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Scott M. Rocklage
-----------------------------------------
Scott M. Rocklage
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on its behalf of the registration
and in the capacities on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Scott M. Rocklage 3/12/98
- -------------------------- President, Chief Executive Officer ------------
Scott M. Rocklage and Director
(Principal Executive Officer)
/s/ Thomas A. Shea 3/12/98
- -------------------------- Treasurer ------------
Thomas A. Shea (Principal Financial and Accounting Officer)
/s/ John K. Clarke 3/12/98
- -------------------------- Chairman of the Board of Directors ------------
John K. Clarke
/s/ Barry Bloom 3/10/98
- -------------------------- Director ------------
Barry Bloom
/s/ George Conrades 3/10/98
- -------------------------- Director ------------
George Conrades
/s/ Ellen M. Feeney 3/13/98
- -------------------------- Director ------------
Ellen M. Feeney
/s/ David W. Martin, Jr. 3/12/98
- -------------------------- Director ------------
David W. Martin, Jr.
/s/ Terrance G. McGuire 3/13/98
- -------------------------- Director ------------
Terrance G. McGuire
/s/ Julius Rebek, Jr. 3/10/98
- -------------------------- Director ------------
Julius Rebek, Jr.
/s/ Paul R. Schimmel 3/13/98
- -------------------------- Director ------------
Paul R. Schimmel
51