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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
For the fiscal year ended: December 31, 2003
CUBIST PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
22-3192085 (I.R.S. Employer Identification No.) |
65 Hayden Avenue, Lexington, MA 02421
(Address of Principal Executive Offices and Zip Code)
(781) 860-8660
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Series A Junior Participating Preferred Stock Purchase Rights
(Title of Each Class)
Nasdaq National Market
(Name of Each Exchange on Which Registered)
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, or the Securities Exchange Act, 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 ý No o
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
The aggregate market value of the registrant's common stock, $0.001 par value per share, held by non-affiliates of the registrant as of June 30, 2003 was approximately $319.7 million, based on 29,603,806 shares held by such non-affiliates at the closing price of a share of common stock of $10.80 as reported on the Nasdaq National Market on such date. The number of outstanding shares of common stock of Cubist on March 8, 2004 was 40,147,199.
DOCUMENTS
INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 10, 2004 ARE INCORPORATED BY REFERENCE INTO PART III.
Cubist Pharmaceuticals, Inc.
Annual Report on Form 10-K
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This annual report contains "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. In some cases, these statements can be identified by the use of forward-looking terminology such as "may," "will," "could," "should," "would," "expect," "anticipate," "continue" or other similar words. These statements discuss future expectations; contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are based on current expectations and are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, but not limited to, the risks and uncertainties described or discussed in the section "Risk Factors." The forward-looking statements contained herein represent our judgment as of the date of this annual report, and we caution readers not to place undue reliance on such statements.
Forward-looking statements include information concerning possible or assumed future results of our operations, including, but not limited to, statements regarding:
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Many factors could affect our actual financial results and could cause these actual results to differ materially from those in these forward-looking statements. These factors include, but are not limited to, the following:
Cubist® and Cubicin™ are our trademarks. This annual report contains trademarks and trade names of other companies.
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ITEM 1. BUSINESS
Corporate Overview and Business Strategy
Cubist Pharmaceuticals, Inc., which is also referred to as "Cubist" or the "Company", is a biopharmaceutical company focused on becoming a leader in the research, development and commercialization of products that address unmet medical needs. Since our founding in 1992, we have been exclusively focused on exploiting business and product opportunities in the antiinfective marketplace. We are currently at an inflection point in our evolution, as we transition from a research and development focused company, to a commercial revenue generating, fully integrated biopharmaceutical company.
Our original technology focused on the discovery of new antibiotics to inhibit specific bacterial targets. This platform enabled us to secure three major pharmaceutical partnerships, all of which explored sets of these targets on an exclusive basis. On the strength of these partnerships, we completed our initial public offering, or IPO, in the fall of 1996.
Soon after our IPO, our senior management team began searching for opportunities to license in a late-stage antibiotic product candidate. About this same time, many larger pharmaceutical companies began abandoning the development of acute care products, such as hospital-based antibiotics, in favor of drugs with greater market potential, such as those for the treatment of chronic diseases. One company in particular, Eli Lilly and Company, had decided to discontinue development of a natural product called daptomycin, a substance discovered to have potent antibacterial activity in the 1980s. The first in a new chemical class of antiinfectives called lipopeptides, daptomycin exhibited promising characteristics. As a result, we licensed worldwide rights to daptomycin from Eli Lilly in late 1997, began clinical trials in late 1998 and were able to successfully complete trials and file a New Drug Application with the U.S. Food & Drug Administration, or FDA, in December 2002. We received approval to market Cubicin (daptomycin for injection) in the U.S. on September 12, 2003 for the treatment of complicated skin and skin structure infections, or cSSS infections.
A large component of our strategy over the years has been to build internal expertise in the development of antiinfective drugs, while also aggressively managing vendor relationships not only to tap into external expertise, but also to benefit from the conversion of fixed costs to variable costs. From our beginning in basic research, over the development life of Cubicin, we have gradually added capabilities in clinical development, quality assurance and control, regulatory affairs, manufacturing, medical affairs, and marketing. In the second half of 2003, we built a commercial infrastructure with a Cubist sales force, continuing our evolution into a fully integrated biopharmaceutical company. We have also added to our development pipeline through the in-licensing of technologies and compounds, while continuing basic drug discovery research.
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Another component of our strategy over the years has been to develop a senior management team with the skill sets necessary to lead the Company through the various stages of its evolution. The changes in our senior management team over the past two years have reflected these changing needs. This new leadership team has developed a long-term strategic plan that includes:
The Infectious Disease Marketplace
Overview of Infectious Diseases and Drug Resistance
Infectious diseases are caused by pathogens present in the environment, such as bacteria, fungi and viruses 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 establish themselves in various tissues and organs throughout the body and cause a number of serious and, in some cases, lethal infections, including infections of the bloodstream, skin, heart, lung and urinary tract.
The antiinfective market can be broken down into three main categories: antibacterials (often referred to as antibiotics), antifungals and antivirals. At present, the majority of our research and development efforts are focused on the antibacterial market. According to Frost & Sullivan, the annual worldwide market for antibacterial agents currently exceeds $26 billion and is expected to surpass $32 billion by 2007.
Currently marketed antibacterial drugs have, in many cases, proven highly successful in controlling the morbidity and mortality that accompany serious bacterial infections. These drugs work by binding to specific targets in a bacterial pathogen, thereby inhibiting a function essential to the pathogen's survival. Many antibiotics were developed and introduced into the market during the 1970s and 1980s. Most of
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these were developed from existing classes of drugs such as semi-synthetic penicillins, cephalosporins, macrolides, quinolones and carbapenems, and proved to be efficacious in treating most bacterial infections. We believe this efficacy prompted pharmaceutical companies to shift their resources to other areas of drug discovery and development. As a result, only two new antibiotics from new chemical classes have been introduced in the past 30 years—Cubicin and Zyvox, which is known generically as linezolid.
The Centers for Disease Control, or CDC, continues to report on new strains of bacteria that are resistant to one or more currently marketed agents. The increasing prevalence of drug-resistant bacterial pathogens has led to significantly increased mortality rates, prolonged hospitalizations, and increased healthcare costs. In addition, the proportion of hospital patients that have compromised immune systems has risen sharply in recent years. Hospital patients with compromised immune systems are more susceptible to serious and life-threatening infections.
The majority of these resistant organisms have emerged from the class of bacteria called Gram-positive pathogens. Gram-positive bacteria can be differentiated from Gram-negative bacteria by the differences in the structure of the bacterial envelope. Gram-positive bacteria possess a single cellular membrane and a thick cell wall component, whereas Gram-negative bacteria possess a double cellular membrane with a thin cell wall component. These cellular structures greatly affect the ability of an antibiotic to penetrate the bacteria and reach its target site. Examples of such resistant Gram-positive bacterial pathogens include:
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There are a limited number of antibiotics currently available to treat these and other resistant organisms and therefore a growing need for new therapies with novel mechanisms of action.
Shortcomings of Current Antibacterial Therapies
Current antibacterial therapies do not provide adequate treatment for some serious and life-threatening infections for the following reasons:
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Our Flagship Product: Cubicin (daptomycin for injection)
Cubicin is a natural product and the first antibiotic from a new class of antiinfectives called lipopeptides. Cubicin targets Gram-positive bacteria such as Staphylococcus, Streptococcus and Enterococcus, which can cause a variety of serious infections, and which are a major cause of morbidity and mortality worldwide. Cubicin possesses a novel mechanism of action that specifically targets Gram-positive bacteria and causes rapid bacterial cell death in vitro. The antimicrobial spectrum of Cubicin includes strains of Staphylococcus aureus that are both susceptible and resistant to treatment by currently available drugs.
We believe Cubicin provides an important advantage over existing antibiotic therapies in the treatment of cSSS infections, given its rapid bactericidal properties and distinct mechanism of action, its convenient once-daily dosing regimen, a safety profile similar to other parenteral antibiotics, and its spectrum of activity against both susceptible and resistant strains of Gram-positive pathogens. In addition, there has been no mechanism of resistance to Cubicin identified, and no observance of cross-resistance with any other class of antibiotic.
Clinical Development of Cubicin
In 1997, we licensed worldwide rights to daptomycin from Eli Lilly. In the years that followed, we completed clinical development of Cubicin for its initial clinical indication and subsequently filed for FDA approval in December 2002. On September 12, 2003, Cubicin was approved in the U.S. for the treatment of complicated skin and skin structure infections caused by certain Gram-positive organisms. We are currently evaluating the safety and efficacy of Cubicin for the treatment of infective endocarditis and bacteremia caused by Staphylococcus aureus in an international Phase 3 clinical trial. On September 30, 2003, we announced that an independent data monitoring committee had reviewed the first group of patients from the trial and recommended the trial be continued. In addition, we are currently planning additional clinical studies of Cubicin in the treatment of febrile neutropenia, osteomyelitis and surgical wounds, and Cubicin's effect on patients with end-stage renal disease.
U.S. Market Opportunity and Market Positioning for Cubicin
According to data collected by Arlington Medical Resources, Inc., over 2 million courses of parenteral antibiotics were prescribed to treat cSSS infections caused by Gram-positive organisms in the U.S. in the twelve months ended June 2003. Based on these data, and with recommended treatment courses of seven to ten days, we believe the potential addressable market for Cubicin in the U.S. to be well over 10 million days of therapy. Should Cubicin receive supplemental approvals from the FDA for additional indications, we believe this market potential could expand significantly.
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Physicians in the U.S. currently face a treatment dilemma. When a patient presents with a serious infection, it is unclear exactly what organism is causing the infection. Typically, it takes between 24 and 48 hours to obtain the results from a bacterial culture. During that time, physicians must make an educated guess and treat accordingly. For instance, presented with a serious Staphylococcal infection, physicians do not know right away what the resistance spectrum is of the bacteria. With hospital-based MRSA rates in the U.S. of just over 50%, physicians are forced to guess. To date, standard clinical practice has been to treat suspected MSSA infections with either a semi-synthetic penicillin or first-generation cephalosporin antibiotic, and to treat suspected MRSA infections with vancomycin. Published data support the finding that mortality rates for patients with certain types of Staphylococcal infections can more than double if treated improperly.
We believe that, for the first time, physicians have a choice in Cubicin that both resolves this dilemma for certain types of infections. In our Phase 3 clinical studies of Cubicin to treat cSSS infections, Cubicin proved to be as good as the current gold standards of care: semi-synthetic penicillins in patients with MSSA infections and vancomycin in patients with MRSA infections.
Using this product positioning, we began marketing Cubicin to the top 900 U.S. hospitals that dispense the majority of the prescriptions for parenteral antibiotics to treat Gram-positive cSSS infections. In addition to our in-house marketing team, we have hired 75 sales representatives and 7 regional business directors, all of whom have extensive hospital-based sales experience and many of whom have previously sold antiinfectives to the hospitals in their current territories.
We believe that marketing in the hospital environment presents certain opportunities and challenges and that understanding the hospital marketplace will continue to be a key to successfully marketing Cubicin. Unlike community-based marketing, every hospital environment is different. Each hospital or hospital group's prescribing is influenced by a list of accepted drugs called a formulary. Each hospital has a committee, often called a pharmacy and therapeutics committee, or P & T committee, which meets periodically to discuss which pharmaceuticals to add to their formulary. Once on formulary, it is much easier for a physician within that hospital or hospital group to prescribe that drug, although physicians are also allowed to prescribe drugs not on the formulary.
Initially, our sales representatives have focused on obtaining formulary approvals of Cubicin. As of the end of 2003, our sales force has reported that, of the hospital formulary committees at our targeted 900 hospitals that had met and made a decision, 95% had added Cubicin to the formulary.
The International Opportunity for Cubicin
On October 3, 2003, we announced an international commercialization agreement with Chiron Corporation for the development and commercialization of Cubicin in Western and Eastern Europe,
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Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. In addition, we have entered into agreements with Medison Pharma, Ltd., or Medison, for the marketing of Cubicin in Israel and Palestine and with TTY Biopharm Company Limited, or TTY, for the marketing of Cubicin in Taiwan.
We intend to seek additional development and commercialization agreements in the remaining significant markets around the world to maximize global sales of Cubicin.
Our Research and Development Programs
Our research efforts focus on the discovery of novel antiinfectives and novel antiinfective classes. Through experience and acquisition, we have amassed an extensive portfolio of proprietary methods for discovering novel pharmaceuticals. We focus on the use of biodiversity as a means of natural product drug discovery, while also using traditional chemical discovery and development techniques. Our research and development expenditures were $54.5 million, $59.0 million and $63.7 million in 2003, 2002 and 2001, respectively.
Oral Ceftriaxone(OCTX)
As a result of agreements with International Health Management Associates, or IHMA, and the University of Utah, we have exclusive worldwide rights to use their oral delivery technology to research, develop, manufacture and sell certain oral formulations of ceftriaxone. We have developed several oral versions of ceftriaxone, which are currently in pre-clinical development. Ceftriaxone, which had worldwide sales of over $1.0 billion in 2002 in its intravenous form, is a third-generation cephalosporin that has demonstrated a broad spectrum of bactericidal antimicrobial activity against Gram-positive and Gram-negative bacteria. We believe that, if successfully developed, an oral formulation could affect the utility and revenue potential of ceftriaxone by enabling community-based prescribing and access to patients treated with the injectable version who require step-down therapy from intravenous to oral delivery.
Next generation Cephalosporins
As a result of an agreement with Sandoz GmbH (formerly known as Biochemie GmbH), or Sandoz, a generics division of Novartis Pharma AG, or Novartis, we acquired exclusive worldwide rights to develop and commercialize a compound called CAB-175 and other back-up compounds. CAB-175 is a next-generation, parenteral cephalosporin antibiotic from a new drug class with demonstrated in vitro activity against most clinically relevant Gram-positive and Gram-negative bacteria, including MRSA. In February 2004, we discontinued clinical development of CAB-175 due to observed adverse events. We
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remain interested in developing a broad-spectrum compound with anti-MRSA activity, and are working with Sandoz to assess whether we will pursue development of one of the back-up candidates to CAB-175.
Our Lipopeptide Program
We have research and development efforts underway that focus on a new class of drug candidates called lipopeptides. Daptomycin is a member of the lipopeptide class and, as a result of our work with daptomycin, we have developed expertise in the chemistry and biology of lipopeptides. Our proprietary lipopeptide program is focused on identifying new lipopeptide compounds for the treatment of a broad spectrum of bacterial infections through the use of chemical and combinatorial biosynthesis technologies.
Our Proprietary Natural Products Drug Discovery Technologies
We own multiple proprietary assets and technologies in the area of natural products that are being applied to discover novel antiinfective agents and that attempt to eliminate the bottlenecks that currently exist in the natural products drug discovery process. Historically, natural products have proven to be a rich source of pharmaceuticals; over 40% of the drugs on the market today are or have been derived from natural products.
Our "10M Challenge" program challenged our scientists to screen through 10 million unique microbes during 2003. Using approximately 25,000 soil samples, researchers were able to surpass this goal and successfully identified a series of compounds that appear to be unique in molecular size and in their ability to overcome all known bacterial resistance mechanisms. These compounds will be further analyzed by our team throughout 2004.
Other Research Programs
From February 1999 until February 2003, we were engaged in a research and license collaboration with Novartis, to validate and develop assays for antiinfective targets and to identify new antiinfective agents. During the collaboration, we successfully delivered to Novartis four novel, validated antiinfective drug targets and high-throughput screening assays. Novartis will optimize, clinically develop and commercialize any compounds that result from their ongoing screening efforts and would make payments to us upon the achievement of clinical milestones or sales.
In June 2001, Cubist and Syrrx, Inc., or Syrrx, entered into an antiinfective drug discovery collaboration. The joint effort used Syrrx and Cubist technologies for the high-throughput characterization of novel antiinfective drug targets and rational drug design. As a result of our decision to discontinue in-house target-based drug discovery, this collaboration ended in January 2003. During the collaboration, Cubist received research milestones and an equity stake in Syrrx, which we continue to hold.
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Our Intellectual Property Portfolio
We seek to protect our cloned targets, expressed proteins, assays, organic synthetic processes, novel compounds, screening technology and other technologies by, among other things, filing, or causing to be filed on our behalf, patent applications.
To date, we own or co-own 39 issued U.S. patents, 20 pending U.S. patent applications, 58 issued foreign patents and approximately 140 pending foreign patent applications. We have licenses to research, develop and commercialize an oral formulation of ceftriaxone from IHMA and the University of Utah under an issued U.S. patent related to oral formulations of ceftriaxone, and together with IHMA and the University of Utah, we co-own pending U.S. and foreign patent application equivalents related to oral formulations and specific oral dosage forms of antibiotics. We have also licensed exclusive worldwide rights to novel cephalosporins from Sandoz. Additionally, we have exclusively licensed rights from Eli Lilly under U.S. patents and foreign patents related to the composition, manufacture, and use of daptomycin. The primary composition of matter patent covering daptomycin in the U.S. has expired; however, currently there are four issued U.S. patents (U.S. Patent Nos. 6,468,967; 5,912,226; 4,885,243; and 4,874,843) that cover the drug product, manufacture, administration or use of Cubicin. In addition, we have also filed a number of patent applications in our name relating to the composition, manufacture, administration and use of daptomycin and other lipopeptides. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our technology.
Manufacturing, Distribution and Other Agreements
In June 2000, we entered into a manufacturing and supply agreement with DSM Capua SpA, or DSM, pursuant to which DSM agreed to manufacture and supply to us bulk Cubicin drug substance for commercial purposes. Under the terms of the manufacturing and supply agreement, DSM was required to prepare its manufacturing facility in Italy to manufacture bulk Cubicin drug substance in accordance with Good Manufacturing Practices, or GMP, standards. We currently purchase bulk Cubicin drug substance from DSM, subject to minimum annual quantity requirements.
In September 2001, we entered into a manufacturing and supply agreement with ACS Dobfar SpA, or ACS, pursuant to which ACS agreed to provide scale-up services and to construct a production facility dedicated to the manufacture of Cubicin and to sell bulk Cubicin exclusively to us for commercial purposes. Under the terms of this agreement, which was amended in February 2003, ACS is required to prepare its manufacturing facility in Italy to manufacture bulk Cubicin drug substance in accordance with GMP standards. Upon completion of the preparation of ACS's manufacturing facility and a determination by the FDA that the manufacturing facility complies with GMP standards, we will purchase bulk Cubicin
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drug substance from ACS subject to minimum annual quantity requirements over a seven-year period. We also currently engage ACS to manufacture bulk clinical grade Cubicin drug substance for our clinical trials. We believe DSM and ACS can adequately meet our bulk drug substance needs for the foreseeable future.
In April 2000, we entered into an agreement with Abbott Laboratories. Under this agreement, Abbott currently converts bulk Cubicin substance into our finished, vialed formulation of Cubicin.
In September 2003, we entered into a services agreement with Cardinal Health PTS, Inc., or Cardinal. Under this agreement, Cardinal provides packaging services for finished Cubicin product.
In June 2003, we entered into a services agreement with Integrated Commercialization Solutions, Inc., or ICS, whereby ICS agreed to exclusively manage our warehousing and inventory program and to distribute Cubicin finished product to our customers. ICS also provides us with order processing, order fulfillment, shipping, collection and invoicing services related to our product sales.
In September 2001, Cubist entered into a services agreement with PPD Development, LLC, or PPD, pursuant to which PPD has agreed to provide various clinical research services for our clinical trials.
Competition
The biotechnology and pharmaceutical industries are intensely competitive. Many companies, including large, multinational pharmaceutical and biotechnology companies, are actively engaged in activities similar to ours. Many of these companies employ greater financial and other resources, including more extensive research, development, marketing and manufacturing organizations than ours or those of our collaborative partners. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which we are working.
Cubicin is currently approved in the U.S. for the treatment of cSSS infections caused by certain Gram-positive organisms. There are many currently approved antibiotics used to treat these types of infections. The most commonly prescribed treatments for susceptible strains of bacteria are: first-generation cephalosporins, such as cefazolin, and semi-synthetic penicillins, such as oxacillin and nafcillin. For the treatment of resistant organisms, the most commonly prescribed treatments are vancomycin and linezolid. All of these antibiotics, except linezolid, which is marketed as Zyvox, are distributed by generic manufacturers at low cost. In addition, there are several compounds in late-stage clinical development that may compete in this marketplace should they receive FDA marketing clearance.
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Government Regulation
Overview
The development, manufacture and marketing of drugs, including antibiotics, developed by us or our collaborative partners are subject to regulation by numerous governmental agencies in the U.S., principally the FDA, by state and local governments, and in some instances by foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act, or FDC Act, and the regulations promulgated there under, the FDA regulates the pre-clinical and clinical trials, safety, effectiveness, manufacture, labeling, storage, record keeping, distribution, and promotion of drugs in the U.S. 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.
FDA Process
Before testing of any compounds with potential therapeutic value in human subjects may begin in the U.S., stringent government requirements for pre-clinical 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, or 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 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. Each clinical trial must be conducted under the auspices of an Institutional Review Board that considers, among other things, ethical factors, the safety of human subjects, the possible liability of the institution and the informed consent disclosure, which must be made to participants in the clinical trial.
Phase 1 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, dose tolerance, absorption,
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bio-distribution, metabolism, excretion and clinical pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase 2 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 determine dose response 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 3 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 3 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 dosing 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, or 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, 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 of our proposed products would likely be subject to demanding and time-consuming registration 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 record keeping, labeling, advertising and marketing procedures.
In some cases, the FDA review of drug development program may proceed under the "fast track" guidelines. Fast Track is designed to facilitate the development and expedite the review of new drugs to that are intended to treat serious or life threatening conditions and demonstrate the potential to address unmet medical needs. An NDA may proceed under "priority review" and/or accelerated approval. Priority review for an NDA is granted if the drug provides a significant improvement compared to marketed products in the treatment, diagnosis, or prevention of a disease; eligibility is not limited to drugs for a serious or life-threatening disease. The accelerated approval provisions are largely codified in FDA's accelerated approval regulations. While the statutory provisions expand upon the regulations, the FDA continues to rely on its regulations to implement the statutory provision. The accelerated approval
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regulations apply to products used in the treatment of serious or life-threatening illnesses that appear to provide meaningful therapeutic benefits over existing treatments. These regulations permit approval of such products before clinical research is completed based on the product's effect on a clinical endpoint or surrogate endpoint. When a product is approved under the accelerated approval regulations, the sponsor may be required to conduct additional adequate and well-controlled studies to verify that the effect the surrogate endpoint correlates with improved clinical outcome or to otherwise verify the clinical benefit. In the event such post-marketing studies do not verify the drug's anticipated clinical benefit, or if there is other evidence that the drug product is not shown to be safe and effective, expedited withdrawal procedures permit the FDA, after a hearing, to remove a product from the market. Significant uncertainty exists as to the extent to which these accelerated approval regulations will result in accelerated review and approval. The FDA retains considerable discretion to determine eligibility for accelerated review and approval.
Other Regulatory Processes
We are 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 we believe that our safety procedures for handling and disposing of radioactive compounds and other hazardous materials used in our 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, we could be held liable for any damages that result and any such liability could exceed our resources.
The development, manufacture and marketing of drugs, including antibiotics, developed by us or our collaborative partners are subject to regulation by numerous governmental agencies in the U.S.
Our Employees
As of March 1, 2004, we had approximately 290 full-time employees, approximately 100 of whom were engaged in research and development and approximately 190 of whom were engaged in management, marketing, sales, manufacturing, quality assurance/quality control, administration and finance. More than 100 of our employees hold advanced degrees. Our employees are not covered by a collective bargaining agreement. We have never experienced an employment-related work stoppage, and we consider our employee relations to be good.
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Our Executive Officers and Directors
| Michael W. Bonney | 45 | President, Chief Executive Officer and Director | ||
| Barry I. Eisenstein, M.D. | 56 | Senior Vice President, Research & Development | ||
| Oliver S. Fetzer, Ph.D., MBA | 39 | Senior Vice President, Corporate Development & Chief Business Officer | ||
| Christopher D.T. Guiffre, J.D., MBA | 35 | Senior Vice President, General Counsel & Secretary | ||
| David W.J. McGirr, MBA | 49 | Senior Vice President & Chief Financial Officer | ||
| Robert J. Perez, MBA | 40 | Senior Vice President, Sales & Marketing | ||
| Francis P. Tally, M.D. | 63 | Senior Vice President, Scientific Affairs & Chief Scientific Officer | ||
| Scott M. Rocklage, Ph.D. | 49 | Chairman of the Board of Directors | ||
| Kenneth M. Bate, MBA (1) (3) | 53 | Director | ||
| Susan B. Bayh, J.D. (3)* | 44 | Director | ||
| John K. Clarke, MBA (1)* | 50 | Director | ||
| David W. Martin, Jr., M.D. (2)* | 63 | Director | ||
| J. Matthew Singleton, MBA, CPA (1) (2) | 51 | Director | ||
| Walter R. Maupay, MBA (2) (3) | 65 | Director |
Mr. Bonney has served as our President & Chief Executive Officer and as a member of the Board of Directors since June 2003. From January 2002 to June 2003, he served as our President & Chief Operating Officer. From 1995 to 2001, he held various positions of increasing responsibility at Biogen, Inc., a biopharmaceutical company, including Vice President, Sales and Marketing from 1999 to 2001. While at Biogen, Mr. Bonney built the commercial infrastructure for the launch of Avonex. Prior to that, Mr. Bonney held various positions of increasing responsibility in sales, marketing and strategic planning at Zeneca Pharmaceuticals, ending his eleven-year career there serving as National Business Director. Mr. Bonney received a BA in Economics from Bates College.
Dr. Eisenstein has served as our Senior Vice President, Research and Development since January 2003. He joined Cubist from ActivBiotics, Inc., a biotech company, where he served as President, Chief Scientific and Medical Officer throughout 2002 and as a member of ActivBiotics' Board of
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Directors from 1997 to 2003. From 1996 to 2002, he was Vice President, Science and Technology at Beth Israel Deaconess Medical Center, responsible for technology transfer, clinical trials and research, research administration and research operations. From 1992 to 1996, Dr. Eisenstein served as Vice President of Lilly Research Laboratories at Eli Lilly and Company, a pharmaceutical company, and from 1986 to 1992, Dr. Eisenstein was Chairman of the Department of Microbiology and Immunology at The University of Michigan Medical School. In addition, Dr. Eisenstein has held various academic positions and currently serves as Clinical Professor of Medicine at Harvard Medical School. Dr. Eisenstein received an AB from Kenyon College and his MD from Columbia University College of Physicians and Surgeons.
Dr. Fetzer has served as our Senior Vice President, Corporate Development and Chief Business Officer since January 2003. From July 2002 to January 2003, he served as our Senior Vice President, Business Development. Prior to joining Cubist, he held various positions of increasing responsibility at the Boston Consulting Group, a leading management consulting firm, including Consultant, Project Leader, Manager and Vice President and Director. While there, he focused on domestic and international strategic issues, predominantly in the healthcare industry, covering all functions of the pharmaceutical value chain. Dr. Fetzer received a B.S. in Biochemistry from the College of Charleston (South Carolina), a Ph.D. in Pharmaceutical Sciences from the Medical University of South Carolina and an MBA from Carnegie Mellon University.
Mr. Guiffre has served as our Senior Vice President, General Counsel and Secretary since January 2004. He served as our Vice President, General Counsel and Secretary from December 2001 until January 2004. From 1997 to 2001, Mr. Guiffre held various positions of increasing responsibility at Renaissance Worldwide, Inc., a provider of information technology consulting services, including Counsel, Corporate Counsel and Director of Legal Affairs, and Vice President, General Counsel and Clerk. Prior to joining Renaissance Worldwide, he was an Associate at Bingham McCutchen LLP, a leading Boston law firm. He received a B.S. in Marketing from Babson College, a JD from Boston College Law School, and an MBA from Boston College Carroll School of Management. Mr. Guiffre is a member of the Massachusetts Bar.
Mr. McGirr has served as our Senior Vice President and Chief Financial Officer since November 2002. He also served as our Treasurer from November 2002 until January 2003. From 1999 to 2002, Mr. McGirr was the President and Chief Operating Officer of hippo inc, an internet technology, venture-financed company. Mr. McGirr served as a member of hippo's Board of Directors from 1999 to 2003. From 1996 to 1999, he was the President of GAB Robins North America, Inc., serving also as Chief Executive Officer from 1997 to 1999. Mr. McGirr was a private equity investor from 1995 to 1996. From 1978 to 1995, Mr. McGirr served in various positions within S.G. Warburg Group, ultimately as Chief Financial Officer, Chief Administrative Officer and Managing Director of S.G. Warburg & Co., Inc., a
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position held from 1992 to 1995. Mr. McGirr received a B.Sc. in Civil Engineering from the University of Glasgow and received an MBA from The Wharton School at the University of Pennsylvania.
Mr. Perez has served as our Senior Vice President, Sales and Marketing since August 2003. Prior to joining Cubist, he served as Vice President of Biogen's CNS Business Unit since 2001 and was responsible for leading the U.S. neurology franchise, including Biogen's flagship product Avonex®, along with customer support, medical affairs, reimbursement and training. From 1995 to 2001 he served as a Regional Director, Director of Sales, and Avonex® Commercial Executive at Biogen. From 1987 to 1995, Mr. Perez held various sales and marketing positions at Zeneca Pharmaceuticals, ultimately serving as Regional Business Manager, responsible for strategic planning and profitability of a key business unit and managing both national and regional sales managers. Mr. Perez received a BS from California State University, Los Angeles and an MBA from The Anderson School at UCLA.
Dr. Tally has served as our Chief Scientific Officer and Senior Vice President, Scientific Affairs since January 1997. From March 1995 to January 1997, he served as our Vice President of Research and Development. From 1986 to February 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, a pharmaceutical company, 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. Rocklage has served as one of our directors since July of 1994 and was elected Chairman of the Board of Directors in March 2000. From July 1994 to June 2003, Dr. Rocklage served as our Chief Executive Officer. He served as our President from July 1994 to March 2001. 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 Nycomed Salutar, Inc. 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 currently serves as a director of Symyx Therapeutics, Inc., a drug discovery and development company, Miikana Therapeutics, Inc., a biopharmaceutical company, and is a venture partner at 5AM Ventures, a venture capital fund. He received his B.S. in Chemistry from the University of California, Berkeley and his Ph.D. in Chemistry from the Massachusetts Institute of Technology.
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Mr. Bate has served as one of our directors since June 2003. Since July 2003, Mr. Bate has served as Executive Vice President, Head of Commercial Operations and Chief Financial Officer of Millennium Pharmaceuticals Inc. From December 2002 to July 2003, Mr. Bate served as Senior Vice President and Chief Financial Officer of Millennium Pharmaceuticals, Inc. Prior to that, he was a founding partner of JSB Partners, LP, a firm providing banking and advisory services to biopharmaceutical and life sciences companies from July 1999 to December 2002. From 1997 to 1999, Mr. Bate served as Senior Managing Director and Chief Executive Officer of MPM Capital, LP, a venture capital company. Mr. Bate served at Biogen, Inc. as Vice President of Sales and Marketing from 1993 to 1996 and as Chief Financial Officer from 1990 to 1993. Mr. Bate received a B.A. in Chemistry from Williams College and an MBA from the Wharton School at the University of Pennsylvania.
Ms. Bayh has served as one of our directors since June 2000. Since 1994, Ms. Bayh has served as the Commissioner of the International Joint Commission, a bi-national organization between the United States and Canada focusing on environmental issues of the Great Lakes. Ms. Bayh served as an attorney in Eli Lilly's Pharmaceutical Division handling federal regulatory issues for marketing and medical clients from 1989 to 1994. Previously, Ms. Bayh practiced law, focusing on litigation, utility, corporate, and antitrust law with the law firms of Gibson, Dunn & Crutcher LLP and Barnes & Thornburg LLP. She is also a director of Anthem, Inc., (a Blue Cross/Blue Shield company), Dendreon, Inc., a biotechnology company, Curis, Inc., a biotechnology company, Dyax, Inc., a biopharmaceutical company, Emmis Communications, a diversified media company, Golden State Foods, a food distribution company and E-Bank, an internet banking subsidiary of E-Trade Securities, LLC. Ms. Bayh has a B.A. from the University of California at Berkeley and a J.D. from the University of Southern California Law Center.
Mr. Clarke has served as one of our directors since our incorporation and as Chairman of the Board of Directors from our incorporation to March 2000. From 1992 to 1994, Mr. Clarke served as our acting President and Chief Executive Officer. Since 1982, he has been a general partner of DSV Management in Princeton, New Jersey, the general partner of DSV Partners IV, a venture capital firm. Mr. Clarke is also the Managing General Partner of Cardinal Partners, a venture capital firm. He is a director of Momenta, Inc., a biopharmaceutical company, Visicu, Inc., a healthcare company and Alnylam Pharmaceuticals, Inc., a therapeutics company. Mr. Clarke received his B.A. in Biology and Economics from Harvard College and his MBA from The Wharton School of the University of Pennsylvania.
Dr. Martin has served as one of our directors since October 1997. Since 2003, he has been Chairman and Chief Executive Officer of GangaGen, Inc., a biotechnology company. From July 1997 until April 2003, Dr. Martin served as President, Chief Executive Officer and a founder of Eos Biotechnology, Inc., a biotechnology company. From 1995 to 1996, Dr. Martin was President and Chief Executive Officer of Lynx Therapeutics, Inc., a biotechnology company. During 1994, Dr. Martin served as Senior Vice President of Chiron Corporation, a biopharmaceutical company. From 1991 to 1993,
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Dr. Martin served as Executive Vice President of DuPont Merck Pharmaceutical Company. From 1983 to 1990, Dr. Martin was Vice President and then Senior Vice President of Research and Development at Genentech, Inc., a biotechnology company. Prior to 1983, Dr. Martin was a Professor of Medicine, Professor of Biochemistry and an Investigator of the Howard Hughes Medical Institute at the University of California San Francisco. Dr. Martin is also a Director of Varian Medical Systems, Inc., a medical equipment and software supplier. Dr. Martin received his M.D. from Duke University.
Mr. Maupay has served as one of our directors since June 1999. From January 1995 to June 1995, Mr. Maupay served as Group Executive of Calgon Vestal Laboratories, a division of Merck & Co. From 1988 to 1995, Mr. Maupay served as President of Calgon Vestal Laboratories. From 1984 to 1988, Mr. Maupay served as Vice President, Healthcare at Calgon Vestal Laboratories. Mr. Maupay is a director of Life Medical Sciences, Inc., a medical device company, Kensey Nash Corporation, a medical device company, PolyMedica Corporation, a healthcare distribution company, and Triosyn, Inc., an infection control medical device company. Mr. Maupay received his Bachelor of Science in Pharmacy from Temple University and his MBA from Lehigh University.
Mr. Singleton has served as one of our directors since June 2003. From 2000 to the present, he has served as Chief Financial and Administrative Officer of CitationShares, LLC, a joint venture of Cessna Aircraft Company and TAG Aviation USA, Inc. From 1994 to 1997, Mr. Singleton served as a Managing Director, Executive Vice President and Chief Administrative Officer of CIBC World Markets, an investment banking firm. Previous to that, he served in a variety of roles from 1974 until 1994 at Arthur Andersen & Co., a public accounting firm, ending his tenure there as Partner-In-Charge of the Metro New York Audit and Business Advisory Practice. During 1980 and 1981, he served as a Practice Fellow at the Financial Accounting Standards Board. Mr. Singleton also serves as a director of Salomon Asset Reinvestment Company. He received an AB in Economics from Princeton University and an MBA from New York University. Mr. Singleton is a Certified Public Accountant.
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Investing in our company involves a high degree of risk. You should consider carefully the risks described below, together with the other information in and incorporated by reference into this annual report. If any of the following risks actually occur, our business, operating results or financial condition could be materially adversely affected. This could cause the market price of our common stock to decline, and could cause you to lose all or part of your investment.
Risks Related to Our Business
Cubicin may not be widely accepted by physicians, patients, third party payors, or the medical community in general.
The commercial success of Cubicin depends upon its acceptance by the medical community. We cannot be sure that Cubicin will continue to be accepted by purchasers in the pharmaceutical market. Cubicin competes with a number of existing antiinfective drugs manufactured and marketed by major pharmaceutical companies and potentially against new antiinfective drugs that are not yet marketed. The degree of market acceptance of Cubicin depends on a number of factors, including, but not limited to:
We cannot be sure that physicians, patients, third party payors, or the medical community in general will continue to accept and utilize Cubicin. Even if the medical community accepts that Cubicin is safe and efficacious for its approved indication, physicians may choose to restrict the use of Cubicin due to antibiotic resistance concerns.
We will need to obtain regulatory approvals for additional indications for Cubicin, foreign regulatory approvals of Cubicin and regulatory approvals for our other drug candidates, and our ability to generate revenues from the commercialization and sale of products will be limited by any failures to obtain these approvals.
The FDA and comparable regulatory agencies in foreign countries impose substantial requirements for the development, production and commercial introduction of drug products. These include lengthy and
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detailed pre-clinical, laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. All of our drug candidates will require governmental approvals for commercialization, and, to date, we have not obtained government approval for any drug product other than Cubicin (daptomycin for injection) for the indication of complicated skin and skin structure infections in the U. S. Pre-clinical testing, clinical trials and manufacturing of our drug candidates will be subject to rigorous and extensive regulation by the FDA and corresponding foreign regulatory authorities. In addition, such authorities, including the FDA, may impose more stringent requirements than currently in effect, which may adversely affect our planned on-going development. Satisfaction of the requirements of the FDA and the foreign regulatory agency requirements typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the drug candidate.
No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. We have limited experience conducting clinical trials. The majority of drug candidates that begin human clinical trials fail to demonstrate the desired safety and efficacy characteristics. Failure to demonstrate the safety and efficacy of our drug candidates for each target indication in clinical trials would prevent us from obtaining required approvals from regulatory authorities, which would prevent us from commercializing those drug candidates. The results of our clinical testing of a drug candidate may cause us to suspend, terminate or redesign our clinical testing program for that drug candidate. We cannot be sure when we, independently or with our collaborative partners, might be in a position to submit additional drug candidates for regulatory review. In addition, we cannot be sure that regulatory approval will be granted for drug candidates that we submit for regulatory review. Moreover, if regulatory approval to market a drug product is granted, the approval may impose limitations on the indicated use for which the drug product may be marketed as well as additional post-approval requirements. For example, the FDA approval to market daptomycin in the U.S. requires that we conduct a post-marketing clinical study to assess the safety, efficacy and pharmacokinetics of daptomycin in renal impairment patients with complicated skin and skin structure infections.
We have only obtained regulatory approval to market Cubicin in the U.S. for the treatment of complicated skin and skin structure infections. In order to implement our business plan for Cubicin, we will need to obtain regulatory approval for additional indications and from foreign regulatory authorities. In addition, we will need to obtain regulatory approval for any additional drug candidates. Our ability to generate revenues from the commercialization and sale of drug products will be limited by any failures to obtain these approvals.
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If clinical trials for our drug candidates are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business.
Before we receive regulatory approvals for the commercial sale of any of our drug candidates, our drug candidates are subject to extensive pre-clinical testing and clinical trials to demonstrate their safety and efficacy in humans. Conducting pre-clinical testing and clinical trials is a lengthy, time-consuming and expensive process that often takes many years. Furthermore, we cannot be sure that pre-clinical testing or clinical trials of any drug candidates will demonstrate the safety and efficacy of our drug candidates at all or to the extent necessary to obtain regulatory approvals. Companies in the biotechnology and pharmaceutical industries, including companies with greater experience in pre-clinical testing and clinical trials than we have, have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. For example, our clinical trials on Cubicin for the treatment of pneumonia failed to demonstrate sufficient efficacy despite promising results in pre-clinical and early clinical trials.
Our clinical trials must be carried out under protocols that are acceptable to regulatory authorities and to the committees responsible for clinical studies at the sites at which the studies are conducted. There may be delays in preparing protocols or receiving approval for them that may delay either or both of the start and finish of our clinical trials. Feedback from regulatory authorities or results from earlier stage clinical studies might require modifications or delays in later stage clinical trials. These types of delays can result in increased development costs and delayed regulatory approvals.
Furthermore, there are a number of additional factors that may cause delays in our clinical trials. We have limited experience in conducting pre-clinical testing or clinical trials. We currently have one product candidate in the early stages of development. In February 2004, we discontinued clinical development of CAB-175 due to observed adverse events. We remain interested in developing a broad spectrum compound with anti-MRSA activity and are working to assess whether a suitable back-up candidate to CAB-175 is available. The rate of completion of our clinical trials is also dependent in part on the rate of patient enrollment. There may be limited availability of patients who meet the criteria for certain clinical trials. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approvals. In particular, our ongoing clinical trial to determine the safety and efficacy of using daptomycin to treat endocarditis, or infections of the heart valves, has experienced delays attributable to slow enrollment. In addition, our clinical trials may be delayed by one or more of the following factors:
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If clinical trials for our drug candidates are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines, which could harm our business and cause our stock price to decline.
We will face significant competition from other biotechnology and pharmaceutical companies, particularly with respect to Cubicin, and our operating results will suffer if we fail to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the U.S. and internationally, including major multinational pharmaceutical and chemical companies, biotechnology companies and universities and other research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staffs and more experienced marketing and manufacturing organizations. Our competitors may succeed in developing or licensing on an exclusive basis technologies and drug products that are more effective or less costly than any drug candidate that we are currently developing or that we may have or develop, which could render our technology, Cubicin or our future drug products, if any, obsolete and noncompetitive.
The competition in the market for therapeutic products that address infectious diseases is intense. Cubicin will face competition from commercially available drugs such as vancomycin, marketed generically by Abbott Laboratories, Shionogi & Co, Ltd., and others, Zyvox, marketed by Pfizer, Inc., and Synercid, marketed by King Pharmaceuticals, Inc. These products have established safety and efficacy profiles. In particular, vancomycin has been a widely used and well known antibiotic for over 40 years and is sold in a relatively inexpensive generic form. Accordingly, if price competition inhibits the acceptance of Cubicin or if the reluctance of physicians to switch from existing drugs to Cubicin inhibits the acceptance of Cubicin, we will not achieve our business plan. In addition, Cubicin may face competition from drug candidates currently in clinical development, including drug candidates that could receive regulatory approval before Cubicin in countries outside the U.S. The inability to compete with existing drug products or subsequently introduced drug products would have a material adverse impact on our operating results.
We are completely dependent on third parties to manufacture Cubicin, and our commercialization of Cubicin could be stopped, delayed, or made less profitable if those third parties fail to provide us with sufficient quantities of Cubicin or fail to do so at acceptable prices.
We do not have the capability to manufacture our own Cubicin bulk drug substance or finished drug product. We have entered into manufacturing and supply agreements with both DSM and ACS to manufacture and supply to us Cubicin drug substance for commercial purposes. However, only DSM is currently capable of manufacturing Cubicin drug substance for commercial sale, and ACS will not be
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capable of manufacturing Cubicin drug substance for commercial sale until such time as they have requested and received the required regulatory approvals. We currently anticipate that ACS will be able to manufacture Cubicin drug substance for commercial sale by the end of 2004. Therefore, we anticipate that we will depend entirely on one company, DSM, to manufacture Cubicin drug substance for commercial sale until that time. We currently depend on one company, DSM, to manufacture Cubicin drug substance for our clinical trials. We currently depend on one company, Abbott Laboratories, to manufacture clinical grade vialed formulations of Cubicin and to manufacture and supply final vialed Cubicin commercial drug product.
We may not be able to enter into definitive agreements on acceptable terms for the expanded commercial scale manufacturing of Cubicin, either for drug substance or drug product. If we are unable to enhance our current manufacturing network, we could experience significant delays in the supply of Cubicin. Because both the DSM and ACS manufacturing facilities are located in Italy, we may also experience interruption or significant delay in the supply of Cubicin drug substance due to natural disasters, acts of war or terrorism, labor unrest, or political instability in Italy. If we are required to transfer manufacturing processes to other third-party manufacturers, we would be required to satisfy various additional regulatory requirements, and we could experience significant delays in supply of Cubicin.
We anticipate that the initial costs of commercial scale manufacturing of Cubicin will be high. We cannot guarantee that we will be able to reduce the costs over time. If the cost of Cubicin is too high, it may significantly delay or prevent Cubist from achieving profitability. In order to reduce costs, we may need to develop and implement process improvements. In order to implement such process improvements, we will need, from time to time, to notify or make filings with regulatory authorities. We cannot guarantee that we will be able to maintain current yield rates in our commercial manufacturing process. If we cannot maintain current yields, we may not be able to reduce our costs over time.
We have collaborative relationships that may expose us to a number of risks.
We have entered into, and anticipate continuing to enter into, collaborative arrangements with multiple third parties to discover, test, manufacture, and market drug candidates and drug products. In particular, on October 3, 2003, we announced an international commercialization agreement with Chiron to seek regulatory approvals and commercialize Cubicin in Europe and other foreign countries. Collaborations such as these are necessary for us to research, develop, and commercialize drug candidates. We cannot be sure that we will be able to establish any additional collaborative relationships on terms acceptable to us.
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Reliance on collaborative relationships poses a number of risks including the following:
Collaborative arrangements with third parties are a critical part of our business strategy, and any inability on our part to be able to establish collaborations on terms favorable to us or to work successfully with our collaborators will have an adverse effect on our operations and financial performance.
If we are unable to continue to develop satisfactory sales and marketing capabilities, we may not succeed in commercializing Cubicin.
Until our launch of Cubicin in November 2003, we had not previously marketed or sold a drug product. We recently developed our own sales and marketing capabilities in the U.S., and we will need to continue to develop those capabilities. We cannot guarantee that we will be successful in selling and marketing Cubicin on our own in the U.S. On October 3, 2003, we announced an international commercialization agreement with Chiron for the development and commercialization of Cubicin in Western and Eastern Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. We cannot guarantee that we will be successful in developing and commercializing Cubicin under our collaboration agreement with Chiron or any of our other current or future collaborations.
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We have incurred substantial losses in the past and expect to incur additional losses over the next several years.
Since we began operations, we have incurred substantial net losses in every fiscal period. We incurred a net loss of $115.0 million for the year ended December 31, 2003, including $12.9 million of one-time lease termination charges, and had an accumulated deficit of $375.5 million at December 31, 2003. These losses have resulted from costs associated with conducting research and development, conducting clinical trials, commercialization efforts and associated administrative costs.
We expect to incur significant additional operating losses over the next several years as we expand our research and development efforts and our pre-clinical testing and clinical trials and as we implement manufacturing, marketing and sales programs. As a result, we cannot predict when we will become profitable, if at all, and if we do, we may not remain profitable for any substantial period of time. If we fail to achieve profitability within the time frame expected by investors, the market price of our common stock may decline.
We will require additional funds.
Currently, we are not a self-sustaining business, and certain economic and strategic factors will require us to seek substantial additional funds. We believe that our existing cash, cash equivalents, short-term investments and cash flow from revenues will be sufficient to fund our operating expenses, debt obligations, milestone payments under our collaborative arrangements and capital requirements under our current business plan through the first half of 2005. We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure and research and development activities. We may need to spend more money than currently expected because of unforeseen circumstances or circumstances beyond our control. We have no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable to our stockholders or us.
We may seek additional funding through public or private financing or other arrangements with collaborative partners. If we raise additional funds by issuing equity securities, further dilution to existing stockholders may result. In addition, as a condition to giving additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. We cannot be sure, however, that additional financing will be available from any of these sources or, if available, will be available on acceptable or affordable terms.
Our annual debt service obligations on our 51/2% subordinated convertible notes due 2008 are approximately $9.1 million per year in interest payments. Our annual debt service obligations on our 81/2% senior convertible notes due in 2005 were approximately $3.3 million per year in interest payments; with
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the $10.0 million pay down of debt in December 2003, interest payments on these notes will be $2.5 million per year. We may add additional lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further. If we are unable to generate sufficient cash to meet these obligations and need to use existing cash or liquidate investments in order to fund our debt service obligations, we may be forced to delay or terminate clinical trials, curtail operations, or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses on terms that are not favorable to us. If we fail to obtain additional capital, we will not be able to execute our current business plan successfully.
We may not be able to obtain, maintain or protect certain proprietary rights necessary for the development and commercialization of Cubicin, our other drug candidates, and our research technologies.
Our commercial success will depend in part on obtaining and maintaining U.S. and foreign patent protection for Cubicin, our drug candidates, and our research technologies and successfully enforcing and defending these patents against third party challenges. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Legal standards relating to the validity and scope of patents covering pharmaceutical and biotechnological inventions are continually developing. Our patent position is highly uncertain and involves complex legal and factual questions, and we cannot predict the scope and breadth of patent claims that may be afforded to our patents or to other companies' patents.
The primary composition of matter patent covering Cubicin in the U.S. has expired. We own or have licensed a limited number of patents directed toward methods of administration and methods of manufacture of Cubicin. We cannot be sure that patents will be granted with respect to any of our pending patent applications for Cubicin, our other drug candidates, or our research technologies, or with respect to any patent applications filed by us in the future; nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting Cubicin, our other drug candidates and our technology.
The degree of future protection for our proprietary rights is uncertain. We cannot be certain that the named applicants or inventors of the subject matter covered by our patent applications or patents, whether directly owned by us or licensed to us, were the first to invent or the first to file patent applications for such inventions. Third parties may challenge, infringe, circumvent or seek to invalidate existing or future patents owned by or licensed to us. A court or other agency with jurisdiction may find our patents invalid and/or unenforceable. Even if we have valid and enforceable patents, these patents still may not provide sufficient protection against competing products or processes.
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If our collaborative partners, employees or consultants develop inventions or processes independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those inventions and/or processes. Such inventions and/or processes will not necessarily become our property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights. Moreover, the laws of foreign countries in which we market our drug products may afford little or no effective protection of our intellectual property.
We engage in collaborations, sponsored research agreements, and other arrangements with academic researchers and institutions that have received and may receive funding from U.S. government agencies. As a result of these arrangements, the U.S. government or certain third parties may have rights in certain inventions developed during the course of the performance of such collaborations and agreements as required by law or by such agreements.
We also rely on trade secrets and other unpatented proprietary information in our product development activities. To the extent that we maintain a competitive advantage by relying on trade secret and unpatented proprietary information, such competitive advantage may be compromised if others independently develop the same or similar technology, resulting in an adverse effect on our business, financial condition and results of operations. We seek to protect trade secrets and proprietary information in part through confidentiality provisions and invention assignment provisions in agreements with our collaborative partners, employees and consultants. It is possible that these agreements could be breached or that we might not have adequate remedies for any such breaches.
Third party patent and intellectual property rights may interfere with our ability to commercialize drug products and research technologies.
Because the patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions, there can be no assurance that the patents owned and licensed by us, or any future patents, will ensure that others will not be issued patents that may prevent the sale of our drug products or require licensing and the payment of significant fees or royalties. Moreover, to the extent that any of our drug products or methods infringe the patents of a third party, or that our patents or future patents fail to give us an exclusive position in the subject matter claimed in those patents, we will be adversely affected. If our drug candidates, drug products, or processes are found to infringe the patents of others or are found to impermissibly utilize the intellectual property of others, our development, manufacture and sale of our infringing drug candidates or drug products could be severely restricted or prohibited. We may be unable to avoid infringement of a third party patent and may have to obtain a license, defend an infringement action, or challenge the validity of a patent in a court of law or agency of competent jurisdiction. A license may be unavailable on terms and conditions acceptable
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to us, if at all. Intellectual property litigation can be expensive and time consuming, and we may be unable to prevail in any such litigation or devote sufficient resources to pursue such litigation. If we do not obtain an appropriate license, if we are found liable for patent infringement or trade secret misappropriation, or if we are not able to have such patents declared invalid and/or unenforceable, we may be liable for significant monetary damages, may encounter significant delays in bringing products to market, and/or may be precluded from participating in the manufacture, use, or sale of products or methods of treatment requiring such licenses.
If we are unable to discover or in-license drug candidates, develop drug candidates or commercialize drug products, we will not generate significant revenues or become profitable.
In order to implement our business plan we will need to identify, develop and commercialize additional drug products. Our approach to drug discovery is unproven. We have not tested in humans any drug candidates developed from our drug discovery program, and we cannot assure you that we will test in humans any internally developed drug candidates or that there will be clinical benefits associated with any drug candidates that we do develop.
Our drug product, Cubicin, and our other drug candidates are the result of in-licensing patents and technologies from third parties. These in-licensing activities represent a significant expense for Cubist. Unless we are able to use our drug discovery approach to identify suitable drug candidates, in-licensing will be our only source of drug candidates. However, there can be no assurance that we will be able to in-license additional desirable drug candidates on acceptable terms, or at all, or that we will be successful in developing them. Our failure to develop or in-license new drug candidates on acceptable terms would have a material adverse effect on our business, operating results and financial condition.
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