Cubist Pharmaceuticals 10-Q 2011
Washington, D.C. 20549
Commission file number: 0-21379
CUBIST PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
65 Hayden Avenue, Lexington, MA 02421
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares of the registrants Common Stock, $0.001 par value, outstanding on October 20, 2011: 61,571,081.
Cubist Pharmaceuticals, Inc.
CUBIST PHARMACEUTICALS, INC.
(in thousands, except share data)
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUBIST PHARMACEUTICALS, INC.
(in thousands, except share and per share data)
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUBIST PHARMACEUTICALS, INC.
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUBIST PHARMACEUTICALS, INC.
A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Cubist Pharmaceuticals, Inc. (Cubist or the Company) in accordance with accounting principles generally accepted in the United States of America, or GAAP, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Companys annual consolidated financial statements have been condensed or omitted. The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Companys financial position and results of operations.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, which are contained in Cubists Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 23, 2011.
The accompanying condensed consolidated financial statements include the accounts of Cubist and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of: inventories; investments; impairment of long-lived assets, including goodwill, in-process research and development, or IPR&D, and other intangible assets; accrued clinical research costs; contingent consideration; income taxes; accounting for stock-based compensation; product rebates, chargeback and return accruals; as well as in estimates used in accounting for contingencies and revenue recognition. Actual results could differ from estimated amounts.
Fair Value Measurements
The carrying amounts of Cubists cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short-term nature of these amounts. Investments are considered available-for-sale as of September 30, 2011 and December 31, 2010, and are carried at fair value. In connection with its acquisition of Calixa Therapeutics Inc., or Calixa, in December 2009, the Company recorded contingent consideration relating to potential amounts payable to Calixas former stockholders upon the achievement of certain development, regulatory and sales milestones. This contingent consideration liability is recognized at its estimated fair value.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. See Note C., Fair Value Measurements, for additional information.
Short-term investments include bank deposits, corporate and municipal notes, United States, or U.S., treasury securities and U.S. government agency securities. Long-term investments include corporate notes, U.S. treasury securities and U.S. government agency securities. See Note B., Investments, for additional information.
Unrealized gains and temporary losses on investments are included in accumulated other comprehensive income (loss) as a separate component of stockholders equity. Realized gains and losses, dividends, interest income, and declines in value judged to be
other-than-temporary credit losses are included in other income (expense). Amortization of any premium or discount arising at purchase is included in interest income.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments and accounts receivable. The Companys cash and cash equivalents are held primarily with five financial institutions in the U.S. Investments are restricted, in accordance with the Companys investment policy, to a concentration limit per institution.
Cubists accounts receivable at September 30, 2011 and December 31, 2010, primarily represent amounts due to the Company from wholesalers, including AmerisourceBergen Drug Corporation, Cardinal Health, Inc. and McKesson Corporation, as well as from Cubists international partners for CUBICIN® (daptomycin for injection). Cubist performs ongoing credit evaluations of its key wholesalers, distributors and other customers and generally does not require collateral. For the three and nine months ended September 30, 2011 and 2010, Cubist did not have any significant write-offs of accounts receivable, and its days sales outstanding has not significantly changed since December 31, 2010.
Acquired In-process Research and Development
IPR&D acquired in a business combination is capitalized on the Companys condensed consolidated balance sheets at its acquisition-date fair value. Until the underlying project is completed, IPR&D is accounted for as indefinite-lived intangible assets. Once the project is completed, the carrying value of the IPR&D is amortized over the estimated useful life of the asset. If a project becomes impaired or is abandoned, the carrying value of the IPR&D is written down to its revised fair value with the related impairment charge recognized in the period in which the impairment occurs. IPR&D is tested for impairment on an annual basis, or more frequently if an indicator of impairment is present, using a projected discounted cash flow model. The valuation techniques utilized in performing impairment tests incorporate significant assumptions and judgments to estimate the fair value. The use of different valuation techniques or different assumptions could result in materially different fair value estimates.
On December 16, 2009, Cubist acquired 100% of the outstanding stock of Calixa for an upfront cash payment of $99.2 million, as adjusted, and contingent consideration with an estimated acquisition-date fair value of $101.6 million, upon which Calixa became a wholly-owned subsidiary of Cubist. Calixas lead compound, CXA-201, is an intravenously-administered combination of a novel anti-pseudomonal cephalosporin, CXA-101, and the beta-lactamase inhibitor tazobactam. The transaction was accounted for as a business combination using the acquisition method. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill. Of the identifiable assets acquired, $194.0 million are IPR&D assets relating to CXA-201. The fair value of the IPR&D acquired was determined using an income method approach, including discounted cash flow models that are probability-adjusted for assumptions the Company believes a market participant would make relating to the development and potential commercialization of CXA-201. CXA-201 as a potential treatment for pneumonia had an estimated fair value of $174.0 million and CXA-201 as a potential treatment for complicated urinary tract infections, or cUTI, and complicated intra-abdominal infections, or cIAI, had an estimated fair value of $20.0 million as of the acquisition date. Cubist has not recorded any impairment charges related to the IPR&D since the acquisition of the assets.
If the Company experiences unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing CXA-201 for any of these indications, then the fair value of CXA-201 would be potentially impaired and the Company would incur significant charges in the period in which the impairment occurs.
Cubists principal sources of revenue are: (i) sales of CUBICIN in the U.S.; (ii) revenues derived from sales of CUBICIN by Cubists international distribution partners; (iii) license fees and milestone payments that are derived from collaboration, license and commercialization agreements with other biopharmaceutical companies; and (iv) service revenues derived from its co-promotion agreement with Optimer Pharmaceuticals, Inc., or Optimer, to co-promote DIFICIDTM in the U.S. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, collectibility of the resulting receivable is reasonably assured and the Company has no further performance obligations.
U.S. Product Revenues, net
All U.S. product revenues are recognized upon delivery. All revenues from product sales are recorded net of applicable provisions for estimated returns, chargebacks, rebates, wholesaler management fees and discounts in the same period the related sales are recorded.
Certain product sales qualify for rebates or discounts from standard list pricing due to government-sponsored programs or other contractual agreements. Reserves for Medicaid rebates and coverage gap discount program rebates are included in accrued liabilities and were $12.8 million at September 30, 2011. Reserves for Medicaid rebates included in accrued liabilities were $6.3 million at December 31, 2010. The increase in the reserve at September 30, 2011, is a result of delayed billing for rebate claims by state authorities. Reserves for returns, discounts, chargebacks, and wholesaler management fees are offset against accounts receivable and were $6.3 million and $6.0 million at September 30, 2011 and December 31, 2010, respectively.
In the three and nine months ended September 30, 2011, provisions for sales returns, chargebacks, Medicaid rebates, coverage gap discount program rebates, wholesaler management fees and discounts that were offset against gross U.S. product revenues totaled $26.7 million and $71.7 million, respectively. In the three and nine months ended September 30, 2010, provisions for sales returns, chargebacks, Medicaid rebates, wholesaler management fees and discounts that were offset against gross U.S. product revenues totaled $19.3 million and $48.2 million, respectively. The increase in the amount of these provisions is primarily due to increases in pricing discounts, chargebacks and Medicaid reserves due to the 6.9% price increases in April 2010 and January 2011 and the 5.5% price increase in July 2011 and an increase in the number of vials sold of CUBICIN in the U.S. In addition, contractual rebates increased as a result of U.S. health care reform legislation enacted in March 2010, which increased the Medicaid rebate rate from 15.1% to 23.1%, the number of individuals eligible to participate in the Medicaid program and the amount of discounts from the coverage gap discount program.
International Product Revenues
Cubist sells its product to international CUBICIN distribution partners based upon a transfer price arrangement that is generally established annually. Once Cubists distribution partner sells the product to a third party, Cubist may be owed an additional payment or royalty based on a percentage of the net selling price to the third party, less the initial transfer price previously paid on such product. Under no circumstances would the subsequent adjustment result in a refund to the distribution partner of the initial transfer price. Cubist recognizes the additional revenue upon receipt of royalty statements from its distribution partners.
From July 2008 through June 2010, Cubist promoted and provided other support for MERREM® I.V. in the U.S. under a commercial services agreement with AstraZeneca Pharmaceuticals, LP, an indirect wholly-owned subsidiary of AstraZeneca PLC, or AstraZeneca. AstraZeneca provided marketing and commercial support for MERREM I.V. The agreement with AstraZeneca, as amended, expired in accordance with its terms on June 30, 2010. Service revenues relating to MERREM I.V. for the nine months ended September 30, 2010, were $8.5 million.
On April 5, 2011, the Company entered into a co-promotion agreement with Optimer pursuant to which Optimer engaged Cubist as its exclusive partner for the promotion of DIFICID in the U.S. DIFICID was approved by the U.S. Food and Drug Administration, or FDA, in May 2011 for the treatment of Clostridium difficile-associated diarrhea. Under the terms of the co-promotion agreement, Optimer and Cubist will co-promote DIFICID to physicians, hospitals, long-term care facilities and other health
care institutions, participate on joint committees and jointly provide medical affairs support for DIFICID. In addition, Optimer will be responsible for the sale and distribution of DIFICID in the U.S. The initial term of the co-promotion agreement is approximately two years from the date of first commercial sale of DIFICID in the U.S., which occurred in July 2011. Optimer paid the Company a quarterly fee of $3.8 million in June 2011, of which $3.0 million was recognized as service revenue during the three and nine months ended September 30, 2011, and will pay the Company quarterly payments of $3.8 million, or $30.0 million in the aggregate, during the term of the agreement. The Company assessed the co-promotion agreement under the accounting guidance on revenue recognition for multiple-element arrangements. The deliverables under the co-promotion agreement with Optimer include co-promotion of DIFICID, participation in joint committees and providing medical affairs support for DIFICID. Each identified deliverable within the arrangement was determined to be a separate unit of accounting, and the performance period of each deliverable was deemed to be the term of the co-promotion agreement. There are no performance obligations extending beyond the term of the arrangement. As a result, the Company will recognize the service fees ratably over the performance period ending July 31, 2013.
Cubist is also eligible to receive: (a) an additional $5.0 million in the first year after first commercial sale and $12.5 million in the second year after first commercial sale if mutually agreed-upon annual sales targets are achieved; and (b) a portion of Optimers gross profits derived from net sales above the specified annual targets, if any. The co-promotion agreement may be renewed by mutual agreement of the parties for additional, consecutive one-year terms. Each of Optimer and Cubist may terminate the co-promotion agreement prior to expiration upon the uncured material breach of the co-promotion agreement by the other party, upon the bankruptcy or insolvency of the other party, or in the event that actual net sales during the first year of commercial sales of DIFICID in the U.S. are below specified levels, subject to certain limitations. Optimer may terminate the co-promotion agreement, subject to certain limitations, if (i) Optimer withdraws DIFICID from the market in the U.S., (ii) Cubist fails to comply with applicable laws in performing its obligations, (iii) Cubist undergoes a change of control, (iv) certain market events occur related to CUBICIN in the U.S., or (v) Cubist undertakes certain restructuring activities with respect to its sales force. Cubist may terminate the co-promotion agreement, subject to certain limitations, if (i) Optimer experiences certain supply failures in relation to the demand for DIFICID in the U.S., (ii) Optimer is acquired by certain types of entities, including competitors of Cubist, (iii) certain market events occur related to CUBICIN in the U.S., or (iv) Optimer fails to comply with applicable laws in performing its obligations.
Other revenues include revenues related to upfront license payments, license fees and milestone payments received through Cubists license, collaboration and commercialization agreements. The Company analyzes its multiple-deliverable arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting.
On January 1, 2011, the Company adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a best estimate of selling price if vendor-specific objective evidence and third-party evidence is not available. Deliverables under the arrangement will be separate units of accounting, provided (i) a delivered item has value to the customer on a standalone basis; and (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the Company. The Company entered into the co-promotion agreement with Optimer in April 2011, which was evaluated under the accounting guidance on revenue recognition for multiple-element arrangements, as noted above. Cubists other existing license and collaboration agreements continue to be accounted for under previously-issued revenue recognition guidance for multiple-element arrangements.
On January 1, 2011, the Company adopted new authoritative guidance on revenue recognition for milestone payments related to arrangements under which the Company has continuing performance obligations. Consideration for events that meet the definition of a milestone in accordance with the accounting guidance for the milestone method of revenue recognition is recognized as revenue in its entirety in the period in which the milestone is achieved only if all of the following conditions are met: (i) the milestone is commensurate with either the Companys performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from the Companys performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the amount of the milestone consideration is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the arrangement. Otherwise, the milestone payments are not considered to be substantive and are therefore deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations. The adoption of this guidance does not materially change the Companys previous method of recognizing milestone payments. All potential future milestones under existing arrangements with licensing partners, as specified
below, and any new arrangements with milestones, will be evaluated under the new revenue recognition guidance for milestone payments.
In March 2007, Cubist entered into a license agreement with Merck & Co., Inc., or Merck, for the development and commercialization of CUBICIN in Japan. On July 1, 2011, Merck received regulatory approval of CUBICIN in Japan, which triggered a $6.0 million milestone payment to Cubist. The milestone was assessed under the accounting guidance for the milestone method of revenue recognition and was not deemed to be substantive and, therefore, approximately $1.9 million was recognized as other revenue during the three months ended September 30, 2011. The remainder of the milestone payment will be amortized to other revenues over the performance period ending January 2021. Cubist may receive up to $32.5 million in additional payments upon Merck achieving certain sales milestones. Merck commenced the commercial launch of CUBICIN in September 2011 through its wholly-owned subsidiary, MSD Japan.
In December 2006, Cubist entered into a license agreement with AstraZeneca AB for the development and commercialization of CUBICIN in China and certain other countries in Asia (excluding Japan, Taiwan and Korea), the Middle East and Africa that had not been covered by previously-existing CUBICIN international partnering agreements. Cubist may receive payments of up to $4.5 million and $14.0 million upon AstraZeneca AB achieving certain regulatory and sales milestones, respectively.
Basic and Diluted Net Income Per Share
Basic net income per common share has been computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share has been computed by dividing diluted net income by the diluted number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net income per share has been computed assuming the conversion of convertible obligations and the elimination of the interest expense related to the Companys 2.25% convertible subordinated notes, or 2.25% Notes, and 2.50% convertible senior notes, or 2.50% Notes, the exercise of stock options, and the vesting of restricted stock units, or RSUs, as well as their related income tax effects.
The following table sets forth the computation of basic and diluted net income per common share (amounts in thousands, except share and per share amounts):
Potential common shares excluded from the calculation of diluted net income per share, as their inclusion would have been antidilutive, were:
During the three and nine months ended September 30, 2011 and 2010, comprehensive income included the Companys net income as well as increases in unrealized gains and losses on the Companys available-for-sale securities.
The following table summarizes the components of comprehensive income:
Cubist considers events or transactions that have occurred after the balance sheet date of September 30, 2011, but prior to the filing of the financial statements with the SEC on this Form 10-Q to provide additional evidence relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been evaluated through the date of the filing with the SEC of this Quarterly Report on Form 10-Q. On October 24, 2011, Cubist entered into an Agreement and Plan of Merger, or Merger Agreement, to acquire all of the outstanding shares of Adolor Corporation, or Adolor, which occurred after September 30, 2011, and is considered a nonrecognizable subsequent event. See Note M., Subsequent Event, for additional information.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board, or FASB, issued amended accounting guidance for goodwill in order to simplify how companies test goodwill for impairment. The amendments permit a company to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, a company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if a companys financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption to have any impact on its consolidated financial statements.
In June 2011, the FASB issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, a company may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of choice in presentation, a company is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. Early adoption is permitted. Other than a change in presentation, the adoption of this update is not expected to have a material impact on the Companys consolidated financial statements.
In May 2011, the FASB amended the accounting guidance for fair value to develop common requirements between GAAP and International Financial Reporting Standards. The amendments clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements and in some instances change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Notable changes under the amended guidance include: (i) application of the highest and best use and valuation premise concepts solely for non-financial assets and liabilities; (ii) measuring the fair value of an instrument classified in a reporting entitys shareholders equity; and (iii) disclosing quantitative information about unobservable inputs used in the fair value measurement within Level 3 of the fair value hierarchy. For public entities, the amendment is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company is currently evaluating the impact of these amendments on its financial statements and related disclosures.
The following table summarizes the amortized cost and estimated fair values of the Companys available-for-sale investments:
The following table contains information regarding the range of contractual maturities of the Companys short-term and long-term investments (in thousands):
Certain short-term debt securities with original maturities of less than 90 days are included in cash and cash equivalents on the condensed consolidated balance sheets and are not included in the tables above. In addition, certain bank deposits with original maturities of more than 90 days are not considered available-for-sale securities and are not included in the tables above. See Note A., Basis of Presentation and Accounting Policies, and Note C., Fair Value Measurements, for additional information.
C. FAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily
obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. This standard classifies these inputs into the following hierarchy:
Level 1 InputsQuoted prices for identical instruments in active markets.
Level 2 InputsQuoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 InputsInstruments with primarily unobservable value drivers.
There were no transfers between fair value measurement levels 1 and 2 during the three and nine months ended September 30, 2011.
The Companys financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, are classified in the table below into one of the three categories described above:
The Company revised its fair value table as of December 31, 2010, to remove approximately $146.2 million of bank deposits classified as cash and cash equivalents that are not subject to the accounting guidance for fair value measurements. This revision had no impact on Cubists results of operations or financial condition as of September 30, 2011 and December 30, 2010.
The Company classifies its bank deposits and corporate and municipal notes as Level 2 under the fair value hierarchy. These assets have been valued by a third-party pricing service at each balance sheet date, using observable market inputs that may include trade information, broker or dealer quotes, bids, offers, or a combination of these data sources. The fair value hierarchy level is determined by asset class based on the lowest level of significant input.
Level 3 Roll-forward
The table below provides a reconciliation of fair value for which the Company used Level 3 inputs:
Contingent consideration relates to potential amounts payable by the Company to the former stockholders of Calixa upon the achievement of certain development, regulatory and sales milestones with respect to CXA-201 in connection with the Companys acquisition of Calixa. As of September 30, 2011 and December 31, 2010, the fair value of the contingent consideration liability was estimated to be $131.5 million and $86.5 million, respectively, and was determined based on a probability-weighted income approach. This valuation takes into account various assumptions, including the probabilities associated with successfully completing clinical trials, obtaining regulatory approval, the commercial success of the product and the period in which these milestones are achieved, as well as a discount rate of 5.25%, which represents a pre-tax working capital rate. This valuation was developed using assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained.
First patient enrollment in Phase 3 clinical trials for cUTI occurred in July 2011 and triggered a $40.0 million milestone payment, which Cubist paid to Calixas former stockholders during the three months ended September 30, 2011. Cubist may be required to make up to an additional $250.0 million of undiscounted payments to the former stockholders of Calixa, including a milestone payment of $30.0 million related to first patient enrollment in a Phase 3 clinical trial for cIAI, which is expected to be achieved in the fourth quarter of 2011. The decrease of $37.9 million in the fair value of the contingent consideration liability during the three months ended September 30, 2011, is the result of the $40.0 million milestone payment discussed above, partially offset by $2.1 million of contingent consideration expense recorded primarily as a result of the time value of money. The increase of $45.0 million in the fair value of the contingent consideration liability during the nine months ended September 30, 2011, is primarily the result of an increase in the probabilities of success of certain milestones during the second quarter of 2011, partially offset by the $40.0 million milestone payment. The probability of achieving the first patient enrollment milestone for the Phase 3 clinical trial for cUTI was increased to 100% as a result of the commencement of the trial, and the probability of achieving the first patient enrollment milestone for cIAI was increased to approximately 100%. The probabilities of success for subsequent associated milestones used in estimating fair value were also increased as a result of receiving positive top-line results from the Phase 2 clinical trial of CXA-201 as a potential treatment for cIAI. In addition, the probability of enrollment in a Phase 3 clinical trial of CXA-201 as a potential treatment for hospital-acquired and ventilator-associated bacterial pneumonia in 2012 and the resulting fair value of the associated milestone were increased. This milestone would be satisfied by enrollment in such a trial to support a filing for marketing approval in either the U.S. or the European Union.
Contingent consideration expense may change significantly as development of CXA-201 progresses and additional data is obtained, impacting the Companys assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. These assumptions require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. Such changes could materially impact the Companys results of operations in future periods. In addition, any contingent consideration payments made in the future are largely not deductible for tax purposes.
D. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at:
Depreciation expense was $2.2 million and $2.4 million for the three months ended September 30, 2011 and 2010, respectively. Depreciation expense was $7.0 million and $6.5 million for the nine months ended September 30, 2011 and 2010, respectively. Property and equipment additions during the three and nine months ended September 30, 2011, related to both the construction-in-progress for the continued expansion of the Companys principal headquarters and research laboratory and related facilities at 65 Hayden Avenue in Lexington, Massachusetts, or 65 Hayden, and the purchase of the building and land at 45-55 Hayden Avenue, Lexington, Massachusetts, or 45-55 Hayden, that was acquired in July 2011.
The property at 45-55 Hayden, which consists of land and approximately 210,000 square feet of primarily office space, is adjacent to the property that Cubist owns at 65 Hayden. Prior to the acquisition, Cubist leased approximately 178,000 square feet of space in the 45-55 Hayden building. The leases terminated upon the closing of the acquisition. Pursuant to the agreement of purchase and sale, Cubist paid $53.5 million, before adjustments, to acquire 45-55 Hayden, which approximated its fair value. The Company allocated $12.1 million and $44.8 million of the total acquisition cost of $56.9 million, which includes a net adjustment for existing leasehold improvements that were incorporated in the total acquisition cost, to the land and building, respectively, based on the relative fair value at the date of acquisition. The acquisition was funded from the Companys existing cash balances.
E. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The Companys goodwill balance remained unchanged as of September 30, 2011, as compared to December 31, 2010. As of September 30, 2011, there were no accumulated impairment losses. Goodwill has been assigned to the Companys only reporting unit. See Note J., Segment Information, for additional information.
Other intangible assets, net consisted of the following at:
Amortization expense was $0.6 million and $0.7 million for the three months ended September 30, 2011 and 2010, respectively, and $1.9 million and $2.2 million for the nine months ended September 30, 2011 and 2010, respectively. The estimated aggregate amortization of intangible assets as of September 30, 2011, for each of the five succeeding years and thereafter is as follows:
Debt is comprised of the following amounts at:
In October 2010, Cubist issued $450.0 million aggregate principal amount of the 2.50% Notes due November 2017, resulting in net proceeds to Cubist, after debt issuance costs, of $436.0 million. The 2.50% Notes are convertible into common stock at an initial conversion rate of 34.2759 shares of common stock per $1,000 principal amount of convertible notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $29.18 per share of common stock. Holders of the 2.50% Notes may convert the 2.50% Notes at any time prior to the close of business on the business day immediately preceding May 1, 2017, only under the following circumstances: (i) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Cubists common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. Upon conversion, Cubist may deliver cash, common stock or a combination of cash and common stock, at Cubists option, to the note holders that requested the conversion. Interest is payable to the note holders on each May 1st and November 1st, beginning May 1, 2011. As of September 30, 2011, the if-converted value exceeded the principal amount of the 2.50% Notes by $94.8 million.
In accordance with accounting guidance for debt with conversion and other options, Cubist separately accounted for the liability and equity components of the 2.50% Notes in a manner that reflected its non-convertible debt borrowing rate of similar debt. The equity component of the 2.50% Notes was recognized as a debt discount and is amortized to the condensed consolidated statements of income over the expected life of a similar liability without the equity component. The Company determined this expected life to be equal to the seven-year term of the 2.50% Notes, resulting in an amortization period ending November 1, 2017. The net carrying value of the equity component of the 2.50% Notes as of both September 30, 2011 and December 31, 2010, was $66.4 million. The unamortized discount on the liability component is being amortized to interest expense using the effective interest method over the term of the 2.50% Notes. For the three and nine months ended September 30, 2011, the effective interest rate on the liability component of the 2.50% Notes was 7.0%. The fair value of the $450.0 million aggregate principal amount of the outstanding 2.50% Notes was estimated to be $614.3 million as of September 30, 2011, and was determined using a quoted market rate.
In June 2006, Cubist completed the public offering of $350.0 million aggregate principal amount of its 2.25% Notes due June 2013. The 2.25% Notes are convertible at any time prior to maturity into common stock at an initial conversion rate of 32.4981 shares of common stock per $1,000 principal amount of 2.25% Notes, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $30.77 per share of common stock. Cubist may deliver cash or a combination of cash and common stock in lieu of shares of common stock at Cubists option. Interest is payable on each June 15th and December 15th. Cubist retains the right to redeem all or a portion of the 2.25% Notes at 100% of the principal amount plus accrued and unpaid interest if the closing price of Cubists common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the date one day prior to the day the Company gives a notice of redemption is greater than 150% of the conversion price on the date of such notice. In February 2008, Cubist repurchased $50.0 million in original principal amount of the 2.25% Notes, reducing the outstanding amount of the 2.25% Notes from $350.0 million to $300.0 million, at an average price of approximately $93.69 per $100 of debt. These repurchases, which were funded out of the Companys working capital, reduced Cubists fully-diluted shares of common stock by approximately 1,624,905 shares.
In October 2010, the Company used a portion of the net proceeds from the issuance of the 2.50% Notes to repurchase, in privately negotiated transactions, $190.8 million aggregate principal amount of the 2.25% Notes at an average price of approximately $105.37 per $100 par value of debt plus accrued interest and transaction fees. These repurchases reduced Cubists fully-diluted shares of common stock by approximately 6,200,053 shares. The remaining shares attributable to the 2.25% Notes could potentially dilute the Companys shares of common stock outstanding if converted. As of September 30, 2011, the if-converted value exceeded the principal amount of the 2.25% Notes by $16.1 million.
In accordance with accounting guidance for debt with conversion and other options, Cubist separately accounted for the liability and equity components of the 2.25% Notes in a manner that reflected its non-convertible debt borrowing rate of similar debt. The equity component was recognized as a debt discount and is amortized to the condensed consolidated statements of income over the expected life of a similar liability without the equity component. The Company determined this expected life to be equal to the seven-year term of the 2.25% Notes, resulting in an amortization period ending June 15, 2013. The net carrying value of the equity component of the 2.25% Notes as of September 30, 2011 and December 31, 2010, was $42.5 million. The unamortized discount on the liability component is being amortized to interest expense using the effective interest method over the term of the note. For the three and nine months ended September 30, 2011 and 2010, the effective interest rate on the liability component of the 2.25% Notes was approximately 8.4%. The fair value of the $109.2 million aggregate principal amount of the outstanding 2.25% Notes was estimated to be $137.3 million as of September 30, 2011, and was determined using a quoted market rate.
The table below summarizes the interest expense the Company incurred on its 2.50% Notes and 2.25% Notes for the periods presented:
In December 2008, Cubist entered into a $90.0 million revolving credit facility with RBS Citizens National Association, or RBS Citizens, for general corporate purposes. Under the revolving credit facility, Cubist may request to borrow at any time a minimum of $1.0 million up to the maximum of the available remaining credit. Any amounts borrowed under the facility will be secured by the pledge of a certificate of deposit issued by RBS Citizens and/or an RBS Citizens money market account equal to an aggregate of 102% of the outstanding principal amount of the loans, so long as such loans are outstanding. Interest expense on the borrowings can be based, at Cubists option, on LIBOR plus a margin or the prime rate. Any borrowings under the facility are due on demand or upon termination of the revolving credit agreement. There were no outstanding borrowings under the credit facility as of September 30, 2011 or December 31, 2010.
G. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at:
Accrued royalties are comprised of royalties owed on net sales of CUBICIN under Cubists license agreement with Eli Lilly & Co., or Eli Lilly. Accrued royalties decreased at September 30, 2011, as compared to December 31, 2010, due to the semi-annual royalty payment made to Eli Lilly in August 2011.
Inventories consisted of the following at:
In September 2011, the Company was notified by one of its third-party, fill-finish manufacturers that certain inventory batches did not meet specification and were unsaleable. The Company disposed of the work-in-process inventory and recorded a write-off of $4.7 million, which was included within cost of product revenues for the three and nine months ended September 30, 2011.
I. EMPLOYEE STOCK BENEFIT PLANS
Summary of Stock-Based Compensation Expense
Stock-based compensation expense recorded in the condensed consolidated statements of income for the three and nine months ended September 30, 2011 and 2010, is as follows:
General Option Information
A summary of option activity for the nine months ended September 30, 2011, is as follows:
A summary of RSU activity for the nine months ended September 30, 2011, is as follows:
J. SEGMENT INFORMATION
Cubist operates in one business segment, the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. The Companys entire business is managed by a single management team, which reports to the Chief Executive Officer. Approximately 95% of the Companys revenues are currently generated within the U.S.
K. INCOME TAXES
The following table summarizes the Companys effective tax rates and income tax provisions for the three and nine months ended September 30, 2011 and 2010:
The effective tax rates of 61.1% and 61.8% for the three and nine months ended September 30, 2011, respectively, differ from the U.S. federal statutory income tax rate of 35.0% and from the effective tax rates of 39.3% and 39.5% for the three and nine months ended September 30, 2010, respectively, primarily due to the impact of non-deductible contingent consideration expense. Contingent consideration expense recorded during the three and nine months ended September 30, 2011, impacted the effective tax rates by approximately 24.4% and 24.5%, respectively. During the three months ended September 30, 2011, the Company also recorded a discrete tax benefit of $3.1 million net of federal tax, related to the reduction in deferred state tax liabilities, as discussed below.
Certain stock option exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant. Although these additional tax benefits, or windfalls, are reflected in the net operating loss carryforwards in tax returns, pursuant to the guidance for accounting for stock-based compensation, the additional tax benefit associated with the windfall is recorded as a credit to equity as the benefits result in a reduction of current taxes. In addition, the Companys accounting policy is to treat windfall benefits as the last tax attributes utilized. Therefore, deferred tax assets at December 31, 2010, do not reflect approximately $8.1 million of federal and state tax benefits related to stock compensation deductions on the basis that these excess tax benefits did not result in a decrease in the Companys tax liability as of December 31, 2010.
The Company expects to fully utilize all tax credit carryforwards in 2011 and, therefore, with the exception of certain state tax benefits, all tax benefits related to stock-based compensation deductions will have resulted in a reduction in current taxes. Accordingly, the Company has recorded a benefit of $13.2 million to additional paid-in capital related to these tax benefits during the nine months ended September 30, 2011, of which $5.3 million related to current year excess tax benefits in connection with stock-based compensation deductions.
During the first quarter of 2011, the Company made a decision to file amended state income tax returns for the years ended December 31, 2008 and 2009, and to file its 2010 state income tax returns using the same filing positions as the amended 2008 and 2009 returns. This decision resulted in an increase in the amount of uncertain tax positions of approximately $11.0 million for state tax purposes for the three months ended March 31, 2011. During the three months ended September 30, 2011, as a result of a change in circumstances impacting certain state tax filing positions related to years beginning in 2012, the Company reevaluated its uncertain tax positions and recognized a discrete tax benefit of $4.8 million, or $3.1 million net of federal tax, related to the reduction in deferred state tax liabilities, and maintained a reserve of approximately $5.4 million for uncertain tax positions as of September 30, 2011, related to prior years.
Cubist has an obligation to make milestone payments to Astellas Pharma, Inc., or Astellas, under the Astellas license agreement, as amended, in which the Company has exclusive rights to manufacture, market and sell any eventual products which incorporate CXA-101, including CXA-201, in all territories of the world except select Asia-Pacific and Middle Eastern territories and to develop such products in all territories of the world. Pursuant to the agreement, the Company made a $4.0 million development milestone payment to Astellas as a result of first patient enrollment in a Phase 3 clinical trial of CXA-201 for cUTI. This milestone payment was recorded as research and development expense within the condensed consolidated income statements for the three and nine months ended September 30, 2011. Remaining milestone payments to Astellas under the Astellas license agreement could total up to $40.0 million if certain specified development and sales events are achieved. The remaining potential development and sales milestone payments to Astellas will be expensed as incurred to research and development and cost of product revenues, respectively. In addition, if products covered by this license are successfully developed and commercialized in the territories, Cubist will be
required to pay Astellas tiered single-digit royalties on net sales of such products in such territories, subject to offsets under certain circumstances.
M. SUBSEQUENT EVENT
On October 24, 2011, the Company entered into the Merger Agreement to acquire all of the issued and outstanding shares of Adolor, a publicly-held biopharmaceutical company specializing in the discovery, development and commercialization of novel prescription pain and pain management products, in a cash transaction valued at up to $415.0 million, net of estimated cash acquired, based upon Adolors cash balances at September 30, 2011. Under the terms of the Merger Agreement, the Company will commence a tender offer to purchase all of the outstanding shares of Adolors common stock at a price of $4.25 per share in cash, or approximately $190.0 million on a fully-diluted basis, net of cash acquired. The aggregate cash to be paid is subject to adjustment based upon Adolors cash balance at the time of closing of the acquisition. In addition to the upfront cash payment, each Adolor stockholder will receive one contingent payment right, entitling the holder to receive additional cash payments of up to $4.50 for each share they own if certain regulatory approvals and/or commercialization milestones for ADL5945, Adolors lead development program for the treatment of chronic opioid-induced constipation, are achieved.
Consummation of the pending acquisition of Adolor is subject to various customary closing conditions, including but not limited to: (i) tender of a majority of the outstanding shares, on a fully diluted basis, into the tender offer; (ii) receipt of applicable regulatory approvals; and (iii) the absence of a material adverse change with respect to Adolor. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is expected to close in the fourth quarter of 2011. The Company expects to fund the acquisition of Adolor, if consummated, with its existing cash balances.
The actual timing of the pending acquisition of Adolor will depend on a number of factors, including the satisfaction of certain conditions set forth in the Merger Agreement, including those set forth above. There can be no assurance that the pending acquisition of Adolor will be consummated or that, if the transaction is consummated, the timing will be as described and as presently contemplated.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains and incorporates by reference forward-looking statements. In some cases, these statements can be identified by the use of forward-looking terminology such as may, will, could, should, would, expect, anticipate, plan, forecast, 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 inherently uncertain, and we caution you not to place considerable reliance on such statements. Our business is subject to substantial risks and uncertainties, including those identified in this report, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. We refer you to Item 1A., Risk Factors, in Part II of this report, which we incorporate herein by reference, for identification of important factors with respect to these risks and uncertainties. The information contained in this Quarterly Report is provided by us as of the date of this Quarterly Report, and we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.
Forward-looking statements in this Quarterly Report include, without limitation, statements regarding:
· our expectations regarding our financial performance, including revenues, expenses, capital expenditures and income taxes;
· our expectations regarding the commercialization and manufacturing of CUBICIN® (daptomycin for injection);
· our expectations regarding the strength of our intellectual property portfolio protecting CUBICIN and our ability to enforce this intellectual property portfolio and prevent any third parties from marketing a generic version of CUBICIN in the United States, or U.S., before the earlier of the expiration of certain of the patents covering CUBICIN and the date Teva Parenteral Medicines, Inc., or Teva, is allowed to launch a generic version of CUBICIN under our settlement and license agreement, or settlement agreement, with Teva and its affiliates;
· our expectations regarding our drug candidates, including the anticipated timing and results of our clinical trials, timing of our meetings with regulatory authorities, and the development, regulatory review and commercial potential of such drug candidates and the costs and expenses related thereto;
· our expectations regarding advancing clinical development, filing for approval, including in which countries and regions we expect such filings to occur, and the commercialization of CXA-201 for its currently planned indications of complicated urinary tract infections, or cUTI, complicated intra-abdominal infections, or cIAI, hospital-acquired bacterial pneumonia, or HABP, and ventilator-associated bacterial pneumonia, or VABP, our characterization of results received to date, including receipt of positive top-line results from our recently completed Phase 2 clinical trial of CXA-201 as a potential treatment for cIAI, and our estimates of potential future milestone payments to the former stockholders of Calixa Therapeutics Inc., or Calixa, based on such advancement of CXA-201;
· our expectations regarding the commercial success of DIFICIDTM;
· the continuation or termination of our collaborations and our other significant agreements and our ability to establish and maintain successful manufacturing, supply, sales and marketing, distribution and development collaborations and other arrangements;
· our expectations regarding the closing, and the timing of closing, of our planned acquisition of Adolor Corporation, or Adolor;
· our expected efforts to evaluate product candidates and build our pipeline;
· the liquidity and credit risk of securities that we hold as investments;
· the impact of current and new accounting pronouncements;
· our expectations regarding the impact of U.S. health care reform legislation enacted in March 2010, or health care reform;
· our expectations regarding the timing and completion of the construction project to expand our principal headquarters and research laboratory and related facilities at 65 Hayden Avenue in Lexington, Massachusetts, or 65 Hayden;
· our future capital requirements and capital expenditures and our ability to finance our operations, debt obligations and capital requirements; and
· our expectations regarding the impact of ordinary course legal proceedings.
Many factors could cause our actual results to differ materially from these forward-looking statements. These factors include the following:
· the U.S. Federal Trade Commission, or FTC, the U.S. Department of Justice, or DOJ, or a third party successfully challenging the settlement agreement with Teva and its affiliates;
· the level of acceptance of CUBICIN by physicians, patients, third-party payors and the medical community;
· any changes in the current or anticipated market demand or medical need for CUBICIN, including as a result of the current flattened growth of the incidence of methicillin-resistant Staphylococcus aureus (S. aureus), or MRSA, skin and bloodstream infections or the economic conditions in the U.S. and around the world, which are leading to cost pressures at hospitals and other institutions where CUBICIN is prescribed and purchased;
· any unexpected adverse events related to CUBICIN, particularly as CUBICIN is used in the treatment of a growing number of patients around the world;
· the effectiveness of our sales force and our sales forces ability to access targeted physicians;
· competition in the markets in which we and our partners market CUBICIN, including from existing products and new agents, such as Teflaro (ceftaroline fosamil), that have recently received marketing approval in the U.S.;
· whether or not third parties other than Teva seek to market generic versions of CUBICIN or any other products that we commercialize in the future and the results of any litigation that we file to defend and/or assert our patents against such third parties;
· the effect that the results of ongoing or future clinical trials of CUBICIN may have on its acceptance in the medical community;
· whether our partners will receive, and the potential timing of, regulatory approvals or clearances to market CUBICIN in countries where it is not yet approved;
· in the case of our planned acquisition of Adolor, the failure to satisfy any of the closing conditions set forth in the Agreement and Plan of Merger, or Merger Agreement;
· the ability of our third-party manufacturers, including our single source provider of CUBICIN active pharmaceutical ingredient, or API, and our two finished drug product suppliers, to manufacture, store, release and deliver sufficient quantities of CUBICIN in accordance with Good Manufacturing Practices, or GMPs, which are guidelines required by the U.S. Food and Drug Administration, or FDA, and other requirements of the regulatory approvals for CUBICIN, which include adherence to strictly-specified processes, in order to meet market demand for our sales in the U.S. and for our supply obligations to our international CUBICIN distribution partners, and to do so at an acceptable cost;
· our ability to work successfully with Optimer Pharmaceuticals, Inc., or Optimer, with respect to promoting and supporting DIFICID in the U.S. and similar market and competitive factors with respect to DIFICID in the U.S. as those described above with respect to CUBICIN;
· our ability to discover, acquire or in-license drug candidates, the costs related thereto, and the high level of competition from other companies that also are seeking to discover, acquire or in-license the same or similar drug candidates;
· whether the FDA or comparable agencies around the world such as the European Medicines Agency, or EMA, issue guidelines that allow for a viable pathway for us to seek approvals for our drug candidates in the indications for which we hope to gain approvals; whether the FDA, EMA or comparable agencies around the world accept proposed clinical trial protocols in a timely manner for studies of our drug candidates; and our ability to execute successful, adequate and well-controlled clinical trials in a timely manner and other risks that may cause our trials to be delayed or stopped or compromise the integrity of the data from such trials;
· the impact of the results of ongoing or future trials for drug candidates that we currently are developing, including CXA-201 and CB-183,315, or may develop in the future, including the impact of unanticipated safety or efficacy data from such trials;
· our ability, and our partners ability, to protect the proprietary technologies and intellectual property related to CUBICIN and our product candidates;
· our ability to develop and achieve commercial success, and secure sufficient quantities of supply for such development and commercialization, for our existing and future drug candidates, particularly as we are managing multiple programs and opportunities and continue to seek to maximize the commercial success of CUBICIN and DIFICID;
· the impact of current and future health care reform, or changes to the existing legislation, and of other future legislative and policy changes in the U.S. and other jurisdictions where our products are sold, including price controls or taxes, that may affect our revenues or results of operations or the ease of getting a new product or a new indication approved;
· our ability to successfully integrate the operations of any business that we may acquire and the potential impact of any future acquisition on our financial results;
· unanticipated changes in our expectations for revenues, expenses or capital expenditures, and the impact on our effective tax rates;
· changes in government reimbursement for our or our competitors products;
· our dependence upon collaborations and alliances, particularly our ability to work effectively with our partners and our partners ability to meet their obligations and perform effectively under our agreements and to do so in compliance with applicable laws, including laws in international jurisdictions and U.S. laws, such as the Foreign Corrupt Practices Act, or FCPA, that relate to activities in international markets;
· our ability to attract and retain talented employees in order to grow our employee base and infrastructure to support the continued growth of our business;
· our ability to finance our operations;
· potential costs resulting from product liability or other third-party claims;
· unexpected delays or expenses related to our pipeline programs or ongoing capital projects, including the expansion of our laboratories and related space at our 65 Hayden facility; and
· a variety of risks common to our industry, including ongoing regulatory review, public and investment community perception of the biopharmaceutical industry, statutory or regulatory changes including with respect to federal and state taxation, and our ability to attract and retain talented employees.
This Managements Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist readers in understanding our results of operations, financial condition and cash flows. We have organized the MD&A as follows:
· Overview: This section provides a summary of our business, of our product pipeline and of our performance during the three and nine months ended September 30, 2011.
· Results of Operations: This section provides a review of our results of operations for the three and nine months ended September 30, 2011 and 2010, respectively.
· Liquidity and Capital Resources: This section provides a summary of our financial condition, including our sources and uses of cash, capital resources, commitments and liquidity.
· Commitments and Contingencies: This section provides a summary of our material legal proceedings and commitments and contingencies that are outside our normal course of business, as well as our commitment to make potential future milestone payments to third parties as part of our various business agreements.
· Critical Accounting Policies and Estimates: This section describes our critical accounting policies and the significant judgments and estimates that we have made in preparing our condensed consolidated financial statements, as well as recently issued accounting pronouncements that we have not yet adopted.
We are a biopharmaceutical company headquartered in Lexington, Massachusetts, focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. CUBICIN is, and our current drug product candidates, if granted marketing approval, are expected to be, used in the U.S. approximately equally in hospitals and other acute care settings, including home infusion and outpatient clinics. Outside of the U.S., where outpatient infusion is a less established practice, the use of CUBICIN is primarily in the hospital setting.
We had a total of $975.2 million in cash, cash equivalents and investments as of September 30, 2011, as compared to $909.9 million in cash, cash equivalents and investments as of December 31, 2010. As of September 30, 2011, we had an accumulated deficit of $111.1 million.
On October 24, 2011, we entered into the Merger Agreement with Adolor, a publicly-held biopharmaceutical company specializing in the discovery, development and commercialization of novel prescription pain and pain management products, in a cash transaction valued at up to $415.0 million, net of estimated cash acquired, based upon Adolors cash balances at September 30, 2011. Under the terms of the Merger Agreement, we will commence a tender offer to purchase all of the outstanding shares of Adolors common stock at a price of $4.25 per share in cash, or approximately $190.0 million on a fully-diluted basis, net of cash acquired. The aggregate cash to be paid is subject to adjustment based upon Adolors cash balance at the time of closing of the acquisition. In addition to the upfront cash payment, each Adolor stockholder will receive one contingent payment right, entitling the holder to receive additional cash payments of up to $4.50 for each share they own if certain regulatory approvals and/or commercialization milestones for ADL5945, Adolors lead development program for the treatment of chronic opioid-induced constipation, are achieved.
Consummation of the pending acquisition of Adolor is subject to various customary closing conditions. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is expected to close in the fourth quarter of 2011. We expect to fund the acquisition of Adolor, if consummated, with our existing cash balances. See Note M., Subsequent Event, in the accompanying notes to the condensed consolidated financial statements for additional information.
During the nine months ended September 30, 2011, we recognized $85.0 million of contingent consideration expense related to increasing the fair value of our contingent consideration liability, which resulted in a net loss of $20.6 million during the second quarter of 2011. See the Results of Operations and Commitments and Contingencies sections of this MD&A for additional information. The following table is a summary of our financial results for the periods presented: