<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2000
OR
| |TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-21379
CUBIST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
22-3192085
(I.R.S. Employer
Identification No.)
24 EMILY STREET
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices)
(617) 576-1999
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
As of November 13, 2000, there were 27,222,205 shares outstanding of
Cubist's common stock, $0.001 per value per share.
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CUBIST PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
Item Page
Number Number
------ ------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Unaudited Financial Statements
Condensed Balance Sheets as of September 30, 2000
and December 31, 1999............................................................... 3
Condensed Statements of Operations for the three months ended September 30,
2000 and 1999 and for the nine months ended September 30, 2000 and 1999............. 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999......................................................... 5
Notes to the Unaudited Condensed Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................... 12
Item 6. Exhibits and Reports on Form 8-K........................................................ 12
SIGNATURE............................................................................... 13
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CUBIST PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 80,105,744 $ 11,570,960
Short-term investments ...................................... -- 14,580,515
Accounts receivable ......................................... 500,000
87,431
Prepaid expenses and other current assets ................... 1,911,629 339,081
------------- -------------
Total current assets ........................................ 82,517,373 26,577,987
Property and equipment ........................................... 44,910,097 8,437,830
Less: Accumulated depreciation and amortization ............ (6,067,727) (4,990,943)
------------- -------------
Property and equipment, net ................................. 38,842,370 3,446,887
Long-term investments ............................................ 72,286,408 --
Other assets ..................................................... 2,078,528 179,287
------------- -------------
Total assets ....................................... $ 195,724,679 $ 30,204,161
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1,786,601 $ 1,299,139
Accrued expenses ............................................ 4,551,638 1,303,012
Current portion of long-term debt ........................... 744,148 394,939
Current portion of capital lease obligations ................ 545,482 535,073
------------- -------------
Total current liabilities .......................... 7,627,869 3,532,163
Long-term debt, net of current portion ........................... 40,899,494 759,782
Long-term capital lease obligation, net of current portion ....... 332,949 758,821
------------- -------------
Total liabilities .................................. 48,860,312 5,050,766
------------- -------------
Commitments
Stockholders' equity:
Common stock - $.001 par value; authorized: 50,000,000 shares;
27,201,331 and 20,523,358 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively ...... 27,201 20,524
Additional paid-in capital ....................................... 222,642,592 77,767,268
Accumulated deficit .............................................. (75,805,426) (52,634,397)
------------- -------------
Total stockholders' equity ......................... 146,864,367 25,153,395
------------- -------------
Total liabilities and stockholders' equity ......... $ 195,724,679 $ 30,204,161
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
CUBIST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sponsored research revenues .................. $ 1,062,500 $ 3,112,503 $ 2,496,247 $ 4,579,378
Operating expenses:
Research and development ............ 8,733,369 4,865,447 25,592,426 13,791,819
General and administrative .......... 2,666,332 947,097 5,598,592 2,901,458
------------ ------------ ------------ ------------
Total operating expenses ........ 11,399,701 5,812,544 31,191,018 16,693,277
Interest income .............................. 2,617,481 192,717 5,959,473 666,912
Interest expense ............................. (289,431) (98,723) (435,731) (259,550)
------------ ------------ ------------ ------------
Net loss ..................................... ($ 8,009,151) ($ 2,606,047) ($23,171,029) ($11,706,537)
============ ============ ============ ============
Basic and diluted net loss per common
share ........................................ ($ 0.30) ($ 0.15) ($ 0.91) ($ 0.67)
============ ============ ============ ============
Weighted average number of common shares
for basic and diluted net loss per
common share ................................. 27,145,358 17,604,971 25,473,432 17,444,373
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
CUBIST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows used for operating activities:
Net loss ........................................ $ (23,171,029) $ (11,706,537)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................. 1,628,351 942,828
Gain on the sale of equipment.................. (8,600) --
Common stock issued for technology milestone .. -- 250,000
Cashless exercise of warrants ................. -- 38,330
Changes in assets and liabilities:
Accounts receivable ...................... (412,569) --
Prepaid expenses and other current assets (1,312,100) (755,016)
Other assets ............................ (873,366) 23,980
Accounts payable and accrued expenses .... 3,736,088 1,751,785
------------- -------------
Total adjustments ...................... 2,757,804 2,251,907
------------- -------------
Net cash used for operating activities ............. (20,413,225) (9,454,630)
Cash flows from (for) investing activities:
Purchase of building and equipment .............. (35,414,264) (453,505)
Proceeds from the sale of equipment.............. 8,600 --
Leasehold improvements .......................... (1,058,003) (85,350)
Purchase of short-term investments .............. (7,857,440) (754,638)
Maturities of short-term investments ............ 22,437,955 8,940,222
Purchase of long-term investments ............... (72,286,408) --
------------- -------------
Net cash provided by (used for) investing activities (94,169,560) 7,646,729
------------- -------------
Cash flows from financing activities:
Issuance of common stock, net ................... 144,346,350 4,376,669
Costs associated with issuance of convertible
notes.......................................... (1,302,240) --
Proceeds from notes receivable .................. -- 30,000
Proceeds from debt financing .................... 6,830,832 787,500
Repayment of debt ............................... 33,658,089 (62,571)
Principal payments of capital lease obligations . (415,463) (482,692)
------------- -------------
Net cash provided by financing activities .......... 183,117,569 4,648,906
------------- -------------
Net increase in cash and cash equivalents .......... 68,534,784 2,841,005
Cash and cash equivalents, beginning of period ..... 11,570,960 6,463,688
------------- -------------
Cash and cash equivalents, end of period ........... $ 80,105,744 $ 9,304,693
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .......... $ 435,730 $ 259,550
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
CUBIST PHARMACEUTICALS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is a specialty pharmaceutical company founded
in May 1992 and is focused on the research, development and commercialization of
novel antimicrobial drugs to combat serious and life-threatening bacterial and
fungal infections, including those caused by bacteria and fungi resistant to
commercially available drugs. Cubist has established multiple technology
licenses and collaborations and has established a network of advisors and
collaborators. Cubist is located in Cambridge, Massachusetts and operates in one
business segment.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are necessary, in
the opinion of management, for a fair presentation of the results of the interim
periods presented. Interim results are not necessarily indicative of results for
a full year. These unaudited condensed financial statements do not include all
information and footnote disclosures required by generally accepted accounting
principles and therefore should be read in conjunction with Cubist's audited
financial statements and related footnotes for the year ended December 31, 1999
which are included in Cubist's Annual Report on Form 10-K. Such Annual Report on
Form 10-K was filed with the Securities and Exchange Commission on March 10,
2000 and further amended on Form 10-K/A on March 21 and April 3, 2000.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential common shares from stock options
and warrants are antidilutive for all periods presented and are therefore
excluded from the calculation. At September 30, 2000 and 1999 options to
purchase 2,760,447 and 2,051,841 shares of common stock, respectively, and
warrants for 1,566,588, and 2,931,980 shares of common stock, respectively, were
not included in the computation of diluted net loss per share since their
inclusion would be antidilutive.
C. VENDOR AGREEMENTS
In April 2000, Cubist entered into a development and supply agreement
with Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to
assist Cubist in the development of daptomycin as a parenteral formulation
and to manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application (NDA) for
daptomycin. Cubist has made payments totaling $325,000 to date. If the FDA
approves the daptomycin NDA, Cubist will purchase minimum annual quantities
of drug product from Abbott over a five year period beginning in 2001.
In June 2000, Cubist entered into a services agreement with Gist-brocades
Holding A.G. (DSM), an affiliated company of DSM Capua pursuant to which DSM has
agreed to provide supervisory and advisory services to Cubist relating to the
equipping of the manufacturing facility at DSM Capua. Cubist has also entered
into a manufacturing and supply agreement with DSM Capua pursuant to which DSM
Capua has agreed to manufacture and supply to Cubist bulk daptomycin drug
substance for commercial purposes. Under the terms of the manufacturing and
supply agreement, DSM Capua is required to prepare its manufacturing facility in
Italy to manufacture bulk daptomycin drug substance in accordance with Good
Manufacturing Practices standards. Under the terms of the service agreements,
Cubist will make a series of scheduled payments to DSM over a five year period
beginning in 2000 in order to reimburse DSM for certain costs to be incurred by
DSM Capua in connection with the preparation, testing and validation of its
manufacturing facility. In February 2000, Cubist reimbursed $750,000 of these
costs to DSM Capua. In addition, in consideration for the implementation of the
Cubist technology in the facility by DSM Capua, Cubist has
6
<PAGE>
agreed to make milestone payments to DSM if specific phases of the preparation
of its manufacturing facility are completed within specified periods of time.
Cubist has accrued a portion of these estimated milestone payments during this
quarter. Upon completion of the preparation of DSM Capua's manufacturing
facility and a determination by the FDA that the manufacturing facility complies
with Good Manufacturing Practices standards, Cubist will purchase minimum annual
quantities of bulk daptomycin drug substance from DSM over a five-year period
beginning in 2002.
D. FINANCINGS
On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less financing costs of
$3,214,500) by issuing 2,200,000 shares of common stock at $25.00 per share.
Cubist filed a registration statement to register the resale of the 2,200,000
shares of common stock issued in this financing. Cubist plans to use the
proceeds of the private placement to fund its clinical trials of Cidecin(TM)
(daptomycin for injection), its lipopeptide drug discovery program and the
development of its proprietary genomic target validation and assay development
VITA functional genomics technology.
On April 3, 2000, Cubist completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of common stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625). Cubist intends to
use the net proceeds of this offering to fund its clinical trials and
commercialization of Cidecin(TM), its lipopeptide drug discovery program, the
continued development of its proprietary genomic target validation and assay
development VITA(TM) functional genomics and ChemInformatics technologies and
for general corporate and working capital purposes.
E. TERRAGEN ACQUISITION
On August 8, 2000, Cubist and TerraGen Discovery Inc. jointly announced the
signing of a definitive agreement for Cubist to acquire TerraGen, a privately
held company with operations in Vancouver, Canada and Slough, England. On
September 22, 2000, the shareholders of TerraGen Discovery, Inc., a British
Columbia corporation ("TerraGen"), approved the arrangement (the "Arrangement")
under Section 252 of the Company Act (British Columbia) contemplated by the
Acquisition Agreement (the "Acquisition Agreement") dated as of August 5, 2000
by and between Cubist Pharmaceuticals, Inc., a Delaware corporation ("Cubist"),
C&T Acquisition Corporation, a British Columbia corporation ("C&T"), TerraGen
and MDS Capital Corp., a company organized under the laws of the Province of
Ontario, Canada, in its capacity as a representative of the shareholders of the
TerraGen. The Arrangement became effective at 12:01 a.m. (British Columbia time)
on October 23, 2000, and as a result, (i) each issued and outstanding common
share of TerraGen (the "TerraGen Common Shares") was exchanged for 0.021323
shares of, at the option of the shareholder, Cubist common stock (the "Cubist
Shares") or C&T stock (the "Exchangeable Shares") and (ii) each issued and
outstanding preferred share of TerraGen (the "TerraGen Preferred Shares") was
exchanged for 0.030386 shares of, at the option of the shareholder, Cubist
Shares or Exchangeable Shares. All of the outstanding options, warrants and
convertible debentures of TerraGen were converted into options, warrants or
convertible debentures of Cubist. Cubist, through its wholly owned subsidiary
C&T, became the beneficial owner of all of the outstanding TerraGen Common
Shares and TerraGen Preferred Shares. Each Exchangeable Share (a) entitles its
holder to dividends economically equivalent to dividends paid on the Cubist
Shares, par value $0.001 per share, (b) is exchangeable for one Cubist share,
(c) will, pursuant to the Voting and Exchange Trust Agreement dated as of
October 23, 2000 between Cubist, C&T and State Street Bank and Company, in which
a share certificate of Cubist Shares, par value $0.001 per share, was deposited,
carry the right to vote at meetings of the stockholders of Cubist and (d)
entitles its holder to participate in any liquidation of Cubist on the same
basis as holders of Cubist Shares. The number of Cubist Shares and Exchangeable
Shares received by holders of TerraGen Common Shares and TerraGen Preferred
Shares, which constitutes the consideration paid by Cubist to such holders of
TerraGen Common Shares and TerraGen Preferred Shares, in connection with the
Arrangement was determined by negotiations between Cubist and TerraGen.
7
<PAGE>
Under the terms of the acquisition, Cubist has acquired 100% of the shares of
TerraGen in a stock-for-stock merger that is being accounted for under the
pooling-of-interests method of accounting. Cubist has issued approximately
608,000 shares of common stock valued at approximately $29 million, which is
2.2% of its post-transaction outstanding primary shares.
F. ACQUISITION OF HEADQUARTERS BUILDING AND CONVERTIBLE DEBT
On September 8, 2000, Cubist announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. Cubist believes this should increase its operating efficiencies to
better meet its corporate goals and objectives and plans to relocate to the
facilities in the third quarter of 2001.
To finance the purchase, Cubist issued $39 million of convertible notes
to John Hancock Life Insurance Company. This financing covers the building
purchase price of approximately $34 million and includes $5 million for
facility improvements. The five-year notes carry a coupon rate of 8.5% and
can be converted to Cubist common stock at $63.8625 per share which
represents a premium to the market price determined at the time of
commitment. Cubist retains the right to redeem these notes after three years.
8
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G. RELATED PARTY TRANSACTIONS
In September 1999, Cubist accepted a promissory note from a Senior Vice
President in consideration for 50,000 shares of restricted common stock
issued to him. The aggregate principal amount of this note at September 30,
2000 is $337,500 and is reflected in stockholders' equity as a reduction to
paid-in-capital. This note has an annual interest rate of 4% and falls due on
September 25, 2002. The note will be forgiven in three equal annual
installments, contingent upon the Senior Vice President's continued
employment, until September 2002.
On September 18, 2000, Cubist accepted a promissory note from the Chief
Executive Officer. The aggregate principal amount of this note at September
30, 2000 is $250,000. This note has an annual interest rate of 6.15% and
falls due March 31, 2002.
H. SUBSEQUENT EVENT
On November 6, 2000, Cubist and Emisphere Technologies, Inc. announced a
research and development collaboration to utilize Emisphere's oral drug delivery
technology for Cubist's late-stage development product Cidecin(TM) (daptomycin
for injection) and other lipopeptides. This agreement follows successful
completion of proof-of-principle feasibility studies using Emisphere carrier
molecules and daptomycin. Under the terms of the agreement, Emisphere could
receive fees, research funding and milestone payments totaling $30 million
should a product be successfully commercialized. Emisphere would also receive a
royalty on sales of any product resulting from the collaboration, while Cubist
would be responsible for drug development and would receive exclusive worldwide
commercialization rights to any oral products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY
REPORT ON FORM 10-Q MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, BUT NOT LIMITED TO, (I) THE COMPANY'S ABILITY
TO SUCCESSFULLY COMPLETE PRODUCT RESEARCH AND DEVELOPMENT, INCLUDING
PRE-CLINICAL AND CLINICAL STUDIES AND COMMERCIALIZATION, (II) THE COMPANY'S
ABILITY TO OBTAIN REQUIRED GOVERNMENTAL APPROVALS, (III) THE COMPANY'S ABILITY
TO ATTRACT AND/OR MAINTAIN MANUFACTURING, SALES, DISTRIBUTION AND MARKETING
PARTNERS,(IV) THE COMPANY'S ABILITY TO DEVELOP AND COMMERCIALIZE ITS PRODUCTS
BEFORE ITS COMPETITORS, AND (V) CERTAIN STATEMENTS IDENTIFIED OR QUALIFIED BY
WORDS SUCH AS "LIKELY", "WILL", "SUGGESTS", "MAY", "WOULD", "COULD", "SHOULD",
"EXPECTS", "ANTICIPATES", "ESTIMATES", "PLANS", "PROJECTS", "BELIEVES", OR
SIMILAR EXPRESSIONS (AND VARIANTS OF SUCH WORDS OR EXPRESSIONS). YOU ARE
CAUTIONED THAT FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN. ACTUAL
PERFORMANCE AND RESULTS OF OPERATIONS MAY DIFFER MATERIALLY FROM THOSE PROJECTED
OR SUGGESTED IN THE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE RISKS AND UNCERTAINTIES
DESCRIBED OR DISCUSSED IN THE SECTION "RISK FACTORS" IN CUBIST'S ANNUAL REPORT
ON FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN REPRESENT CUBIST'S JUDGMENT AS OF THE DATE OF THIS
QUARTERLY REPORT ON FORM 10-Q, AND CUBIST CAUTIONS READERS NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS.
OVERVIEW
Since our incorporation on May 1, 1992 and commencement of operations in
February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections, including those caused by
bacteria and fungi resistant to commercially available drugs. We have a limited
history of operations and have experienced significant net losses since
inception. We expect to incur significant additional operating losses over the
next several years and expect cumulative losses to increase due to expanded
research and development efforts, preclinical testing and clinical trials and
the development of manufacturing, marketing and sales capabilities.
In recent years we have enhanced our drug discovery and development
programs and funded a portion of our capital requirements, by entering into
collaborative agreements with pharmaceutical and biotechnology companies. We
have entered into collaborative agreements based specifically on our
aminoacyl-tRNA synthetase program with Merck and Bristol-Myers Squibb, and a
collaborative agreement with Novartis based on our VITA(TM) functional genomics
technology. Under these collaborative agreements, we have received sponsored
research payments and, if drug
9
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development milestones are achieved, we are entitled to milestone payments. In
addition, we will be entitled to receive royalties on worldwide sales of any
drug developed and commercialized from these collaborations. We have received
all of the sponsored research payments that we were entitled to under our
collaborative agreements with Merck and Bristol-Meyers Squibb, although Merck
and Bristol-Myers Squibb are still required to make milestone payments and pay
royalties to us for any drug developed and commercialized from these
collaborations.
On February 3, 1999, we entered into a collaborative research and
license agreement with Novartis Pharma AG to use our VITA functional genomics
technology to validate and develop assays for antimicrobial targets and to
identify new compounds for development as antimicrobial agents. In exchange
for the license, Novartis is making research payments and, if scientific and
development milestones are achieved, Novartis will make milestone payments to
us. As of September 30, 2000 we earned a development milestone in the amount
of $500,000 and recorded the full amount as revenue. In addition, Novartis
will be required to pay royalties to us on worldwide sales of any drug
developed and commercialized from any products derived from this
collaboration. Upon the signing of the research and license agreement,
Novartis purchased, and we issued to Novartis, 797,448 shares of our common
stock for a total purchase price of $4.0 million in cash.
On November 7, 1997, we entered into a license agreement with Eli Lilly and
Company, pursuant to which we acquired exclusive worldwide rights to develop,
manufacture and market Cidecin(TM) (daptomycin for injection). In exchange for
such license, we paid to Eli Lilly an upfront license fee in cash, and if drug
development milestones are achieved, have agreed to pay milestone payments in
cash or by issuing shares of our common stock to Eli Lilly. In addition, we will
be required to pay royalties to Eli Lilly on worldwide sales of Cidecin(TM). On
February 19, 1999, we issued to Eli Lilly 56,948 shares of our common stock as a
milestone payment which was due upon commencement of Phase III clinical trials
of Cidecin(TM). The value of the common stock issued was $250,000 and was
recorded as research and development expense.
In April 2000, we entered into a development and supply agreement with
Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to assist
Cubist in the development of daptomycin as a parenteral formulation and to
manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application (NDA) for
daptomycin. Cubist has made payments totaling $325,000 to date. If the FDA
approves the daptomycin NDA, Cubist will purchase minimum annual quantities
of drug product from Abbott over a five year period beginning in 2001.
In June 2000, Cubist entered into a services agreement with Gist-brocades
Holding A.G. (DSM), an affiliated company of DSM Capua pursuant to which DSM has
agreed to provide supervisory and advisory services to Cubist relating to the
equipping of the manufacturing facility at DSM Capua. Cubist has also entered
into a manufacturing and supply agreement with DSM Capua pursuant to which DSM
Capua has agreed to manufacture and supply to Cubist bulk daptomycin drug
substance for commercial purposes. Under the terms of the manufacturing and
supply agreement, DSM Capua is required to prepare its manufacturing facility in
Italy to manufacture bulk daptomycin drug substance in accordance with Good
Manufacturing Practices standards. Under the terms of the service agreements,
Cubist will make a series of scheduled payments to DSM over a five year period
beginning in 2000 in order to reimburse DSM for certain costs to be incurred by
DSM Capua in connection with the preparation, testing and validation of its
manufacturing facility. In February 2000, Cubist reimbursed $750,000 of these
costs to DSM Capua. In addition, in consideration for the implementation of the
Cubist technology in the facility by DSM Capua, Cubist has agreed to make
milestone payments to DSM if specific phases of the preparation of its
manufacturing facility are completed within specified periods of time. Cubist
has accrued a portion of these estimated milestone payments during this quarter.
Upon completion of the preparation of DSM Capua's manufacturing facility and a
determination by the FDA that the manufacturing facility complies with Good
Manufacturing Practices standards, Cubist will purchase minimum annual
quantities of bulk daptomycin drug substance from DSM over a five-year period
beginning in 2002.
On August 8, 2000, Cubist and TerraGen Discovery Inc. jointly announced
the signing of a definitive agreement for Cubist to acquire TerraGen, a
privately held company with operations in Vancouver, Canada and Slough,
England. On September 22, 2000, the shareholders of TerraGen Discovery, Inc.,
a British Columbia corporation ("TerraGen"), approved the arrangement (the
"Arrangement") under Section 252 of the Company Act (British Columbia)
contemplated by the Acquisition Agreement (the "Acquisition Agreement") dated
as of August 5, 2000 by and between Cubist Pharmaceuticals, Inc., a Delaware
corporation ("Cubist"), C&T Acquisition Corporation, a British Columbia
corporation ("C&T"), TerraGen and MDS Capital Corp., a company organized
under the laws of the Province of Ontario, Canada, in its capacity as a
representative of the shareholders of the TerraGen. The Arrangement became
effective at 12:01 a.m. (British Columbia time) on October 23, 2000, and as a
result, (i) each issued and outstanding common share of TerraGen (the
"TerraGen Common Shares") was exchanged for 0.021323 shares of, at the option
of the shareholder, Cubist common stock (the "Cubist Shares") or C&T stock
(the "Exchangeable Shares") and (ii) each issued and outstanding preferred
share of TerraGen (the "TerraGen Preferred Shares") was exchanged for
0.030386 shares of, at the option of the shareholder, Cubist Shares or
Exchangeable Shares. All of the outstanding options, warrants and convertible
debentures of TerraGen were converted into options, warrants or convertible
debentures of Cubist. Cubist, through its wholly owned subsidiary C&T, became
the beneficial owner of all of the outstanding TerraGen Common Shares and
TerraGen Preferred Shares. Each Exchangeable Share (a) entitles its holder to
dividends economically equivalent to dividends paid on the Cubist Shares, par
value $0.001 per share, (b) is exchangeable for one Cubist share, (c) will,
pursuant to the Voting and Exchange Trust Agreement dated as of October 23,
2000 between Cubist, C&T and State Street Bank and Company, in which a share
certificate of Cubist Shares, par value $0.001 per share, was deposited,
carry the right to vote at meetings of the stockholders of Cubist and (d)
entitles its holder to participate in any liquidation of Cubist on the same
basis as holders of Cubist Shares. The number of Cubist Shares and
Exchangeable Shares received by holders of TerraGen Common Shares and
TerraGen Preferred Shares, which constitutes the consideration paid by Cubist
to such holders of TerraGen Common Shares and TerraGen Preferred Shares, in
connection with the Arrangement was determined by negotiations between Cubist
and TerraGen. Under the terms of the acquisition, Cubist has acquired 100% of
the shares of TerraGen in a stock-for-stock merger that is being accounted
for under the pooling-of-interests method of accounting. Cubist has issued
approximately 608,000 shares of common stock valued at approximately $29
million, which is 2.2% of its post-transaction outstanding primary shares.
On September 8, 2000, Cubist announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. Cubist believes this should increase its operating efficiencies to
better meet its corporate goals and objectives and plans to relocate to the
facilities in the third quarter of 2001.
To finance the purchase, Cubist issued $39 million of convertible notes
to John Hancock Life Insurance Company. This financing covers the building
purchase price of approximately $34 million and includes $5 million for
facility improvements. The five-year notes carry a coupon rate of 8.5% and
can be converted to Cubist common stock at $63.8625 per share which
represents a premium to the market price determined at the time of
commitment. Cubist retains the right to redeem these notes after three years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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REVENUES. Total revenues in the three months ended September 30, 2000 were
$1,063,000 compared to $3,113,000 in the three months ended September 30, 1999,
a decrease of $2,050,000 or 65.9%. The revenue earned in the three months ended
September 30, 2000 consisted of research support funding from the Novartis
collaboration. The revenue earned in the three months ended September 30, 1999
consisted of $2,500,000 in research support funding from the Merck
collaboration, $563,000 in research support funding from the Novartis
collaboration, and $50,000 in funding from SBIR grants. The decrease was
primarily due to decreased research support funding associated with the Merck
collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the three months ended September 30, 2000 were $8,733,000
compared to $4,865,000 in the three months ended September 30, 1999, an
increase of $3,868,000 or 79.5%. The increase was largely due to increased
clinical trial and clinical material manufacturing costs related to
Cidecin(TM) development and the additional personnel and purchases required
by such development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in the three months ended September 30, 2000 were $2,666,000 compared to
$947,000 in the three months ended September 30, 1999, an increase of
$1,719,000 or 181.5%. The increase was largely due to increased costs related
to personnel and recruiting expenses, and increased legal expenses which were
expensed under pooling accounting treatment related to the acquisition of
TerraGen.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended
September 30, 2000 was $2,617,000 compared to $193,000 in three months ended
September 30, 1999, an increase of $2,424,000 or 1256.0%. The increase in
interest income was due primarily to a higher average cash, cash equivalent and
investment balances during the three months ended September 30, 2000 as compared
to the three months ended September 30, 1999. Interest expense in the three
months ended September 30, 2000 was $289,000 as compared to $99,000 during the
three months ended September 30, 1999 due to increased long-term debt.
NET LOSS. The net loss during the three months ended September 30, 2000 was
$8,009,000 compared to $2,606,000 during the three months ended September 30,
1999, an increase of $5,403,000 or 207.3%. The increase was primarily due to
additional expenses incurred associated with the development of Cidecin(TM).
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total revenues in the nine months ended September 30, 2000 were
$2,496,000 compared to $4,579,000 in the nine months ended September 30, 1999, a
decrease of $2,083,000 or 45.5%. The revenue recognized in the nine months ended
September 30, 2000 consisted of $2,188,000 in research support payments from the
Novartis collaboration and $308,000 in SBIR grants. In the nine months ended
September 30, 1999, revenues consisted of $2,500,000 in research support funding
from the Merck collaboration, $1,479,000 from the Novartis collaborations,
$500,000 in research support payments from the Bristol-Myers Squibb
collaboration and $100,000 in SBIR grants. The decrease of revenues was due to
the decrease of research support funding associated with the Merck and Bristol
Myers Squibb collaborations, offset by increased funding from SBIR grants and
revenues associated with the Novartis collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses
in the nine months ended September 30, 2000 were $25,592,000 compared to
$13,792,000 in the nine months ended September 30, 1999, an increase of
$11,800,000 or 85.6%. The increase was largely due to increased costs related to
the development of Cidecin(TM), and the additional personnel and purchases that
are required by such development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in the nine months ended September 30, 2000 were $5,599,000 compared to
$2,901,000 in the nine months ended September 30, 1999, an increase of
$2,698,000 or 93.0%. The increase was primarily due to increased costs
related to personnel and recruiting expenses, and increased legal expenses
which were expensed under pooling accounting treatment related to the
acquisition of TerraGen.
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INTEREST INCOME AND EXPENSE. Interest income in the nine months ended
September 30, 2000 was $5,959,000 compared to $667,000 in the nine months ended
September 30, 1999, an increase of $5,292,000 or 793.4%. The increase in
interest income was due primarily to a higher average cash, cash equivalent and
investment balances during the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999. Interest expense in the nine months
ended September 30, 2000 was $436,000 as compared to $260,000 during the nine
months ended September 30, 1999 due to increased long-term debt.
NET LOSS. The net loss during the nine months ended September 30, 2000 was
$23,171,000 compared to $11,707,000, an increase of $11,464,000 or 97.9%. The
increase was primarily due to the additional expenses incurred to support the
development of Cidecin(TM).
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Cubist has financed its operations through the sale of
equity securities, equipment financing, sponsored research revenues, license
revenues and interest earned on invested capital. The total cash, cash
equivalents and investments balance at September 30, 2000 was $152,392,000
compared to $26,151,000 at December 31, 1999.
Since inception through September 30, 2000, we have invested an
aggregate of $45,042,000 (of which $34,815,000 was invested during the three
months then ended) in property and equipment, primarily in building,
leasehold improvements and laboratory equipment under capital leases. The
obligations under capital leases at September 30, 2000 were $878,000. Minimum
annual payments due under capital leases total $166,000 in 2000. Principal
payments are scheduled to decline each year thereafter until expiration in
2002. We made principal payments under our capital lease obligations of
$415,000 in the nine months ended on September 30, 2000. We expect our
capital expenditures to be approximately $285,000 for the remainder of 2000
consisting primarily of laboratory and other equipment purchases.
On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less financing costs of
$3,214,500) by issuing 2,200,000 shares of common stock at $25.00 per share.
We have registered for the resale of the 2,200,000 shares of our common stock
issued in this financing.
During March 1999, we entered into a term loan agreement with a bank under
which we are able to borrow up to $1,500,000 to finance fixed asset purchases.
In March 2000, we increased the term loan by an additional $2,000,000 to finance
leasehold improvements and fixed asset purchases. Advances under this facility
are to be repaid over a 36-month period, commencing on March 31, 2000. Interest
on the borrowings is at the bank's LIBOR rate (9.23% at September 30, 2000).
Borrowings under the facility are collateralized by all capital equipment
purchased with the funds under this term loan. At September 30, 2000, borrowings
outstanding totaled $2,643,642.
On April 3, 2000, Cubist completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of common stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625). Cubist intends to
use the net proceeds of this offering to fund its clinical trials and
commercialization of Cidecin(TM), its lipopeptide drug discovery program, the
continued development of its proprietary genomic target validation and assay
development VITA(TM) functional genomics and ChemInformatics technologies and
for general corporate and working capital purposes.
On September 8, 2000, Cubist announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. Cubist believes this should increase its operating efficiencies to
better meet its corporate goals and objectives and plans to relocate to the
facilities in the third quarter of 2001.
To finance the purchase, Cubist issued $39 million of convertible notes
to John Hancock Life Insurance Company. This financing covers the building
purchase price of approximately $34 million and includes $5 million for
facility improvements. The five-year notes carry a coupon rate of 8.5% and
can be converted to Cubist common stock at $63.8625 per share which
represents a premium to the market price determined at the time of
commitment. Cubist retains the right to redeem these notes after three years.
We believe that the additional funds from the sale of shares in the recent
public offering, together with our existing cash resources and our existing
capital resources, interest income and future revenues due under our
collaborative agreements, will be sufficient to fund our operating expenses and
capital requirements as currently planned through at least March 31, 2002. Our
actual cash requirements may vary materially from those now planned and will
depend on numerous factors. We cannot be sure that our existing cash, cash
equivalents, other capital
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resources, interest income and future revenues due under our collaborative
agreements will be sufficient to fund our operating expenses and capital
requirements during that period.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB
101B which is effective no later than the quarter ended December 31, 2000. SAB
101 clarifies the SEC's views related to revenue recognition and disclosure. We
are presently determining the effect SAB 101 will have on our financial
statements, but management does not believe the effect will be material.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently own financial instruments that are sensitive to market risks
as part of our investment portfolio. Our investment portfolio is used to
preserve our capital until it is required to fund operations, including our
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Our investment portfolio includes
investment grade debt instruments. These bonds are subject to interest rate
risk, and could decline in value if interest rates fluctuate. Due to the
conservative nature of these instruments, we do not believe that we have a
material exposure to interest rate risk. We do not own derivative financial
instruments in our investment portfolio.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less financing costs of
$3,214,500) by issuing 2,200,000 shares of common stock at $25.00 per share.
We have registered for the resale of the 2,200,000 shares of our common stock
issued in this financing.
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On April 3, 2000, Cubist completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of Common Stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less estimated financing costs of $680,625). Cubist
intends to use the net proceeds of this offering to fund its clinical trials and
commercialization of Cidecin(TM) (daptomycin for injection), its lipopeptide
drug discovery program, the continued development of its proprietary genomic
target validation and assay development VITA(TM) functional genomics and
ChemInformatics technologies and for general corporate and working capital
purposes.
On October 23, 2000, Cubist completed the acquisition of TerraGen
Discovery, Inc. (see Part I, Item 2) in part by issuing 495,584 shares of
common stock pursuant to the exemption from registration provided by 3(a)(10)
of the Securities Act of 1933, as amended, and Regulation S.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
__________
(b) Reports on Form 8-K
A current report on Form 8-K was filed by Cubist on September 16, 2000
with respect to the purchase of new corporate headquarters, Lexington,
Massachusetts.
A current report on Form 8-K was filed on November 7, 2000 with
respect to the acquisition of TerraGen Discovery, Inc.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CUBIST PHARMACEUTICALS, INC.
November 14, 2000 By: /s/ THOMAS A SHEA
-----------------
Thomas A. Shea,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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