- --------------------------------------------------------------------------------
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 March 31, 1998
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 Commission file number 0-21379
CUBIST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3192085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 May 1, 1998, there were 10,580,902 shares outstanding of the
Company's common stock, $0.001 per value per share.
- --------------------------------------------------------------------------------
CUBIST PHARMACEUTICALS, INC.
INDEX
Item Page
Number Number
- ------ ------
PART I FINANCIAL INFORMATION
Item 1. Condensed Unaudited Financial Statements
Condensed Balance Sheets as of March 31, 1998
and December 31, 1997 ....................................... 3
Condensed Statements of Operations for the three months ended
March 31, 1998 and 1997 ..................................... 4
Condensed Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 ..................................... 5
Notes to the Unaudited Condensed Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ...................... 10
Item 6. Exhibits and Reports on Form 8-K ............................... 10
Signature ...................................................... 11
2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CUBIST PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ................... $4,886,507 $2,837,600
Short-term investments ...................... 4,660,343 6,709,623
Accounts receivable ......................... -- 53,333
Notes receivable ............................ 10,000 --
Prepaid expenses and other current assets ... 180,846 142,635
------------ ------------
Total current assets ........................ 9,737,696 9,743,191
Property and equipment ......................... 6,219,615 5,893,101
Less: Accumulated depreciation and
amortization .............................. (3,003,051) (2,712,341)
------------ ------------
Property and equipment, net ................. 3,216,564 3,180,760
Long-term investments .......................... 6,044,295 8,569,107
Other assets ................................... 141,989 180,294
------------ ------------
Total assets .......................... $19,140,544 $21,673,352
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................ $643,203 $275,260
Accrued expenses ............................ 483,717 492,304
Current portion of long-term debt ........... 169,254 189,730
Current portion of capital lease obligations 544,731 548,351
------------ ------------
Total current liabilities ............. 1,840,905 1,505,645
Long-term debt, net of current portion ......... 69,411 100,072
Long-term capital lease obligation, net of
current portion .............................. 962,174 1,004,969
------------ ------------
Total liabilities ..................... 2,872,490 2,610,686
------------ ------------
Commitments
Stockholders' Equity:
Common Stock - $.001 par value; authorized:
25,000,000 shares; issued: 10,580,902, 1998
and 10,580,555 shares, 1997 ................. 10,581 10,581
Additional paid-in capital ..................... 42,070,244 42,047,966
Accumulated deficit ............................ (25,812,771) (22,995,881)
------------ ------------
Total stockholders' equity ............ 16,268,054 19,062,666
------------ ------------
Total liabilities and stockholders'
equity ................................ $19,140,544 $21,673,352
============ ============
The accompanying notes are an integral part of the
unaudited condensed financial statements.
3
CUBITS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three months ended
March 31,
----------------------------
1998 1997
---- ----
Sponsored research revenues .................... $513,550 $834,600
Operating expenses:
Research and development ..................... 2,563,518 2,011,273
General and administrative ................... 858,077 645,469
------------ ------------
Total operating expenses .................... 3,421,595 2,656,742
Interest income ................................ 184,168 286,779
Interest expense ............................... (93,013) (56,011)
------------ ------------
Net loss ....................................... ($2,816,890) ($1,591,374)
============ ============
Basic and diluted net loss per
common share ................................. ($0.27) ($0.17)
============ ============
Weighted average number of common
shares for basic and diluted net
loss per common share ........................ 10,581,054 9,547,771
============ ============
The accompanying notes are an integral part of the
unaudited condensed financial statements.
4
CUBIST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
Three months ended
March 31,
----------------------------
1998 1997
---- ----
Cash flows for operating activities:
Net loss ..................................... $(2,816,890) $(1,591,374)
Adjustments to reconcile net loss to net cash
provided by/ (used in) operating activities:
Depreciation and amortization ............... 308,358 225,943
Changes in assets and liabilities:
Accounts receivable .................... 53,333 --
Prepaid expenses and other current
assets ............................... (38,211) (164,043)
Other assets ........................... 38,305 (10,000)
Accounts payable and accrued expenses .. 359,356 (297,015)
Deferred revenue ....................... -- (84,600)
------------ ------------
Total adjustments .................... 721,141 (329,715)
------------ ------------
Net cash used in operating activities .......... (2,095,749) (1,921,089)
Cash flows from investing activities:
Purchase of fixed assets ..................... (307,639) (311,611)
Leasehold improvements ....................... (18,875) (6,763)
Purchase of short-term investments ........... -- (10,635,801)
Maturities of short-term investments ......... 2,049,280 --
Purchase of long-term investments ............ -- (2,540,934)
Maturities of long-term investments .......... 2,524,812 --
------------ ------------
Net cash provided by/(used in) investing
activities .................................. 4,247,578 (13,495,109)
------------ ------------
Cash flows for financing activities:
Issuance of stock ............................ (5,370) (9,156)
Repayments of debt ........................... (51,137) (45,381)
Proceeds from capital lease financing ........ 92,984 185,665
Principal payments of capital lease
obligations ................................ (139,399) (151,983)
------------ ------------
Net cash used in financing activities .......... (102,922) (20,855)
------------ ------------
Net increase (decrease) in cash and cash
equivalents .................................. 2,048,907 (15,437,053)
Cash and cash equivalents,
beginning of period .......................... 2,837,600 19,329,353
------------ ------------
Cash and cash equivalents,
end of period ................................ $4,886,507 $3,892,300
============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest ....... $93,013 $56,011
Non cash activity:
Reclassification of amount due under note
issued in connection with preferred stock
offering from additional paid in capital to
notes receivable ............................ $10,000 --
The accompanying notes are an integral part of the
unaudited condensed financial statements.
5
CUBIST PHARMACEUTICALS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business
Cubist Pharmaceuticals, Inc. ("Cubist" or the "Company") is a
biopharmaceutical company founded in May 1992 and is focused on the discovery,
development and commercialization of novel classes of antiinfective drugs to
treat infectious diseases caused by bacteria and fungal pathogens. Cubist has
established multiple technology licenses and collaborations, as well as a
network of advisors and collaborators and is located in Cambridge,
Massachusetts.
Note 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 the Company's
audited financial statements and related footnotes for the year ended December
31, 1997 which are included in the Company's Annual Report on Form 10-K. Such
Annual Report on Form 10-K was filed by the Company with the Securities and
Exchange Commission (the "Commission") on March 20, 1998.
Net Loss Per Common Share
The net loss per common share is computed based upon the weighted average
number of common shares and common equivalent shares (using the treasury stock
method) outstanding after certain adjustments described below. Common equivalent
shares are not included in the per share calculations where the effect of their
inclusion would be anti-dilutive.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards 128 (SFAS 128) "Earnings per Share", which requires the
disclosure of Basic Earnings per Common Share and Diluted Earnings per Common
Share, both as defined in the standard, for all periods presented. Adoption of
this standard did not have any impact on the earnings per share computation for
any period presented.
Comprehensive Income
Effective January 1, 1998, the Company adopted the Statement of Accounting
Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". This statement
requires changes in comprehensive income to be shown in a financial statement
that is displayed with the same prominence as other financial statements.
Adoption of this statement did not have an impact on the financial statements.
Note C. Materials Transfer Agreement
On February 18, 1998, the Company entered into a materials transfer
agreement (the "Dobfar Agreement") with ACS Dobfar S.p.A ("ACS Dobfar"). Under
the terms of the Dobfar Agreement, ACS Dobfar will manufacture and supply the
antibiotic daptomycin for Phase III clinical trials. The Company shall supply
ACS Dobfar with materials and information to perform studies set forth in the
Dobfar Agreement, and in exchange, the Company will acquire all right, title and
interest in the daptomycin produced.
6
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) statements about the
adequacy of the Company's cash, cash equivalents, other capital resources,
interest income, other income and future revenues due under the Company's
collaborative agreements to fund its operating expenses and capital requirements
as currently planned through mid-1999 (ii) statements about the amount of
capital expenditures that the Company expects to incur in 1998, (iii) statements
about the Company's plans to begin clinical trials of daptomycin in the fourth
quarter of 1998 or first quarter of 1999, and (iv) certain statements identified
or qualified by words such as "likely", "will", "suggests", "may", "would",
"could", "should", "expects", "anticipates", "estimates", "plans", "projects",
"believes", or similar expressions (and variants of such words or expressions).
Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, but not limited to, the risks and
uncertainties described or discussed in the section "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. The forward-looking statements contained herein represent the Company's
judgment as of the date of this quarterly report on Form 10-Q, and the Company
cautions readers not to place undue reliance on such statements.
Overview
Since its incorporation on May 1, 1992 and commencement of operations in
February 1993, Cubist has been focused on the discovery, development and
commercialization of novel antiinfective drugs to treat infectious diseases
caused by bacteria and fungal pathogens. The Company has a limited history of
operations and has experienced significant operating losses since inception. The
Company expects to incur significant additional operating losses over the next
several years and expects cumulative losses to increase substantially due to
expanded research and development efforts, pre-clinical and clinical trials and
development of manufacturing, marketing and sales capabilities.
A key element of the Company's strategy is to enhance certain of its drug
discovery and development programs and to fund its capital requirements, in
part, by entering into collaborative agreements with major pharmaceutical
companies. The Company is a party to collaborative agreements based specifically
on its aminoacyl-tRNA synthetase program with Bristol-Myers Squibb Company
("Bristol-Myers Squibb") and Merck & Co., Inc. ("Merck"). Under these
collaborative agreements, the Company is entitled to receive research support
payments and, if certain drug development milestones are achieved, milestone
payments. In addition, the Company will be entitled to receive royalties on
worldwide sales of any drug developed and commercialized from these
collaborations.
In addition, the Company entered into a license agreement with Eli Lilly
and Company ("Eli Lilly") pursuant to which the Company acquired exclusive
worldwide rights to develop, manufacture and market daptomycin. Daptomycin is a
novel, natural product being developed for the treatment of Staphylococcus
aureus and enterococcus infections. The Company anticipates that it will begin
clinical trials of daptomycin in the fourth quarter of 1998 or the first quarter
of 1999. In exchange for such license, the Company has paid an upfront license
fee in cash, and if certain drug development milestones are achieved, has agreed
to pay milestone payments by issuing shares of Common Stock to Eli Lilly. In
addition, the Company will be required to pay royalties to Eli Lilly on
worldwide sales of daptomycin.
On February 18, 1998, the Company entered into a materials transfer
agreement (the "Dobfar Agreement") with ACS Dobfar S.p.A ("ACS Dobfar"). Under
the terms of the Dobfar Agreement, ACS Dobfar will manufacture and supply the
antibiotic daptomycin for Phase III clinical trials. The Company shall supply
ACS Dobfar with materials and information to perform studies set forth in the
Dobfar Agreement, and in exchange, the Company will acquire all right, title and
interest in the daptomycin produced.
7
The Company has considered the impact of the year 2000 as it relates to
the programming within the Company's computer and operating systems. While the
Company cannot predict the impact of the year 2000 on the Company as a result of
the effects on its collaborative partners, suppliers and consultants, the
Company does not believe there is a significant risk to the Company's internal
systems.
Results of Operations
Three Months Ended March 31, 1998 and 1997
Revenues. Total revenues in the three months ended March 31, 1998 were
$514,000 compared to $835,000 in the three months ended March 31, 1997, a
decrease of $321,000 or 38.4%. The revenue earned in the three months ended
March 31, 1998 consisted of $357,000 in research support funding from the
Bristol-Myers Squibb and Merck collaborations; and $157,000 in SBIR grants. In
the three months ended March 31, 1997, total revenues consisted of research
support funding from the Bristol-Myers Squibb and Merck collaborations. The
decrease was due to smaller revenues associated with such stage of the
Bristol-Myers Squibb collaboration.
Research and Development Expenses. Total research and development expenses
in the three months ended March 31, 1998 were $2,564,000 compared to $2,011,000
in the three months ended March 31, 1997, an increase of $553,000 or 27.5%. The
increase was largely due to costs related to daptomycin development, and the
additional personnel and purchases that are required by such development.
General and Administrative Expenses. General and administrative expenses
in the three months ended March 31, 1998 were $858,000 compared to $645,000 in
the three months ended March 31, 1997, an increase of $213,000 or 33.0%. The
increase was largely due to increased costs related to additional personnel
hired in connection with the Company's growth.
Interest Income and Expense. Interest income in the three months ended
March 31, 1998 was $184,000 compared to $287,000 in three months ended March 31,
1997, a decrease of $103,000 or 35.9%. The decrease in interest income was due
primarily to a lower average cash, cash equivalent and investment balances
during the three months ended March 31, 1998 as compared to the three months
ended March 31, 1997. Interest expense in the three months ended March 31, 1998
was $93,000 as compared to $56,000 during the three months ended March 31, 1997.
Net Loss. The net loss during the three months ended March 31, 1998 was
$2,817,000 compared to $1,591,000 during the three months ended March 31, 1997,
an increase of $1,226,000 or 77.1%. The increase was primarily due to the
decreased revenues associated with the Bristol-Myers Squibb collaboration, and
additional expenses incurred to support the advancement of the Company's
internal research and development programs.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through the sale
of equity securities, equipment financing, sponsored research revenues, license
revenues and interest earned on invested capital. The Company's total cash, cash
equivalent and investments balance at March 31, 1998 was $15,591,000 compared to
$18,116,000 at December 31, 1997.
8
As of March 31, 1998, the Company had invested an aggregate of $6,220,000
(of which $327,000 was invested during the three months then ended) in property
and equipment, primarily in laboratory equipment under capital leases. The
obligations under capital leases at March 31, 1998 were $1,507,000. Minimum
annual principal payments due under capital leases total $574,000 in 1998.
Principal payments are scheduled to decline each year thereafter until
expiration in 2002. The Company made principal payments under its capital lease
obligations of $139,000 in the three months ended on March 31, 1998. The Company
expects its capital expenditures in 1998 to be approximately $1,000,000
consisting of laboratory and other equipment purchases.
The Company believes that its existing capital resources, interest income
and future revenues due under the Bristol-Myers Squibb and Merck collaborative
agreements will be sufficient to fund its operating expenses and capital
requirements, as currently planned, through mid-1999. The Company's actual cash
requirements may vary materially from those now planned and will depend on
numerous factors. There can be no assurance that the Company's existing cash,
cash equivalents, other capital resources, interest income and future revenues
due under the Bristol-Myers Squibb and Merck collaborative agreements will be
sufficient to fund its operating expenses and capital requirements during such
period. The Company will need to raise substantial additional capital to fund
its operations. The Company intends to seek such additional funding through
public or private financing or collaborative or other arrangements with
corporate partners.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards 128 (SFAS 128) "Earnings per Share", which requires the
disclosure of Basic Earnings per Common Share and Diluted Earnings per Common
Share, both as defined in the standard, for all periods presented. Adoption of
this standard did not have any impact on the earnings per share computation for
any period presented.
Comprehensive Income
Effective January 1, 1998, the Company adopted the Statement of Accounting
Standards No. 130 (SFAS 130) "Reporting Comprehensive Income". This statement
requires changes in comprehensive income to be shown in a financial statement
that is displayed with the same prominence as other financial statements.
Adoption of this statement did not have an impact on the financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
9
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company's Registration Statement on Form S-1 (Reg. No. 333-6795) in
connection with the Company's initial public offering of Common Stock was
declared effective by the Securities and Exchange Commission ("the SEC") on
October 25, 1996. On October 25, 1996, the Company also filed another
Registration Statement on Form S-1 (Reg. No. 333-5880) with the SEC pursuant to
Rule 462 (b) promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Such Registration Statements (together the "IPO Registration
Statement") provided for the Registration under the Securities Act of 2,875,000
shares of the Company's Common Stock.
The aggregate initial public offering proceeds for all 2,875,000 shares of
Common Stock registered under the Securities Act pursuant to the IPO
Registration Statement was $17,250,000. The net proceeds to the Company from
such issuance and distribution, after deducting the aggregate amount of expenses
(including underwriting discounts and commissions) paid by the Company in
connection therewith, were $15,153,000.
Of such net proceeds, an aggregate of $7,870,000 has been spent through
March 31, 1998 for the following uses and in the following amounts per use:
$290,000 in construction of plant, building and facilities; $1,228,000 for
repayment of indebtedness; $6,352,000 for working capital. All amounts spent by
the Company for such uses, other than payment of salaries to directors and
officers of the Company, consisted of direct payments to persons or entities,
none of which was a director or officer of the Company, holder of 10 percent or
more of any class of equity securities of the Company or other affiliate of the
Company. The remaining balance of such net proceeds, consisting of $7,283,000,
are held in cash, cash equivalents, and investments.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
10
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.
May 12, 1998 By: /s/ Thomas A. Shea
----------------------------------------
Thomas A. Shea,
Senior Director of Finance
& Administration and Treasurer
(Authorized Officer and Principal
Finance and Accounting Officer)
11