Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 3Q14 Earnings Update
Prev. Ed.: Sep 25; 2Q14 Earnings (brokers’ material considered till Sep 18)
Brokers’ Recommendations: Neutral: 84.6% (11 firms); Positive: 7.7% (1 firm); Negative: 7.7% (1 firm) Prev. Ed. 7:4:0
Brokers’ Target Price: $98.73 (↑ $18.82 from the last edition; 11 firms) Brokers’ Avg. Expected Return: 1.0%
*Note: Though dated Dec 24, share price and brokers’ material are as of Dec 21.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Cubist Pharmaceuticals Inc. is focused on the development and commercialization of drugs for the acute care setting. The company’s lead antibiotic product, Cubicin, approved for the treatment of skin infections and gram-positive bacterial infections, is on target to generate over $1 billion in U.S. sales in 2014. In addition to Cubicin, the company markets two additional antibiotics (Dificid and Sivextro) and one product (Entereg) focused on post-surgical gastrointestinal (GI) recovery. Cubist also has a late-stage pipeline that consists of Surotomycin among others. Zerbaxa (gram-negative infections) gained the FDA approval on Dec 21, 2014. Meanwhile, Cubist is set to be acquired by Merck in an all-cash transaction valued at $9.5 billion or $102 per share. With the Cubist acquisition, Merck is all set to strengthen its hospital acute care portfolio. The deal is expected to close in 1Q15.
Of the 13 firms covering the stock, 84.6% of the firms are neutral on the stock, 7.7% of the firms are neutral and negative respectively.
Neutral outlook (11/13 firms): Though the cautious firms are encouraged by the Cubist/Merck deal and the premium offered for the buyout, they prefer to remain on the sidelines till its closure in 1Q15. The neutral firms also believe the negative court ruling in the Cubicin patent infringement lawsuit and the likely appeal by Cubist will continue to be a major overhang on the stock. With multiple pipeline events lined up, the firms prefer to remain on the sidelines until more visibility is obtained on the same.
Positive outlook (1/13 firms): The bullish firm is encouraged by the company’s better-than-expected 3Q14 results, particularly with the performance of Cubicin in a flat-to-down methicillin-resistant Staphylococcus aureus (MRSA) market. The firm is impressed with the highly anticipated FDA approval of Zerbaxa. The firm expects investor focus to remain on the initial uptake of Sivextro and the commercialization of Zerbaxa. Though the bullish firm is concerned given the negative ruling of the court in the generic Cubicin patent infringement lawsuit, they believe Cubist still has a chance to defend the validity of the patent.
Negative outlook (1/13 firms): Broker report was not available. Oct 22, 2014
Overview
Based in Lexington, MA, Cubist Pharmaceuticals Inc. is focused on the discovery and development of new anti-infectives for the treatment of serious and life-threatening infections, including those caused by drug-resistant pathogens. The company markets Cubicin, an antibiotic approved for the treatment of complicated skin and skin structure infections (cSSSI), bacteremia, and right-sided endocarditis. The Dec 2011 acquisition of Adolor Corporation brought another marketed product, Entereg (post-surgical GI recovery), to Cubist’s portfolio. The company’s 2013 acquisition of Trius Therapeutics and Optimer Pharmaceuticals, added two more antibiotics, Sivextro and Dificid, which further strengthened its antibiotics portfolio. Meanwhile, Cubist gained rights to Zerbaxa following its acquisition of Calixa Therapeutics in Dec 2009. Zerbaxa gained the FDA approval on Dec 21, 2014, for treating adults suffering from complicated urinary tract and intra-abdominal infections (cUTI/cIAI).
Cubist is set to be acquired by Merck in an all-cash transaction valued at $9.5 billion or $102 per share. The deal is expected to close in 1Q15.
For more information on the company, please visit its website at www.cubist.com.
The firms identified the following factors for evaluating the investment merits of Cubist Pharma:
Key Positive Arguments / Key Negative ArgumentsMost firms are impressed by the acquisition of antibiotics makers Trius Therapeutics and Optimer Pharma, which consequently strengthened Cubist’s pipeline and product portfolio. Most firms are impressed by the FDA approval of Sivextro. / Cubist’s lead product, Cubicin, faces fierce competition.
The firms are also encouraged by Entereg’s successful label expansion and view the drug as a significant growth driver going forward. / The company’s decision to recall a few lots of Cubicin in Aug 2014 following complaints of foreign particulate matter in the vials is concerning. The recall was related to certain observations made by the FDA in the Form 483 issued after the Jul 2014 inspection of the company’s facilities.
Most firms are impressed by the potential of Cubist’s pipeline. Most firms are impressed with Zerbaxa’s FDA approval for cUTI and cIAI / The court invalidated four of five Cubicin patents and ruled in favor of Hospira, thus setting the stage for the entry of generic Cubicin as early as Jun 15, 2016. Cubist intends to appeal against the ruling. Unless the issue is resolved fully it will continue to be a major overhang on the stock.
Note: The company’s financial year coincides with the calendar year.
Dec 24, 2014
Long-Term Growth
Several firms are encouraged by strong Cubicin sales in 3Q14 as it came after two consecutive quarters of decline and amid a flat-to-declining MRSA market. The increase was primarily driven by both volume expansion and price increase. Apart from Cubicin, Cubist generates revenues from drugs like Entereg, Dififcid and the newly launched antibiotic, Sivextro.
The company has an attractive late-stage pipeline in development including surotomycin for Clostridium difficile -associated diarrhea (CDAD) and bevenopran (CB-5945) for opioid-induced constipation (OIC). Zerbaxa was approved in the U.S. on Dec 21, 2014, for treating adults suffering from cUTI/cIAI.
Meanwhile, Cubist is set to be acquired by the U.S. drug maker, Merck, in an all-cash transaction valued at about $9.5 billion or $102 per share. The Cubist acquisition will add four marketed products, including Cubicin, to Merck’s hospital acute care portfolio. With the Cubist acquisition, Merck will also gain rights to the Cubist’s late-stage pipeline of anti-infective medicines including the recently approved, Zerbaxa. The deal is slated to close in 1Q15.
Target Price/Valuation
Rating DistributionPositive / 7.7%↓
Neutral / 84.6%↑
Negative / 7.7%↑
Avg. Target Price / $98.73↑
High / $102.00↑
Low / $80.00↑
No. of Analysts with Target price/Total / 11/13
A couple of firms have raised their price targets based on the proposed acquisition by Merck.
Risks to the target price include a fallout of the Cubist-Merck deal, slowdown in Cubicin sales and pipeline setbacks
Recent Events
Cubist Pharmaceuticals 3Q14 Earnings Beat Expectations – Oct 21, 2014
Cubist Pharmaceuticals’ third-quarter 2014 earnings (excluding special items) of $0.58 per share were well ahead of the Zacks Consensus Estimate of $0.36 due to higher-than-expected revenues. Earnings were also ahead of the year-ago figure by 41.5%.
Including one-time items, Cubist Pharma reported earnings of $0.29 per share as compared to a loss of $0.50 a year ago. Revenues in the third quarter of 2014 climbed 16% to $309.2 million. Revenues were ahead of the Zacks Consensus Estimate of $304 million. The top line was primarily boosted by higher Cubicin (daptomycin) sales.
The Third Quarter in Details
Net product sales in the U.S. climbed 19.8% year over year to $291.9 million. Most of the U.S. sales came from Cubicin. Net sales of the product in the U.S. increased 12% to $256.7 million. Apart from Cubicin sales, total product revenues at Cubist Pharma comprised Entereg (up 12% to $15.3 million), Dificid ($17.4 million, up 9.4% sequentially) and Sivextro ($2.4 million) sales in the U.S. and international markets (up 28% to $16.6 million).
Cubist Pharma gained full control of Dificid (fidaxomicin), an antibiotic for treating patients suffering from clostridium difficile-associated diarrhea (CDAD), following the completion of its acquisition of Optimer Pharmaceuticals in Oct 2013. This has strengthened the company’s antibiotics portfolio. Dificid was relaunched earlier in the year.
The company’s third antibiotic Sivextro, after Cubicin and Dificid, was approved in the U.S. in Jun 2014. The FDA approved Sivextro (200 mg: once daily for six days) for treating adults suffering from acute bacterial skin and skin structure infections (ABSSSI). The FDA has approved both intravenous as well as oral versions of the drug which can be used for treating serious skin infections, including those caused by methicillin-resistant staphylococcus aureus (MRSA). Sivextro is under review in the EU for treating complicated skin and soft tissue infections (cSSTI). Sivextro was added to Cubist Pharma’s pipeline following its acquisition of Trius Therapeutics last year.
Adjusted selling, general and administrative (SG&A) expenses were up 65.6% to $77.8 million during the third quarter of 2014. Adjusted research and development (R&D) expenses were down 41.4% to $65.1 million during the quarter primarily due to lower pre-launch expenses related to the manufacturing of Zerbaxa.
Zerbaxa is under priority review in the U.S. with a decision expected by Dec 21, 2014. The candidate is also under review in the EU with a final decision pending in the second half of 2015. Cubist Pharma is looking to get the candidate approved for treating complicated urinary tract and intra-abdominal infections.
2014 Outlook
Apart from announcing its earnings results, Cubist Pharma also updated the guidance for 2014. The company expects its revenues to be on the lower end of the previously provided guidance range of $1.19 billion to $1.275 billion. Gross margin (on an adjusted basis) is now expected in the range of 76%–77% (previous: 77%–78%).
The company lowered its guidance for R&D costs (inclusive of milestone payments) for 2014 to the range of $375 million to $400 million from the previous range of $460 million to $480 million. Selling, general and administrative expenses in 2014 are still expected in the range of $310 million to $320 million.
Revenue
Total net revenues in 3Q14 climbed 16% y/y to $309.2 million. The Zacks Digest average revenues for 3Q14 were in line with the company’s report. Total revenues in 3Q14 were above the expectations of several firms.
Sales from international markets in 3Q14 were $16.6 million, up 28% y/y. In Sep 2014, Cubist announced the opening of its international headquarters in Zurich. International revenues were mainly derived from sales of Cubicin, by the company’s distribution partner, Novartis, in the EU among others.
2014 Guidance: For 2014, the company still expects its revenues to be on the lower end of the previously provided guidance range of $1.19 billion to $1.275 billion.
All product revenues (apart from U.S. Cubicin sales) are still projected in the range of $205 million to $235 million for 2014. Service and other revenues for 2014 continue to be projected in the range of $15 million to $20 million.
Revenue($ in million) / 3Q13A / 2013A / 1Q14A / 2Q14A / 3Q14A / 4Q14E / 2014E / 2015E / 2016E
Digest
High / $266.0 / $1,054.5 / $261.2 / $294.4 / $309.3 / $342.7↑ / $1,208.0↓ / $1,480.4↑ / $1,719.6↑
Digest Low / $266.0 / $1,054.4 / $261.2 / $294.0 / $309.0 / $321.6↑ / $1,184.7↑ / $1,256.9↓ / $1,308.2↓
Digest Average / $266.0 / $1,054.4 / $261.2 / $294.4 / $309.2 / $335.5↑ / $1,201.1↑ / $1,387.3↓ / $1,549.5↑
Specific Products
Note: Recent significant changes are in bold.
Cubicin (daptomycin)
Indication: In the U.S., the drug is approved for cSSSI caused by certain broad gram-positive bacterial infections, including MRSA and methicillin-susceptible staphylococcus aureus (MSSA). In the EU, the drug is approved for treating patients suffering from cSSSI and for right-sided infective endocarditis caused by certain broad bacterial infections. In Nov 2010, the FDA approved a two-minute intravenous injectable version of Cubicin.
Product Life Cycle Status: Marketed
Partners: The company licensed Cubicin from Eli Lilly & Co. Cubist commercializes Cubicin in the U.S. and has a commercialization agreement with AstraZeneca. AstraZeneca has the right to market Cubicin in China and many other countries.
Cubist has a license agreement with Merck & Co. for the development and commercialization of Cubicin in Japan. Novartis is the company’s distribution partner for Cubicin in the EU. Novartis also posseses the rights to develop, market and sell the drug in Australia, New Zealand, India, certain Central American, South American and Middle East nations. The company has other partners for Cubicin in international markets.
Sales: Net U.S. revenues of Cubicin climbed 12% year over year to $256.7 million primarily due to 4.4% y/y growth in vial and price increases. Sales surpassed the expectations of most of the firms.
According to the Zacks Digest model, Cubicin revenues in 3Q14 were in line with the company’s report.
2014 Outlook: Net U.S. sales of Cubicin are still expected near the lower end of the previously guided range of $0.97 billion to $1.02 billion.
Competitors: Cubicin faces competition in the U.S. from vancomycin, marketed generically by multiple companies, Pfizer’s Zyvox, Tygacil, and Synercid, Actavis’ Teflaro and Theravance’s Vibativ.
Patents: On Dec 8, 2014, the U.S. District Court of Delaware delivered an unfavorable ruling in Cubicin’s patent infringement lawsuit between Cubist and Hospira. The court invalidated four of five Cubicin patents and ruled in favor of Hospira. As a result, generic Cubicin can enter the market as early as Jun 15, 2016. Cubist intends to appeal the ruling.
Hospira is looking to launch its generic version of Cubicin.
On Apr 4, 2011, Cubist announced the settlement of its patent dispute with Teva, which was looking to introduce a generic version of Cubicin. Per the terms of the settlement, if Cubist is successful in gaining approval for Cubicin for the pediatric population in the U.S., Teva can start selling the generic version only from Jun 18, 2018. In the event of Cubist failing to win pediatric exclusivity, Teva can start selling the generic version of the antibiotic from Dec 24, 2017. The agreement also requires Cubist to supply the entire amount of daptomycin required for selling the generic version of Cubicin in the U.S.
$ in million / 2013A / 2014E / 2015E / 2016E / 2017E / Est. Growth (13-’16)Cubicin Sales / $969.2 / $1,035.8↑ / $1,100.8↓ / $1,092.4↓ / $973.5↓
Entereg (alvimopan)