Cubist's Q4 Preliminary Sales Down

| About: Merck & (MRK)

Cubist Pharmaceuticals Inc.’s (CBST) preliminary revenues for the fourth quarter of 2010 declined 3% to $161.8 million due to the reduced sales of its antibiotic injection, Cubicin (daptomycin). Moreover, fourth quarter revenues were also hurt by the absence of service revenues pertaining to Cubist’s marketing agreement with AstraZeneca plc (NYSE:AZN) involving AstraZeneca's antibiotic Merrem. The deal came to an end in June last year. Preliminary fourth quarter revenues fell short of the Zacks Consensus Estimate of $165 million.

The softness in US sales of Cubicin was attributable to the cost pressures on branded drugs in US hospitals. This was highlighted by Cubist in December 2010 itself when it slashed its 2010 revenue outlook to $634–$640 million from $645–$650 million.

Preliminary 2010 revenues were within the forecasted range. Preliminary revenues climbed 13% to $636.4 million and also surpassed the Zacks Consensus Estimate of $634 million. Full year revenues were helped by increases in US as well as international revenues. Cubist intends to announce results for the fourth quarter of 2010 as well as the full year on January 20, 2011.

Our Take & Recommendation
The softness in Cubist sales, which accounts for the bulk of the company’s revenues, bothers us. We are concerned about the unabated cost pressure on branded drugs in hospitals and the possibility of it persisting through 2011. Moreover, the pending litigation with Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA), which is seeking to launch a generic version of Cubicin, is also a matter of great concern. The ongoing litigation poses a significant threat to the Cubicin franchise and could be a source of overhang on Cubist’s shares in the foreseeable future.

These concerns cause us to have an ‘Underperform’ recommendation on Cubist, which is supported by the Zacks #4Rank (short-term ‘Sell’ rating) carried by the company.