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This is the kind of company I like - cash rich and undervalued. Cubist Pharmaceuticals (CBST) had $910 million in cash at the end of 2010 and a current market cap of approximately $1.3 billion. It had 2010 revenue of $636.4 million and anticipates full year 2011 revenue in the range of $680 to $700 million, about a 10% increase.
So no, revenue is certainly not growing like gangbusters but it certainly is a cash cow, generating $167 million in free cash flow last year with net income of $94 million. Why then the low valuation? It's a four-letter-word in the world of brand name drugs: T-E-V-A (TEVA).
Not news here. Cubist's revenue is almost entirely derived from sales of its antibiotic, Cubicin. In February 2009, Teva filed an ANDA to make a generic copy of the drug; Cubist countered with a patent infringement suit in March, leading to a 30-month stay. In just a few weeks, on April 25, the case will finally go to trial. Teva will not be able to launch an “at risk” drug at the immediate start of the trial because the 30-month stay extends until August 2011.
I believe Cubist will prevail in its suit. Many Wall Street analysts also believe the company's patents are strong. If it should prevail, Cubicin has patent protection that may last into 2019. By then, it will have revenues of over $1 billion and be one of the premiere players in the acute care field - if it hasn't been bought.
On the other hand, if Cubist loses the patent lawsuit, Teva will be free to begin selling its generic version and Cubist will likely lose more than half of its sales. Although I do not foresee this scenario, if it does occur, Cubist has some protection in its strong brand and its newly developed two-minute injection product - a considerable improvement over the previous 30-minute infusion. Also, sales will decline less until additional generics enter the market.
There's a lot going for this little company once you look beyond the patent lawsuit. The most obvious is its very promising pipeline. There are now two candidates in Phase II studies. The more interesting of the two is a product that arises from its purchase of Calixa in late 2009 for $92.5 million upfront and $310 million in potential milestones.
It is a fixed-dose combination pill comprised of a novel cephalosporin (CXA-101) with the beta-lactamase inhibitor tazobactam - together known as CXA-201. It is being developed as a treatment for gram-negative infections. Phase III trials are expected to begin by the end of this year in cUTI (complicated urinary tract infection) and cIAI (complicated intra abdominal infection). A pivotal trial in NP (nosocomial pneumonia) is expected in 2012. The company anticipates filing for regulatory approval of the first two indications by year-end 2013.
Cubist is now a proven drug developer and an active player on the business development front. Its drug reps are some of the best in the league, but now that Cubist's contract to sell Merrem for AstraZeneca has ended, it probably has some spare capacity. With its huge cash horde, the company has plenty of options for filling it. Licensing deals or acquisition of late stage products/companies are certainly likely events this year.
The long IPO drought has left buyouts as the only real option for backers seeking an exit from their biotech investment. It's a great time to have cash.
Disclosure: I am long CBST.
Source: Cubist Pharmaceuticals: Lots of Cash and Low Valuation