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I manage Wax Ink.net, a baseline equity research company comprised of individual investors not licensed or registered with any government agency. I have been all cap value investor and independent equity researcher for the past 30 years, and believe that patience is the key to successful... More
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  • Cubist Pharmaceutical - Acutely Aware 0 comments
    May 9, 2010 6:37 AM | about stocks: MRK, CASC

    We were asked last week why we never investigated biotechnology companies. To set the record straight, we own shares in a biotechnology company, Oncothyreon, Inc. (NASDAQ: ONTY), a clinical stage company developing cancer treatment therapies.

    But to answer the question directly, we don't investigate biotechnology companies because the vast majority offer little in the way investment risk mitigation, which is a polite way of saying that an investment in companies in the biotechnology sector is a very big gamble, and if we wanted to gamble we would just go to Las Vegas where we think there a better odds.

    Enter Cubist Pharmaceuticals, Inc. (NASDAQ: CBST), a company focusing on acute care. It was the "acute care" part that piqued our curiosity.

    Basis
    Financial information related to Cubist Pharmaceuticals, Inc. contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 26, 2010.

    What They Do
    The company is a biopharmaceutical company focused on the research, development and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment.

    The company's products are used, or are being developed to be used, primarily in hospitals but also may be used in acute care settings, including home infusion and hospital outpatient clinics.

    The company currently derives substantially all of its revenues from CUBICIN® (daptomycinGram-positive organisms, including methicillin-resistant Staphylococcus aureus (S. aureus), or MRSA, and, as of December 31, 2009, has been used in the treatment of more than an estimated 880,000 patients.

    CUBICIN is approved in the U.S. for the treatment of complicated skin and skin structure infections, or cSSSI, caused by S. aureus, and certain other Gram-positive bacteria, and for S. aureus bloodstream infections (bacteremia), including those with right-sided infective endocarditis, or RIE, caused by methicillin-susceptible and methicillin-resistant isolates.

    In the European Union, or EU, CUBICIN is approved for the treatment of complicated skin and soft tissue infections, or cSSTI, where the presence of susceptible Gram-positive bacteria is confirmed or suspected and for RIE due to S. aureus bacteremia and S. aureus bacteremiaRIE or cSSTI.

    The company was as incorporated as a Delaware corporation in 1992 and has been a publicly traded company since 1996, with principal offices in Lexington, Massachusetts.

    Short-Term Investment

    It looks to us as if the stock is in a downtrend and is heading towards an oversold condition.

    Coupling an oversold condition with a retraction in the MACD is exactly what sets up the potential for a profitable short-term trade, and while the MACD has broken through zero, we would want to see this indicator at or below -0.5 before we decided to commit to a short-term investment.

    The stock closed recently at $20.15 with resistance at $20.19, a 0% increase from current levels, and support at $16.19, a 20% decline from current levels.

    Coupling the current confusion in the markets with no immediate upside potential and a 20% downside potential, we simply don't believe a short-term trade is advisable at this time.

    Long-Term (5 Year Hold) Investment

    Admittedly, we were impressed that a biopharmaceutical company that derives almost all of its revenues from a single product has any financial metrics that we would consider investment quality, but Cubist seems to be the exception rather than the rule.

    The company's Current Ratio at 3.57, its Quick Ratio at 2.99, its Cash Ratio at 2.53, and its Free Cash Flow of $1.85 per share, got our attention in a pretty big way.

    Another item that attracted our attention was the company's Debt to Cash Ratio at 0.77, meaning that for every dollar in Cash the company has, it has $0.77 in Debt.

    Put another way, the company could pay off all of its Debt with the Cash it has, and still have $0.23 left over. That, to us, is a pretty fair accomplishment for any company, much less a fairly young biotech company.

    Valuations

    Based on our review of the company’s FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $28 to $33 range, and that a reasonable entry target is in the $14 to $17 range, an entry point supported by our Graham number of $14, and our Relative Value number of $28.

    Final Thoughts
    When we started our miniature journey of discovery, the idea was to get a little understanding of what acute care actually was, since it was that particular term that made got our attention in the first place.

    Along the way, we found a fairly young company that manufactures a single product, a company that at least at first glance, appears to be very well managed and very much focused on providing not only the best product to their customers, but perhaps the best investment value for its shareholders.

    Worksheet

    To download the Cubist Pharmaceuticals Wax Ink Raw Value Worksheet, please click here.


    Wax



    Disclosure: Position in ONTY
    Stocks: MRK, CASC
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