Monday, October 02, 2006

Calls of Note Part 3

- Merrill Lynch believes there are 5 key reasons to be BUYING Cubist Pharma (NASDAQ:CBST):

1) the stock is trading at a significant discount to the potential of Cubicin, 2) CBST will likely be profitable in 3Q & has significant earnings leverage, 3) they are confident that management's decision on "what's next" will create rather than dilute value for investors, 4) Cubicin is becoming established as a new standard of care for serious bacterial infections, and 5) they believe concerns about resistance should decline.

In a worst case scenario, if Cubicin sales peaked in '07, the firm estimates Cubist stock is trading at a 5% discount to the value of the drug. Based on their peak sales they estimate Cubist is trading at a 30-49% discount to Cubicin's current fair value.

Firm expects Cubist to report its first profitable quarter on a GAAP basis in 3Q. Depending on Cubist's long-term strategy, they believe the company could reduce expenses by $30 MM to $55 MM per year, which could increase profitability by $0.45 to $0.85 and add $5 to $13 of value assuming historical pharma multiples

Investors are concerned about what "Act 2" will be, but Merrill believes management is more likely to create value for investors than significantly dilute shareholders. There are a select few synergistic drugs potentially available for license or acquisition, but if Cubist is unable to build its pipeline externally, they believe it will reduces expenses, maximize cash flow, & package the company for acquisition.

Reits Buy and $35 tgt.

Notablecalls: While there was considerable buy interest in CBST already on Friday (following Jeffco's comments), I suspect comments from Merrill will provide another upward push.

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