Thursday, August 06, 2009

Cubist Pharma (NASDAQ:CBST): Downgraded to Underperform at Oppenheimer

Oppenheimer is downgrading Cubist Pharma (NASDAQ:CBST) to Underperform from Peer Perform.

Firm notes they are downgrading CBST based on risk of unfavorable in-licensing/acquisition, current valuation, Cubicin litigation risk, and low probability of takeout. Importantly,

1) Firm remains cautious ahead of a significant in-licensing or acquisition;

2) They believe CBST is fairly valued at $17.00-$19.00 after adjusting for an in-licensing or acquisition;

3) They believe Cubicin patent litigation represents a significant revenue overhang;

4) They believe an acquisition is unlikely given the generic Cubicin challenge and ensuing patent litigation.

Oppenheimer continues to believe a meaningful late-stage acquisition/product in-licensing is required to maintain bottom-line growth, increasing risk and potential R&D expense. They see a limited number of opportunities in the antiinfectives space, and believe execution risk increases if CBST shops outside of its core domain.

Cubicin Patent Litigation Significant Revenue Overhang. Cubicin revenues could decline significantly within the next 1-2 years assuming a generic entrant. Based on our understanding of the Cubicin patents, TEVA may request summary judgment, representing significant downside.

Acquisition Unlikely Given Generic Challenge. Oppenheimer believes an acquisition is unlikely given the risk of generic Cubicin within the next 1-2 years. Also, recent stock appreciation based on a potential acquisition is unwarranted.

Notablecalls: CBST traded up 10% yesterday on takeover speculation. We saw comments out of RBC Capital around noon saying they spoke to management and there was nothing that would indicate a deal was in process. The stock ticked lower on this but the shorts got squeezed into the close.

Must say I have seen this movie before. It usually ends up with CBST giving back almost all of its gains over the next couple of days as speculation cools down. Now it looks like Oppenheimer is here to speed up the process. Note that none of the stuff they are saying is new but it will cause pain for the longs today.

$20.50 downside target in the the s-t looks prudent here, making anything above $21 a short.

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