Friday, December 05, 2008

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

Oppenheimer is out downgrading Cubist Pharma (NASDAQ:CBST) to Underperform from Mkt Perform, seeing downside to $18-$19 range.

According to Oppenheimer the downgrade is based on concerns that the near-term product in-licensing is likely to be outside core markets and may result in material dilution. CBST has identified licensing a late-stage or commercial product as a high priority. Based on firm's review of acquisition candidates in CBST's core anti-infective market, they see few compelling opportunities and believe CBST may be forced to expand outside its core market. On valuation, CBST trades at 22.0x '09 fully taxed pro forma EPS compared to 16.1x for a universe of profitable biotechs. View the absence of composition of matter patents for Cubicin as a chronic high-impact risk factor justifying a lower PEG than peer group.

Opco points to the acquisition of Ecallantide from Dyax Corp. (DYAX, NR, $2.48) on 4/24 as the first step in CBST's transition from anti-infective company to an acute care-focused commercial company.

Does lower commercial risk trump higher clinical development execution risk? In firm's view, investors offered a clear answer, sending shares of CBST down 13% in the two week period following the Ecallantide in-licensing on 4/24/08, versus the Amex Biotech Index performance of -0.25% during the same period.

ANDA Risk Fades But IP Questions Remain. While investor concern about a near-term aNDA filing for Cubicin is receding, Oppenheimer views the absence of composition of matter protection for Cubicin as a chronic overhang justifying a lower PEG ratio and creating a deterrence to potential acquirers.

If a paragraph IV challenge is filed, CBST would have 45 days to file an infringement suit against an ANDA applicant. An infringement suit would prevent FDA approval of the ANDA for at least 30months from the date of the notice, unless a court rules in favor of the ANDA applicant beforehand. While we have no specific knowledge of companies preparing Paragraph IV certifications, the firm believes there is always a chance such filings would occur, creating overhang on CBST shares.

Notablecalls: I like the reasoning behind this Opco's call. It kind of looks like the stock has gotten ahead of itself - Cubicin is a nice product but has its problems (ANDA's looming).

What to do with the stock?

I think the stock will get hit on this call. See sub-$27 levels.

The larger cap bios have underperformed lately and I think people are better off taking profits in CBST and moving into CELG's of the world.

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