BioWatch: Cubist Moves Beyond Patent Fears (CBST, TEVA)

Cubist Pharmaceuticals Inc. (NASDAQ: CBST) is going to be back in favor now that it has settled a key patent case against Teva Pharmaceutical Industries Limited (NASDAQ: TEVA).  The company announced that it will grant the Israel-based generic giant a license to produce a generic version of Cubicin out in 2017, its blockbuster antibiotic used to treat hospital infections like staph and other bacteria and for bloodstream infections.

Cubist wins here even if it loses business from brand sales versus generic sales.  As a part of the deal, Teva can launch its generic version in the United States in June-2018 if Cubist wins a six month pediatric exclusivity.  If exclusivity is not granted, then Teva can launch in December-2017.  Here is where Cubist wins: Teva will buy the drug ingredients from Cubist and the terms call for a percentage of Teva’s net profit on these sales to go back to Cubist.  Teva also agreed to acknowledge the patents under the case as valid patents and that a prior generic launch would violate those patents.

If this is not a win-win for Cubist, then what is?  The move effectively settles a patent infringement case filed by Cubist in early 2009 against Teva after Teva filed with the FDA to sell a generic version of the drug.  Teva gets one more feather in its cap for the decade ahead.  Cubist safely secured its market today and it locked in revenues for Cubicin even after its patent exclusivity expires. 

Cubist is one we had noted as maturing but also as one of many possible buyout candidates in the biohealth space.  Shares still trade at an acceptable multiple compared to many biotechs and emerging pharmaceutical companies out there.  Thomson Reuters sees $0.74 EPS in 2011 and $1.45 EPS in 2012.  At $29.20 after a 16% gain this morning that comes to a blended forward multiple of roughly 26-times expected earnings.  That is not exactly cheap, but it is not at all in the ridiculous territory for a company of this caliber in the biohealth space. 

Cubist’s market cap is a mere $1.74 billion even after this 16% gain.  While Cubist has over $435 million in direct long-term debt, it also has more than $900 million in its cash, short-term investments and long-term investments.

JON C. OGG