Cubist Beats, Ups View

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Cubist Pharmaceuticals, Inc.’s (CBST) first quarter 2012 earnings (excluding special items but including stock-based compensation expense) came in at 82 cents per share up 51.9% from the year-ago period.

Reported earnings came in at 45 cents, up 32.4% year-over-year. The Zacks Consensus Estimate for the first quarter was 41 cents. Results in the quarter were helped by strong sales of antibiotic injection, Cubicin (daptomycin).

Revenue in the first quarter of 2012 climbed 30.0% to $211.7 million, beating the Zacks Consensus Estimate of $210.0 million.

The Quarter in Detail

Cubicin, which is approved in the US and several other markets for the treatment of severe bacterial infections of the skin and bloodstream, accounted for the bulk of the revenues reported in the quarter.

Net product sales in the US climbed 26.3% to $194.2 million. Most of the US sales came from Cubicin. Net sales of the product in the US climbed 20.0% to $184.7 million due to strong volume growth in the reported quarter.

Net revenues from international sales of Cubicin jumped 52% to $12.7 million in the first quarter of 2012, due to the impressive performance in Japan, Canada, France, Turkey and Brazil. Total Cubicin sales climbed 22% in the reported quarter to $197.4 million.

Entereg, which became a part of Cubist Pharma’s portfolio following the December 2011 acquisition of Adolor Corporation, delivered revenues of $9.4 million in the quarter. Cubist Pharma is working on growing Entereg sales. During the first half of 2012, the company intends to focus initially on the institutions where Entereg is used regularly. The company then intends to focus on larger markets.

Meanwhile, Cubist Pharma is looking to expand Entereg’s label so that it can be used to accelerate the time to upper and lower GI recovery in patients undergoing radical cystectomy. The company intends to seek approval for this additional indication later this year. Entereg is currently marketed to expedite gastrointestinal recovery following bowel resection surgery.

Net revenues from international sales of Cubicin jumped 52% to $12.7 million in the first quarter of 2012, due to the impressive results form Japan, Canada, France, Turkey and Brazil. Total Cubicin sales climbed 22% in the reported quarter to $197.4 million.

During the quarter, Cubist Pharma recognized $3.7 million as service revenues pertaining to its two-year agreement with Optimer Pharmaceuticals Inc. (OPTR) for the co-promotion of Optimer’s Dificid (fidaxomicin) in the US. The drug, developed by Optimer, is approved for treating patients suffering from c. difficile-associated diarrhea. Dificid is available in US markets since July 2011. Cubist Pharma recorded $1.2 million as other revenues in the first quarter of 2012.

2012 Projection Tweaked

Inspired by the strong first quarter performance, Cubist Pharma made some changes in its guidance for 2012. The biopharmaceutical company increased its 2012 revenue guidance to $900 - $930 million (old guidance: $880-$910 million), driven by strong Cubicin sales in the US. The Zacks Consensus Estimate of $908 million is towards the lower end of the revised guidance range.

Net US sales of Cubicin are expected in the range of $790 - $850 million (old guidance: $770-$795 million). Adjusted operating income is now forecasted in the range of $260 - $265 million (old guidance: $245 - $250 million) for 2012.

Cubist Pharma maintained other aspects of its guidance, as provided in January 2012. This includes international Cubicin sales of approximately $45 million, Entereg sales in the US of $40 - $45 million, service and other revenues of up to $25 million, research and development costs of $285 - $295 million and selling, general and administrative expenses of $165-$175 million.

Our Recommendation

Currently, we have a Neutral recommendation on Cubist Pharma. While we are impressed with Cubicin’s performance and the first quarter results, we remain concerned about Cubist Pharma’s overdependence on Cubicin. The stock carries a Zacks #4 Rank (Sell rating) in the short-run.

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