Is This Cubist's Biggest Opportunity?

Antibiotic resistance is a major problem in health care. The misuse and overuse of antibiotic treatments cost the U.S. health care system $20 billion in 2000, with nearly 1 billion cases of antibiotic resistant infections; the number of cases having doubled since 1990. Development of antibiotics has slowed, with just two approvals from the Food and Drug Administration from 2008 through to 2012 (compared to 16 in the period 1983-1987), but one has to go back more than 40 years for the last antimicrobial approval for a Gram -ve bacteria, such as could be used against an E. coli or Pseudomonas.

In terms of drug development, anti-microbials don't have the attraction of other treatments that may sell at higher prices. Antibiotics are perceived as a low-cost, short-term, one-hit solution for infection -- not the most attractive area of research for a drug development company -- whereas treatments for chronic diseases can be both costly and will be administered for a long period of time. However, Cubist Pharmaceuticals (NASDAQ: CBST  )  has managed to beat this thesis, combining profitability with anti-microbial drug development.

Cubist Pharmaceuticals flagship product is Cubicin, accounting for more than 85% of its total revenue. Cubicin is in its 10th anniversary since approval, and according to CFO Michal John Tomsicek, it's expected to achieve $1 billion in revenue in the U.S. alone. Cubicin is used to treat multi-resistant (Gram +ve) bacteria and is a market leader in this area. The company did report a drop in volumes of 1% over the third quarter, although CEO Michael Bonney had noted a shift in treatment away from hospitals in favor of home treatment, although the target group for Cubicin -- the sickest of the sick -- are admitted patients.

Partners
Cubist Pharmaceuticals has partnered with Novartis (NYSE: NVS  ) and AstraZeneca (NYSE: AZN  ) for the marketing of Cubicin outside of the U.S. Overall, Novartis' suite of pharmaceutical products grabbed a larger share of the net sale pie for the company (35% of total sales), delivering an 8% growth, offset a little by currency factors. However, Cubicin alone delivered 21% growth for Novartis in the first half of 2013, with Italy, Spain, and Germany being strong points for the company, although sales figures were unavailable.

AstraZeneca is responsible for the Chinese market, in addition to sales in other parts of Asia, Europe, and the Middle East. While AstraZeneca has valued the antimicrobial market as worth $37 billion, it had not reported individual sales figures for Cubicin. Instead, Cubicin sales for 2012 were part of $100 million figure, which also included pneumonia treatment, Zinforo. As for the Chinese market, Cubist Pharmaceuticals was not expecting much revenue until some form of reimbursement was in place.

New products
Cubist Pharmaceuticals has a number of new antibiotics under development, researching four of the 10 antibiotic therapies sought by the Infectious Diseases Society of America. Its most exciting is perhaps Ceftolozane/Tazobactam, which is currently under development for the treatment of multi-drug-resistant Gram -ve bacteria.

On the recent earnings call, COO Robert Perez said he is "assuming positive data later this quarter" from phase 3 studies of this treatment. The company is also working to secure manufacturing capacity for Ceftolozane/Tazobactam, with an expected launch in Australia, Europe, and the U.S. There are also plans to have the treatment approved for complicated urinary tract infections. Furthermore, the company has been in discussion with the FDA with respect to use against ventilator-associated pneumonia, with a sharp reduction in the number of patients required for the study; delivering greater efficiency and lower cost.

Summary
Cubist Pharmaceuticals has accomplished the hard part of becoming a profitable anti-microbial company. Ironically, the difficulties imposed by regulators on antibiotic treatments, in effect "the labeling requirement," may help it in the long run. For having proved efficacy against the target organism, the focus moves toward ticking the boxes for each pathology caused by the targeted bacteria. While this takes more time and money because of the need for additional clinical studies, the result is new markets -- and therefore revenue opportunities -- for each success.

The ace in the hole is its Gram -ve antibiotic.  Inthe absence of a new antimicrobial in the last 40 years, and with an existing Gram +ve treatment bringing in $1 billion, it's hard not seeing Ceftolozane/Tazobactam offering as good a revenue stream as Cubicin, effectively doubling the income stream for the company. In the recent earnings call, analysts considered a commercial launch of Ceftolozane/Tazobactam in late 2014, although Cubist Pharmaceuticals did not pass comment on such expectations.

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