No Dicey Results for Cubist

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2006 was a nice year for Cubist Pharmaceuticals (Nasdaq: CBST), but you wouldn't know that by looking at the company's stock price, which is sitting near 52-week lows. Cubist received approval from the FDA for a market-expanding new use for its antibiotic treatment Cubicin and grew revenues 61% vs. 2005.

Cubist had already pre-released its sales numbers for the fourth quarter three weeks ago, so its sales numbers came as no surprise. Revenue gained 53% to $56.5 million year over year, and gross margins improved 3% to 75%. Earnings were finally in the black at $5 million ($0.10 per share) versus a year-ago loss of almost $7 million, even with higher research and development spending.

Several other stories in the media mentioned Cubist's "lackluster" outlook for the first quarter this year, where sales are expected to be flat versus the fourth quarter. But ever since Cubicin has been on the market, sales have always been sequentially flat in these quarters, so it should come as no surprise that they are flat again this year. 2007's estimates aren't bad at all, though, with Cubist guiding for U.S. net product revenue in the $255 million-$275 million range and earnings of at least $27 million for the year, by my calculations. The only thing holding back earnings next year is the $16 million jump in R&D spending as Cubist initiates more clinical trials to expand Cubicin's label and patent life.

There are some big unknowns that will likely be resolved next year. Besides a possible product acquisition on which Cubist may use its more than $300 million in cash, there is also the resolution of the search for a Japanese partner for Cubicin, which should bring in $10 million-$20 million in up-front payments.

One risk that's worth watching out for -- and which Cubist mentioned -- is the possibility that a paragraph IV filing by a generic company may occur as early as September. Nonetheless, with the FDA's 30-month stay of action on these filings and numerous patents protecting Cubicin, there are many challenges for a generic competitor to overcome before it could begin selling a generic version of the drug. So for the near term at least, investors have nothing to worry about on this front.

Shares of Cubist aren't exactly expensive, with more than $50 million in cash flow expected for next year, sales growing at a rapid clip, and only a $970 million market capitalization. As long as Cubist doesn't make a bad acquisition with that cash hoard, then shares look cheap at today's prices.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.