Cubist Pharmaceuticals (CBST +0.00%) is a biopharmaceutical company focused on the research, development, and commercialization of pharmaceutical products that address unmet medical needs in the acute care environment. On Oct. 24, Cubist completed a buyout of Optimer Pharmaceuticals. As part of the buyout, a CVR Cubist Pharmaceuticals (NASDAQ: CBSTZ) was created. The CVR tracks the sales of the drug Dificid, which was the only drug in Optimer's portfolio. Dificid is used for the treatment of CDAD, or Clostridium difficile-associated diarrhea, and is used to fight deadly bacterium linked to intestinal infections often caught in hospitals. The drug was approved in the United States by the Food and Drug Administration in May 2011.
The market for CDAD
The CDAD market is growing and has more than 700,000 cases annually in the U.S. with a high recurrence rate at 20%-30%. According to the U.S. Centers for Disease Control and Prevention, the disease is estimated to be responsible for approximately 14,000 deaths per year in the U.S.
Competitors
Generic vancomycin is also approved to treat CDAD. According to the Cubist merger press release, Dificid was non-inferior to oral Vancomycin 125 mg four times daily in clinical response at the end of 10 days of treatment, and was superior to vancomycin in sustained clinical response through 25 days beyond the end of treatment.
Cubist has another CDAD drug, surotomycin, that they plan on seeking regulatory approval for in 2015 for treatment of CDAD. Cubist COO Robert Perez says Dificid and surotomycin can co-exist since they are "very different compounds with very different mechanisms of action."
What is a CVR?
CVRs are types of rights given to shareholders of an acquired company that ensures they receive additional benefit if a specified event occurs. The Cubist CVR, if all sales milestones are hit, offers investors $266 million, or $5 per CVR.
| CVR Value | Cumulative net sales of Dificid in the U.S. and Canada between July 1, 2013 and Dec. 31, 2015 |
| $3 | Exceed $250 million |
| $4 | Exceed $275 million |
| $5 | Exceed $300 million |
As of Tuesday's price of 2.00, the market is pricing in a strong possibility of at least the 1st milestone being reached. If that happens an investor would gain 50%. If $275 million is reached the gain would be 100%. And if the top milestone is hit the gain would be 150%. Of course, if none of the milestones are achieved, an investor would lose all of his investment. But will Dificid's sales top $250 million, $275 million, and/or $300 million by the end of 2015? Make no mistake, this isn't like investing in Johnson & Johnson (JNJ 1.24%) or Pfizer (PFE 1.10%). Those companies are considered among the bluest of blue chips with many drugs in their pipelines and plenty of cash to buy promising drugs and/or companies. Cubist's CVR, on the other hand, is pure speculation.
The value of this CVR will be determined by Dificid's revenue numbers. Investors will constantly be repricing the rights' value after each of the CVR revenue updates during Cubist's earnings calls. There may not be many data points, so the CVR can be expected to be quite volatile.
| CVR Value | Average Dificid revenue needed in next 10 quarters for CVR to pay off |
| $3 | $25 million |
| $4 | $27.5 million |
| $5 | $30 million |
According to Optimer's latest (second-quarter) earnings report before the deal closed, net product sales for Dificid in the U.S. and Canada were $19 million. The report cited an increase in the number of customers ordering Dificid and increased sales to existing Dificid customers, as well as the impact of a price increase. The second-quarter revenues don't count toward the CVR, but the next 10 quarters will. While the sales figure of $19 million is far short of any of the three above averages needed to cash in on the CVR, it was encouraging as it represented a 25% gain over the second quarter of 2012 and a 13% gain over the first quarter of 2013.
Reasons why the CVR could pay off
Dificid revenue growth is heading in the right direction. Even modest quarter-over-quarter growth may be enough to reach one or more of the milestones. 2012's Dificid revenues were $62.4 million. In the last reported quarter, the drug's revenues were $19 million.
Cubist has the expertise to promote and market Dificid. Cubist and Optimer had been partners prior to the buyout. Cubist has been co-promoting Dificid to physicians, hospitals, and other health care institutions in the U.S for more than two years. It is possible that Cubist's sales force can significantly boost the drug's top line.
The market for CDAD is growing. Clostridium difficile is rapidly becoming more common and more serious.
Risks
The sales of Dificid could stagnate or not accelerate much. Doctors could prescribe the inexpensive generic vancomycin more often, which could keep Dificid sales down. In a recession this could become prevalent. And finally, it is possible that Cubist's own CDAD drug, surotomycin, which is in development, could take away sales from Dificid.
Conclusion
Dificid is an important drug in a growing CDAD market. Revenues for Dificid have been growing, and we will see if that continues soon with third-quarter numbers. With an experienced sales team, Cubist is hoping to sell more of the drug. What percentage of physicians will choose Dificid over the much cheaper generic vancomycin? Finding the right price points for Dificid will be the key for Cubist to maximizing the drug's revenues. Will the CVR reach its milestones?
