Cubist Pharmaceuticals' (NASDAQ:CBST) antibiotic drug Cubicin was approved in September 2003 for the treatment of complicated and potentially life-threatening skin and skin-structure infections that had become increasingly resistant to other drugs. Over the past year, Cubicin's launch has been very successful. The sales ramp has been so robust that management has twice increased revenue guidance for the drug. Sales of $18 million in the third quarter were reported today, with expectations now set at $55 million to $60 million in sales for the full year.

With such strong performance, why is this stock down 25% since Cubicin's approval? To put it in context, let's note that the Nasdaq Biotech Index is down 12% for the same period. General malaise certainly is a contributing factor to Cubist's decline, but there are other forces at work.

Quite simply, a good drug launch and sales potential of several hundred million dollars have not been enough to overcome the near-term negatives weighing on the stock.

Despite excellent revenue growth, Cubist is still showing sizable quarterly losses and hemorrhaging cash. From the financial guidance in this morning's conference call, it looks like cash burn in the fourth quarter will again be in excess of $20 million. With only $63 million in cash on hand right now, this is not a trend that can continue for much longer. This is a big problem in that the quarterly revenue increases have yet to plug this leak.

Given the shaky balance sheet, there are legitimate concerns about dilution from the inevitable financing that will almost certainly have to come in the first half of 2005. The company has already filed a $100 million shelf-registration statement. If all of that stock is sold at the current market price, outstanding shares would be diluted by 25%. That's a big hit. The best thing that could happen would be for an increase in the share price to reduce the dilutive impact of the financing. The company has to play a game of chicken with the market to hope for terms that are more favorable to shareholders -- an unenviable situation.

I really like Cubist and I think the company has a great drug in Cubicin. But the company is going to have to work through some growing pains and make strides toward profitability before the performance of the stock will match the performance of its drug.

Charly Travers is an analyst for the Fool's new high growth newsletter, Motley Fool Rule Breakers . Take a free trial today to learn more.

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Fool contributor Charly Travers does not own shares of any company mentioned in this article.