Cubist Maintains Growth Streak, As Investors Fear Generic Threat, Thin Pipeline

1/25/10

Cubist Pharmaceuticals has grown into one of the big success stories in biotech industry of the past few years, based almost entirely on the sales of a single product. The Lexington, MA-based company’s big hit is an intravenous antibiotic for deadly infections called daptomycin (Cubicin). Even though this has propelled Cubist into profitable territory, the company’s (NASDAQ:CBST) stock price has been flat for more than four years amid concerns on Wall Street about potential threats to its antibiotics franchise.

Last week, I visited the company’s headquarters and met with CEO Michael Bonney and discussed the successes and challenges he faces at Cubist. This month the company announced 2009 revenue of $562.1 million, a 30-percent jump from the year before. Revenues have grown rapidly every year since the market debut of daptomycin in 2003. But Bonney was clear that the company doesn’t plan to rest on its laurels, and the firm is taking more aggressive measures than in previous years to bring a second commercial product to market. (The company also sells an antibiotic called meropenem on behalf of AstraZeneca in the U.S., but that agreement brought Cubist only $22.5 million in revenue last year.)

Indeed, analysts have criticized the company’s lack of an encore to its success with daptomycin. Bonney acknowledged that the company’s critics have a point, and that he’s tackling it now.

“I think we could have been a little more aggressive at pipeline building earlier than we started to,” Bonney said. “It’s always a fine balancing act between [profitability] and how much you are going to spend, and there’s no formula that I’ve found in any textbook that says this is how you do it. But I do think, with the benefit of hindsight, that is something we could have done differently.”

Cubist has more than just its pipeline to worry about. It generates 93 percent of its revenue from daptomycin, a compound used in hospitals to treat lethal MRSA (Methicillin-resistant Staphylococcus aureus) infections and other bugs. And while analysts say daptomycin has potential to reach $1 billion in peak annual sales, that is no sure thing. Generic drug maker Teva Pharmaceutical has plans to market a cheaper generic copy of the drug before Cubist’s patents for the product expire between 2016 and 2019. Cubist plans to prove in its pending lawsuit against Teva that its patents protect its lead antibiotic from generic competition.

Cubist’s problem isn’t exactly unique in the biotech game; there are a number of mid-sized drug developers whose success hinges largely on one product. A couple of those companies include Cheshire, CT-based Alexion Pharmaceuticals (NASDAQ:ALXN), which gets all of its sales revenue from one product, eculizumab (Soliris), a treatment for a rare blood disorder called paroxysmal nocturnal hemoglobinuria, as well as Emeryville, CA-based Onyx Pharmaceuticals (NASDAQ:ONXX), which has an anti-tumor drug called sorafenib (Nexavar) that it develops and markets with the help of Bayer .

Though Cubist may not have another drug in its pipeline to bring to the market within the next two years, the company completed several deals in 2009 to broaden its portfolio of drug candidates. Last month, the firm bought San Diego-based Calixa Therapeutics for $92.5 million up front and an additional $310 million in potential payments. The buyout gave Cubist most of the commercial rights to Calixa’slead antibiotic treatment, a combination of anti-bacterial agents, that has the potential of being a top seller on par with daptomycin. That’s because it may be able about to treat a life-threatening bug called P. aeruginosa better than existing antibiotics on the market, Bonney says. That promising treatment is in mid-stage clinical trials, and Cubist predicts that it could be seeking U.S. approval for the product in 2013.

Cubist also revealed separate deals last year with a trio of Massachusetts-based biotechs with products in various stages of development: Alnylam Pharmaceuticals, Forma Therapeutics, and Hydra Biosciences. Perhaps the most high profile of those deals was with the RNA-interference (RNAi) drug developer Alnylam (NASDAQ:ALNY), from which Cubist licensed rights to Alnylam’s gene-silencing technology for treating respiratory syncytial virus (RSV), which sends about 125,000 children to the hospital in the U.S. every year, according to Alnylam. Alnylam is in mid-stage clinical development of a first-generation RNAi therapy for RSV. Bonney told me that his company is keenly interested in a newer version of the treatment specifically for children. Yet the therapy hasn’t reached human clinical trials, meaning that its potential commercial impact on the firm is both many years away and highly uncertain.

Another big question mark in Cubist’s pipeline is the future of its experimental drug ecallantide. The company put the brakes on a mid-stage clinical trial of the drug, which it is developing as an anti-bleeding agent for heart surgeries, after more patients who were treated with the drug died compared with those who didn’t take it. (Ecallantide is a protein drug that was discovered by Cambridge, MA-based Dyax (NASDAQ:DYAX), which has licensed the drug to Cubist for use in heart surgeries.) Cubist is expected to provide an update on what happened in its trial with ecallantide sometime in the first half of this year.

Still, what perhaps keeps the company’s stockholders up at night is the near-term challenge Teva has brought to the daptomycin patents. Cubist mounted a lawsuit against Teva early last year in response to Teva’s notice that it planned to start seek FDA approval of generic version of the antibiotic, before the expiration of Cubist’s patents on the treatment between 2016 and 2019. Bonney said that his company had been ready for such a case since 2007, expecting that Teva or another generic drug-maker would challenge its patents.

Cubist filed two of the three patents in question in the case, Bonney said, after the company acquired rights to daptomycin from the company that discovered the molecule, Indianapolis-based drug giant Eli Lilly (NYSE:LLY). Daptomycin is used in hospitals mostly to treat infections in the skin and tissue just beneath the skin. Cubist is credited with discovering how best to administer the antibiotic to patients at certain dose levels, something that Eli Lilly wasn’t able to figure out. (In fact, Bonney told me that the agreement that brought daptomycin to Cubist required the company to pay Eli Lilly an upfront fee of about $1 million and royalty payments to Lilly—an amazingly small amount considering that the antibiotic now generates more than half a billion dollars in annual revenue.)

Despite the rapid growth in Cubist’s sales of daptomycin, the price of the company’s common stock has been lingering in the $15 to $25 range since mid-2005. Wall Street analysts have cited the potential approval of a generic version of daptomycin, competition from new antibiotics such as South San Francisco-based Theravance’s telavancin, and Cubist’s lack of a late-stage product candidate in its pipeline, as reasons to be concerned about the company’s future.

“I think it’s generally recognized by everybody that the key thing for Cubist is to continue to build the pipeline and find a follow on to Cubicin. That’s relevant whether or not Teva is successful,” says Alan Carr, a biotech analyst for the investment bank Needham & Company in New York. Carr, who is a bit more optimistic about Cubist’s prospects than some of his fellow analysts, has a “buy” rating for the company’s stock.

Bonney said that building the company’s pipeline, including staying in the market for acquisitions that would give the company a new product to bring to market, is one of his top three priorities. However, he said that he isn’t willing to spend too much to acquire new products, especially at the expense of his other big priorities, which are to continue boosting daptomycin sales and to increase the company’s operating profits.

Massachusetts officials are also rooting for Cubist to continue growing in the state. As part of state’s 10-year plan to invest about $1 billion to boost its life sciences industry, Cubist garnered $1.74 million in tax incentives last year tied to its commitment to add jobs in the commonwealth. Cubist employed 362 people in Lexington and 227 more workers outside of the town as of late last month, company spokesman Francis McLoughlin says. He noted that the firm has budgeted for 87 new hires in 2010.

The company is also planning an 110,000-square-foot expansion to its facilities in Lexington. There are still some permitting requirements before construction begins, McLoughlin says, but the project could break ground before the end of this year.

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