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Anatomy of an Earnings Jump: Cubist Pharmaceuticals Inc (CBST)

Cubist Pharmaceuticals Inc (NASDAQ:CBST)Shares of Cubist Pharmaceuticals Inc (NASDAQ:CBST) exploded upward on Friday, finishing up over 9%. The company reported strong second-quarter results Thursday, beating average analyst estimates for both revenue and EPS. Total net revenues were $258.8 million, up 12.2% over Q2 2012, while non-GAAP diluted EPS was $0.42. Average analyst estimates were $254.73 million for revenue and EPS of $0.38.

Management highlighted strong growth in revenue (up 13.5% over Q2 2012  to $227.1 million) from Cubicin, the company’s flagship product, which fights complicated bacterial infections such as MRSA. In Q1, Cubicin sales had fallen 9% compared to the previous year, so some of the jump should be attributed to this recovery.

Cubist Pharmaceuticals Inc (NASDAQ:CBST) also reported it has received fast-track status from the Food and Drug Administration for all three potential indications of its late-stage pipeline drug, ceftolozane/tazobactam (CXA-201), which targets serious Gram-negative bacterial infections. Shares are up more than 30% this year based on Friday’s close, and investors looking for growth should be pleased with Cubist Pharmaceuticals Inc (NASDAQ:CBST)’s top-line growth, especially the increase in Cubicin sales. However, the potential indications of CXA-201 are more important going forward, as the market turns its attention to Cubist’s pipeline.

Diversifying revenue stream
There are several factors to consider in Cubist Pharmaceuticals Inc (NASDAQ:CBST)’s long-term outlook. Multi-drug resistant “superbugs” represent a serious global threat. Look for future health care legislation similar to the 2012 Generating Antibiotic Incentives Now (GAIN) Act to encourage stronger investment in antibiotic R&D. The most significant threat in Cubist Pharmaceuticals Inc (NASDAQ:CBST)’s future is the generic competition that Cubicin is expected to face in 2017. Cubicin accounted for around 90% of the company’s 2012 revenue. If a replacement can’t be found, the company could be in trouble. Cubicin also faces competition from similar drugs such as Zyvox, marketed by Pfizer Inc. (NYSE:PFE).

Cubist’s late-stage pipeline is the key area to watch. Those events include the new drug application for CXA-201 — which should follow results from the phase 3 trials that are expected in the second half of 2013 — as well as phase 3 trial results for two other drugs, CB-315 and CB-5945. Analysts expect CXA-201 to be Cubist’s next big blockbuster drug, so getting this drug through clinical trials and under FDA review is of paramount importance.

Long term, Cubist Pharmaceuticals Inc (NASDAQ:CBST) needs to diversify its revenue streams. If it can’t, bacteria will be the least of its worries.

The article Anatomy of an Earnings Jump: Cubist Pharmaceuticals originally appeared on Fool.com and is written by Jake Keator.

Jake Keator has no position in any stocks mentioned. The Motley Fool recommends Cubist Pharmaceuticals.

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