Gamble of the week: undervalued, small-cap US pharma

By Tim Price Aug 22, 2008

Tim Price

While many equity investors are probably in need of some "acute care", they can now invest in a stock that actually addresses that market. And with the American dollar now firmly in the ascendancy against sterling, and healthcare being one of the more defensive sectors in the market, this week's gamble might well suit the more pragmatic investor.

Cubist Pharmaceuticals Inc. (US: CBST), rated a BUY by Alan Carr of Needham & Co

Cubist Pharmaceuticals is a biopharma firm that discovers, develops and commercialises new drugs to treat infections and "super bugs". It has an MRSA antibiotic called Cubicin, which is the most effective antibiotic against the bacterium. Sales in America have been growing at a 50% rate year-on-year for the last couple of years, and Novartis has recently started selling Cubicin in Europe.

Alan Carr, pharmaceuticals analyst at Needham & Co, began coverage of Cubist with a 'Buy' recommendation in July. Alan says: "We believe the stock is undervalued, noting weakness due to concerns about a potential challenge to Cubicin patents and the threat of competition from several antibiotics now under development. However, in our opinion, the Cubicin strategy is sound... Furthermore, based on our discussions with experts, we believe prescribers may be slow to adopt new antibiotics in the serious bacterial infections space due to established comfort levels with Cubicin." Tom Russo, analyst at Robert W Baird, agrees, pointing out that in its fifth year on the market, Cubicin is still generating impressive growth and capturing market share from generic rivals.

Cubist is a relatively small cap stock (its market capitalisation is just $1.3bn) and the company has almost 100% US dollar earnings, although it shows early signs of being set for growth in Europe. The stock trades on a p/e ratio of 23 times for 2008, and 15 times for 2009, which looks very reasonable for such a fast-growing healthcare business. According to Bloomberg analytics, 12 brokers cover Cubist Pharmaceuticals, with six, including Carr, rating the stock a 'Buy' and the other six a 'Hold'. The stock has delivered annual returns of around 11.5% since 2003, and has slightly outperformed the S&P 500 Smallcap Index over that period.

Recommendation: BUY at $23.64

Tim Price is director of investment at PFP Wealth Management. He also edits The Price Report investment newsletter. Find out more about The Price Report here.

Paul Hill is away.

Published in Tips & advice | More articles by Tim Price

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