Cubist Commands the Courtroom: Investors Can Now Focus On Long-Term Story

Things are looking up for Cubist Pharmaceuticals (CBST). As we speculated last week, a key piece of Cubist’s ongoing litigation with Hospira has gone in favor of the antibiotic developer, with Judge Sleet of the U.S. District Court in Delaware ruling in favor of Cubist in a Markman hearing on Monday. We previously laid out the full thesis — read the report here — but essentially, the judge upheld prior interpretation of disputed claim terms in Cubist’s patent infringement case against Hospira, solidifying Cubist’s patent infringement lawsuit against the generic drug maker. It’s possible now that Hospira could drop its patent challenge entirely given the interpretation of the patents, in which case shares of CBST would continue to work higher. (PropThink subscribers are up 12% since last week.)

Cubist received a Paragraph IV notification from Hospira in 2012, meaning that Hospira sought FDA approval for its own version of Cubicin, Cubist’s treatment for Gram-positive infections and largest product. The legal battle began, and Judge Sleet’s ruling on Monday is the first piece of evidence from the case that indicates Cubist (and its investors) are not facing a significant risk of losing Cubicin sales early. It’s major news for Cubist not only because it lends credence to the company’s case against Hospira (a full trial is currently scheduled to begin in February 2014), but because it removes a key overhang on the stock. It now looks like Hospira and Cubist will either come to a favorable settlement agreement (Cubist arranged a particularly impressive agreement with Teva in 2011), or Hospira could remove itself from this legal scene altogether — a best case scenario for Cubist, and one that we think is likely.

This event has a “clearing” effect on CBST, as investors who are more interested in Cubist’s pipeline had remained on the sidelines ahead of this binary legal event. Cubist’s lead candidate is CXA-201, a treatment for Gram-negative infections that Wall Street believes could be Cubist’s next blockbuster product; Phase III data is due in the second half of this year, and with the outcome of the Hospira case looking like it will go in favor of Cubist, investors eyeing CXA-201 as a promising antibiotic asset are more apt to get involved now. With the Phase III data for CXA-201 approaching after the summer, we believe CBST will remain buoyant into the release of these results.

CBST touched an all-time high of $55.50 on Monday and we expect the stock to continue working towards the $60 range. CXA-201 results in the back half of this year represent the next major catalyst for Cubist, and if favorable (clinical data thus far have been quite positive), CBST could make its way into the $70 range.