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Cubist Pharmaceuticals (CBST Quote) is a biopharmaceutical company that engages in the research, development, and commercialization of pharmaceutical products for the anti-infective market. Headquartered in Lexington, Massachusetts, the company operates primarily in the United States. Its products focus on the medical needs of the acute care environment. The company's flagship drug is CUBICIN (daptomycin for injection), the first IV antibiotic from a class of antiinfectives called lipopeptides. This drug, which was launched in the U.S. in November 2003, contains a novel mechanism of action that specifically targets Gram-positive bacteria. It has been shown to cause rapid bacterial cell death in vitro. Cubist was founded in 1992 and employs more than 500 people.

We recently upgraded Cubist from a hold to a buy on Oct. 17. Our rating is supported by a number of strengths, such as its robust revenue growth, solid stock price performance, and expanding profit margins. Growth in net income and earnings per share (EPS) also contribute to the company's strengths. The company reported 40.9% year-over-year revenue growth in the third quarter of fiscal 2008, contributing to an EPS improvement of 37.5%. EPS climbed from $0.32 in the third quarter of fiscal 2008 to $0.44 in the most recent quarter. The company has, in fact, demonstrated a pattern of positive EPS growth over the past two years, and we feel that this trend is likely to continue. Net income also increased in the third quarter, increasing 39.5% from where it was a year ago. Although Cubist's gross profit margin is very high at 79.10%, it has managed to decrease that result compared to the prior year's quarter. In addition, the company's net profit margin of 24.80% compares favorably to the average for the biotechnology industry.

The stock price is not only higher than it was a year ago, but it also outperformed the S&P 500 over the same period of time. Strong earnings growth appears to have been key to this growth, although other factors clearly played a role as well. Although even the best stocks can fall in an overall down market, we feel that this stock still has good upside potential under any other market conditions. Although no company is perfect, we do not currently see any significant weaknesses that are likely to detract from Cubist's generally positive outlook.