David Fessler from Investment U offers us his advice on the two stocks:

Cubist Proves Saving Lives Isn’t Good Enough

With the recent surge in cases of MSRA (methicillin-resistant staphyloccus aureus), or at least a surge in reporting, one would think it was good news for Cubist Pharmaceutical’s (Nasdaq: CBST).

It may have been, had Cubist not been blindsided by a business-rocking revelation Tuesday.

MRSA is a big problem. It’s a widely prevalent and pervasive bacteria found in hospital facilities, and it’s the most common cause of staph infections. Patients contract these infections from catheters, surgeries or I.V. drug needles.

As we use (some would say over-use) anti-biotics to treat infections, only the resistant germs remain. Each successive generation of bacteria are more resilient to treatment and we continually need stronger and stronger drugs to fight them.

They’re called “superbugs” in the press, but that’s not too far from the truth. We are running out of ways to treat these outbreaks. Current estimates put the annual cost of treating MRSA infections at over $10 billion dollars.

And it’s only going to get worse…

That’s why Cubist Pharmaceuticals had really hit a home run with its antibiotic Cubicin – one of the few ways left for hospitals and doctors to fight back.

Introduced in 2003, Cubicin was first prescribed as a treatment for serious skin infections caused by bacteria that invade the body during surgery. However, in 2006, the FDA approved Cubicin to treat bloodstream infections from blood-resistant staph bacteria.

Things looked good for Cubist, until this week.

Teva Pharmaceuticals Files For Generic Cubicin

An Israeli drug company, Teva Pharmaceuticals (Nasdaq: TEVA) has just filed with the FDA to start production of a generic form of Cubicin. Even though Cubist’s patents extend to 2016 and 2019.

How so? Teva contends that either Cubist’s patents were not valid in the first place, or Teva can produce a generic without infringing on those patents.Of course, Cubist intends to challenge Teva through litigation, which automatically puts Teva’s plans on hold for 30 months, according to FDA rules.

Even more of a problem, Cubicin is the one and only product that Cubist Pharmaceuticals sells. It’s all indicative of the kinds of intellectual property problems that plague pharmaceutical development.

Cubicin costs about $100 per day (depending on details), while Teva’s generic would be expected to cost much less. Of course, that’s good news for patients worried about medical bills.

But still, if Cubist, and other pharmaceuticals can’t protect the profitability of their products, then there would be no incentive to spend millions in research and development to create new products and save lives.

It’s one of those ugly problems where both sides are right… and wrong.

Using Price Controls As Alternatives

The alternatives? Price controls. Ugh. Single-payer system. Blech. Publicly-funded research. Yikes.

One of the better “outside the box” suggestions is a prize-based system. Wherein the government or well-funded charities take a necessary, but unprofitable drug needing ailment, and fund a large cash prize to be delivered to those who make the first successful cure.

By balancing the prize, the cost of R&D, and the revenues that could be made on an affordably priced drug, it could be the most cost effective means of providing incentives to provide a public good.

But somehow, I don’t see such progressive thinking passing through the U.S. legislative system.

I’d love to see comments on successful reform of the pharmaceutical industry.

In any case, investment in Cubist has now become a binary pass-or-fail proposition. If Cubist wins, shares will surge. If Teva wins, Cubist is likely a penny stock.

But at least we’ve got something to cure an infection.

Source: Cubist Pharmaceutical’s (CBST): Stock of the Day

Biotech stocks are notoriously volatile, of course. But this company’s case was unique… At the heart of the price swings were two conflicting academic studies, which produced what I call the “ivory tower glitch.”

Believe it or not, academic researchers tucked away in labs and classrooms can cause quite a raucous on Wall Street. Ever hold a biotech stock that drops or jumps 15%-20% in one day with no news, press release, or conference presentations to explain it? Chances are, your stock just experienced an ivory tower glitch. And you’ll likely find the culprit in the pages of academic journals like Nature, Science, The New England Journal of Medicine, or their smaller counterparts.

You see, biotech and drug companies need academic researchers to perform “objective” third-party clinical trials or lab testing for new drugs. After all, it looks great to list collaborators from Johns Hopkins, Harvard, or Stanford on your company website. But every now and then, these academic studies can torpedo a drug stock.

That’s exactly what happened to shares of molecular diagnostic company Cepheid (CPHD) earlier this year…

Cepheid makes a test for the so-called MRSA “superbug” – a hardy bacterium that wreaks havoc in hospitals. MRSA infections can be fatal, and treatment runs about $40,000 for those patients who do survive. Hospitals use Cepheid’s rapid MRSA detection technology to screen incoming patients and prevent the spread of infection, saving themselves the expense of treatment.

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However, an academic study published March 12 in the Journal of the American Medical Association (aka JAMA) concluded such infection monitoring provides hospitals no economic benefit. Cepheid’s stock plummeted.

Then a few days later, another academic article, this time from the Annals of Internal Medicine, directly refuted the JAMA article, claiming hospitals could hugely reduce costs and disease with active MRSA surveillance. Again, Cepheid shares were on the move, this time to the upside.

While the turmoil whipsawed most shareholders, shrewd investors had a chance to cash in on this ivory tower glitch. Let me explain…

Not every academic study is created equal. The trick for investors is finding the studies that likely won’t stand up to a stiff breeze. Here’s what to look for…  

1) Motivations. I check to see who “sponsored” the study… In other words, who signed the check? If the people paying for the study directly benefit from positive results, take it with a shaker of salt.

2) Publication. Just as in the popular press, academic publishing has a pecking order of prestige. Nature and Science, for example, have clout like the Wall Street Journal. The American Journal of Physiology, on the other hand, garners the same amount of respect as The West Fargo Pioneer.

3) Study design. Did the clinical trial contain five patients or 5,000? (The more the better.) Did the investigators use placebo controls? (Double-blind placebo studies yield more valuable results.) Did they use practical procedures? (Look for studies that mimic real-world situations.)

In the JAMA article that slammed Cepheid’s stock, the study only tested patients after they’d been in the hospital for 12 hours. Cepheid’s technology screens patients and visitors as they walk through the door. Moreover, infected patients weren’t notified or treated until 22.5 hours after being admitted to the hospital. One critic said the JAMA study was like “testing a recipe, but omitting half the ingredients or test-driving a car without the tires.” So it didn’t pass the design test.

Investors who quickly realized the JAMA article wouldn’t hold up under scrutiny were able to pocket quick 30%-50% gains on Cepheid’s temporary setback.

The next time you see a stock fall after an ivory tower glitch, dig a little deeper and ask the questions above. Done correctly, it’s one of the best ways to make money in early stage medical stocks.

Good investing,

Rob