Considering Our Investment – $CBST : Infectious Smile

by Enis November 25, 2013 11:03 am • Commentary

CBST was our inaugural investment idea for RiskReversal, executed at the start of November.  Here are initial thoughts on the opportunity. And here was the initiation of the position:

TRADE: CBST Bought Stock for $61.84

As we said in that post, the idea is to not only identify longer term investment ideas but to show how options can be used against those ideas overtime:

As we’ll do with all our longer term investment trades we’ll look to manage this position using options as we know more about the timing of trials and other events in the company’s future.

With Phase 3 trials on deck, we hedged the position a bit last week by selling a December call against our long stock:

INVESTMENT OVERLAY:  Against Long 100 shares of CBST (currently 64.75, purchased for 61.84) stock, sell 1 CBST Dec 65 Call at 3.80

So, the Phase 3 results everyone was expecting in December reported, here’s how they went:

Cubist Pharmaceuticals, Inc. (Nasdaq: CBST) announced positive top-line results from the Company’s pivotal Phase 3 clinical trial of its antibiotic candidate ceftolozane/tazobactam in complicated urinary tract infections (cUTI). Ceftolozane/tazobactam met its primary endpoint of statistical non-inferiority compared to levofloxacin (10% non-inferiority margin). The primary endpoint is a composite of microbiological eradication and clinical cure rate (composite cure rate) at 5 – 9 days after end of therapy (the Test of Cure visit). The 95% confidence interval around the treatment difference had lower and upper bounds of 2.3% and 14.6%, respectively, favoring ceftolozane/tazobactam. Results of the secondary analyses were consistent with and supportive of the primary outcome.

Due to those results, the stock is up about 8% this morning, making new highs for the year.  At this point, we’re likely going to leave the long stock / short call position as is and try to collect that last bit of premium in the calls, (about 1.50 here) with the knowledge that the stock is nearly hedged 1 for 1 (calls are 75 deltas).  However, we can always adjust the position on any weakness.