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Merck to pay $8.4 billion for Cubist
January 2015
by Jeffrey Bouley  |  Email the author
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WHITEHOUSE STATION, N.J.—Antibiotics haven’t been what one would call a priority for Big Pharma lately, given the fact they don’t lend themselves as well to blockbuster status compared to many other therapeutic areas. However, that doesn’t seem to be stopping Merck & Co., known as MSD outside the United States and Canada, from making a pricey and, to some, risky decision to acquire Lexington, Mass.-based Cubist Pharmaceuticals Inc. for $102 per share in cash, a 35-percent premium to Cubist’s average stock price for the most recent five trading days at the time of the early-December announcement.
 
This makes for an equity valuation of $8.4 billion, but the deal also includes the assumption of $1.1 billion in net debt and other considerations, putting the total transaction value at around $9.5 billion.
 
The boards of directors for both companies have weighed in with their approval of the deal, and the companies expect the transaction to close in the first quarter of this year.
 
The acquisition of Cubist will create what Merck calls a “strong fundamental value with return on capital in excess of Merck’s hurdle rate within a few years of closing,” and the company expects the acquisition to add more than $1 billion of revenue to its 2015 base. In the end, the transaction will likely be neutral to non-GAAP EPS in 2015, Merck acknowledged, though it expects the deal to be significantly accretive to non-GAAP EPS in 2016 and beyond, with these gains expected to appear in both Merck’s sales and earnings growth.
 
Cubist’s pipeline and abilities reportedly complement Merck’s strategy and the global initiative the company launched last year, particularly in the area of “sharpening its commercial focus on key therapeutic areas that have the potential to deliver the greatest return on investment.” Merck leaders maintain that with the company’s longstanding leadership in anti-infectives, as well as its customer-focused operating model, it was natural to identify the hospital acute-care segment as one of the company’s key priority areas and one in which Merck maintains it can have the greatest impact in addressing significant unmet medical needs while delivering the greatest value to customers and society.
 
“Cubist is a global leader in antibiotics and has built a strong portfolio of both marketed and late-stage pipeline medicines,” according to Kenneth C. Frazier, chairman and CEO of Merck. “Combining this expertise with Merck’s strong capabilities and global reach will enable us to create a stronger position in hospital acute care while addressing critical areas of unmet medical need, such as antibiotic resistance.”
 
Merck has strategically focused on acute care within the larger hospital setting as a top priority because of the significant unmet need and the unique opportunities for Merck to improve patient care and manage costs in this setting with its in-line portfolio, promising pipeline and its customer capabilities, the company reports. Hospitals are a central hub for healthcare delivery around the world and currently represent 25 percent of overall healthcare spending. Merck believes now is an optimal time to significantly grow its hospital acute-care presence because of the positive regulatory and reimbursement trends in the hospital setting and the increasingly important role that hospitals are expected to provide in healthcare overall.
 
In fact, for the first three quarters of 2014 compared to 2013, Merck’s hospital acute-care portfolio grew by more than 10 percent, excluding the impact of foreign exchange. Key products in Merck’s hospital acute care portfolio include several antibiotics and antifungals, as well as Bridion (sugammadex), which is marketed outside the United States and is currently under regulatory review in the United States. In addition, Merck has continued to invest in its hospital acute-care pipeline and has several candidates, including actoxumab/bezlotoxumab (MK-3415A), an investigational combination of therapeutic antibodies targeting two C. difficile pathogenic toxins (A and B), which is being evaluated in clinical trials for the prevention of recurrence of C. difficile infection; and relebactam (MK-7655), an investigational class A and C beta-lactamase inhibitor being evaluated in clinical trials for the treatment of severe bacterial infections.
 
For more than 20 years, Cubist has touted a commitment to global public health “through the discovery, development and supply of antibiotics to treat serious and potentially life-threatening infections caused by a broad range of increasingly drug-resistant bacteria.” Cubist’s antibiotic Cubicin, the only approved once-a-day therapy for both S. aureus bacteremia and complicated skin and skin structure infections, has been used to treat more than two million patients and continues to be an important therapy in the acute-care environment. Cubist’s in-line and late-stage pipeline of anti-infective medicines, including Zerbaxa, which is pending approval from the U.S. Food and Drug Administration, is expected to enhance Merck’s hospital acute-care business in a variety of therapeutic areas, including Gram-positive and Gram-negative multidrug-resistant infections.
 
“Combining with Merck is an exciting opportunity to accelerate Cubist’s established leadership in antibiotics and deliver significant, certain and immediate value to shareholders,” said Michael Bonney, CEO of Cubist, when the deal was announced. “We have a deep respect for Merck, and it is clear that they share our commitment to addressing the growing, global problem we are facing in combating antibiotic-resistant bacteria. Under Merck’s robust commercial platform, global reach and scientific expertise, we believe Cubist’s programs can thrive. We’re proud of the company that our team has built and are confident that Cubist’s important mission and focus on significant unmet medical needs will continue.”
 
Merck isn’t alone among large pharmas in looking at antibiotics with a new eye in the face of rising antibiotic-resistant disease rates, but some think the company may be overreaching with this acquisition deal. As noted in coverage by the New York Times, immediate investor response was to wipe away some $8 billion—almost the entire purchase price—from Merck’s market capitalization, in part because a legal decision in Cubist vs. Hospira in the U.S. District Court in Delaware could force Cubist to face generic competition for Cubicin in the United States as early as the middle of 2016 rather than 2020. Although the Times noted this was probably an overreaction on the part of investors, because even a worst-case scenario probably means foregone Cubicin revenue would not likely exceed $3 billion, it shows that many don’t have the same level of faith in the deal as does Merck.
 
As Leerink Research notes, the district court ruling was in favor of Hospira on all but one of five patents that Hospira had said were infringed by Cubist.
 
“Barring a rapid appeal overturning the judge’s ruling on at least one of the four patents, we would expect several generics to be introduced in late 2016 assuming Cubicin receives pediatric exclusivity,” wrote Seamus Fernandez and Aneesh Kapur of Leerink. “In a press release commenting on the decision, [Cubist] specifically noted that “the transaction with Merck is unaffected.”
 
Leerink noted that Cubist expects a rapid appeal, and the firm’s note about the deal indicates that “This decision clearly increases the importance of selling the strategic importance” of the deal with Cubist. The Leerink analysts also expect increased scrutiny of Cubist’s Zerbaxa launch in the United States and Europe.
 
Overall, they note, Merck’s price for Cubist looks to be between $2 billion and $3 billion too high, adding: “This is a very tough start to a relatively sound strategic deal in our view.”
 
Code: E011501

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