Cubist’s Time To Shine: Antibiotic Specialist Acquires Optimer, Trius

Cubist will rely on its experience in infectious disease to drive growth of Dificid for Clostridium difficile infection and to launch tedizolid for skin infections, but the commercial market for new antibiotics is daunting and re-creating the success of Cubicin won’t be easy.

Cubist Pharmaceuticals Inc. made a bold play that will position it as one of the world’s leading antibiotic marketers with the announcement July 30 that it will acquire two rivals, Optimer Pharmaceuticals Inc.and Trius TherapeuticsInc.

The acquisitions will reduce Cubist’s dependence on its primary revenue generator, the antibiotic Cubicin (daptomycin), but will increase its reliance on the hospital antibiotic market, an increasingly challenging commercial market for premium-priced drugs that is set to come under more pressure from new generics.

The acquisition of Optimer will give Cubist the marketed antibiotic Dificid (fidaxomicin) for Clostridium difficile associated diarrhea (CDAD), a drug Cubist knows well since the company has been Optimer’s commercial partner for the product for the first two years of its launch. Trius adds a late-stage antibiotic tedizolid for Gram-positive infections, including methicillin-resistant Staphylococcus aureus (MRSA). Tedizolid has already been tested in Phase III clinical trials in acute bacterial skin and skin structure infections and Cubist expects an NDA for tedizolid will be filed in the U.S. in the second half of the year.

The simultaneous all-cash deals will cost Cubist at least $1.24 billion by the end of 2013, when they’re expected to close. Cubist will pay $10.75 per share, or $535 million, up front for Optimer, and $13.50 per share, or $707 million, up front for Trius. The up-front payments represent a 15% premium over San Diego-based Trius’ July 30 closing price, but a 19% discount to Optimer’s July 30 closing price (Also see "Two New Sides Of Cubist: Antibiotics Maker Buys Both Optimer And Trius" - Pink Sheet, 30 Jul, 2013.). Both deals include contingent value rights that could deliver substantial additional returns to the acquired companies’ shareholders, and are based on the net sales performances of their key drugs.

Cubist will rely on its experience in the hospital antibiotic market to drive growth of Dificid, which has struggled to establish solid footing in the cost-conscious hospital market, and to launch tedizolid, which will face similar challenges despite potential benefits over existing standard of care.

Success Means Demonstrating Value

The specialist believes it has the mettle to navigate the tricky market using insights it has gleaned during the 10 years it has marketed Cubicin, a product that is on track to become a blockbuster in 2013 in the face of similar challenges. Like Dificid and presumably tedizolid, Cubicin is a premium-priced antibiotic, but it has carved out a niche in the highly genericized field as a treatment for the most serious resistant infections. Cubist has built a compelling pharmaco-economic case for the higher-priced product because it can help get seriously ill patients out of the hospital faster.

Cubicin’s Slow But Steady Climb In The U.S.

2003 – $1.7 million

2004 – $58.6 million

2005 – $113.5 million

2006 –$189.5 million

2007 – $285.1 million

2008 – $414.7 million

2009 – $524 million

2010 – $599.6 million

2011 – $698.8 million

2012 – $809.2 million

2013 – on track for blockbuster status

Source: Cubist Filings

Building Dificid and tedizolid into successful brands will require a similarly convincing pharmaco-economic narrative since the market for both is dominated by generic vancomycin dosed intravenously and in the case of Dificid, the low-cost oral version of vancomycin, ViroPharma Inc.’s Vancocin, which is approved for CDAD and staphylococcal enterocolitis, but no other infections. Tedizolid will face a new generic rival when Pfizer Inc.’s Zyvox (linezolid) goes generic as expected in the second quarter of 2015 in the U.S. and in 2016 in Europe.

Establishing winners in the market also requires time. “The way we look at it is anti-infectives grow slow and steady, but over a long period of time,” President Robert Perez said in an interview July 31.

“The tie that binds all of our products together, both now and we think in the future, is we believe we can provide therapeutics that offer value to the hospital, and value not just [in terms of] safety and efficacy, but also reducing overall resources and providing good outcomes, things like getting people out of the hospital sooner, things like reducing readmissions,” he said.

Investors seem convinced Cubist can deliver on its promise. The company’s stock traded up 16% Aug. 1 over its closing price July 30, the day the news was announced after market close. UBS analyst Matthew Harrison raised his price target for Cubist from $61-per-share to $70 the day the news was announced. “We see Cubist becoming a great diversified growth asset that investors should be willing to pay greater than 20 times [2013 estimated EPS] as visibility improves,” he said.

The acquisitions help to diversify Cubist away from Cubicin, which continues to grow, but is only five years from the end of its lifecycle; the company negotiated a patent settlement agreement with Teva Pharmaceutical Industries Ltd. that allows Teva to launch a generic version on June 24, 2018 if a pediatric extension is granted and otherwise on Dec. 24, 2017. Cubist has several drugs in mid- to late-stage development, including its own candidate for CDAD infection and ceftolozane/tazobactam, a potentially lucrative opportunity to treat resistant Gram-negative infections.

“Every one of our products will have as part of its message the impact of the product on the health care system overall, not just in acquisition costs, but in overall resource utilization, be that within the hospital or afterwards in terms of readmission penalties,” Perez said.

More recently, Cubist has taken steps to diversify outside of antibiotics, though with a focus on the hospital market, through the 2011 buyout of Adolor Corp., which added the niche product Entereg (alvimopan) for accelerating time to recovery after a partial large or small bowel resection for $190 million upfront and contingency payments (Also see "Cubist Gets Entereg And A Late-Stage Compound With Adolor Buy" - Pink Sheet, 24 Oct, 2011.). Entereg represents a small commercial opportunity, though Cubist is driving growth out of the product. Entereg generated revenues of $12.4 million in the second quarter, up 27.6% over the 2012 quarter.

A $600 Million To $1 Billion Opportunity

Dificid and tedizolid could be significant revenue generators. The two combined could represent peak sales of $600 million to $1 billion annually, CEO Michael Bonney predicted during a July 30 conference call.

Cubist will have a long way to go to get there. Sales of Dificid were about $69 million in the last 12 months, management said. Optimer reported second quarter sales of Dificid of $19 million in the U.S. and Canada Aug. 1, reflecting strong growth, up 25% from the year-ago quarter. The product got off to a strong launch in 2011 and surpassed analyst expectations early on, but then began to plateau in 2012 (Also see "Optimer's Early Sales Of Dificid Topping Analyst Projections" - Pink Sheet, 4 Nov, 2011.).

Optimer already has several commercial partners for the product, including Cubist, which had a two-year marketing deal in the U.S. and has extended the commercial arrangement until the deal closes. Its other partners include Astellas Pharma Inc. in Europe and Asia, and AstraZeneca PLC in South America. All three partners were rumored to be bidding to acquire Optimer after the company put itself up for sale earlier this year (Also see "Optimer Is Up For Sale And Could Attract Hospital-Focused Suitors" - Pink Sheet, 27 Feb, 2013.).

But the three apparently weren’t convinced enough of the long-term value of Dificid to wage a bidding war. Cubist’s upfront cash offer of $10.75 per share values the company below where Optimer’s stock was trading, at $13.29, on July 30 and even below where the stock opened Feb. 27 at $11.65, the day Optimer said it was looking for a buyer. The deal does include a one-time contingent value right of up to $5 per share tied to sales of Dificid. If cumulative net sales of Dificid in the U.S. and Canada exceed $250 million between July 1, 2013 and Dec. 31, 2015, Optimer shareholders will receive an additional $3. If cumulative sales exceed $275 million, the payment would be $4 and if they exceed $300 million, it would be $5.

The upfront cash, together with the contingent sales payments, represent a fair offer for both companies’ shareholders, Perez said. “We would be very glad to pay that CVR because it means the product is on a trajectory that would make it very valuable for Cubist’s shareholders, and I also believe it is optimal for Optimer shareholders,” he said.

Take-Unders: Few And Far Between Only A Handful Of Pharma Acquisitions Come At A Discount
July 2013	Cubist to acquire Optimer	24% discount
July 2011	Pfizer acquires Icagen	9% discount
February 2011	Forest acquires Clinical Data	3% discount
August 2009	Ligand acquires Neurogen	19% discount
Results are based on upfront cash or stock swap value and 10-day trading averages Source: Elsevier’s Strategic Transactions Database

As for Dificid’s recent up-and-down performance, Perez said the pattern is not unusual when it comes to sales of anti-infectives. “Part of realizing the potential of a product like this is to manage through the ups and downs and focus on the long term,” he said. “We did that with Cubicin. We had some quarters that were softer than we thought early on. We stuck to the long-term value of the product, and now it is going to be greater than $1 billion in the U.S. alone.”

Emphasis On Hospital Stays And Readmission Rates

A key growth driver Cubist will rely on for Dificid is language already included in the drug’s current labeling. Dificid was approved with labeling that calls out its superiority versus Vancocin on reducing CDAD recurrence. The claim represents a strong pharmaco-economic foundation for Dificid, Perez said. “We’re not saying we don’t have to add anything to the story, but we are saying it has a tremendous base to build on.”

Demonstrating a reduction on rate of recurrence should be an important point for hospitals to note. Under the health care reform law, hospitals are hit with penalties for preventable hospital readmissions. If drug makers can show their products reduce readmissions, it presents a compelling story, even for pricier drugs.

“Every one of our products will have as part of its message the impact of the product on the health care system overall, not just in acquisition costs, but in overall resource utilization, be that within the hospital or afterwards in terms of readmission penalties,” Perez said.

The business case for tedizolid lies mainly in its dosing advantage. In Phase III clinical testing, tedizolid demonstrated non-inferiority to Zyvox following six days of treatment versus 10 days of treatment with Zyvox and at a dose of 200 mg once-a-day compared to 600 mg of linezolid twice a day (Also see "Trius Antibiotic Tedizolid Hits Old, New And In-Between Endpoints" - Pink Sheet, 1 Apr, 2013.). The drug also lacks certain drug/drug interaction problems that Zyvox has with therapies that act on the monoamine oxidase system. Like Zyvox, tedizolid is available in both IV and oral forms, which can help hasten a patient out of the hospital.

Despite the positive data, when Zyvox becomes available as a generic in 2015, it will become more challenging to convince hospitals to use tedizolid over the cheaper alternative.

“We have to see what the label ultimately says and what we can speak to, but we do believe the clinical data suggests there are plenty of hooks that can be used for differentiating tedizolid versus linezolid,” Perez said.

As Cubist was evaluating new antibiotics to add to its portfolio in the Gram-positive spectrum, oral availability, once-daily dosing and safety were the key attributes the company was looking for, he said.

“The ability to take a pill once a day will trump IVs,” he said, even those that are long-acting, as The Medicines Co. is proposing for its late-stage antibiotic oritavancin, which is administered just one time through a single three-hour infusion (Also see "The Medicines Co. Prepares To Move Into New Commercial Territory" - Pink Sheet, 3 Jul, 2013.).

Tedizolid is already partnered with Bayer AG in Asia, Africa, Latin American and most of the Middle East, where Cubist will receive milestones on certain regulatory developments and is eligible for a double-digit royalty on sales of the product.

Cubist said its existing acute care commercial organization and medical team will be sufficient to market Dificid and tedizolid in the U.S. The company is already building out a European commercial organization in preparation for the launch of ceftolozane/tazobactam. The addition of tedizolid in Europe will help accelerate the effort, the firm said. The company expects to file a regulatory application in Europe in the first half of 2014.

With multiple new commercial opportunities on the horizon, Cubist has set the stage for growth beyond Cubicin. Now it needs to execute the plan.