Merck Pays Big To Expand Into Acute Care With Cubist Acquisition (Updated)

Merck agreed to pay $9.5 billion to acquire Cubist, gaining a portfolio of antibiotics for hard-to-treat infections as part of a broader strategy to expand in the acute care setting.

Merck & Co. Inc.’s $9.5 billion acquisition of Cubist Pharmaceuticals Inc. will extend the big pharma further into acute care with a portfolio of antibiotics marketed through the hospital setting. Merck and Cubist announced they reached a merger agreement Dec. 8, with Merck agreeing to pay $8.4 billion in cash and pick up $1.1 billion in net debt.

Merck will acquire Cubist for $102 per share in cash, a 35% premium to Cubist’s average stock price for the most recent five trading days [See Deal]. The stock closed Dec. 5 at $74.36.

Cubist, based in Lexington, Mass., has emerged as a leading antibiotic developer and marketer over the last decade while big pharma has deemphasized research in the area due to development, regulatory and commercial challenges.

Merck’s renewed interest in the therapeutic area (it was once heavily involved in the sale of antibiotics) is notable if it suggests a broader trend on the part of big pharma to reinvest in the field. Specialists like Cubist have established a pharmacoeconomic case for premium-priced antibiotics reserved for the most serious infections, but it remains a relatively niche commercial opportunity.

Merck CEO Kenneth Frazier said during a same-day conference call that the acquisition would extend the company’s commercial footprint and expertise in acute care, one of four priority areas, along with vaccines, diabetes and oncology.

“Cubist’s experience and commercial portfolio will enable us to enhance our growing hospital acute care business,” Frazier said. “Notably, the acute care market is growing two times faster than the overall market and hospitals have become a central hub for health care delivery around the world, currently representing 25% of overall health care spending.”

A Late-Day Glitch: A Ruling On Cubicin Patent Case

The company’s top-selling drug is Cubicin (daptomycin), an intravenous antibiotic for Gram-positive infections that launched in 2003.

The drug surpassed $1 billion in sales for the first time in 2013, and continues to make up the vast majority of the company’s sales despite its attempts to diversify (Also see "Cubicin Becomes Blockbuster, As Cubist Passes on Adynxx Acquisition" - Pink Sheet, 24 Jan, 2014.).

Cubist sold only Cubicin for close to a decade, but more recently the company picked up the pace of business development in an effort to diversify away from Cubicin ahead of expected generic competition. The same day news of the merger with Merck broke, a Delaware district court ruled in a patent infringement suit filed by Cubist against Hospira Inc., allowing Hospira to launch a generic version of Cubicin in 2016, two years earlier than expected. The company has already granted Teva Pharmaceutical Industries Ltd. the right to launch a generic in 2018 under a patent infringement settlement (Also see "Moving Beyond Cubicin: Cubist Sets The Stage For Long-Term Growth" - Pink Sheet, 7 May, 2012.).

The latest development, revealed after market close Dec. 8, puts more pressure on Merck to justify the $9.5 billion purchase price over the long-term.

In a statement, Cubist said it would appeal the judgment and confirmed that the decision would not have an impact on the Merck deal.

During the conference call earlier in the day, before the judgment was issued, Frazier insisted Merck was interested in acquiring Cubist regardless of the pending court decision.

“We’ve looked at all the risks involved in this deal, including the patent infringement case, and we continue to believe that the acquisition will create value for Merck across a wide range of outcomes,” he said. [Editor’s note: information on the court decision was added after this story was first published.]

A Merger “About Growth,” Merck Says

In addition to Cubicin, Cubist sells three other products in the hospital setting and is awaiting FDA approval of another, the antibiotic Zerbaxa (ceftolozane/tazobactam)for resistant Gram-negative infections; the product has a Dec. 21 user fee date.

Cubist added two of the currently marketed drugs via acquisition last year, when it acquired Trius Therapeutics Inc. for $707 million upfront and Optimer Pharmaceuticals Inc. for $535 million upfront (Also see "Cubist’s Time To Shine: Antibiotic Specialist Acquires Optimer, Trius" - Pink Sheet, 5 Aug, 2013.). Trius added Sivextro (tedizolid), which was approved in I.V. and oral forms to treat resistant Gram-positive infections earlier this year (Also see "Cubist’s Sivextro To Beat Durata’s Dalvance To Antibiotic Market" - Pink Sheet, 23 Jun, 2014.). The acquisition of Optimer gave the company Dificid (fidaxomicin) for Clostridium difficile-associated diarrhea (CDAD), a small commercial product by big pharma standards with $47.7 million in sales in the first nine months of 2014, but one that Cubist has started growing.

The company’s other marketed drug is Entereg (alvimopan), a niche product approved for accelerating time to recovery after partial large or small bowel resection, which Cubist gained through the acquisition of Adolor Corp. in 2011.

Merck President-Global Human Health Adam Schechter said the acquisition was not done for the sake of synergies. “This deal is really about growth. It’s about a leadership position in the hospital acute care settings. It’s about launching new products,” he said.

“Obviously, there will be some cost synergies over time, but this is really about trying to drive growth, particularly as we launch new products,” he added.

Merck, which has a long history in anti-infectives but reduced its emphasis more recently, has a portfolio of hospital products with annual sales of more than $2 billion, according to the firm. Its portfolio includes the antibiotics Invanz and Primaxin and the antifungals Noxafil and Cancidas.

Merck also sells Bridion (sugammadex), an anesthesia reversal agent, which is approved in Europe and other countries around the world, but not in the U.S. Merck resubmitted the drug in 2013 to FDA, which deemed it “not approvable” in 2008 when the sponsor was Schering-Plough Corp. (Also see "Sugammadex Clinical Trial Issues Still Causing Trouble For Merck" - Pink Sheet, 23 Sep, 2013.).

Merck views the launch of Cubist’s Zerbaxa as a significant opportunity, given the large market for Gram-negative infections and the increasing need for new antibiotics to treat resistant infections (Also see "Market Snapshot: Gram-Negative Antibiotics Progress As Urgency Grows" - Pink Sheet, 3 Mar, 2014.).

Merck Research Labs President Roger Perlmutter called antibiotics like Zerbaxa, with activity against serious bacterial infections, “rare assets” when questioned by an analyst about Merck’s return to antibiotics.

The commercial opportunity for Zerbaxa is expected to be larger in Europe than in the U.S., where the incidence of Gram-negative infections is higher. Cubist was in the midst of establishing a commercial business unit in Europe and opened an international headquarters in Switzerland in September.

Its international presence has otherwise been limited. Cubicin is sold in Europe by Novartis AG but with lackluster results.

“We have a very strong hospital acute care global footprint, and we have the size, the scale and the ex-U.S. reach to help ensure the successful launch of Cubist products,” Merck’s Schechter said.

The takeout of Cubist comes as the company was set to embark on a new phase of growth, with several new drug launches and expansion into Europe underway. President and Chief Operating Officer Robert Perez had been tapped to lead the transition, succeeding CEO Michael Bonney effective Jan. 1 (Also see "Cubist Leadership Transitions To Perez With ‘Strong Hand To Play’" - Pink Sheet, 22 Oct, 2014.).