By Peter Loftus And Dana Cimilluca
Merck & Co. agreed to buy Cubist Pharmaceuticals Inc. for
$8.4 billion as the drug giant pushes deeper into antibiotics, an
area seeing renewed interest because of the rise of dangerous new
infections.
The deal, which also includes the assumption of $1.1 billion in
debt, is worth $102 a share, a 37% premium to Friday's close. The
Wall Street Journal and other media had reported on Friday that
Merck was nearing a deal for Cubist worth about $100 a share.
The proliferation of so-called "superbugs" that are resistant to
treatment with older antibiotics is a growing health threat. At
least two million people in the U.S. become infected with
drug-resistant strains of bacteria each year, and at least 23,000
people die as a result, according to the Centers for Disease
Control and Prevention.
Merck Chief Executive Kenneth C. Frazier said in an interview
that he has had discussions with doctors who have expressed alarm
that drug makers aren't as focused on antibiotics research as they
should be. "Many pharmaceutical companies are not focused on this
field, although there's a huge societal imperative," he said.
Cubist shares jumped 35% Monday to $100.60, while Merck added 39
cents to $61.88.
Lexington, Mass.-based Cubist is one of few companies that
specializes in drugs to treat infectious diseases and other
conditions, primarily in a hospital setting. Its flagship drug
Cubicin, an intravenous antibiotic used to treat serious
infections--including those caused by bacteria resistant to older
antibiotics--had $967 million in sales in 2013. The drug currently
accounts for more than 80% of Cubist's sales.
Antibiotics traditionally hasn't been considered one of the drug
industry's most lucrative areas, but some analysts believe new
versions could garner higher prices as it becomes more important
for hospitals to reduce infections and as resistance to traditional
antibiotics grows.
Mr. Frazier said the deal arose from his conversations with
Cubist CEO Michael W. Bonney about antibiotics research. The deal
will help Merck beef up its lineup of products used in acute
hospital care--one of four product areas that Merck identified as a
priority in a 2013 strategy to narrow its focus. The other key
areas are diabetes, vaccines and oncology.
Merck's interest in Cubist appears to stem from a strategy
announced in 2013 to narrow its focus to areas including diabetes,
acute hospital care, vaccines and oncology.
Key products in Merck's hospital-acute-care portfolio include
several antibiotics and antifungals. One of its experimental drugs,
relebactam, was fast-tracked by the U.S. Food and Drug
Administration in September. Relebactam fights beta-lactamase, an
enzyme that can cause resistance to antibiotics like
penicillin.
Merck expects the deal to add more than $1 billion to its
revenue next year and begin adding to earnings the following
year.
Merck is counting not only on near-term sales from Cubist but
also on future sales from newer products. Cubist has applied for
U.S. and European regulatory approval of Zerbaxa, a proposed
treatment for certain complicated infections. RBC Capital Markets
estimates Zerbaxa could eventually generate more than $1.5 billion
in annual sales if it is approved for sale.
Still, the deal has some risks, especially in light of the $8.4
billion price tag. Cubicin faces the threat of generic competition
in coming years, the timing of which will depend upon the
resolution of patent litigation with Hospira Inc., which has
challenged the validity of a U.S. patent for the drug. Also,
Zerbaxa could face competition from a new antibiotic co-developed
by Actavis PLC and AstraZeneca PLC.
A federal judge in Delaware issued an order Monday
afternoon--several hours after the Merck-Cubist deal was
announced--concluding that certain claims in Cubist patents
covering Cubicin were invalid because the claimed inventions would
have been obvious to people skilled in drug development. The
patents are due to expire in 2019 and 2020. Evercore ISI analyst
Mark Schoenebaum said it appeared the ruling could allow Hospira to
launch a generic version of Cubicin in 2016.
Spokesmen for Cubist, Hospira and Merck couldn't be reached to
comment on the patent ruling. Earlier Monday, Merck executives said
they had considered a range of possible outcomes of the ongoing
patent litigation surrounding Cubicin, and said the Cubist deal
looked good under all scenarios.
Shares of Hospira rose more than 2% in after-hours trading,
while the stocks of both Merck and Cubist slid more than 1%.
The transaction has been unanimously approved by the boards of
both companies and is expected to close in the first quarter of
next year. Merck plans to initiate a tender offer for Cubist's
shares and will acquire the remaining stock through a second-step
merger that won't require a shareholder vote.
Merck's leaders have made clear they aren't interested in
pursuing large-scale acquisitions, but rather more modest-size,
"bolt-on" deals that bolster the company's research-and-development
pipeline and its product lineup.
Merck has an aging drug portfolio and its top selling product,
diabetes treatment Januvia, isn't growing like it once did. The
company recently got a cancer immunotherapy called Keytruda
approved. In August, Merck acquired Idenix Pharmaceuticals Inc., a
developer of hepatitis C drugs, for about $3.9 billion.
Merck's war chest for such deals has grown partly by the
company's slimming down in other areas. The company sold its
consumer-healthcare division to Bayer AG for $14.2 billion in
October, and the company has unloaded other products in smaller
deals.
Merck also reduced costs by laying off thousands of employees
and closing offices.
Angela Chen contributed to this article.
Write to Peter Loftus at peter.loftus@wsj.com and Dana Cimilluca
at dana.cimilluca@wsj.com
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