Cubist Pharma sold in $9.5bn deal

February 2015 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Rounding off a bumper year for mergers and acquisition activity in 2014, US biotech firm Merck & Co announced in December that it had entered into a definitive agreement to acquire drug manufacturer Cubist Pharmaceuticals Inc. The transaction will see Merck gaining control of the US’ largest antibiotics company in a deal worth $8.4bn plus the assumption of Cubist’s existing $1.1bn debt.

According to a joint statement, the deal has been unanimously approved by the boards of directors of both companies and is expected to close in the first quarter of 2015, pending antitrust approval and the satisfaction of a number of other conditions.

Under the terms of the deal, Cubist’s shareholders will receive $102 cash for each share they hold. The price represents a 35 percent premium to Cubist’s average stock price for the five trading days prior to the deal’s announcement. “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, Cubist’s chief executive. “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.”

For Cubist, based in Lexington, Massachusetts, the deal will allow the company to expand its global reach. The firm’s international expansion to date has been rather stayed. Indeed, though Cubist has been looking to expand into Western Europe for some time, sales of the company’s antibiotics have been confined exclusively to the US and Canada thus far.

For Merck, one of the key drivers of the deal was Cubist’s standing in the so called ‘superbug’ market. Cubist’s antibiotic Cubicin was a major draw for Merck. The drug is expected to add more than $1bn to Merck’s revenue in 2015, pending the expected first quarter closure. Cubist has long been considered a global leader in the antibiotics market, and the company generated $23m profit on revenues of $309m in Q3 2014, much of this revenue from antibiotic sales. Furthermore, the company has dedicated a significant number of resources to research and development projects in the antibiotics space in recent years. Cubist has previously outlined that it intends to release at least four new antibiotics by 2020. In 2014 alone the firm allocated $400m of funding for its antibiotic focused research and development department.

The deal for Cubist was Merck’s second significant acquisition of 2014, following the announced $3.85bn acquisition of hepatitis C specialist Idenix Pharmaceuticals. The Cubist deal is fully in keeping with the company’s strategy of acquiring mid-sized pharmaceutical firms with offerings that complement Merck’s existing product lines. “Cubist is a global leader in antibiotics and has built a strong portfolio of both marketed and late-stage pipeline medicines,” said Kenneth Frazier, Merck’s chairman and chief executive. “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.”

Despite Merck’s optimism about the deal, there may yet be a fly in the ointment. Cubist could lose patent protection for Cubicin two years earlier than expected. Merely hours after the deal was announced, a federal court invalidated four of the company’s patents. Cubist immediately appealed the decision; however, if the court’s ruling stands, generic versions of Cubicin will enter the market in 2016.

There has been speculation that if Cubist’s appeal is unsuccessful, Merck would walk away from the deal. For now, Merck remain optimistic about the deal’s prospects, publicly at least. In a statement the firm noted that it “continues to believe the acquisition of Cubist will create strong fundamental value for Merck’s shareholders. The combined strength of both companies will provide both incremental and long-term value, and Merck expects the transaction to add more than $1bn of revenue to its 2015 base, with strong growth potential thereafter.”

Richard Summerfield