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Merck, Cubist, and Hospira: The Inside

Or as much of the inside as we’re likely to have. Thanks to @AndyBiotech on Twitter, here’s an SEC document detailing the negotiations between Merck and Cubist. It makes for interesting reading in general – you can see how a deal like this comes together, and all the places where it might have fallen apart – and you can also see that the Hospira patent fight was, in fact, very much on the minds of Merck’s management. Emphasis added in the extracts below:

On October 16, 2014, Mr. Bonney called Mr. Frazier to discuss the Company Board’s feedback in response to Parent’s stated interest in a potential strategic transaction. . .Mr. Bonney informed Mr. Frazier that the Company would continue discussions with Parent only if Parent was prepared to move quickly, to propose consideration payable to stockholders of the Company in excess of $100.00 per Share, and to provide assurance that any definitive transaction document would not be conditioned on the outcome of, or include closing conditions based on the Company’s litigation with Hospira or regulatory decisions about ceftolozane/tazobactam. Mr. Frazier responded that he needed to discuss these terms with Parent’s senior management and consult Parent’s Board of Directors (the “Parent Board”).
. . .On October 23, 2014, Mr. Bonney and Mr. Frazier had two telephone conversations to discuss the potential business combination. . .Mr. Frazier described for Mr. Bonney certain of Parent’s assumptions for the combined businesses and identified certain key areas for further due diligence that Parent would require before signing a definitive agreement, including long-term tax planning, the Company’s pending litigation with Hospira, and the regulatory dialogue regarding ceftolozane/tazobactam. Mr. Frazier also indicated that Parent was prepared to offer between $95.00 and $100.00 per Share, with a portion of that price contingent on the outcome of the Hospira litigation. Mr. Frazier indicated that Parent was willing to accept certain regulatory risk in connection with the potential transaction, but was unwilling to assume all of the risk related to the outcome of the Hospira litigation. Mr. Bonney responded that the deal parameters laid out by Mr. Frazier did not meet each of the conditions set forth by the Company Board, but that he would review Parent’s proposal with the Company Board.
On October 25, 2014, Mr. Bonney informed Mr. Frazier that the Special Committee had discussed Parent’s most recent proposal and considered it inadequate with respect to both price and the proposed contingency associated with the outcome of the Hospira litigation. Mr. Bonney offered to facilitate a discussion between Parent and the Company’s outside patent litigation counsel regarding the status of the Hospira litigation, subject to Parent first entering into an appropriate confidentiality agreement with the Company.
. . .On November 6, 2014, representatives of the Company, external patent litigation counsel to the Company, and representatives of Parent held a telephonic diligence meeting about the Hospira litigation, including the potential outcome and timing of a district court decision. The Company also presented to Parent language for a definitive agreement between the parties excluding conditionality regarding the outcome of the Hospira litigation or regulatory action related to ceftolozane/tazobactam.

The strong impression one gets is that Merck really wanted to do this deal, and was initially trying to avoid exposure to Cubist’s patent issues. But in the end, the only way to do the acquisition was to put in language that excluded this as a deal-breaker. We don’t know what that November 6th meeting concluded about the timing of the District Court’s action, or the likelihood that Cubist would lose – maybe the coefficients in front of those two terms were wrongly estimated? Merck certainly knew that this was an issue, but it was, in the end, not enough to make Cubist undesirable. We’ll see how that works out for them.

16 comments on “Merck, Cubist, and Hospira: The Inside”

  1. anonao says:

    Now wondering if anyone signing the deal in Merck side was looking for a bonus if the deal went through, or had friends who are shareholders of Cubist.

  2. Maier says:

    Strength in any negotiation is the willingness to walk away. Without contingencies linked to the negotiations, Merck should have walked. Very weak on their part.

  3. Anonymous says:

    @1: That would make sense. Otherwise, why pay such high premium for assets that might be compromised and -if so- their value is largely reduced?
    @2: Maybe anonao is on to something?

  4. exGlaxoid says:

    Maybe Cubist offered them some magic beans if they bought them quickly. That trick seemed to work with GSK, they bought all kinds of crap companies.

  5. Anonymous says:

    Now it seems *very* clear that Cubist already had advance warning of the negative patent decision and wanted to push the deal through immediately (while insisting that the patent decision wouldn’t negate the deal), before the news was made public. Naughty Cubist. Stupid Merck. I think heads will roll at Merck, but they will do this later, and very quietly so as not to make it obvious that they screwed up big time. But now we know anyway.

  6. Maier says:

    @3 I don’t think you need to assume any malfeasance when desperation can explain it. Sometimes someone just blinks at a critical negotiation, especially if they have invested a lot of time and effort into the deal. I do believe it is possible that Cubist may have known about the weakness of their position in some substantial way, but honestly even if they had more information, Merck knew enough to fight for the clause of contingent positive judgement or just walk away.

  7. Anon2 says:

    What investment bank did Cubist use? That is who should take the fall here. The guys that knew a significant value risk was approaching and pushing for a quick transaction.

  8. Anon2 says:

    Just came across it
    “In this transaction, J.P. Morgan and Deutsche Bank served as financial advisors to Merck, and Hughes Hubbard & Reed LLP and Baker & McKenzie served as its legal advisors. Morgan Stanley & Co. LLC and Goldman, Sachs & Co. served as financial advisors to Cubist, and Ropes & Gray served as its legal advisor.”

  9. infected says:

    Ha! Big deal, limited revenue generator. Yet another ploy by dying big pharma to keep investors from fleeing.

  10. Larry J says:

    J.P. Morgan and Deutsche Bank served as financial advisors to Merck, and Hughes Hubbard & Reed LLP and Baker & McKenzie served as its legal advisors. Morgan Stanley & Co. LLC and Goldman, Sachs & Co. served as financial advisors to Cubist, and Ropes & Gray served as its legal advisor.
    We gotta get paid.

  11. Cytirps says:

    That’s what happened when one is too desperate

  12. Rycan says:

    Everything else aside, insisting that a clause be inserted in an acquisition thata specifically precludes a potentially adverse event from being a dealbrealer should be a red flag to be the other party, if not a reason to promptly walk away.
    Perhaps Merck places too much incentive on successfully negotiating an acquisition, and not enough on avoiding a raw deal. Sitting on your hands typically isn’t rewarded, but it is so mcuh better than making a mess.

  13. Ed says:

    I agree with most sentiments expressed, and would like to offer three thoughts:
    I cannot a recall a single occasion when a deal was evaluated, say, three years later on its merits and bd folks were held accountable. One can safely assume that Merck bd folks will have added to their bonus with this acquisition, and that will be the end of that.
    One could imagine investors would hold Merck accountable for this deal, but then, how many of us reshuffled our 401k’s to our reduce exposure to this company?
    I think this may be positive for industrial antibacterial efforts in that ultimately Cubist’s business model, (and that of Optimer, Trius, Fujisawa, anyone else?, worked). Of course, it is another step of disintegrating traditional large pharma efforts into individual drug discovery, development and sales companies.

  14. Anonymous says:

    By analogy, I wonder what person would accept an offer to buy my house under the condition that it must be bought *tonight* at full price, without regard or recourse to the engineer’s report on structural issues which is due to be published any day now. Any offers?

  15. Anonymous says:

    @14
    You should try buying a house on San Francisco, because that is exactly how some negotiations there go. Walk in, take a look around, make an offer at or above price or walk away. Apparently Merck really wanted this to happen.

  16. Anon2 says:

    This has to do with the investment bankers setting a timeline and convincing all parties on the buy side that a deal is imminent and the bidding period closes on date X.
    The issue I see is that the investment bankers on the sale side may have known about this issue and purposely set the timelines before they expected to hear back on the patent issue. Locking a deal in their pocket and forcing the buy side guys to roll the dice.
    If this is indeed the case, I can’t people trusting anything Morgan Stanley or Goldman Sachs pitches to them…

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