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Merck Buys Cubist

So Merck is buying Cubist, the specialty antibiotic company. There’s been a lot of talk in the press over the years about how big drug companies have bailed out of antibiotic research because no money could be made in it, and this deal will probably set off more stories about how all that’s changing, but that’s really not the main part of the story. Cubist has been doing fine, with revenues of over $800 million, mostly from Cubicin (daptomycin), a ferocious-looking natural product that has one of the very new antibiotic mechanisms of recent years.
Here are a couple of posts on the problems of antibiotic drug discovery. It’s no stroll through the garden, I can tell you from personal experience, and it’s gotten harder and harder over the years. If you find something, you can do well with it, as Cubist has shown, but first find something that hasn’t been found before, and we’ll talk. That hasn’t changed; nothing about antibiotic drug discovery has changed. It’s just that Cubist has had some success, and Merck would like to appropriate that for its own pipeline.

39 comments on “Merck Buys Cubist”

  1. ExLilly says:

    Cubist in-licensed Daptomycin (LY146032)
    http://en.wikipedia.org/wiki/Daptomycin

  2. newnickname says:

    Cubist’s other drug, fidaxomicin, was also acquired by purchase, not by their own scientific R&D.

  3. Anchor says:

    As a ex-Merck employee I can vouch for the fact many of my friends felt awful when Merck deserted the antibiotics program. Recall that this was the same company that introduced Imipenem (Premaxin), a most potent beta-lactam antibiotics! I knew many people who worked on that program and everyone were brilliant (all gone!). Bottom line-Merck could have soldiered on in the antibiotic program (MRSA) and perhaps the same team could have delivered on a drug in this important area of bacterial resistance at a price much cheaper than they are paying Cubist. What’s next? Tetraphase? Real tragedy here!

  4. houstonlife says:

    But if Merck just wants Cubicin which is doing very good then how can $7B justify the price. I guess the buyout is more than 7B but just considering 7B I dont think it makes sense. Lets say, Merck makes 1B per year from acquired cubist. still it would take 7 or more than 7 years to breakeven.I am not sure how these prices are decided

  5. Anonymous says:

    @4: The value doesn’t justify the high price, but pharma companies are so desperate to fill their pipelines that they forget they are actually supposed to be creating value in the process. So instead they overpay, and thus destroy shareholder value. That’s how crap pharma management has become.

  6. Yeah, I don’t get the math either. Cubist 2013 operating expenses were about $687 M. Even if you zero that out and project a $500 M increase in revenue from new products (to $1.5 M), you still don’t get a positive NPV in 5 years.

  7. MoMo says:

    Well deserved and to the past chemists and execs I salute you!

  8. Morten G says:

    Double the price and they’ll handily make back the expense. If you need Daptomycin it’s probably because there aren’t any alternative.

  9. Mario says:

    No one is commenting on sales from the recent approvals for Cubist. This might make a difference in the analysis of profit in this acquisition.

  10. Anonymous says:

    @9: But on the other hand you’re also ignoring the loss of talent, innovation, projects and focus during integration.

  11. Dr Manhattan says:

    ALL of the Cubist antibiotics currently on the market or at late stage are licensed in products. As pointed out above, Cubcin was a Lilly compound, Fidoxamicin was from Optimer, Sivextro (oxazolidinone) was acquired last year (ex-Trius/ex-DongA), Ceftolozane was from Astellas (Fujisawa).
    #8 “If you need Daptomycin it’s probably because there aren’t any alternative.” Daptomycin is used primarily to treat MRSA. There is also linezolid (Zyvox) which is highly effective, and has the advantage of oral step down (not so with Cubicin), and also several new glycopeptides which are very effective vs. Gram positives. I think Merck is looking at the value in the new oxazolidinone and the cephalosporin. Still $8.4B is quite a premium!
    Cubist has very good people, but antibiotics is a tough business. I hope that most of them have lots of stock options/grants. When Merck acquired Idenix earlier, they shut the doors there. I wonder what their plans are for Cubist? Keep the products only? It would be a tragedy to lose another of the few antibiotic R&D groups left.

  12. Anonymous says:

    @11: “Cubist has very good people”
    Don’t worry, they will be out on the street within a few months. After all, a lot of “synergies” are required to pay for that huge premium!

  13. SP says:

    Don’t miss the Fierce Biotech article with the awesome typo, they’re acquiring the “anti-invective” pipeline. That probably would be something unique among big pharma. I’m sure at some point they’ll correct it online, but it went out to all the email subscribers with that version:
    http://www.fiercebiotech.com/story/merck-splashes-antibiotics-95b-cubist-deal/2014-12-08

  14. anonymous says:

    Maybe Merck is acquiring Cubist for their in-licensing team!

  15. Anonymous says:

    @14: LOL, classic!

  16. Playing on my calculator I get $2.1B in annual gross profit each year for five years just barely earns back your $8.4B in cash at an 8% discount rate (ignoring the debt and spending no money on R&D and SGA). Last quarter Cubist was on track to make $1.2B revenue, $800M gross profit annually. Sooo… You need a huge increase in sales and some serious cost cutting to make this work. Are these deals analyzed with longer time frames? More than five years payback seems like forever in the Pharma industry.

  17. Anonymous says:

    Probably it doesn’t matter whether Merck lose with this deal, as long as the people involved benefit from a nice bit of insider trading:
    http://mobile.reuters.com/article/idUSL1N0TS13K20141208

  18. Dr Manhattan says:

    “Cubist has been doing fine, with revenues of over $800 million, mostly from Cubicin (daptomycin), a ferocious-looking natural product that has one of the very new antibiotic mechanisms of recent years.”
    Yes, but Cubicin goes off patent in 2018. Sivextro, the new oxazolidinone will have to go up against generic linezolid in 2018 as well as generic Cubicin. Probably the big hope is that the new Gram negative cephalosporin will do well, but it will be up against ceftazidime/avibactam, an older cephalosporin combined with a new and novel beta-lactamase inhibitor. These would probably have kept Cubist going at a comfortable rate but I’m not sure how well they will go to justify $8.4B.
    @#12 “a lot of “synergies” are required to pay for that huge premium!”. Yeah, I’ve been “synergized” in the past…

  19. lynn says:

    Dr. Manhattan has laid it out well, as far as what Cubist had to offer. I think ceftolozane/tazo will be fine [for the nonce] against Pseudomonas – but Merck has an internal beta-lactam [similar to avibactam] going into Phase III to be paired with imipenem which would probably be better, overall, than ceftolozane-tazo. And if ceftaz-avi is registered, then that too will compete. Merck has said that it wants to strengthen its role in the hospital acute care market – where it already has the anti-infectives imipenem, ertapenem, caspofungin, posaconazole, moxifloxacin – so this Cubist basket will help fulfill that goal. I don’t know how much is left of the antibacterial infrastructure at Merck these days [there has been an ongoing internal program ongoing there…not all of it was deep-sixed] – but maybe Cubist’s marketing…and in-licensing…groups would help. Derek notes correctly that discovery has been the rate limiting step and this move doesn’t seem to increase that capacity. Perhaps some of the research programs instituted at Trius [which Cubist recently acquired and rapidly depopulated] would be reinitiated at Merck? But the Eeyore in me worries that Merck will end up squashing whatever research/discovery potential is left.

  20. Lunar landing says:

    I agree. Merck, at one time, had a group of excellent researchers in the antibacterial field. They were let go and now management celebrates the purchase of a company that purchases assets. Not a lot of Merck management vision or strategic thinking. What amazes me is that for an industry that is supposed to be so innovative big pharma for the most part all do the same thing at the same time. Predict we will see other pharma getting into this space …..again. It’s called generational amnesia.

  21. Chrispy says:

    Well, it looks like four of Cubist’s patents were just thrown out, and Hospira can launch a generic in 2016
    http://tinyurl.com/pr6kcln
    Looks like Cubist got the deal done just in time.

  22. Anonymous says:

    I guess that means Ken Frazier will be out tomorrow.

  23. Joshu says:

    @21 Snap! Maybe this wouldn’t be so devastating if, you know, Merck/PFE/etc were actually interested in acquiring companies for their R&D infrastructure as well as their pipeline…

  24. Anonymous says:

    Merck wouldn’t have been able to lose all that cash so quickly if they had set it on fire. Cubist’s investors must be pissing themselves, while Merck’s are left holding the bag.

  25. Kazoo chemist says:

    I love the part in the Wiki article where it states “non-inferior”. The marketing types must have had a field day with that quote.
    “Daptomycin has been shown to be non-inferior to standard therapies (nafcillin, oxacillin, flucloxacillin or vancomycin) in the treatment of bacteraemia and right-sided endocarditis caused by S. aureus.”
    I fully understand the issues of resistance , etc., etc., but “non-inferior”?

  26. Anonymous says:

    Not so fast…
    From seeking alpha comments:
    From the AGREEMENT AND PLAN OF MERGER:
    “Material Adverse Effect”:
    “(xi) any decision or action with respect to the Company’s litigation in the U.S. District Court for the District of Delaware related to Hospira, Inc.’s applications to the FDA seeking approval to market generic versions of CUBICIN.”
    http://1.usa.gov/1A9eXA2

  27. Dr Manhattan says:

    @#26. Apparently this may have no effect on the deal:
    From Bloomberg News:
    Cubist said today that Merck’s acquisition will be “unaffected” by the ruling in the patent case. “We feel strongly about our rights and intend to appeal the judgment,” Michael Bonney, Cubist’s chief executive officer, said in a statement.
    Cubist said today that Merck’s acquisition will be “unaffected” by the ruling in the patent case. “We feel strongly about our rights and intend to appeal the judgment,” Michael Bonney, Cubist’s chief executive officer, said in a statement.
    Nonetheless, this is currently THE big moneymaker for Cubist and now may go away in June 2016 unless today’s ruling is challenged successfully.

  28. Mark Nelson says:

    Merck bought into an antibiotic we discovered at Tufts Medical and Paratek Pharma now named Omadacycline. Then they gave it back after 2 years or so. Perfectly good drug and orally available to boot. I never could understand it as now it’s been resurrected by a reverse merger and back in business. We hope it succeeds as well as anyone else’s and that includes Tetraphase’s, as the world is running low on antibiotics and the Mercks and industry giants wake up and sniff the molecules.
    As far as Cubist goes they deserve it, they fought the battle and won as other start-ups try to succeed at the same game.
    And I can tell you antibiotic discovery and development is like a wild card game-with many losers and few winners and peppered with a few Aces and uneven amounts of Jokers.
    But these drugs keep people alive-and that’s what it’s all about. Staying alive, whether you are a patient or an antibiotic company.

  29. Dr Manhattan says:

    Sorry, messed up the above post, duplicated one statement and left out the other. The second part of the Bloomberg New report said,
    ““It appears that MRK cannot walk away from this deal for today’s news only,” Mark Schoenebaum, an analyst with Evercore ISI in New York, said in a note to clients. According to the merger agreement between Merck and Cubist, a negative legal outcome for Cubist isn’t counted as a “material adverse event” that would allow the deal’s breakup, he said.

  30. DAvid says:

    @26
    Actually, the text of the merger agreement explicitly says that will not be considered a material adverse effect. Merck is the one hit by this.

  31. Anonymous says:

    @21 Interesting. One reason Merck didn’t buy Cubist at a pittance [3 orders of magnitude lower] when it was at a low point, before Cubicin’s registration, because Merck feared the patent situation for the long term.
    @25 – “non-inferior” is a term based on the way the clinical trials were run – i.e. it’s there for regulatory reasons. It is very hard to do a trial large enough to show clinical superiority. In the endocarditis trial, you’ll notice that it’s for S. aureus, not MRSA [although it doeswork on MRSA] – and those other drugs work well for S. aureus. At the time there was really no way to do a trial to show superiority over other drugs for resistant strains. This is an FDA-derived problem. It really has nothing to do with efficacy.

  32. Anonymous says:

    Well that pretty much guarantees that everyone at Cubist will have to go. Immediately.

  33. tangent says:

    For an outsider to the industry, are these in-licensing deals a matter of Company A has a drug that’s a longshot but it hasn’t busted yet, so they sell it to Company B who thinks they can do better / has a higher estimation of its chances?
    Or it could be for cash flow, but I assume (naively?) that if the payoff is there, the money can be had efficiently. I mean, pharma companies are finance specialists these days, no? So I figure these deals are often genuine differences in estimating drugs’ chances.
    Which makes them interesting data points about uncertainty in drug development. If everybody knew accurate probabilities, there’d be no deal here. If domain knowledge and expertise were uniformly valuable, then the original developers (having more domain expertise) would win these deals, only selling rights at losing prices.
    Are there enough of these deals to say much about how the buyers do? Is there a dataset?

  34. Anonymous says:

    @33: “pharma companies are finance specialists these days, no?”
    That’s actually the problem, they focus on financial engineering (which basically amounts to taking value from tax payers, employees and others), while they have forgotten how to create value for society as a whole: Take value while destroying it vs create value and share it. Short term vs long term. Destructive competition vs constructive competition. Copying vs innovating. Following vs leading. Decline vs growth.
    As for making money from deals (M&A or BD&L), they are just buying assets at fair market value, but lose on average due to information asymmetry (the seller always knows more about their asset than the buyer) and winner’s curse, as companies are desperate to fill their pipelines, but forget that they are supposed to be creating value in the process.

  35. Sid says:

    Cubist’s major drug could come off patent in 2018. I do not get the math, how Merck will make ROI. I think Generic Pharma manufacturers will jump on Cubist major drug.

  36. Sid says:

    Cubist’s major drug could come off patent in 2018. I do not get the math, how Merck will make ROI. I think Generic Pharma manufacturers will jump on Cubist major drug.

  37. tangent says:

    Yeah, that information asymmetry effect is what I’d expect to see in these deals. But if the buyers in these rights deals actually seem to do okay, that’s pretty damning: that’s telling us we don’t know enough about drug discovery that information asymmetry even gives a benefit.

  38. yuriwho says:

    It is also possible that Cubist has some early pipeline candidates that are not publicly known with great potential that drove the valuation up. What I do like about this deal is that it signals big pharma is beginning to take antibiotics for drug resistant infections seriously again.

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