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A Slight Cubist Complication

This probably isn’t quite as embarrassing as it looks: the very day of Merck’s bid for Cubist Pharmaceuticals, the company loses a patent case for protection of its flagship drug. Cubicin (daptomycin) is by far the main source of revenue at the company right now ($800 million last year, and continuing to climb), and as one might imagine, the generic companies would like some of that action as soon as possible. That’s what the present case is about: four patents that take the drug’s protection out to 2019 or 2020.
These were invalidated by a district court in Delaware, on the grounds that they do not actually represent new inventions. So as it stands, Hospira could take Cubicin generic in 2016. This can’t be welcome news to Merck, since those extra years of revenue would go a long way towards paying off the entire cost of the acquisition. But the risk was known – in fact, the offer specifically states that an unfavorable decision in the case would not be a material event and would not derail things. It’ll be appealed, for one thing, and enough legal skill will surely be applied to grind the gears past that 2016 date, no matter what the final decision is. You can’t always count on a big drug company to be able to discover the drugs it needs (nor a small one, for that matter), but big companies tend to be pretty good at maximizing the revenues that they already have.
The other part of the deal is that Cubist has other antibiotics in development, which you can count on Merck also making the most out of. The main way that things can fall apart is if there’s a combination of lost Cubicin revenue and some clinical failures among these new drugs. Embarrassment still awaits, as it does, potentially, for all of us in the business.
Update: not everyone agrees with this take, with some in the comments section citing this as a major Merck mistake.

34 comments on “A Slight Cubist Complication”

  1. Anonymous says:

    LOL

  2. Anonymous says:

    “This probably isn’t quite as embarrassing as it looks”
    Oh really? Given the price was difficult enough to justify if the patents were guaranteed, how is this not utterly embarrassing, especially in view of the timing?
    I think Merck’s management would rather be running naked through Manhattan right about now.

  3. Anonymous says:

    Not embarrassing? Interesting that Merck’s share price barely moved on announcement of the acquisition, and then dropped 5% on announcent of the patent case hours later. They should have stayed in bed.

  4. Dr Manhattan says:

    The revenue from Cubicin was THE main income for Cubist. All of the other compounds are either launched with currently modest income, or about to be launched. The prior posts on this subject outline some of the compounds.
    Merck clearly has to put some marketing muscle behind the acquired products, and also challenge yesterday’s patent ruling. As pointed out by Lynn in her prior post yesterday, Merck already has imipenem/novel beta-lactamase inhibitor in Ph. III. I am not sure how they will position ceftazolone/tazobactam as a result.
    Wonder what the price for Cubist would have been if Merck has waited just one more day to make their move??

  5. Anonymous says:

    @4: “Wonder what the price for Cubist would have been if Merck has waited just one more day to make their move??”
    Presumably this would be Cubist’s pre-M&A share price minus 5% of Merck’s market cap per Cubist share.
    I.e., a lot less!

  6. anchor says:

    This stark example of management under sight should tell all about how many of us soldiered on at Merck over the years! I guess nothing has changed after all and it is business as usual. Those who do not learn history are doomed to repeat it, I guess.

  7. Anonymous says:

    I beg to differ. This *is* embarrassing for Merck and good for Cubist.
    The premium Merck paid for Cubist had to include the value on the asset (Cubicin) and projected revenues based on discounted cash flows.
    Cubicin didn’t come from Cubist’s labs but from Eli Lilly. So kudos to Cubicin for taking this unwanted gem and turn it into a revenue source.
    So what has Cubist proven of value coming out of its labs that can provide confidence (and comfort) that the premium paid and the acquisition will meet an ROI somewhere in the next 5 years?
    Just thinking aloud…

  8. Anonymous says:

    Just a week ago everyone was lamenting how looking at ROI in a five year was ill-conceived and now that’s exactly what you guys are bringing up now. That comment section was littered with people saying you can’t possibly only look at 5 years you have to at least the the very minimum look at the picture 10 years out in this industry.

  9. Anonymous says:

    Just a week ago everyone was lamenting how looking at ROI in a five year was ill-conceived and now that’s exactly what you guys are bringing up now. That comment section was littered with people saying you can’t possibly only look at 5 years you have to at least the the very minimum look at the picture 10 years out in this industry.

  10. Moody Blue says:

    So I have a question, perhaps a naive one: Why didn’t Merck wait a day or two before making this big purchase? They obviously knew the decision on the patent was imminent…. TIA

  11. Anonymous says:

    @ 8: But Merck knew that Cubicin’s patent protection (before getting invalidated, that is) could only last until 2020… 5 years out.
    So why not make your ROI calculations at least for 5 years when you know it’s when Cubicin’s life cycle will bring in the most revenues possible?

  12. Hap says:

    @8/9: I think the assumption is the assets Merck bought were the ones Cubist had (their current drugs and IP), and not the ones they could develop (which their discovery branch won’t be around long enough to do). Developing drugs takes lots of time (more than five years), so that it requires long-term evaluation to see if it worked, while the assets that determine the financial value of this transaction are mainly short-term (expiring or otherwise being competed against in 2016-2020) – ones that can be evaluated over a shorter period of time.

  13. Anonymous says:

    @ 11: Doesn’t it seem like there was another reason for the purchase since the ROI for the deal was weak even before the patent protection was invalidated and that the result is of the court case is apparently immaterial to the deal?

  14. Anonymous says:

    @ 12: Do you think that assumption is valid tho? They had to of known the decision was coming any day if that was a big factor in the purchase you would think they would delay it till they knew the outcome

  15. Hap says:

    I don’t know enough, but since most of their drugs weren’t developed internally, then you wouldn’t figure Merck was going to spend more than (at first glance) make sense to get their discovery capabilities, unless they thought there was likely to be an urgent need for antibiotic development (and they didn’t want to recapitulate their own capabilities). If that’s not the case, then the assets they have are the ones they expect to justify the money. The long-term ones might help, but with failure rates as they are, you’d discount their expected income a lot, and so that leaves their current products, mostly.
    I don’t know why Merck either didn’t wait or make some of the money to be paid contingent on the court case (maybe they couldn’t get it done then?).

  16. Anonymous says:

    @10: THAT is a very good question indeed. Why?
    Was there another company trying to snatch Cubist?

  17. Chest Rockwell says:

    @ Dr. Manhattan
    Good point regarding Ceftolo/Tazo and Imipenem/Relebactam. It will also be interesting to see how they integrate their various C. diff assets. Cubist has the antibiotics fidaxomicin (approved) and surotomycin (Ph. III) and Merck has their monoclonal antibodies (also Ph. III). That’s a bit of a crowd for a single (albeit important) indication.

  18. Anonymous says:

    To be fair to Merck, I guess they figured the price was good given the uncertainty over the patents, on the basis that they believed the market overestimated the probability that there would be a problem. If the decision on the patents had been positive they would have had to pay a higher price. But they took the gamble, and they were wrong.
    That’s not to say that Cubist’s current development projects can’t succees and make a good return for Merck in the end, but now they are starting from far behind in negative territory, and so the odds are now heavily stacked against them.

  19. Anonymous says:

    Would the companies have known in advance that decision about the patent case was coming the same day (or at least very soon)?

  20. Anonymous says:

    The fact that the patent decision came later that same day is irrelevant (except for the embarrassment). Merck clearly decided to take a calculated gamble while the issue was still uncertain, on the basis that they believed the market was overestimating the likelihood of a negative decision. If they had waited they would have lost that perceived opportunity.
    On the other hand, I wonder whether Cubist had already got prior warning of the negative decision in private, so they were keen to sell asap?

  21. Glinkst says:

    @10,16, 18, 20
    The calculated gamble theory is reasonable and may have been forced by pressure with another Cubist suitor.
    Looking into the patents, it appears two of them relate to purification and improved fermentation (U.S. 8,058,238; U.S. 8,129,342) and the other two related to dosing (U.S. 6,468,967; U.S. 6,852,689). Just glanced at the abstract of the purification ones – look pretty weak. Cannot imagine they were hanging their hat there.
    These big companies are desperate. They overpay, do some accounting write down, and move ahead (BMS-Inhibitex. The CEO is still there.)
    Glinkst

  22. Anonymous says:

    So basically a mis-calculated gamble, and not just in hindsight: They should have known better even before the patent decision was made.

  23. Anonymous says:

    This Bloomberg article includes some speculation about other possible buyers. One analyst says that he was a bit surprised by the high price.
    http://www.bloomberg.com/news/2014-12-08/merck-s-knockout-cubist-bid-should-fend-off-rivals.html

  24. Anonymous says:

    @19
    When I worked at Lilly, we had no advance warning when important patent court decisions involving Prozac and Zyprexa would be issued. I doubt this has changed recently.
    I agree with Glinkst in that there were likely other suitors and Merck decided to pull the trigger now.

  25. Thomas says:

    For an antibiotic, some exclusivity seems to be a good thing – slowing down resistance by having the drug not being used to treat the common cold. Unless WhateverRiceSackCountry uses it for cattle in kilogram quantities.
    So… is this a financial or also a medical setback?

  26. Anonymous says:

    Great… So Merck’s strategy is to overspend and overpay. Is that how business should be conducted with investors’ money?
    Has Merck said how they expect to get their investment back? And when they can make a profit MATCHING the risk taken?
    High risk high reward, right?

  27. Anonymous says:

    #21 – The two dosing patents really were important – since it was figuring out the correct regimen to overcome the myotoxicity that Lilly had seen in initially trying to develop daptomycin (cubicin).
    Cubist had, aside from antibiotics, Entoreg [for accelerated GI recovery after resection] on the market and a candidate for opiate-induced constipation. They were also trying to start a pain franchise.
    While I don’t see the Merck payout as being straightforwardly recoverable, actually, the rest of the Cubist antibiotic pipeline (ex-dapto) is fairly new. Ceftolozane/tazo (from Cerexa who got it from Astellas)should have a reasonably good patent life. Cubist was developing its own beta lactamase inhibitor and Merck has its own (relebactam) [both similar to avibactam] which could do better than tazobactam in the combination [although I don’t know the effect on total patent life]. I’d wondered about the fidaxomicin/surotomycin duality for a while[I believe suroto was a Cubist discovery; fidaxo was an old natural product that Optimer developed]. C. difficile will soon be treated with fecal transplants [or cleaned up bacterial transplants], I think. And then there’s tedizolid (sivextro) – obtained from Trius who got it from Dong-A. It may have some benefits over generic linezolid – more potent, it overcomes linezolid resistance (which is not too prevalent), conceivably fewer AEs? But its uptake will depend on pricing.
    Maybe the synergies from having a good basket of hospital drugs to sell will help the bottom line [that certainly used to be a Merck trait]. Or…Maybe Merck wanted to buy a bunch of Lexington, MA real estate?

  28. Atticus Finch says:

    No claims survive any of the four patents.
    From Judge Sleet’s opinion:
    . . .
    (5) the ‘967, ‘689, ‘238, and ‘342 Patents
    are not invalid for lack of written description; (6) the asserted claims of the ‘967 Patent are invalid due to anticipation; (7) the asserted claims of the ‘967 and ‘689 Patents are invalid due to obviousness; (8) claim 98 of the ‘238 Patent is invalid due to anticipation; (9) the asserted claims of the ‘238 and ‘342 Patents are invalid due to obviousness; . . .”
    Cubist Pharms. v. Hospira, Inc., No. 12-367-GMS, 2014 BL 344823 (D. Del. Dec. 08, 2014), Court Opinion (12/08/2014)
    A technical note though, Hospira stipulated at the beginning of the litigation to have infringed all four of the patents; however, they successfully asserted invalidity as a defense. Their obviousness and anticipation arguments were the ones that won the day; the technical prosecution arguments that would have invalidated the patents didn’t fly. Hospira won on substance. Building a fence around property that doesn’t exist only works in Minecraft.

  29. Dr Manhattan says:

    @17 Chest Rockwell
    “their various C. diff assets. Cubist has the antibiotics fidaxomicin (approved) and surotomycin (Ph. III) and Merck has their monoclonal antibodies (also Ph. III). That’s a bit of a crowd for a single (albeit important) indication.”
    Very crowded. Especially since my ID friends are saying that the newer fecal transplant technologies are working well in patients who redevelop C. diff after initial treatment. Right now, oral vancomycin is the first choice, and it looks as if fecal transplants may become #2. Fidoxamicin just isn’t that heavily used. All of these newer C. diff treatments need to be (literally) cheaper than sh*t!

  30. Anonymous says:

    I am glad to see how my former employer is squandering all the money saved from firing those employees who invented the drugs that are bringing-in the money.

  31. CMCguy says:

    Could Merck Interest by following notice?
    A new study predicts that drug-resistant infections will kill an extra 10 million people a year worldwide – more than currently die from cancer – by 2050 unless action is taken, such as developing new antibiotics. BBC, 12/10
    http://www.bbc.com/news/health-30416844

  32. Anonymous says:

    I beg to differ from the majority of the posts here. I think that we should give the due credits to Cubist, which takes on one of the hardest therapeutic areas to try to develop some novel antibiotics to combat the ever-evolving multi-drug resistant bacteria, knowing that the ROI is likely pathetic due to the generally low pricing of antibiotics. I also think that Cubist has a great chance to appeal the patent ruling regarding the obviousness. If a reputable big pharma like Eli-Lilly could not solve the toxicity problem and gave up on Daptomycin, how can the new dosing protocol in the patent be obvious?

  33. Ano says:

    Cubist’s BD team certainly outsmart merck’s team

  34. Anonymous says:

    @33. Yaaa but now Merck will most certainly cut ALL headcount at Cubist in an attempt to recover any loss as a result of the patent rulings. Personally, I’d rather be on the Merck BD side…..

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