Cubist Shoots Up on $9.5 Billion Buyout Offer from Merck - Analyst Blog

Putting an end to rumors, Cubist Pharmaceuticals Inc. (CBST) and Merck & Co. Inc. (MRK) announced that they have entered into a definitive agreement under which the former will be acquired by the latter in a cash transaction valued at about $9.5 billion or $102 per share. The offer price represents a significant premium of 35% to Cubist's average stock price over the last five trading days. While Cubist's shares jumped 35.3% on the news, Merck shares were up 0.6%.

What's in it for Merck?

With the Cubist acquisition, Merck will add four marketed products including Cubist's potential blockbuster antibiotic drug, Cubicin, the only approved once-a-day therapy for both S. aureus bacteremia and complicated skin and skin structure infections (cSSSI), to its hospital acute care portfolio.

The acquisition will also give Merck rights to Cubist's attractive in-line and late-stage pipeline of anti-infective medicines, including Zerbaxa. Zerbaxa is currently under priority review in the U.S. with a decision expected by Dec 21, 2014, for treating complicated urinary tract and intra-abdominal infections. The candidate is also under review in the EU with a final decision expected in the second half of 2015.

Meanwhile, Merck's hospital acute care portfolio grew by more than 10% year over year in the first nine months of 2014. The deal, slated to close in the first quarter of 2015, will add more than $1 billion to Merck's revenue in 2015.

Meanwhile, it is expected to be neutral to Merck's earnings in 2015 but significantly accretive in 2016 and beyond.

Our Take

We believe the Cubist acquisition is in line with Merck's strategy of strengthening its hospital acute care portfolio. Although the U.S. District Court in Delaware's decision in the Hospira (HSP) patent infringement case could lead to the entry of generic Cubicin as early as Jun 15, 2016, the agreement with Merck is not expected to be impacted by the court's ruling. Merck's hospital acute care portfolio currently consists of Bridion and pipeline candidates like relebactam (MK-7655) and actoxumab/bezlotoxumab (MK-3415A) among others.

The Cubist acquisition did not come as a surprise as the company has often been viewed as an attractive acquisition target. Mergers and acquisitions in the antibiotic and anti-infective space are heating up with companies like Durata Therapeutics and Forest Labs getting acquired. We expect to see even more buyouts over the coming months.

Cubist currently carries a Zacks Rank #2 (Buy). A better-ranked stock in the health care sector is Biodel Inc. (BIOD) carrying a Zacks Rank #1 (Strong Buy).

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