By Chelsey Dulaney
Drug maker Merck & Co. is facing criticism that it is
overpaying for its planned $8.4 billion purchase of antibiotics
specialist Cubist Pharmaceuticals Inc., in light of a court ruling
issued hours after the deal was announced Monday that could dampen
the sales potential for Cubist's top-selling drug.
Leerink Swann analyst Seamus Fernandez said the purchase price
appeared to be about $2 billion to $3 billion too high, based on
reduced sales expectations for the Cubist drug, the antibiotic
Cubicin.
Merck shares fell 3.2% to $59.88 in recent trading Tuesday.
Cubist shares fell 4.2% to $96.42, about 5% less than the
$102-per-share that Merck has agreed to pay.
"This is a very tough start to a relatively sound strategic
deal," Mr. Fernandez said in a research note.
An order issued Monday by U.S. Judge Gregory M. Sleet in federal
court in Delaware invalidated claims in four patents covering
Cubicin. If the ruling stands, rival Hospira Inc., which challenged
the patents, could begin selling a generic version of Cubicin in
mid-2016, when a remaining patent expires. That would be at least
three years earlier than the now-invalidated patents were to expire
in 2019 and 2020. Cubist said it would appeal the ruling, but some
analysts believe it is unlikely to be overturned.
Cubicin generates annual sales of nearly $1 billion for Cubist,
so the court ruling could end up wiping out a large chunk of
potential sales due to low-cost generic competition from Hospira
and others. Robert W. Baird & Co. analysts estimated Merck
could lose out on more than $3 billion in potential revenue that
would have helped justify the price tag Merck is paying.
Merck, Whitehouse Station, N.J., issued a statement Tuesday
reiterating its belief in the value of the Cubist deal. Merck said
the patent decision doesn't change its expectation that the deal
will add more than $1 billion in revenue for 2015, and that it will
add to earnings in 2016 and thereafter.
Before the court ruling, Merck Chief Executive Kenneth C.
Frazier and other company officials had said they considered a
range of possible outcomes of the Cubicin patent litigation before
closing the deal, and were still comfortable with the acquisition.
They touted other Cubist drugs that could support sales and profit
growth in coming years, including an antibiotic, Zerbaxa, that
could be approved by U.S. regulators this month. "This deal is not
about one product, it's about a leadership position in the acute
hospital setting," Adam H. Schechter, president of Merck's global
human health unit, said in an interview Monday.
"We still feel the deal continues to bring strong economic value
over the long-haul to the company," Merck spokesman Steve Cragle
said Tuesday. "We're going to move forward with it."
Cubist, of Lexington, Mass., said late Monday the court ruling
wouldn't affect its sale to Merck, and it expected the deal to
close in early 2015.
Still, the $8.4 billion price tag and the patent ruling
triggered skepticism. Bernstein analyst Tim Anderson said the deal
would help flesh out Merck's portfolio of anti-infective drugs and
bolster its presence in the market for products used in hospitals.
"But the limited commercial life of Cubicin and the lack of a
high-science, cutting edge [research and development] platform
mutes our enthusiasm for the deal," Dr. Anderson wrote in a
research note Monday, before the court ruling.
It may also be tough for Merck to back out. The purchase
agreement specifically bars Merck from citing the outcome of the
Hospira patent litigation as a so-called "material adverse effect"
that could scuttle the deal.
One large Merck shareholder wasn't overly concerned about the
price or timing of the deal. "Merck is going to be smart about how
they proceed from here," said Tony Scherrer, director of research
at Smead Capital Management in Seattle, which owns about 690,000
Merck shares. "We think Merck is looking at a deal like this in
terms of what it can bring to the table over the next decade-plus,
not just the next 18 months."
Cubist specializes in antibiotics, including those designed to
treat complicated infections caused by bacteria that have developed
resistance to older antibiotics. Cubicin, an intravenous
antibiotic, was introduced in 2003 and is used primarily in
hospital patients to treat skin and other infections. The company
markets two other antibiotics, Dificid and Sivextro, and a drug to
help bowel-surgery patients, Entereg.
The company's research pipeline includes Zerbaxa, a newer
intravenous antibiotic designed to target a different set of
infections including those of the urinary tract. Some analysts
believe it has potential to generate sales of more than $1 billion
a year if it is approved for sale, but it could face competition
from other newer antibiotics including one that could be launched
soon by Actavis PLC. Cubist also is developing treatments for
clostridium difficile, a bug that causes diarrhea, and
opioid-induced constipation.
Write to Peter Loftus at peter.loftus@wsj.com
Access Investor Kit for Cubist Pharmaceuticals, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2296781071
Access Investor Kit for Hospira, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US4410601003
Subscribe to WSJ: http://online.wsj.com?mod=djnwires