December 23, 2014    4 minute read

Merck to Target Superbugs

   December 23, 2014    4 minute read

Merck to Target Superbugs

Merck has said it would buy Cubist Pharmaceuticals in a deal valued at $9.5bn (£6.1bn), allowing the major drug manufacturer to enter the market targeting superbugs (antibiotic resistant bacteria).

Industry Overview

Deal making in the healthcare industry has been booming throughout the year, with medical technology companies and cosmetic drug makers changing ownership for what may be perceived as high premiums. Now, a different part of the industry — antibiotics — is at the center of the mergers and acquisitions frenzy.

Merck & Co Inc (MRK.N), based in Kenilworth, NJ, United States, is one of the biggest pharmaceutical companies in the world, currently employing over 70,000 people and offering a range of products in heart and respiratory health, infectious diseases and women‘s health. It has a market capitalisation of around $170bn and its shares are trading at the present date at $59.58 with its price steadily rising since the 2008 financial crisis. Cubist Pharmaceuticals Inc (CBST), headquartered in Lexington, MA, United States, is one of the few companies globally taking on the tough challenge of antibiotic resistance, having led on for over twenty years. It makes drugs to treat dangerous bacteria and superbugs, including potentially causing pandemics. Its market capitalisation is around $8bn and its shares are currently trading at $98.67

Deal Drivers

The deal is the latest sign that large pharmaceutical companies are turning their attention back to antibiotics after decades of low investment. This comes after the declaration of the Food and Drug Administration (FDA) to offer incentives to manufacturers to invest in new products. In fact, the World Health Organization has warned back in April of “a post-antibiotic era” where common infections appear to be lethal once again due to the growing diffusion of superbugs capable of resisting against the most powerful antibiotics.

This transaction fits into Merck’s strategy of buying midsize drug makers that complement its existing products. Moreover Cubist’s biggest seller, Cubicin, adapts perfectly to Merck’s hospital division, one of the areas recently identified by executives as a priority for the company. Merck said that the main driver of the deal with Cubist was the rise in revenues, rather than cost reduction, along with the possibility to instantly bolster its presence in antibiotics. By selling to Merck, Cubist will be able to enlarge internationally at a faster rate. Cubist antibiotics are in fact sold only in the United States and Canada, although the company is working on expanding towards Western Europe.

“With Merck taking over we have access to this Class A infrastructure around the world […]”

Michael Bonney , Chief Executive, Cubist

The boards of both companies have unanimously approved the $8.4 billion purchase price, which, together with the acceptance of $1.1 billion in debt, brings the enterprise value of the deal to $9.5 billion. Merck will begin a tender offer to investors to acquire all of Cubist’s outstanding shares for $102 per share in cash by means of a company subsidiary. Last month, Cubist posted third-quarter sales of $309 million, which represents a 16 percent increase from the same period in the previous year. Merck posted revenue of about $10.6 billion in the third quarter stating that the buyout of Cubist would add more than $1 billion to its expected 2015 revenues.

At the time of the announcement, on December 8th, Cubist’ shares spurted 35% to about $100.60, whereas Merck shares closed 0.6% higher at $61.88, leaving Cubist’s executives satisfied. The deal, subject to approval by regulators, is expected to close in the first quarter of 2015.

Deutsche Bank, JPMorgan Chase, and the law firms Hughes Hubbard & Reed and Baker & McKenzie acted as Merck advisors, while Morgan Stanley, Goldman Sachs and the law firm Ropes & Gray advised Cubist.

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