KENILWORTH, N.J. & LEXINGTON, Mass.—Merck & Co., known as MSD outside the United States and Canada, announced Dec. 8 that it had entered into a definitive agreement with Cubist Pharmaceuticals Inc. under which Merck will acquire Cubist for $102 per share in cash, a 35-percent premium to Cubist’s average stock price for the most recent five trading days. This makes for an equity valuation of $8.4 billion, but with the assumption of $1.1 billion in net debt (based on projected cash balances) and other considerations, the total transaction value is actually more like $9.5 billion.
The boards of directors for both companies have weighed in with their approval of the deal, and the companies expect the transaction to close in the first quarter of 2015.
The acquisition of Cubist will create what Merck calls a "strong fundamental value with return on capital in excess of Merck's hurdle rate within a few years of closing," and the company expects the acquisition to add more than $1 billion of revenue to its 2015 base. In the end, the transaction will likely be neutral to non-GAAP EPS in 2015, Merck acknowledged, though it expects the deal to be significantly accretive to non-GAAP EPS in 2016 and beyond, with these gains expected to appear in both Merck’s sales and earnings growth.
Cubist's pipeline and abilities reportedly complement Merck’s strategy and the global initiative the company launched last year, particularly in the area of "sharpening its commercial focus on key therapeutic areas that have the potential to deliver the greatest return on investment." Merck leaders maintain that with the company's longstanding leadership in anti-infectives, as well as its customer-focused operating model, it was natural to identify the hospital acute-care segment as one of the company’s key priority areas and one in which Merck maintains it can have the greatest impact in addressing significant unmet medical needs while delivering the greatest value to customers and society.
Merck strategically focused on acute care within the larger hospital setting as a top priority because of the significant unmet need and the unique opportunities for Merck to improve patient care and manage costs in this setting with its in-line portfolio, promising pipeline and its customer capabilities, the company reports. Hospitals are a central hub for healthcare delivery around the world and currently represent 25 percent of overall healthcare spending. Merck believes now is an optimal time to significantly grow its hospital acute-care presence because of the positive regulatory and reimbursement trends in the hospital setting and the increasingly important role that hospitals are expected to provide in healthcare overall.
For the first three quarters of 2014 compared to 2013, Merck’s hospital acute care portfolio grew by more than 10 percent, excluding the impact of foreign exchange. Key products in Merck’s hospital acute care portfolio include several antibiotics and antifungals, as well as Bridion (sugammadex), which is marketed outside the United States and is currently under regulatory review in the United States. In addition, Merck has continued to invest in its hospital acute-care pipeline and has several candidates, including actoxumab/bezlotoxumab (MK-3415A), an investigational combination of therapeutic antibodies targeting two C.difficile pathogenic toxins (A and B), which is being evaluated in clinical trials for the prevention of recurrence of C.difficile infection; and relebactam (MK-7655), an investigational class A and C beta-lactamase inhibitor being evaluated in clinical trials for the treatment of severe bacterial infections.
For more than 20 years, Cubist has touted a commitment to global public health "through the discovery, development and supply of antibiotics to treat serious and potentially life-threatening infections caused by a broad range of increasingly drug-resistant bacteria." Cubist’s antibiotic Cubicin, the only approved once-a-day therapy for both S. aureus bacteremia and complicated skin and skin structure infections, has been used to treat more than two million patients and continues to be an important therapy in the acute-care environment. Cubist’s in-line and late-stage pipeline of anti-infective medicines, including Zerbaxa, which is pending approval from the U.S. Food and Drug Administration, is expected to enhance Merck’s hospital acute-care business in a variety of therapeutic areas, including Gram-positive and Gram-negative multidrug resistant infections.
“Cubist is a global leader in antibiotics and has built a strong portfolio of both marketed and late-stage pipeline medicines,” said Kenneth C. Frazier, chairman and CEO of Merck. “Combining this expertise with Merck’s strong capabilities and global reach will enable us to create a stronger position in hospital acute care while addressing critical areas of unmet medical need, such as antibiotic resistance.”
“Combining with Merck is an exciting opportunity to accelerate Cubist’s established leadership in antibiotics and deliver significant, certain and immediate value to shareholders,” said Michael Bonney, CEO of Cubist. “We have a deep respect for Merck, and it is clear that they share our commitment to addressing the growing, global problem we are facing in combating antibiotic-resistant bacteria. Under Merck’s robust commercial platform, global reach and scientific expertise, we believe Cubist's programs can thrive. We’re proud of the company that our team has built and are confident that Cubist's important mission and focus on significant unmet medical needs will continue.”
Under the terms of the agreement, Merck, through a subsidiary, will initiate a tender offer to acquire all outstanding shares of Cubist Pharmaceuticals. The closing of the tender offer will be subject to certain conditions, including the tender of shares representing at least a majority of the total number of Cubist’s outstanding shares (assuming the exercise of all options), the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. Upon the completion of the tender offer, Merck will acquire all remaining shares through a second-step merger without the need for a stockholder vote under Delaware law.
