Cubist Battling Superbugs Offers Remedy for J&J: Real M&A

Photographer: John Guillemin/Bloomberg

There have been a flurry of mergers and acquisitions in the health-care industry this year, driven by growth-hungry acquirers seeking to take advantage of low interest rates and also reduce their taxes. Close

There have been a flurry of mergers and acquisitions in the health-care industry this... Read More

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Photographer: John Guillemin/Bloomberg

There have been a flurry of mergers and acquisitions in the health-care industry this year, driven by growth-hungry acquirers seeking to take advantage of low interest rates and also reduce their taxes.

The timing may be right for a takeover of Cubist Pharmaceuticals Inc. (CBST)

The rising threat from drug-resistant germs and increasing calls from global health groups for more potent antibiotics is placing a premium on companies such as Cubist. The $4.8 billion drug developer is preparing to introduce four new medicines by 2020 to combat bacterial infections that have become resistant to older therapies because of decades of overuse.

Cubist may receive takeover offers based on the prospects for those remedies and could get sold for about 50 percent more than its current price, Cowen Group Inc. said. It already has one blockbuster drug on the market, and analysts estimate its revenue will double to almost $2 billion by 2018. Pfizer Inc. (PFE) could fold Cubist’s antibiotics sales force into its acute-care division, while new legislative efforts to revive the antibiotic market also could draw Eli Lilly & Co. or Johnson & Johnson (JNJ) to the bidding table, according to Robert W. Baird & Co.

Cubist “would be pretty accretive to any company who would be looking to buy them,” Brian Skorney, a New York-based analyst at Baird, said in a phone interview. “They have a drug that’s selling $1 billion a year in the U.S. That’s always an attractive asset.”

If the new drugs “are as successful as management’s contention is, the valuation would see a significant step up and any M&A premium would see a similar step up,” he said.

Unmet Need

Julie DiCarlo, a spokeswoman for Lexington, Massachusetts-based Cubist, declined to comment. Representatives for Indianapolis-based Lilly, J&J and New York-based Pfizer declined to comment.

Drug companies had largely abandoned antibiotics to focus on more profitable chronic illnesses, such as diabetes and heart disease. Now that traditional antibiotics are becoming ineffective, there’s growing unmet demand. It means that common infections and minor injuries could end up being deadly, according to the World Health Organization.

The U.S. Centers for Disease Control and Prevention said antibiotic resistance is killing at least 23,000 Americans a year, making it “one of our most serious health threats.”

Incentive Program

President Barack Obama enacted the Generating Antibiotic Incentives Now, or GAIN Act, in 2012 to encourage drugmakers to invest in new antibiotics by lengthening the time they get to sell the treatment exclusively before facing competition from cheaper generic versions.

The GAIN Act may entice companies that don’t have an existing antibiotics business to make bids for Cubist to enter the market, said David Krempa, a Chicago-based analyst at Morningstar Inc. It might be enough to get Lilly (LLY) or New Brunswick, New Jersey-based J&J “back in the game,” Skorney of Baird said.

“It’s not like it’s a small company where the only people it would make sense for it to be bought by are people that already have the presence there and can buy and cut out the sales force,” Krempa said in a phone interview. “Cubist is big enough that if someone were looking to get into that market that could be one way to get in.”

Cubist would also be a cheap takeover candidate, making a deal even more compelling, he said.

The drug developer was valued last week at 2.4 times analysts’ average revenue estimate for 2018. That’s a lower valuation than 86 percent of U.S. pharmaceutical and biotechnology companies larger than $1 billion, according to data compiled by Bloomberg.

Shares of Cubist climbed 1.9 percent to $64.56 today.

Less Risk

Cubist’s Cubicin, a daily injection to treat Methicillin-resistant Staphylococcus Aureus, or MRSA, is what the pharmaceutical industry calls a blockbuster drug because it generates more than $1 billion in annual revenue. That makes Cubist a less risky target than a biotechnology company that doesn’t yet have any approved or marketed medicines, said Alan Carr, an analyst at Needham & Co.

“Acquirers have tended to be risk-averse and have looked for later stage assets when they’re acquiring something,” Carr said in a phone interview. “They’d rather pay more for a de-risked asset rather than invest in something early stage that has a lot of risk embedded in it.”

Pfizer Synergies

For companies that still have at least a small sales team dedicated to antibiotics like Cubicin, Cubist would be a relatively easy company to acquire, according to Irina Rivkind, a New York-based analyst with Cantor Fitzgerald.

Pfizer’s best-selling antibiotic -- Zyvox, for MRSA -- generated $1.35 billion of sales last year and will begin facing generic competition in the second quarter of 2015. An easy way for Pfizer to maintain its anti-infective revenue would be to acquire a company such as Cubist, Rivkind said in an e-mail.

“It can generate cost synergies by acquiring Cubist and stripping out its sales force and research expenditures,” she said.

There have been a flurry of mergers and acquisitions in the health-care industry this year, driven by growth-hungry acquirers seeking to take advantage of low interest rates and also reduce their taxes. The record $320 billion of transactions through last week is already double the volume for all of last year, according to data compiled by Bloomberg.

A drugmaker might pay $95 a share for Cubist, representing a 50 percent premium to last week’s closing price, according to the average of three analysts’ estimates. That would value the company at more than $7 billion. Skorney said that could be a problem for Cubist’s management, who may value the company’s antibiotic pipeline much higher.

New Drugs

Cubist has applied for U.S. Food and Drug Administration approval for ceftolozane/tazobactam, an antibiotic for complicated urinary tract infections. If the drug is approved, which could happen as early as December, a buyer that has both U.S. and international hospital-based sales teams would be drawn to the asset, Ken Cacciatore, a New York-based analyst at Cowen, wrote in a July 23 report.

On the other hand, the low profit margins for antibiotics may make Cubist less appealing, Skorney said. Cubist earned less than a penny of profit on each dollar of sales in the past 12 months, versus the 6-cent average for its closest peers, data compiled by Bloomberg show.

“You really have very little pricing power and there’s so many generic options available to treat bacterial infections that the products become very, very niche,” Skorney said.

That may be changing. Biotechnology companies are beginning to demand better prices for their antibiotics, and the growing need for new medicines may position Cubist to profit off this improved pricing power, Morningstar’s Krempa said.

Antibiotics “have life-saving power and yet people are only paying hundreds or a couple thousand dollars for them,” Krempa said. “You should be able to increase prices consistently for a long period of time.”

To contact the reporter on this story: Jennifer Surane in New York at jsurane4@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net; Ben Livesey at blivesey@bloomberg.net

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