Cubist Pharmaceuticals Deal Seen Sales Ticket: Real M&A

Cubist Pharmaceuticals Inc.’s best hope for achieving a goal of more than doubling revenue is to pursue its biggest acquisition.

Cubist, the maker of products used in hospitals to treat bacterial infections, is aiming to reach $2 billion in annual revenue by 2017. Analysts are projecting that the Lexington, Massachusetts-based company will fall short of the target by about 23 percent, according to data compiled by Bloomberg. At the same time, the drug accounting for most of its sales faces generic competition as soon as 2018, Royal Bank of Canada said.

The $2.8 billion company, with at least three new therapies in the pipeline, still will need to use its $897 million in cash to buy a drugmaker such as Optimer Pharmaceuticals Inc. or Cadence Pharmaceuticals Inc., said Robert W. Baird & Co. A takeover of either would top Cubist’s largest deals for Calixa Therapeutics Inc. and Adolor Corp., data compiled by Bloomberg show. Cantor Fitzgerald LP says it also could look to smaller targets Trius Therapeutics Inc. or Cempra Inc. to add to its antibiotics portfolio.

Even with Cubist’s products in development, “it still leaves a gap,” Adnan Butt, a San Francisco-based analyst for RBC, said in a telephone interview. “That gap will need to be filled by both internal and external products. Its balance sheet is decent enough. It has a lot of firepower.”

Deal Need

Cubist Chief Executive Officer Michael Bonney, responding to questions about the company’s need to make an acquisition, indicated yesterday that he would consider doing a deal to buttress the drugmaker’s lineup and boost sales.

“We can’t take the known world and get to $2 billion. There’s a gap,” Bonney said yesterday in an interview at the JPMorgan Chase & Co. health-care conference in San Francisco. “We will be using the balance sheet to fill that gap.”

Bonney said future deals would likely seek products in the hospital and acute-care market. He declined to comment on specific targets.

Cubist told investors last June that it expects to reach $2 billion in annual revenue, earn $700 million in profit and have four products in late-stage clinical trials by the end of 2017.

The company announced preliminary 2012 sales yesterday of about $926 million, 93 percent of which came from the antibiotic Cubicin. The drug targets methicillin-resistant Staphylococcus aureus, the superbug better known as MRSA, which can cause life-threatening skin infections, typically acquired in hospitals. Patents protecting Cubicin are set to expire from 2016 to 2028.

Adolor Purchase

Cubist gained CXA-201, an antibiotic in late-stage clinical trials, after it agreed to buy Calixa Therapeutics in 2009 for $92.5 million in cash, plus potential milestone payments of as much as $310 million.

The company added Entereg, a therapy to speed up recovery after bowel-resection surgery, after it agreed to buy Adolor in 2011 for about $190 million, or as much as $415 million including the company’s net cash and a contingent payment right based on drug approvals and commercialization. Entereg sales were $40.2 million last year.

Cubist’s current product lineup won’t generate enough revenue to meet its sales goal, based on analysts’ projections that the company will reach only $1.54 billion by the end of 2017.

Irina Rivkind, a New York-based analyst with Cantor Fitzgerald, estimates that about $700 million, or 35 percent of the sales goal will need to come from acquisitions. She projects Cubicin and Entereg together will generate just $1.1 billion by 2017 and that another $200 million will come from its products that are still in development.

Logical Targets

“Cubist needs to continue growing its base business, further develop its pipeline, but more importantly, it needs to make an acquisition,” Rivkind said in an e-mail. “Management has readily admitted that it will need to pursue M&A.”

Optimer and Cadence are among the most logical targets for Cubist, Brian Skorney, a New York-based analyst for Baird, wrote in a note to clients last week.

“We expect the company to acquire additional development-stage or early commercial-stage products that complement the hospital-based focus,” he wrote. “Depending on valuation, we see a number of options that could make sense.”

Optimer makes Dificid, an antibiotic that won approval in 2011 to treat a deadly bacterium linked to intestinal infections often caught in hospitals. The $497 million company and Cubist jointly market the drug to U.S. health-care providers under an agreement that expires this year.

Relative Value

Shares of San Diego-based Optimer traded yesterday for 5 times this year’s estimated sales, less than half the median multiple among U.S. specialty pharmaceutical and biotechnology companies larger than $100 million, according to data compiled by Bloomberg.

Optimer’s revenue is projected by analysts to surge 114 percent to $310 million by the end of 2017 from the level in 2011, while sales at Cadence may gain more than 17-fold to $302 million, data compiled by Bloomberg show.

Cadence, also based in San Diego, makes Ofirmev, an injectable version of the pain medicine acetaminophen -- known as the brand name Tylenol -- that was approved by the U.S. Food and Drug Administration in 2010. Shares of the $448 million company have gained 31 percent in the last year as Ofirmev sales began to ramp up.

Representatives for Optimer and Cadence didn’t return phone calls or e-mails seeking comment.

Today, Optimer shares gained 1.4 percent to $10.58 at 9:55 a.m. in New York, while Cadence rose 0.2 percent to $5.25.

Trius, Cempra

Cubist, because of its interest in the hospital market, could also look to buy antibiotics makers Trius and Cempra, as well as Pacira Pharmaceuticals Inc., another maker of a pain remedy, said Cantor Fitzgerald’s Rivkind. Pacira has a market capitalization of $584 million, while Trius and Cempra are valued at $206 million and $157 million, respectively.

Trius may report sales of $216 million in 2017, more than five times the level in 2011, the latest fiscal year that it has reported, estimates compiled by Bloomberg show. Cempra, which doesn’t yet generate revenue, may have sales of $146 million in 2017, while Pacira may boost revenue to $533 million from $15.7 million in 2011, the data show.

Representatives for San Diego-based Trius and Chapel Hill, North Carolina-based Cempra declined to comment on whether the companies are for sale or have been approached by Cubist. Susan Heins, a spokeswoman for Parsippany, New Jersey-based Pacira from the firm Pure Communications Inc., said no one at the company was available to comment.

Today, Trius shares were unchanged at $5.23 at 9:55 a.m. in New York, while Cempra fell 1.3 percent to $6.21. Pacira rose 1.3 percent to $18.17.


“Something that’s hospital-focused is synergistic with Cubist’s franchise,” RBC’s Butt said. “That’s their targeted market and they know that market well. Most of their pipeline is focused on antibiotics. Those are their sweet spots.”

Cubist’s balance sheet makes it well-equipped to do a deal, he said. Cubist has $897 million in cash and short-term investments, with just $397 million in debt, data compiled by Bloomberg show.

“That’s a lot of firepower for them,” Butt said. “The company’s in a pretty good spot if they need to raise capital. That said, I expect them to be both disciplined and opportunistic.”

One challenge for Cubist is that larger pharmaceutical companies with deeper pockets are also looking for targets to fill holes left by expiring patents on what were once blockbuster drugs. Henry Gosebruch, managing director of health-care mergers and acquisitions at JPMorgan, said that will lead to more “big pharma M&A activity in 2013.”

Pfizer Inc.’s Lipitor, Eli Lilly & Co.’s Zyprexa and Bristol-Myers Squibb Co.’s Plavix are among drugs that lost patent exclusivity in recent years.

Cash Hoard

Pfizer has almost $23 billion in cash and short-term investments, while Eli Lilly has $6.9 billion and Bristol-Myers has $2.9 billion, the data show.

“It could be a challenge for Cubist to find companies to acquire because you have big pharma also looking,” Alan Carr, a New York-based analyst with Needham & Co., said in a phone interview. “Cubist doesn’t have the same resources.”

Still, Cubist will probably need to do a deal to help it achieve its sales and profit goals because its current pipeline may not be enough, he said.

“It’s a little close in terms of hitting $2 billion,” Carr said. “They do have an active internal effort, but those won’t make it to market by 2017. Certainly bringing in something else would help them reach that mark.”

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