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Did Merck pay $3B too much for Cubist? Weighing the impact of Cubicin patent loss

December 10, 2014
Life sciences
Merck may have to rethink its math on the Cubist buyout. Announcing the $9.5 billion transaction Monday, the company pointed to an earnings bump beginning in 2016. But later in the day, a U.S. court nixed all but one of the patents covering its top seller, Cubicin–and that patent expires in 2016.
 
With more than $700 million in sales for the first 9 months of 2014, Cubicin is by far the biggest product for Cubist; its next-best-seller, the C. difficile fighter Dificid, brought in $47.7 million. Cubist had hoped to keep that money flowing till at least 2019, if not 2020, but U.S. District Judge Gregory Sleet changed all that.
 
Now, generics from Hospira ($HSP) and others could launch as early as June 2016, or later that year if Cubist wins pediatric exclusivity for the product. That means up to four years of Cubicin sales endangered by one patent decision.
 
Merck says it’s not too fussed about the patent loss. In a statement issued Tuesday morning, the company said the buyout will “proceed as planned, with a closing expected next quarter. “[T]he acquisition of Cubist will create strong fundamental value for Merck’s shareholders,” the company said. Together, the two companies “will provide both incremental and long-term value,” and Merck still expects that $1 billion revenue bump for 2015, plus “strong growth potential thereafter.”
 
There wasn’t much Merck could do about the deal in any case. According to analysts, the court decision isn’t reason enough for Merck to opt out of the deal, legally speaking. The Hospira litigation was specifically excluded as a “material adverse effect” in the two companies’ merger agreement, ISI Group’s Mark Schoenebaum said in a note issued late Monday.
 
Suddenly, the price Merck agreed to pay looks as much as $2 billion to $3 billion too high, Leerink Partners analyst Seamus Fernandez said in a Tuesday investor note. Yes, Cubist is set to win approval for its new, powerful antibiotic Zerbaxa–which is forecast for blockbuster sales at peak, or about $560 million by 2018. Obviously, it will take time to build up sales for that drug.
 
But Merck says it thought through the possibilities on the Hospira case. “[T]here are always different scenarios that could occur,” the company said during a conference call yesterday (as quoted by Schoenebaum). “Under all scenarios that we looked at, we still thought that this deal made the right sense both strategically and financially. … We continue to feel very good about the deal, not just from the Cubicin perspective, but also because of the other products, including Zerbaxa.”
 
The lawsuit pitted the generic injectables maker Hospira against Cubist and its 5 key patents on Cubicin. Sleet struck down four of them–two that expire in 2019 and two more that expire in 2020. The one bit of good news was that Sleet backed the remaining patent, which lasts till June 2016. If Cubist wins pediatric exclusivity, that would hold off generics till almost the end of the year.
 
Besides Hospira, Mylan ($MYL), Fresenius and Teva Pharmaceutical Industries ($TEVA) are all working on generic versions of the drug. Teva settled its patent fight with Cubist, with plans to launch in 2018, Bernstein & Co. analyst Tim Anderson says. Presumably, Teva’s launch date could change if Sleet’s patent decision sticks.
 
Leerink’s earnings model forecasts a 22 cents-per-share bump to Merck earnings in 2017 and 2018–provided Cubicin keeps the market to itself. If Cubicin faces multiple generic rivals in late 2016, Merck would get a 10 cent earnings bump in 2016, a 5-cent bump in 2017 and just 1 cent extra in 2018, Fernandez says.
 
What does Merck say? The decision doesn’t change its near-term earnings forecast, the company said: Neutral to “modestly accretive” in 2015, and “mid-single digit accretion on a percentage basis” in 2016. That’s all logical, particularly with pediatric exclusivity on Cubicin delaying generics till December of that year.
 
It’s 2017 and beyond that Merck would have to worry about. The deal “will continue to be accretive” after 2016, Merck added. The question is, how much? 
 
If Merck can put its 2,000-strong force of hospital reps to bear on Cubicin sales–and flog the heck out of the new Zerbaxa–it could change those downgraded numbers significantly. If Cubist can win on appeal, then even more so.
 
By Tracy Staton
 

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