Merck & Co., Inc. (MRK), one of the largest pharmaceutical companies in the world, has offered to buy out Cubist Pharmaceuticals Inc (CBST) for $102 per share according to Bloomberg. The offer is a 37% premium to CBST stock’s closing level on Friday.
In the deal — which would consist of $8.4 billion in cash and total about $9.5 billion with debt — would add a strong and proven antibiotic-focused company to Merck’s robust pharmaceutical empire. Even without Cubist Pharmaceuticals, MRK stock was doing just fine this year, up more than 22% in 2014.
As for Cubist Pharmaceuticals, it was just kind of chugging along before this announcement, with CBST stock up about 8% at Friday’s closing price.
Cubist Gives Merck A Much-Needed Area of Expertise
Cubist researches and develops treatments that kill drug-resistant superbugs that’ve started popping up more frequently in medicine with the overuse of certain antibiotics.
Right now, Cubist is somewhat of a one-trick pony. Its drug Cubicin — approved by the FDA in 2003 for serious skin infections and in 2006 for bloodstream infections — generates about 80% of sales currently and is projected to generate up to $2 billion in revenue by 2017. By 2020, Cubicin shouldn’t be the only big-market drug on Cubist’s resume, as it expects to develop four drugs by 2020 — each of which addresses infections that may be resistant to traditional treatments.
MRK has been good about allocating its resources with a keen eye to the risk/reward ratio. Last month, Merck bought the rights to an Ebola treatment by NewLink Genetics Corp (NLNK) for $50 million. Since thankfully Ebola affects thousands and not millions of people in the world right now, Merck’s Ebola treatment will never be a blockbuster but could find success as an “orphan drug,” which can be sold at outrageous prices and generate hundreds of millions of dollars over time.
And for Merck, the $50 million purchase from NewLink Genetics last month doesn’t even make an impressionable dent in the company’s cash coffers, which were above $14 billion at the end of the September quarter.
When Merck sold its consumer business to Bayer AG (ADR) (BAYRY) in May for $14.2 billion, InvestorPlace contributor Dan Burrows told us that, although MRK could be loading up for a dividend hike or share buyback, the company would likely take its time and try to make a big acquisition or invest in research:
“Be forewarned that anyone holding Merck stock needs to be patient while waiting to see what MRK does with the $8 billion to $9 billion it expects to net from the sale. The idea is to build up the higher-margin prescription drug business, but funding research and development and finding targets to buy could take some time.”
It looks like Merck’s figured out what it wants to do with that $8 billion to $9 billion, to the great joy of CBST shareholders. With Cubist, Merck gets one proven drug, a pipeline of four drugs set to debut before 2020, and a wealth of research that can augment and advance Merck’s own R&D efforts.
Of course, this isn’t a done deal yet — CBST shareholders must accept Merck’s $102 per-share offer. (I’m optimistic that they will.)
John Divine is assistant editor of InvestorPlace.com. As of this writing, he held no positions in any of the aforementioned stocks. You can follow him on Twitter at @divinebizkid.
