Merck-Cubist Deal On Despite Patent Setback, Shares Fall - Analyst Blog

The very day Merck & Co. Inc. ( MRK ) announced its intention to acquire Cubist Pharmaceuticals Inc. ( CBST ) in an all-cash transaction valued at about $9.5 billion or $102 per share, the U.S. District Court of Delaware delivered an unfavorable ruling in a patent infringement lawsuit regarding Cubist's flagship antibiotic drug, Cubicin. While Merck's shares were down 3% on the news, Cubist's shares declined 4.7%.

The Court invalidated 4 of 5 Cubicin patents and ruled in favor of Hospira ( HSP ), thus setting the stage for the entry of generic Cubicin as early as Jun 15, 2016. Cubist intends to appeal the ruling.

We remind investors that Cubicin has been facing generic challenges not just from Hospira but also from companies like Teva Pharmaceutical Industries Limited ( TEVA ) among others. However, Cubist had entered into a settlement with Teva under which Teva can start selling a generic version of Cubicin in Dec 2017 or Jun 2018 subject to certain conditions.

Merck continues to believe that the acquisition of Cubist will remain unaffected by the court's ruling and expects the deal to add more than $1 billion to its revenue in 2015. Meanwhile, it also expects the deal to be neutral to earnings in 2015 but significantly accretive in 2016 and beyond.

With the Cubist acquisition, Merck will add four marketed products including Cubicin, which recorded sales of $703.6 million in the first nine months of 2014. The acquisition will also give Merck rights to Cubist's attractive in-line and late-stage pipeline of anti-infective medicines, including Zerbaxa (FDA Action Date: Dec 21, 2014), which targets complicated urinary tract and intra-abdominal infections.

The deal is still expected to close in the first quarter of 2015.

Our Take

We still believe the Cubist acquisition is in line with Merck's strategy of strengthening its hospital acute care portfolio. However, the acquisition does give rise to concerns regarding the financial value of the deal as well as the timing of the deal, given that a decision from the court was likely.

Merck currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the health care sector is Teva carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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