Cubist patent loss means buyer’s remorse for Merck

Bad luck or bad judgement? Merck could not have known that the decision on Cubist’s patent litigation against Hospira would come the same day as it bought the antibiotic specialist, but it must have known it was imminent. The decision to push ahead anyway – and with a specific clause in the contract regarding the Cubicin litigation that bars it from walking away – puts the company in a highly unenviable situation.

True, the patent case had been expected to go Cubist’s way. But the acquisition was still a huge gamble, as EvaluatePharma data shows: the NPV of Cubicin drops by nearly 60% as a result of Hospira’s victory (see table). Perhaps Merck was not the only bidder and felt it had to jump when it did. But management must be wishing they had waited another 24 hours - they were punished with a 4.5% drop in share price this morning.

No way out

The US District Court’s ruling means Hospira will be able to start selling a generic version of the antibiotic Cubicin in 2016. Before this, generic entry had been set for 2018 under a deal Cubist had struck with Teva.

The inevitable appeal will now get underway, but analysts from Leerink wrote that a “rapid” decision overturning the verdict would be necessary to preclude the entry of several generics in late 2016.

And if the appeal is unsuccessful, or success comes too late, Cubicin will be worth vastly less. EvaluatePharma’s NPV Editor tool shows that if generic entry occurs two years earlier than expected, Cubicin’s net present value falls to just $961m, a decrease of 58%. Cubist itself is worth 17% less, and the 35% premium Merck paid for the company yesterday looks expensive (Merck snaps up Cubist in $9.5bn antibiotic play, December 8, 2014).

Patently obvious: Cubist's loss becomes Merck's 
Patent expiry 2018 Patent expiry 2016 Change Percentage change
Cubist's market cap ($m) 7,675 6,346 -1,329 -17.3%
Cubicin's NPV (after tax) ($m) 2,290 961 -1,329 -58.0%
NPV per share ($) 30.02 12.60 -17.4 -58.0%

Merck is putting a brave face on it, saying that the ruling does not change its expectations for 2015 revenue (a further $1bn in 2015) or earnings (neutral or modestly accretive to 2015 non-GAAP EPS and accretive after that).

But in private the company’s management must be far less sanguine. Evercore ISI analyst Mark Schoenebaum wrote that the scenario under which Hospira wins the court case was specifically mentioned in the merger agreement and the parties agreed this could not be a reason for Merck to walk.

The agreement has a $250m break fee, but it appears that Merck cannot simply fork this over and ride off; Mr Schoenebaum says that if Merck did try to back out on these grounds Cubist could sue, “and would very likely win”.

Second hope

Cubicin is, of course, not Cubist’s only asset, for all it contributes 80% of the company’s revenues. The other important project is Zerbaxa, a therapy for Gram-negative infections, which is heading for an FDA approval decision next week.

Merck now badly needs Zerbaxa to deliver. The product, a combination of ceftolozane and tazobactam, is forecast to sell $59m next year rising to $733m in 2020, according to EvaluatePharmaconsensus; Leerink analysts wrote that based on Cubist's projections of a 6-7% share of the Gram negative market, peak sales could top $1bn.

Merck could do with these sales earlier rather than later and if Zerbaxa takes off strongly it might not do too poorly after all.

However even taking an optimistic view on Zerbaxa, the obvious question of why Merck did not wait for resolution of the Cubicin patent case – or at least include a cancellation clause if the ruling were to go the wrong way – remains. Cubist has been the subject of takeout rumours for a long time, with Shire being mentioned as a possible buyer back in March, so perhaps executives felt they had to move fast or miss out forever.

In this case, missing out might have been the better outcome.

To contact the writer of this story email Elizabeth Cairns in London at [email protected] or follow @LizEPVantage on Twitter

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