Yesterday, December 8th, Merck & Company (NYSE:MRK) announced plans to acquire Cubist Pharmaceuticals (NASDAQ:CBST) for a total transaction value of $9.5 billion. The two pharmaceutical companies have agreed that:
“Merck will acquire Cubist for $102 per share in cash, which represents a 35 percent premium to Cubist’s average stock price for the most recent five trading days.”
Cubist is known for creating antibiotics to combat stubborn bacteria. Antibiotics were once viewed as an unprofitable segment of healthcare sector because patients only use the product for specific rather than ongoing treatment. Drugs used to treat chronic illnesses received more attention due to inelastic demand. However, antibiotics are becoming more relevant and profitable with the surge of superbugs, or antibiotic-resistant infections.
Cubist has proved itself to be a key player in combating superbugs. Bacteria morphs as it encounters resistance, and Cubist is working to outpace these mutations. Cubist currently has four drugs in phase 2 and 3 testing that will treat pneumonia, urinary tract infections, and other ailments to add to this portfolio. Michael Bonney, CEO of Cubist, stated “Combining with Merck is an exciting opportunity to accelerate Cubist’s established leadership in antibiotics and deliver significant, certain and immediate value to shareholders.” Both companies noted how their portfolios will complement each other nicely.
Once the acquisition is complete, Merck estimates that Cubist will “add more than $1 billion of revenue to its 2015 base.” Looking forward, Merck anticipates that the transaction will be “significantly accretive to non-GAAP EPS in 2016 and beyond.”
One Financial Expert’s Opinion
On December 8th, analyst Irina Rivkind of Cantor Fitzgerald maintained a Hold rating on Cubist with a price target of $90, raised from $64. Rivkind based the increase price target on “a 5x multiple applied to 2016 sales of $1.5B. We think that a takeout thesis on the company is quite reasonable given the accretion associated with Cubicin (~$1.0B net sales per year), but we also believe that some portion of the deal value could be structured via contingent value rights (CVRs) associated with the company’s pipeline (similar to other antibiotic deals).” She attributed the Hold rating to CVRs being “typically structured around difficult-to-achieve targets or aggressive time lines.”
Rivkind’s Past Recommendations
Rivkind has a history of rating stocks in the pharmaceutical industry such as Salix Pharmaceuticals (NASDAQ:SLXP) and Jazz Pharmaceuticals (NASDAQ:JAZZ).
Since April 2012, Rivkind has rated Salix twelve times. She rated the pharmaceutical company a Buy in April 2012 when shares were $48.10. Last month, Rivkind reiterated her Buy rating when shares were $93.87. Rivkind has a 57% success rate recommending Salix with an average return of +13% per recommendation.
Jazz Pharmaceuticals has been rated eleven times by Rivkin. In March 2013, she rated Jazz a Buy when shares were $59.11 and continued to issue Buy ratings as shares climbed to $114.38 in December 2013. Because of these cunning recommendations, Rivkind has a 120% average return per Jazz recommendation. In addition, it has helped Rivkind earn a 62% overall success rate over the past year recommending stocks with an average return of +15.3% per recommendation.
Conclusion
Merck and Cubist are excited to merge their portfolios of antibiotics and drugs in the face of superbugs. How will the acquisition affect the stock price?