Merck Triggers The Race to Replace Cubist

12.8.14 | Forbes

By Steve Brozak

To read the entire article on Forbes, please click here.

A real healthcare crisis has been in the works for the last half-century and it has nothing to do with the cost of healthcare, although you could argue it has something to do with the price of it. It has everything to do with the phenomenon of antibiotic drug resistance. Some of the best investment strategies begin with identifying an important need and filling that need. In biotech and healthcare investing, identifying crucial needs is often linked to matters of life and death, and with regard to Cubist, Merck may have hit the proverbial jackpot in the field of antibiotics and drug resistance.

Drug resistance occurs when drugs used to treat common bacterial infection become ineffective through the misuse of antibiotics and over time as bacteria evolve. The rise of super bugs has been in the news for several years, but now has reached catastrophic levels as resistance has accelerated. For instance when Erythromycin was first introduced in the 1950s, it took decades before bacteria became resistant. It took a fraction of the time for Levofloxacin to become ineffective against Pneumoccoccus in the 1990s. To blunt drug resistance, our newest drugs are approved as last resort measures against deadly infections. This is one of the main reasons why it took 16 years for resistance to develop against Vancomycin. However today drug resistance outpaces our ability to develop newer, more potent drugs.

To prove the point, the FDA granted approval to 19 new drug applications for antibiotics in the early 1980s. From 2005 to 2009, that number fell to 3 new approvals. Of course, antibiotic development continued throughout this time, but as science and technology advanced, big pharma began abandoning large campuses dedicated to antibiotic programs to pursue mega revenue indications like pill a day cardiovascular and metabolic disease categories, and now they focus on drugs for oncology and rare diseases where they can charge $50,000 to $100,000 per course. Why develop antibiotic drugs that patients only take for 7 to 14 days that you can only charge in the thousands when you can produce blockbusters like Lipitor, Plavix, and Viagra?

For all of these reasons, today’s announcement of Merck’s acquisition of Cubist is completely unsurprising and uninspired, especially if you’re one of the savvy investors who invested wisely in the antibiotic space.

It was 18 months ago that I wrote about the antibiotic issue in this publication.  At the time I was advocating for greater investment in biotechs developing new antibiotics like Trius Therapeutics and Cempra Pharmaceuticals. Since that article, not only were Trius and Optimer Pharmacueticals (another antibiotic company) acquired by Cubist in a rollup for $1.6 billion in 2013, but just last month Durata Therapeutics was acquired by Actavis for $675 million. Durata commercialized Dalvance, an IV antibiotic treatment for acute bacterial skin and skin structure infections (ABSSSI). Most recently, Tetraphase Pharmaceuticals announced it is courting suitors for its acquisition. Tetraphase is developing a new, more potent version of tetracycline, an important antibiotic drug that was introduced in the 1950s, but developed resistance in Shigella before that decade was even over. Cempra is left as one of the last freestanding small biotechnology companies developing critical antibiotics.

Analyzing the pattern of transactions over the course of the last 18 months, it was a foregone conclusion that Cubist would be an acquisition target. Cubist, a consolidator of societally and medically important drugs, is a perfect candidate in a pharma landscape populated by cash rich, R&D poor behemoths. Merck just purchased the antibiotic franchise it couldn’t develop on its own and can now drop into the rest of its product portfolio. The backbreaking development work, however, occurs at smaller, mid-stage biotech companies rarely valued correctly by the market. In fact Cubist was a middling biotech when Lily gave up on an internal drug program that is now known as Cubicin. Cubist picked up the failed asset, proved it worked, and commercialized it successfully into the total  franchise Merck is now purchasing for $9.5BN. Now that Tetraphase is pondering an exit the question remains: Who will rise to replace Cubist? The answer may be Cempra, the North Carolina based antibiotic company with trial data anticipated next quarter.