In July, anticipating the loss of its near-blockbuster Cubicin in a couple of years, Cubist (CBST) has made two acquisitions: Optimer (OPTR) and Trius (TSRX) for up to $1.6 billion in total. Along with the companies, Cubist acquired the drugs Dificid and tedizolid, two of the most promising new antibiotics around.
The deals would give Cubist one antibiotic already on the market and another one that has passed all three phases of clinical trials necessary for FDA approval.
Dificid
Dificid was the first antibacterial drug approved in more than 25 years to treat CDAD (Clostridium difficile-associated diarrhea).
Approved in May 2011, Dificid has FDA-labeled superiority for sustained response versus oral vancomycin, the so-called "last resort" in antibiotics, a rare distinction in the antibiotic world.
Cubist and Optimer have been co-promoting Dificid since its launch. It was a tough marketing job. Despite data showing a terrific record at preventing recurrent infections, quarterly sales figures were disappointing. The most likely reason is the drug's high price, which has led hospitals to use it sparingly and only as a last resort.
Optimer has out-licensed Dificid to AstraZeneca (AZN) for Latin America, and to Astellas for Europe, Japan, and certain other countries in the Middle East and Africa.
Dificid has generated $69 million in net revenue in the U.S. and Canada in the last 12 months.
Cubist considers the drug a very attractive asset in an important growing market with significant unmet need. Management believes that Cubist's commercial and medical expertise and direction can help Dificid achieve its growth potential over its long patented life.
Cubist is looking at ongoing bone marrow transplant and other postmarketing studies in hopes of extending Dificid indications.
CDAD is a serious, often debilitating, disease associated with increased hospitalization and mortality. A spore-forming bacteria, Clostridium difficile is a very difficult bug to eradicate. Recurrence of disease is a problem both for the patients with an increased risk of dying, and for the healthcare system, which absorbs additional cost. What is needed are multiple therapeutic options with different mechanisms of action to reduce these recurrence rates.
Cubist is developing an oral antibiotic, surotomycin, now in Phase 3 studies, as a potential treatment for CDAD. Surotomycin and Dificid are very different compounds with very different mechanisms of action.
Tedizolid
Cubist bought Trius in order to acquire tedizolid, or TR-701, a second generation oxazolidinone antibiotic that will be filed for US and European approval in the coming months.
Tedizolid is an improved version of Pfizer's (PFE) blockbuster Zyvox, which is considered standard-of-care for pneumonia and goes off patent in 2015. Tedizolid is viewed as more potent and safer, and is administered only once daily in the form of a short-course IV. Moreover, it is a candidate for development into a pill to treat certain Gram-positive infections, including those caused by MRSA.
Tedizolid recently met all primary and secondary endpoints in two Phase 3 clinical trials in patients with acute bacterial skin and skin structure infections. Application for FDA approval is expected to be filed in the second half of 2013. If approved, Cubist plans to launch the drug in the U.S. in late 2014.
Cubist believes that tedizolid's approval and launch in Europe can accelerate the potential launch of its late-stage antibiotic candidate for Gram-negative infections: ceftolozane/tazobactam.
The acquisition of Trius will also bring in an additional international partner, Bayer (OTCMKTS), which has the rights to tedizolid in Asia, Africa, Latin America and most of the Middle East.
Under the agreement with Bayer, upon completion of the acquisition, Cubist will be eligible for milestone payments for the achievement of certain development, regulatory and commercial milestones. It will also be entitled to receive double-digit royalties on annual net sales in the licensed territories.
Cubist's current drug, Cubicin, and tedizolid, when approved, will address different patient populations based on the severity and type of infection. If approved for use in skin infections, tedizolid, because of its convenient dosing, could be an attractive option for patients with less serious MRSA skin infections but who require treatment options beyond vancomycin and Zyvox. This contrasts with Cubicin, which is an IV-only drug, generally used with sicker patients with more serious skin or bloodstream infections.
Also, assuming a successful trial and approval, tedizolid will offer an alternative to both Zyvox and vancomycin in lung infections for which Cubicin is not approved.
Threat of antibiotics resistance
Antibiotics have been facing bacterial resistance for almost as long as people have been using them. Alexander Fleming, the discoverer of penicillin, warned about this possibility when he accepted the Nobel prize in 1945.
Knowing this, doctors have used the most effective drugs sparingly: careful rationing of the powerful antibiotic vancomycin, for example, meant that bacteria took three decades to develop resistance to it. But trouble came sooner than expected.
In 2000, researchers at the CDC were grinding through analyses of a surveillance program, which was monitoring intensive-care units for unusual resistance factors.
Among the samples was Klebsiella pneumoniae, a common cause of infection in intensive-care units. The strain, which belongs to a group of gut-dwelling bacteria, showed resistance to carbapenems, a set of powerful broad-spectrum antibiotics developed in the 1980s. This class of drugs includes Amoxicillin among others.
The bacteria produced an enzyme, dubbed KPC (for Klebsiella pneumoniae carbapenemase), that broke down carbapenems. What's more, the gene that encoded the enzyme sat on a plasmid, a piece of DNA that can move easily from one bacterium to another. Carbapenem resistance had arrived.
A recent article in a medical journal paints a bleak picture of the current situation.
For example the resistance of acinetobacter baumannii to carbapenems is more than 50 percent as opposed to the 11 percent recorded by the CDC in 2008.
Brad Spellberg, MD, co-author comments:
"None of the antibiotics under development today can address all of these antibiotic-resistant infections. A complete overhaul of the approaches to resistance, disease and prevention could change the continuing upward trajectory of antibiotic resistant infections. To do anything less invites a bleak post-antibiotic future, in which infectious diseases once again reign supreme."
Acinetobacter baumannii, a multidrug-resistant bacteria, is extremely difficult to kill once it enters the body. As a result, Acinetobacter can often only be treated with a highly toxic drug, colistin, which was abandoned in the 1960s because it causes kidney damage.
Another resistant infection receiving increased scrutiny is CDAD, a Hospital Associated Infection that can cause severe diarrhea, rupture of the colon, kidney failure, blood poisoning, and death. CDC estimates there are 500,000 cases of CDAD infection annually in the U.S., contributing to between 15,000 and 30,000 deaths.
Meanwhile, New York City hospitals, perhaps because of the large numbers of patients treated, have become the global breeding ground for another drug-resistant Gram-negative germ: Klebsiella pneumoniae.
Investors' summary
Cubist, with revenue of $926.4 million in 2012, specializes in antibiotics used to treat drug-resistant infections acquired in hospitals.
Cubist's top-selling drug is Cubicin, used to combat MRSA (Methicillin-resistant Staphylococcus aureus). The medicine had sales of $859.7 million in 2012, generating about 93 percent of the company's revenue.
Cubist will pay mostly cash for the acquisitions, but will also seek additional financing. Cubist has made arrangements with its banks to prepare a range of debt instruments.
Optimer: Cubist has agreed to acquire all outstanding shares of the company for $10.75 per share in cash or approximately $535 million. In addition to the upfront cash payment, each Optimer stockholder will receive 1 publicly-traded CVR (contingent value right) for each share they own. The CVR entitles the holder to receive an additional cash payment of up to $5 for certain net sales milestones achieved in the U.S. and Canada between July 1, 2013 and December 31, 2015. Specifically, the CVR will pay out $3 if these revenues exceed $250 million, $4 if these revenues exceed $275 million or $5 if sales exceed $300 million for that period.
As a partner, Cubist is well aware of the challenges facing Dificid. Perhaps this explains why the terms of the deal do not look as generous as the Trius transaction. And of course Optimer, with $77.5 million in the bank and quarterly operating expenses of around $50 million, was not in a strong position to negotiate over the price.
It will take roughly 2.5 years for Optimer investors to realize the full potential of the deal, and then only if its anti-diarrhea drug Dificid meets a specific sales target.
Optimer's shares have been battered in the past year by a disappointing launch for Dificid and potential violations of the Foreign Corrupt Practices Act that led to the resignation of former Chief Executive Pedro Lichtinger and other executives.
Still, as with many acquisitions these days, lawyers are sniffing around the Optimer deal for potential shareholder lawsuits.
Trius: Cubist has agreed to acquire all outstanding shares of the company for $13.50 per share or approximately $707 million. In addition to the upfront cash payment, each Trius shareholder will receive 1 non-tradable CVR (contingent value right) for each share they own.
The CVR entitles the holder to receive an additional cash payment of up to $2 based on certain milestones for 2016 net sales in the U.S., Canada, and Europe. Specifically, the CVR will pay out $1 if these revenues reach $125 million and stepwise to a maximum of $2 if sales reach $135 million for 2016.
Some analysts are skeptical of the Trius deal.
Tedizolid will likely face generic competition right from the start. Jefferies analyst Eun Yang wrote in a note : "the acquisition of Trius Therapeutics is perplexing. With the main competitor (Zyvox) going generic in 2015/2016, we see little value in TSRX's tedizolid."
Cubist's total revenues for the second quarter were up 12.2 percent over the same period in 2012. Q2 2013 total revenues were $258.8 million compared to $230.6 million in Q2 2012.
U.S. Cubicin sales increased 13.5 percent to $227.1 million from $200.2 million in Q2 2012. Cubicin international revenues were $15.0 million compared to $11.4 million in Q2 2012.
Non-GAAP adjusted operating income was $51.3 million compared to $71.1 million in the second quarter of 2012.
Non-GAAP diluted earnings per share was $0.42 compared to $0.56 in the second quarter of 2012.
As of June 30, 2013, Cubist had $1.0 billion in cash and cash equivalents. The share price ranged from $38.53 - 65.55 in the past 52 weeks and recently the company's market cap was $4.16 billion.
Because of poor returns, antibiotics have often been neglected by many big pharma firms as a field of research.
CEO Michael W Bonney said during the July conference call that the deals will give Cubist, one of the few big players in U.S. antibiotics, an additional $600 million to $1 billion in revenue on an annual basis from the lead drugs it has acquired.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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