Should deal-needy Pfizer target antibiotics specialist Cubist?

Forget tax-advantaged Irish drugmakers. It may be a good time to take over an antibiotics maker on the cheap--and analysts have just the antibiotics maker in mind.

The mounting threat from drug-resistant germs has triggered a need for newer, stronger antibiotics, with the CDC labeling antibiotic resistance one of the most serious health threats in the U.S. But most drugmakers have abandoned antibiotics with an eye toward bigger moneymakers--drugs that target fast-growing chronic diseases like diabetes and pricey treatments for cancer.

Enter Cubist Pharmaceuticals ($CBST). The Massachusetts-based company already has one blockbuster antibiotic on the market in Cubicin, with a stash of four more bacterial infection-fighting meds that it expects to roll out by 2020. All things considered, Cowen Group analysts figure Cubist could strike a deal for about 50% more than its current stock price, according to Bloomberg.

Cubist "would be pretty accretive to any company who would be looking to buy them," Robert W. Baird & Co. analyst Brian Skorney told the news service. "They have a drug that's selling $1 billion a year in the U.S. That's always an attractive asset."

And Cubicin is on the rise, with some analysts predicting its revenue to double to nearly $2 billion by 2018. Those kind of sales--coupled with incentives for antibiotics development introduced by President Obama's 2012 Generating Antibiotic Incentives Now Act--could draw interest from the likes of Pfizer ($PFE), Eli Lilly ($LLY) or Johnson & Johnson ($JNJ), Baird analysts said.

"It's not like it's a small company where the only people it would make sense for it to be bought by are people that already have the presence there and can buy and cut out the sales force," Morningstar analyst David Krempa told Bloomberg. "Cubist is big enough that if someone were looking to get into that market that could be one way to get in."

A pickup may make sense for Pfizer in particular, Cantor Fitzgerald analyst Irina Rivkind pointed out. Pfizer's best-selling antibiotic, MRSA-fighting Zyvox, scored $1.35 billion in 2013 sales, but come next year's second quarter, it will be fending off generic competitors. Buying a company like Cubist--which boasts the newly FDA-approved Sivextro, a direct Zyvox competitor--would be an easy way for the drug giant to keep a hold on its anti-infectives revenue while cutting costs, Rivkind told Bloomberg.

"It can generate cost synergies by acquiring Cubist and stripping out its sales force and research expenditures," she said.

The icing on the cake: Cubist is a bargain, Bloomberg notes. It's currently valued at 2.4 times analysts' average revenue estimate for 2018--a valuation lower than 86% of pharma and biotech companies larger than $1 billion.

So why haven't pharma giants already pounced? It's those nagging low margins, according to Baird's Skorney. Because of limited pricing power and a wealth of generic options, antibiotics become "very, very niche."

But that may be changing--at least on the pricing-power front. As Krempa told the news service, biotechs are starting to demand better prices for their antibiotics, and the increasing need for those drugs may give Cubist a little more leverage.

Antibiotics "have life-saving power and yet people are only paying hundreds or a couple thousand dollars for them," he told Bloomberg. "You should be able to increase prices consistently for a long period of time."

- see the Bloomberg story

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