Many market observers believe that Merck (MRK) overpaid in its takeover of Cubist Pharmaceuticals. And it very well may have. But it did pick up the real jewel in Cubist's portfolio, Zerbaxa, which is used to fight urinary tract infections.
Whether Merck overpaid for Cubist should not be the main takeaway for investors from this important $9.5 billion deal.
The key point that investors should focus on is that this deal is a sign of the times in the pharmaceutical industry. Not only consolidation, but consolidation focused on a few select areas.
One of the definite centers of interest for drug companies is on new antibiotics. They are searching for something that will fight the growing numbers of so-called superbugs, such as MRSA and C. difficile.
Merck's chairman and CEO, Kenneth Frazier, told the Financial Times, "There is a huge unmet need in this area. Around 23,000 patients die every year because there is no way to treat their infections." The Center for Disease Control (CDC) says that in addition to the deaths there are least two million infections annually by these superbugs.
Superbug Threat Serious
Frazier neglected to say that there is an unmet need because pharma companies neglected the antibiotic segment for decades while pursuing higher-margin sectors - e.g., chronic diseases like cancer.
In a comprehensive report issued in April, the World Health Organization (WHO) said that antibiotic resistance from superbugs is "a threat so serious that it threatens the achievements of modern medicine."
The report said there was growing antibiotic resistance in seven different bacteria. These bacteria are responsible for common, but serious diseases such as sepsis, diarrhea, pneumonia, urinary tract infections and gonorrhea.
The WHO went on to warn that without action "the world is headed for a post-antibiotic era, in which common infections and minor injuries, which have been treatable for decades, can once again kill."
Another study conducted in the U.K. by former Goldman economist Jim O'Neill was also insightful.
It said drug-resistant bacteria would cut world GDP growth by 2% to 3.5% by 2050. That translates, the study said, to up to $100 trillion. The study also said that in human terms here, we could literally be talking here about millions of lives.
Even if those figures are exaggerated, the facts clearly seem to indicate superbug resistance to current antibiotics are concerning.
For example, the rate of infection by the intestinal superbug C. difficile in U.S. hospitals doubled between 2001 and 2010.
Environment Improving for Development
Incoming data like that seems to have woken up both the drug companies and government policy makers.
U.S. regulators are now taking a more lenient stance on approvals of new antibiotics. In fact, some antibiotics in the U.S. are even granted 10 years of patent protection versus the standard five years of product exclusivity.
This new regulatory environment is one crucial factor behind the Merck offer for Cubist.
It was also the likely driving force behind other deals including the smaller deal a few months ago for Durata Therapeutics by Actavis (ACT).
And most of the other major pharma companies have flagged their interest in pursuing deals to develop a new generation of antibiotics to fight superbugs.
Now for Something Totally Different
But my guess is that the solution to the growing superbug problem will not come from big pharma.
It may come from companies like privately-held Dutch company Micreos, which is developing a different way to fight bacterial infections, endolysin technology. The company's perspective is not that of a drug company, but from its background in the food safety sector.
The type of treatment being developed is based on a naturally occurring enzyme produced by microorganisms in the body, known as bacteriophages, which are viruses that infect a particular bacteria. These enzymes produced from bacteriophages specifically target and kill bacteria by cutting through the bacteria cell wall, thereby killing it.
The key point here is that other bacteria in the body are left alone. The viruses will attack only a specific bacteria, such as MRSA.
Unlike traditional antibiotics, which need to get inside the cell wall to work, these type of drugs will target specific regions of the cell simultaneously making it much less susceptible to mutation and therefore resistance down the road.
Microes has already developed a drug to fight MRSA called Staphefekt, which has proved highly effective in testing. It is the first endolytic enzyme available for human use.
This development may have put the company in the sights of one of the major drug companies for a possible takeover.
Takeover or not, further development of this promising technology will help us avoid what the UK's chief medical officer, Dame Sally Davies, called an "apocalyptic scenario".
Sources:
The Pharmaceutical Journal: New Bactericidal Enzyme Solution Could Help the Fight Against MRSA Infection
Financial Times: Drug Resistance to Cost $100 Trillion by 2050
Financial Times: Superbug Threat Drives $9.5 Billion Merck Deal
Aljazeera America: Rates of Antibiotic-Resistant Superbug Double Over Last Decade
Newsweek: Revolutionary New Antibiotic Alternative Could Save World From Superbug Apocalypse
