Update: Cubist Pharmaceuticals Is Acquired By Merck, Gains Remain For Investors

| About: Merck & (MRK)
This article is now exclusive for PRO subscribers.

Summary

Cubist entered into a merger agreement to be acquired by Merck.

This reinforces my positive long-term view for the company.

Although I didn’t predict an acquisition, I previously pointed out that Cubist was a buy.

Merck & Co. (NYSE:MRK) offered to acquire Cubist Pharmaceuticals (CBST) for $102 per share or a total of $8.4 billion. The terms of the agreement call for a cash deal without interest. The completion is expected to occur in the first quarter of 2015. Cubist's stock increased 35% to $100 on the day of the announcement. The stock then declined 4.7% the following day as traders locked in profits. Cubist is worth about $1.2 billion in revenue based on expectations for 2014. Cubist is expected to produce $1.4 billion in revenue in 2015. Ironically, Cubist announced the same day that a judge ruled that 2 key patents for the company's drug, Cubicin are invalid. This would allow competitor, Hospira (NYSE:HSP) to offer a generic version of the drug as early as June 15, 2016. Cubist is going to appeal the decision. So, the worst-case scenario is that Merck will benefit from sales of Cubicin through June 15, 2016 before sales drop off due to the generic competition. Merck stated that the decision did not change the fact that it will proceed with completing the acquisition.

The news of the acquisition reinforced my positive outlook for Cubist. The ruling on Cubicin's patents did lower my enthusiasm a bit, but the company still has value for Merck even if the ruling stands. I previously pointed out in my last Cubist article that investors should have a contrarian view and buy the stock. At the time of the article, Cubist had 18.1% of the float short the stock. The stock was trading at about $40 at the time. If investors remained long the stock since then, they could have booked a profit of 150% on the day of the acquisition announcement.

Since Cubist sold-off to just under $96, investors have the chance to make 7% between the current price and the announced closing price of $102. Cubist is highly profitable with a gross margin of 71%. The company is expected to increase earnings by 59% next year. So, you can see that this deal has value for Merck even if the ruling on Cubicin's patents hold up after the appeal. I wouldn't see anything wrong with buying Cubist now and holding until the acquisition is complete. Even if the deal doesn't close for some reason, Cubist's stock is likely to increase on higher revenue and earnings growth for at least the next 18 months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.