In $9.5b deal, giant Merck buying Lexington’s Cubist

Cubist Pharmaceuticals spent $300 million on antibiotic drug research last year at its Lexington campus.Jonathan Wiggs/Globe Staff

The battle against emerging "superbugs" is producing a new generation of antibiotics. Now it has also produced a giant payout for a Lexington biotech on the front lines of the effort to take on increasingly potent bacteria.

Cubist Pharmaceuticals Inc., which is amassing a portfolio of drugs for bacterial strains that prove stubbornly resistant to today's antibiotics, said Monday that it accepted a $9.5 billion buyout offer from pharmaceutical goliath Merck & Co.

The deal, which drove Cubist's stock up by more than 35 percent, is the latest play by a global drug company in the Boston area's booming biomedical cluster, where researchers are working on everything from cancer drugs to rare disease therapies to antibiotics.

Cubist, founded in 1992, has become the world's leading antibiotics developer at a time when many larger companies have scaled back research and development in the field.

Because they cure infections quickly — and therefore patients no longer need drugs — antibiotics have been less profitable than medicines for chronic conditions such as heart disease and multiple sclerosis. But with the rise of new bacterial infections, leading to epidemics such as one affecting tens of thousands of newborns in India, that calculation may be changing.

"This is a recognition that the antibiotics space is becoming more important," Cubist president Robert J. Perez said of the Merck buyout. "This move signals that large companies appreciate the importance of innovations in that area."

Barry R. Bloom, professor of immunology and infectious diseases at Harvard School of Public Health, said the overuse and inappropriate use of antibiotics has fueled the emergence of antibiotic-resistant superbugs.

"We're just out of drugs," Bloom said. "When you see the degree of resistance in India, as well as some place like China, you see this is an overwhelmingly serious problem that is only going to get worse. The economics don't incentivize antibiotics."

Merck's acquisition of Cubist could spur further moves by drug makers scrambling to reenter the antibiotics field, said pharmaceutical analyst Seamus Fernandez, managing director at Boston health care investment bank Leerink Partners.

"They let the little guys do the heavy lifting, and then pick up the assets that end up being most promising," Fernandez said.

Cubist has about 1,000 employees worldwide, including 600 at its Lexington headquarters and research center, where the company spent $300 million on antibiotic drug research last year.

Merck, which is based in Whitehouse Station, N.J., and has about 71,000 workers globally, has been one of the few large pharmaceutical companies that have maintained an antibiotics pipeline, though it spent less on antibiotics research last year than Cubist.

"This deal is about growth," Merck chief executive Ken Frazier said in a conference call with stock analysts. Merck has not said how many of Cubist's employees will be retained, or whether it will keep the Lexington campus, but Frazier said the immediate focus would be on making Cubist grow, not cutting costs.

Still, the Cubist name will go away, according to Merck spokeswoman Lainie Keller.

Under terms of the deal, Merck will pay $8.4 billion for Cubist shares, a 37 percent premium to Friday's closing price. The company will also assume $1.1 billion in Cubist debt.

Cubist is the second major Massachusetts company Merck has purchased this year. In June, it paid $3.8 billion for Idenix Pharmaceuticals Inc., a Cambridge biotech developing drugs to treat hepatitis C. Merck also runs an 11-story research tower in Boston's Longwood Medical Area, where more than 450 scientists, chemists, and biologists work in the fields of cancer, inflammation, diabetes, genetics, and neuroscience.

Merck expects the Cubist deal to generate more than $1 billion of revenue for it next year, and to significantly add to corporate profits in 2016 and beyond.

The pace of life sciences mergers and acquisitions has picked up in the past several years as major pharmaceutical and medical technology firms eager to expand their pipelines of drugs have been snapping up smaller biotechs and other companies.

In June, medical device maker Medtronic Inc. agreed to pay $42.9 billion for health care supplies company Covidien PLC, which has its US headquarters in Mansfield. An even bigger deal — AbbVie Inc.'s plan to spend $54 billion for drug maker Shire PLC, which has its US base in Lexington — collapsed last month when the US government moved to restrict the tax benefits the takeover would have reaped for AbbVie.

Merck telegraphed its interest in acquisitions in May when the company hosted its first investor presentation at the company's Boston research lab. Merck had just agreed to sell its consumer care business to German drug maker Bayer AG for about $14.2 billion, and executives said they might use the money from the sale to buy companies with promising experimental treatments, particularly in biotechnology.

In an interview Monday, Frazier would not say whether Merck was considering other acquisitions, but said the company had "a strong balance sheet and cash flow."

Frazier said Merck sales are up in the company's product class that includes antibiotic and antifungal drugs. It is an area that Merck "has had intense interest in," he said.

Cubist has several drugs in development. An antibiotic that treats urinary tract and intra-abdominal infections has the potential to reach a huge market. The FDA granted the experimental drug priority review in June and is scheduled to decide by Dec. 21 whether to approve it.

The company's flagship antibiotic, Cubicin, is used to prevent bacterial skin infections and treat blood and heart infections. It accounts for annual sales of more than $1 billion globally. But the drug is expected to face competition from low-priced generics starting in 2018. A rival drug maker, Hospira Inc., has also filed court challenges to Cubicin patents.

"Our portfolio dovetails very nicely with Merck's antibacterial portfolio," said Cubist chief executive Michael W. Bonney.

Jason Kantor, biotechnology analyst with financial firm Credit Suisse in San Francisco, said antibiotics will "never be a big needle-moving franchise" for drug makers. But with the fight against superbugs getting attention, he said, the business is likely to become more profitable than in the past — particularly if companies like Cubist continue to develop effective treatments.

"Pharma and biotech companies are driven by meeting unmet medical needs," Kantor said. "This is an area of very dire unmet needs."