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Square deal

8 Dec 2014 By Robert Cyran

Superbugs may have beneficial side effects – for giant pharmaceutical companies. In agreeing to buy Cubist Pharmaceuticals, Merck is betting $8.4 billion that the antibiotics used to fight them will become more profitable.

In the 1990s and 2000s, big pharma lost interest in new antibiotics. Existing drugs worked very well and were cheap, so there seemed little reason to spend heavily to develop new ones. Regulators demanded more stringent trials after one approved drug turned out to have life-threatening side effects. That raised costs further. And a perverse financial logic ruled: antibiotics usually cure patients rapidly, limiting revenue. The pursuit by the likes of Cubist of new ways to treat bacterial diseases looked increasingly lonely.

The mood has, however, been changing as bacteria have developed resistance to existing antibiotics. The World Health Organization warned earlier this year that gonorrhea could soon become untreatable. The U.S. Centers for Disease Control and Prevention estimate that the extra cost of treating antibiotic-resistant infections runs up to $35 billion a year. That could rocket higher as infections become harder to contain.

In response Uncle Sam is spending more on research and development and U.S. regulators are giving new drugs that combat life-threatening infections an extra five years of market exclusivity. They are also promising to approve new antibiotics quickly. The drive by governments worldwide to tie drug prices to efficacy will help further. New cancer treatments can cost $100,000 but may only add a few months of life. Antibiotics that permanently cure fatal diseases for $3,000 look cheap in comparison.

That could mean a renaissance for antibiotics, with profit opportunities to match. But the pace of drug development is still glacial, which makes big drug groups eager to buy companies that already have compounds in clinical trials. Despite the above-average outlook for new antibiotics and the fact that Cubist has one potential blockbuster that just hit the market and another awaiting approval, Merck is paying only about 4.3 times Cubist’s estimated revenue for next year.

That’s about the same multiple as investors give Merck’s own business, making it look like a relative bargain. More alarm about superbugs will only make the deal look better.


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