Cubist Says Adolor Deal Offers “Free Option on Billion-Dollar Program”

10/26/11Follow @arleneweintraub

Lexington, MA-based Cubist Pharmaceuticals (NASDAQ: CBST) had its eye on Adolor (NASDAQ: ADLR) long before it announced it would acquire the Exton, PA-based company on Monday. But it wasn’t until drug giant GlaxoSmithKline (NYSE: GSK) pulled out of a co-promotion deal with Adolor in June that Cubist could finally pounce.

Glaxo and Adolor were partnered on a drug called alvimopan (Entereg), which was launched in 2008 to accelerate healing after bowel surgery. Glaxo’s developers had hoped the product would be approved for chronic use, but it ran into safety issues and was cleared only for short-term use. “What was intended to be an outpatient product became an inpatient product,” says Michael Bonney, CEO of Cubist. The hospital market might seem too small for a Big Pharma player, he says, but it looked just right to Cubist. “Inpatient is the piece that’s always been interesting to us,” Bonney says. “That’s our world.”

Cubist investors have yet to be convinced, though. Cubist will acquire Adolor for $190 million in cash, or $4.25 a share, plus milestones that are achieved with one of Adolor’s experimental drugs, ADL5945 to treat chronic opioid-induced constipation. The total value of the deal is $415 million. After the acquisition was announced, Adolor’s shares shot up from $1.92 to $4.67 on roughly seven times its previous trading volume. Cubist shareholders, on the other hand, pushed the acquirer’s stock down about 2 percent to $39. But Bonney isn’t worried. “As people start processing this, I think you’ll see more enthusiasm from our shareholders,” he says.

The company currently markets two antibiotics: daptomycin (Cubicin) and fidaxomicin (Dificid), which it co-promotes with Optimer Pharmaceuticals (NASDAQ: OPTR). Cubist’s salesforce calls mostly on hospitals and long-term care facilities—a “sweet spot,” Bonney says, that he believes will make for an ideal fit with Adolor. Cubist met with Xconomy in New York on Tuesday after ringing the opening bell on NASDAQ to celebrate its 15 years as a publicly traded company.

Cubist’s most immediate opportunity from the Adolor deal is alvimopan, a drug that Bonney believes has been underperforming against its potential. Adolor sold $25 million worth of the drug in 2010. “They increased their salesforce from 20 to 50″ after regaining the rights from Glaxo, Bonney says. “But we have 200 salespeople. Given our broader footprint, we think we can add additional hospitals to the customer list,” in addition to expanding the drug’s use in facilities that are already buying alvimopan, he predicts. “Something like 83 percent of [bowel surgeries] are being done in the hospitals we’re in every day.”

Bonney predicts Cubist will push annual sales of alvimopan to $100 million—a figure that some Wall Street analysts confirm. “We believe [Cubist] is more than capable of accelerating the sales trajectory of [alvimopan] giventhe strengths of the sales force in the hospital setting,” wrote Oppenheimer analyst Christopher Holterhoff in a report issued after the Adolor deal was announced. Holterhoff has a $45 price target on Cubist’s shares.

Rob Perez, chief operating officer of Cubist, says he believes his company’s expertise in the hospital market gives it a sales advantage that larger companies don’t have. “We allow the people closest to the customer—the salespeople—to have much more autonomy than most large companies do,” Perez says. “Hospitals are difficult to segment, so you have to give people on the street the freedom to do what’s necessary locally. Big Pharma has many more people, so their models are driven by the home office.” He adds that Cubist will simply add Adolor’s product “to the bags” of the same 200 people who have been selling Cubist’s antibiotics. “We’ll allow them to manage their local business like an account within each hospital.”

Nevertheless, the rich valuation Cubist placed on Adolor was largely driven by ADL5945, which is expected to enter Phase 3 testing next year—one of two late-stage drug candidates that Bonney estimates could have peak sales potential of $1 billion a year. Bonney points out that last year there were 6 million prescriptions written in the U.S. for three-month courses of opioid painkillers. That means ADL5945 could be used not only in Cubist’s core inpatient setting, but also by people who are being treated chronically, on an outpatient basis, with opioid drugs. “There’s a big primary-care piece to this,” Bonney says. He adds that Cubist will be looking for a partner to help offset the costs of developing the drug and then selling it to primary-care physicians.

Cubist’s other billion-dollar opportunity, says Bonney, is CXA201, an antibiotic it is developing to treat complicated urinary tract and abdominal infections. The drug acts against a type of bacteria that accounts for 40 percent of hospital-acquired pneumonias, Bonney says.

Cubist will likely face competition on both drugs. Bonney says he’s aware of “a number of similar products” to ADL5945 that are neck-in-neck in the development process. “We think 5945 strikes the best balance of efficacy and safety,” he says, adding that the billion-dollar estimate “assumes a modest market share.”

The Adolor deal caps off “one heck of a year,” Bonney says. During the company’s third-quarter conference call on October 19, Cubist beat analyst estimates by announcing sales of $202 million and earnings-per-share of 33 cents. Bonney says sales of daptomycin have been stronger than expected, largely because of a new course of administration that the FDA approved for the drug late last year. Instead of infusing the drug for 30 minutes, outpatient staff can choose to administer it in a two-minute injection. The quicker route has been a popular choice, Bonney says.”Fifty percent of our business is outpatient clinics, where beds are at a premium,” he says. “This way, a nurse can hook the patient up to an IV, and two minutes later, that bed is available. It changes the economics for the hospital. And the patient gets to go home sooner.”

With $800 million in cash still on the balance sheet, Cubist could go looking for more deals, but Bonney and Perez says the Adolor deal satisfies their most immediate priorities. “We’re getting a commercial-stage product and almost a free option on a billion-dollar program,” Perez says. Adds Bonney, “I almost think we’re getting paid, because the gross margin on [alvimopan] is more than what’s necessary to progress the Phase 3 program on 5945, even without a partner. So we’re getting paid for a huge option on a multibillion-dollar market.”

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