Why Cubist Pharmaceuticals Inc. Stock Skyrocketed 33% in December

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What: Shares of Cubist Pharmaceuticals , a biopharmaceutical company focused on developing drugs to be used in the acute-care environment, skyrocketed 33% in December, based on data from S&P Capital IQ, after agreeing to be purchased by Merck .

So what: Under terms of the buyout Merck agreed to purchase all outstanding shares of Cubist for $102 per share, a hefty premium considering it began the month at less than $76 per share. The purchase fits with Merck's theme of adding "bolt-on" acquisitions over time rather than seeking a large acquisition or merger partner. Additionally, purchasing Cubist will further enhance Merck's acute hospital care medicine portfolio, which is one of a handful of indications Merck's management team has chosen to focus on moving forward.

Source: Cubist Pharmaceuticals.

The real allure of this transaction is Cubist's Cubicin, a drug designed to treat complicated skin and skin structure infections, as well as drug-resistant infections like MRSA. Currently Cubicin has an annual run rate in excess of $1 billion. The remainder of Cubist's portfolio will likely account for less than $140 million in combined sales in fiscal 2014, but it is made up of a number of potentially high-growth drugs, including recently approved acute bacterial skin and skin structure infection drug Sivextro.

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Now what: If you were a Cubist shareholder prior to this purchase you probably did nothing short of dance in the middle of the street once you heard the news.

On one hand I understand why Merck is willing to pay big bucks to acquire Cubist. By specializing in just a few indications, Merck can reduce its expenses, improve operating efficiency and drug pricing power, and buy growth to help offset the loss of patent expirations. Furthermore, the deal will significantly add to Merck's profitability in 2016 and beyond.

Source: Cubist Pharmaceuticals.

However, the acute hospital space is getting more competitive by the day, and betting $8.4 billion ($9.5 billion if you include the assumption of $1.1 billion in debt) on Cubicin may turn out to be a big mistake. Patents protecting Cubicin from generic competition are set to expire in 2016, meaning Merck will need nearly perfect execution from Cubist's existing products and developing pipeline in order to profit from this purchase.

I suspect Cubist shareholders are making out like bandits, while Merck investors are once again left wondering if another deal will pan out as expected.

The article Why Cubist Pharmaceuticals Inc. Stock Skyrocketed 33% in December originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.