NEW YORK (TheStreet) -- Merck (MRK) , the second-largest drug company in the U.S. bought antibiotic maker Cubist Pharmaceuticals (CBST) for $9.5 billion. Merck is paying a hefty 35% premium to Cubist's most recent closing price of $74.36 per share, valuing Lexington, Mass.-based Cubist at $102 per share.
Wall Street doesn't appear too impressed. Merck shares were trading at $61.47 around 2:00 pm. Shares were down by almost 1% earlier in the day, reaching a low of $60.98. Shares are still up more than 22% on the year to date, beating the Dow Jones Industrial Average (DJI) by almost 14 percentage points.
But this is not a deal to sleep on. Merck just bought an important asset that will serve two key purposes.
First, Merck is looking for ways to complement its existing drug portfolio, which includes Januvia, its top-selling diabetes treatment that's begun to suffer slowing growth. Merck is also hurt from weak sales of Gardasil, its human papillomavirus vaccine, which declined 11% year over year in the third quarter, reported in October.
Cubist can help Merck bridge the gap between the declining sales in its existing products, while helping it to figure out it next blockbuster drug.
Secondly, Cubist recently said it plans to releases at least four new drugs by 2020. These drugs are said to combat bacterial infections -- the type, due to overuse, that don't respond to other types of treatment. This will be an important growth area for Merck.
According to the Centers for Disease Control and Prevention, each year, more than two million Americans contract infections that can be treated by antibiotics and at least 23,000 people die as a result. This is because these diseases are resistant to normal treatment.
So with health authorities urging drug companies to develop treatment to prevent these threats by developing new antibiotics, Merck is, essentially, skating to where the puck is going to be. And Cubist has already positioned itself to be a leader in these treatments.
Must Read: Warren Buffett's Top 10 Dividend Stocks