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Merck & Co., Inc. Cutting Its Losses, While Others Charge Toward RNAi

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Sometimes success in business requires the ability to make decisions and zig while others are zagging. It is also important to know when to stop throwing good money after bad and call it a day. I believe those two bromides may offer some explanation for why Merck (NYSE: MRK  ) agreed to sell its Sirna assets to Alnylam Pharmaceuticals (NASDAQ: ALNY  ) for a small fraction of their purchase price at a time when others like Sanofi (NYSE: SNY  ) and Roche (NASDAQOTH: RHHBY  ) are increasing their spending and commitment to the space.

A Billion-Dollar Experiment Gone Bad

Merck spent $1.1 billion to acquire Sirna in 2006 amid booming enthusiasm for RNAi to be "the next big thing" in biotech and pharmaceutical development. While Sirna had a couple of early stage clinical programs at the time (one for wet AMD and a respiratory disease collaboration with GlaxoSmithKline, the real attraction was the IP that Sirna brought to the table, particularly in delivery technologies.

Unfortunately, Merck has managed to do next to nothing with the Sirna in the intervening years. That wet AMD drug flamed out and Merck couldn't seem to crack the code on how to develop promising RNAi-based therapies. Merck significantly pared back its RNAi efforts in 2011, but now the company is getting out almost completely.

Alnylam is acquiring Sirna for $175 million, and only $25 million of that is in cash. Merck will be entitled to $105 million in milestones and single-digit royalties, but those are not likely to ever reverse a large loss on that initial Sirna acquisition. Alnylam is likely to benefit most from Sirna's siRNA conjugate technology for RNAi delivery, technology that should expand and build upon its own GalNAc delivery technology to offer more formulation options.

A Familiar Problem

I am not going to pummel Merck over their missteps with Sirna and RNAi. Merck did this deal when enthusiasm over RNAi was at its peak, and rumors were everywhere that Alnylam and Roche were about to sign a major partnership (which proved true). What's more, there is still a very real chance that RNAi will become a significant platform technology that generates multiple billion-dollar drugs for biotech and pharma companies.

The problem is that RNAi is very tricky. Isis Pharmaceuticals has been working on antisense for the better part of two decades and has two approvals to show for it. Delivering RNAi-based therapeutics has proven to be particularly challenging, and Merck is just one of many who hasn't managed to crack the code. With that, I'd note that Roche backed out of its partnership with Alnylam in late 2010 and Novartis chose not to expand its partnership in 2010 and has yet to do much of anything with the early stage compounds it identified.

Zigging While Others Zag

Investors will notice that Merck is exiting RNAi at the same time that others are stepping up. Almost simultaneous with the announcement of Alnylam's acquisition of Sirna, the company also announced a major investment and partnership with Sanofi. Roche too has come back to the market, partnering with Isis on a Huntington's disease compound and crafting a partnership with Santaris to gain access to its LNA (locked nucleic acid) platform. Last and not least, Monsanto, which also works with Alnylam, just announced a partnership with Tekmira for RNAi delivery technology.

Readers can also take note of the coming IPO of Dicerna Pharmaceuticals as a comment on the renewed enthusiasm for RNAi therapies.

The Bottom Line

It is not as though Merck is going off to sulk. Merck has been committing considerable resources to its onco-immunology pipeline and there is nothing wrong with a company realizing that it cannot explore every potentially interesting line of drug research. It will definitely sting if Alnylam is able to take Sirna's technology and leverage it into billion-dollar drugs, but Merck had nearly seven years and could do virtually nothing with the technology. At this point, getting $175 million in value for the technology through sale is the best chance of Merck getting value out of the Sirna assets.

For Alnylam, I believe this could be a savvy deal. Sirna holds valuable intellectual property, and I suspect that patent battles are going to heat up again now that multiple drug companies are looking at the RNAi space. Should Sirna also improve the company's options for RNAi delivery, so much the better for Alnylam and its shareholders.

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Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

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