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Merck's RNAi Trash is Alnylam's Treasure

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The tussle over Tuschl patents came to an end earlier this month when Alnylam (NASDAQ: ALNY  )  orchestrated a $175 million acquisition of Merck's  (NYSE: MRK  )  RNAi business.

Alnylam has long made hay from founder Thomas Tushcl's RNAi patents. Those patents, which laid the groundwork for developing RNAi compounds, have been at the heart of a series of deals stretching from Roche's (NASDAQOTH: RHHBY  )  licensing pact with Alnylam in the late 2000's to Sanofi (NYSE: SNY  )  tying a bow on a $700 million equity deal with Alynylam this month.  Those patents have also been the source of legal wrangling stretching back to Merck's billion dollar acquisition of Sirna Therapeutics in 2006.  

The long winding path back home
Merck had hoped acquiring Sirna would catapult it into the lead in what was expected to be a rapidly growing market for targeted RNAi treatments.  Why? Because Sirna had licensed the Tuschl 1 patent series from UMass in 2003.  Merck believed those Tuschl 1 patents could short-circuit being shut-out from access to the Tuschl 2 patents controlled by Alnylam if Alnylam linked up with a competitor.

Merck turned out to be only half-right. Roche gave Alnylam $331 million upfront and took an equity stake in Alnylam in 2007 and  Alnylam ended its collaboration deal with Merck a couple months later. 

However, the Tuschl 1 patents didn't pan out to be as strong as previously hoped and uncertainty tied to which patent series covered what technology resulted in a wave of lawsuits.  One of those suits was settled in 2011 by an agreement that included Alnylam issuing a sublicense to Merck for access to Tuschl 2.   

Despite that settlement, the overhang of patent uncertainty, coupled with an inability to quickly develop a safe, marketable drug, meant Merck was faced with a tough decision.

It could double down on RNAi hoping for a breakthrough, or shelve development to focus on compounds closer to commercialization. Facing the loss of $5 billion in annual sales tied to patent expiration for Merck's Singulair in 2012, Merck decided to cut bait on RNAi in 2011 to focus on drugs further along in its pipeline.   

Buying on the cheap
It's likely Alnylam wasn't interested in another player gaining access to its Tuschl 2 patents by acquiring the rights held by Merck's RNAi business.  

It's also likely Alnylam was interested in potentially valuable intellectual property held by Merck given Merck and Roche had been researching the use of polyconjugates as a way to more safely deliver RNAi therapies. Roche sold off its polyconjugate intellectual property to Arrowhead Research (Nasdaq: ARWR) in 2011 after abandoning its RNAi research program in 2010.  

And Alnylam has a license to that technology from Arrowhead for an undisclosed therapy tied to its Alnylam's plans to have five compounds in human trials by 2015.  

As a result, Alnylam's deal with Merck strengthens its patent portfolio, giving its R&D department additional depth for a fraction of the $1 billion plus Merck had sunk into it and for a fraction of the cost it may eventually have paid Arrowhead to expand its relationship with them.

All isn't lost
For Merck, moving out of the RNAi research field was costly.  The company not only spent a billion acquiring Sirna, but likely invested hundreds of millions more in R&D that ended up on the cutting room floor.  

However, inking the deal with Alnylam means the two are working together for the first time since the companies went their separate ways in 2007.  And while the $175 million purchase price is a fraction of Merck's overall investment, Merck may find the value of the deal climbs thanks to an opportunity to earn milestones and royalties.  

Additionally, Merck could also benefit further from Alnylam's success given $150 million of the $175 million purchase price was paid in Alnylam stock.  

Fool-worthy final thoughts
Thanks to Sanofi, Alnylam has plenty of cash on the books to bring along its late stage TTR program, advance its hemophilia and complement-mediated hematology disease programs further into clinic, and make the most of its newly acquired Merck assets.  If those programs work out as hoped, Alnylam may finally fulfill its promise to be the big winner in commercializing RNAi therapies.  

As for Merck, writing down the assets based on Alnylam's sales price should offers some support to its financials short term while Merck may also find itself earning margin friendly milestones and royalties long term.  As a result, investors should consider the deal a win for Alnylam and a potential win for Merck, depending on Alnylam's success.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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