Here's Why Merck Paid Triple the Price for Idenix

Merck pays a hefty price for hepatitis C specialist Idenix Pharmaceuticals.

Jun 9, 2014 at 7:00PM

U.S. stocks put in another record high on Monday -- the ninth in 11 trading sessions -- as the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) both rose 0.1%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) gained 0.4%.

Although companies are reluctant to dip into their cash piles to make capital expenditures, mergers and acquisitions are back in vogue, with health care one of the busiest sectors. Large pharmaceutical firms are willing to buy growth, and they're seemingly not afraid to pay up for it, either. Today, it was the turn of Merck (NYSE:MRK) to announce that it has agreed to acquire Idenix Pharmaceuticals (NASDAQ:IDIX) with an all-cash offer of $24.50 per share -- more than three times Friday's closing price of $7.23. The transaction values the hepatitis C specialist at $3.85 billion.


Source: Wikipedia.

Merck is eyeing with envy the payday Gilead Sciences has hit with hepatitis C drug Sovadi. As the Financial Times pointed out today, Sovadi is well on its way to becoming the most successful drug launch in history, having racked up a whopping $2.3 billion in revenue in its first three months on the market.

Merck isn't alone. Hepatitis C is considered to be one of the most promising areas for drug development, and though Gilead has grabbed the lead, the field is intensely competitive. In April, AbbVie (NYSE:ABBV) published late-stage trial results for a drug cocktail that cured over 90% of patients with the recalcitrant GT1 strain of hepatitis C after just 12 weeks. Merck wants to combine an Idenix drug with two of its own to create a cocktail that might cure most strains of hepatitis within two months, although Merck expects to commercialize its two-drug regimen first (assuming phase 3 trials are successful).

Last week, I made a reference to the Baupost Group, which is led by Seth Klarman, probably the greatest investor you've never heard of. It turns out that the hedge fund group is one of the big winners in this deal, being the largest shareholder of Idenix, with 35% of the shares outstanding at the end of March.

Baupost acquired nearly a third of that stake at the end of January in a direct offering at a price of $6.50; as of today's close, that operation has generated a 266% return -- not bad for a holding period that barely exceeds four months. There is no use complaining that you don't have access to a direct offering the way Baupost does, either -- individual investors could have purchased shares below $6.50 as recently as May 30.

However, Baupost is no fast-buck artist. The hedge fund manager has owned shares of Idenix since the second quarter of 2011. Furthermore, the portfolio manager had to display steely nerves to hold them through periods of massive volatility -- over the past three years, the shares have risen to above $14 before falling below $4 (multiple times).

Baupost has made out superbly owning Idenix, but will Merck be able to say the same thing in several years' time? Price paid is a key determinant of your ultimate return, and by that standard, Merck has set itself a high hurdle. (For more on this topic, read why my Foolish colleague George Budwell doesn't like the deal.)

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