In something of a surprising move, Merck & Co. (NYSE: MRK ) announced today that it is buying Idenix Pharmaceuticals (NASDAQ: IDIX ) in a deal that comes at a whopping 238% premium compared to the company's closing price on Friday. Specifically, Merck is paying $3.85 billion for what amounts to three experimental hepatitis C therapies: two nucleotide prodrugs called IDX21437 and IDX21459 and a NS5A inhibitor, samatasvir.
According to comments made by Merck's President of Research Laboratories, Dr. Roger Perlmutter, he believes this deal will help the company compete against the likes of Gilead Sciences (NASDAQ: GILD ) and its wonder drug Sovaldi in the lucrative hepatitis C market. In particular, the company plans on combining its experimental hepatitis C therapies with those of Idenix to help bring an all-oral, pan-genotypic combo to market that would have a shorter treatment duration than Gilead's market leading offering.
With the preamble out of the way, here are two reasons why I think this deal won't work out for Merck shareholders in the long run.
Reason No. 1
Perhaps the biggest reason this deal looks destined for failure is Idenix's poor clinical trial record. Thus far, Idenix has scrapped the development of several different hepatitis C therapies because of toxicity issues. As a result, the company has lagged far behind its competitors in the field and its most advanced clinical candidate, IDX21437, is only at the midstage level of clinical testing. Put simply, Merck is paying a hefty premium for a company whose technology has yet to be validated in a late-stage study.
Reason No. 2
I think Merck is barking up the wrong tree in regards to putting more resources into the hepatitis C market. While the market is large, payer pushback on price (both here in the U.S. and abroad) and the fact that Merck isn't first (or likely even second) mover may limit the commercial opportunity substantially. After all, given that Gilead's Sovaldi is (fortunately) effectively a cure, this market may not have much of a tail -- once patients are on Sovaldi (or likely second-mover AbbVie's therapy), there may not be any additional revenue potential.
By the time Merck is able to get a therapy to market that incorporates Idenix's early stage technology, the bulk of lucrative markets could evaporate, thanks to the outstanding clinical profiles of Gilead and AbbVie's therapies. Going forward, most experts believe the hepatitis C market will be one of diminishing returns as these new functional cures dramatically lower infection rates in many countries.
When I look at the terms of this deal, I can't help but think that Merck is suffering from Sovaldi envy after the drug smashed sales records in the first quarter. And was therefore looking for a way to play catch up. Sometimes, however, it's better to admit defeat and move on to more fruitful endeavors like advancing your promising immuno-oncology candidate.
At the end of the day, this deal looks and feels a lot like Bristol-Myers Squibb's $2.5 billion purchase of Inhibitex for its hepatitis C therapy that ultimately resulted in a halted trial. Perhaps Merck will have more success on the clinical front with Idenix's platform, but the commercial result could very well be the same. Time will tell.
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