Vertex Combines to Keep From Being Ground Up

Sometimes the best solution for dealing with competitors is to pay them to go away.

Yesterday Vertex Pharmaceuticals (Nasdaq: VRTX  ) announced that it was buying ViroChem Pharma for $100 million plus quite a few of its shares. The final amount of shares will be determined by the prices at closing, but won't be more than 11 million shares.

The drugmaker will get two early stage hepatitis C compounds in the deal, one of which looks like it has at least as good of activity as Vertex's phase 3 compound telaprevir, although it's still very early. The ultimate goal will likely be to combine the newly acquired compounds with telaprevir to try and increase the virus-fighting activity even further. There's certainly precedence for combination treatments to treat viral diseases -- Gilead Sciences' (Nasdaq: GILD  ) and Bristol-Myers Squibb's (NYSE: BMY  ) combination treatments for HIV have been successful for both patients and the companies.

I'm not sure that now was the ideal time to make an acquisition and dilute shareholders further. Small companies like American Oriental Bioengineering (NYSE: AOB  ) and Natus Medical (Nasdaq: BABY  ) have done well using their stock to finance acquisitions, but both of those companies have products on the market and bought companies that were already generating revenue. The acquisition of ViroChem Pharma will only add to research and development costs and Vertex doesn't look like it'll have a revenue stream until 2011.

But Vertex didn't have much of a choice -- it pretty much had to make the acquisition for the long-term sustainability of the company. Hepatitis C is an insanely competitive market. Vertex along with Schering-Plough (NYSE: SGP  ) may be the current leaders in the next-generation treatments, but the next-next-generation compounds from Roche, InterMune (Nasdaq: ITMN  ) and others are already on their way. Hearing the footsteps has to make Vertex a little nervous and this acquisition should help it sleep a little better at night.

More Foolishness:

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