Venerable pharmaceutical company Merck (NYSE:MRK) announced Monday that it will buy privately held Aton Pharma for an undisclosed sum, continuing its strategy of targeted small-scale acquisitions.
How does this strategy help Merck? For pharmaceutical investors, the mantra has become: "It's the pipeline, stupid." Many of Merck's peers, such as Pfizer (NYSE:PFE) (which completed its purchase of Pharmacia in 2003) and GlaxoSmithKline (NYSE:GSK) (formed from a combination of GlaxoWellcome and SmithKline Beecham in 2000) have closed mega-mergers. Part of the rationale behind many of these large deals was to fill holes in each companies' drug stables as marketed drugs came off patent.
Another big pharma strategy to quickly rejuvenate aging drug portfolios has been to license drugs from biotech companies. One of the biggest of these deals was Bristol-Myers Squibb's (NYSE:BMY) pact with ImClone Systems (NASDAQ:IMCL) for the cancer drug Erbitux. For Bristol Myers, the deal was in some sense a departure from its core focus, which had traditionally been small molecule-based drugs, i.e., drugs derived from chemical compounds. Instead, Erbitux is a large molecule, or biologic drug, made from altered proteins grown in culture.
For its part, Merck, despite an impending loss of patent protection for its cholesterol-lowering drug Zocor, has mostly shied away from both of these approaches. Instead, the drug giant has decided to acquire smaller firms for their technology, maintain its core focus on small molecule drugs, and build from within. With its lead candidate in only mid-stage trials, Aton won't be a quick fix to Merck's Zocor problem, but evidently Aton's pipeline will complement technology acquired from another acquisition, and hopefully yield results in the years ahead.
Merck's maneuvers to date have not been particularly popular with investors, with the stock down almost 24% from its 52-week high. The strategy has also been painful for Merck employees, since the firm has had to lay off workers. Still, there's a good chance the drug giant may be on to something.
The concept of economies of scale may hold in other industries, but the jury is out as to whether greater size makes pharmaceutical research more efficient. While Pfizer is sitting on top of the world at the moment, just a few years after its mega-merger, GlaxoSmithKline is on the ropes. And though licensing from biotech has its allure, Bristol Myers' initial fiasco with Erbitux showed that not having full control over the development process can be dangerous.
This may not gel with some investors, who demand consistently higher revenue and profits, but it doesn't seem that drug development can simply be ramped up as need arises. It relies on talent and creativity. While past performance is not necessarily an indicator of future success, Merck's track record suggests that if investors take a page from the company and remain patient, they'll be rewarded.
Will the tortoise win the race? Does Merck have the right idea with its slow-and-steady strategy? All this and more on the Merck discussion board. Only on Fool.com.
Fool contributor Brian Gorman is a freelance writer in Chicago, Ill. He does not own shares of any companies mentioned in this article.
