Merck, Bristol-Myers Team Up

Merck's (NYSE:MRK) and Bristol-Myers Squibb's (NYSE:BMY) decision to join forces on Bristol-Myers' experimental diabetes drug, muraglitazar, and a follow-on product brings into focus a new emphasis on partnerships in the pharmaceutical industry.

The "global development and commercialization" agreement actually will probably involve little development for muraglitazar, at least not in the clinical sense. Bristol-Myers has already done most of the heavy lifting on this front, advancing the treatment into phase 3 trials. In fact, the firm's intention to file a new drug application (NDA) within the next nine to 12 months suggests that initial clinical work is all but wrapped up.

Instead, Merck will mostly help "commercialize" muraglitazar, or in other words, sell it. It seems strange that Bristol-Myers would need any sales help -- after all, in the first quarter alone, it racked up $1.5 billion in marketing, selling, advertising, and administrative expenses and still brought in net income of $964 million. So after putting in all the development work, why give up a portion of future sales to Merck, even if it is in exchange for up to $375 million?

The answer might have something to do with the industry's 800-pound gorilla, Pfizer (NYSE:PFE). While Bristol-Myers' first-quarter sales and administrative expenditures were huge, consider that Pfizer's totaled $3.9 billion. Merck, meanwhile, spent $1.6 billion, meaning Pfizer outspent its two rivals combined by $770 million. Even on a percentage-of-revenue basis, Pfizer wins: Its expenditures were 31.5% of revenue vs. 29.9% for Bristol-Myers and 28.6% for Merck.

Faced with Pfizer's sales and marketing heft, lesser players have a good reason to lean on each other. In this case, Merck seems to have gained the most from the deal, given that it will also receive a portion of sales from another diabetes treatment that is in phase 2 trials. Nevertheless, given the stiff competition, the tie-up looks to be in the best interest of both participants.

Mathew Emmert recommended Merck for Motley Fool Income Investor subscribers. Take a free trial to learn more about the companies that will pay you to own them.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.