A recent Reuters article pointed out that Merck (NYSE:MRK) has been notably absent from the oncology space, as it doesn't have any oncology drugs on the market or in its pipeline. This puts Merck behind competitors like Bristol-Myers Squibb (NYSE:BMY), Novartis (NYSE:NVS), and Genentech (NYSE:DNA), which have all been successful in the large market for cancer drugs. As demonstrated this morning with the announcement of a major deal with Vertex Pharmaceuticals (NASDAQ:VRTX), Merck is now in the midst of a strategic push to build out its oncology pipeline.

In this collaboration, Merck acquired the rights to VX-680, which is a small-molecule drug that inhibits Aurora kinase (a type of protein). According to Vertex, these kinases are required for cells to proliferate, so blocking their activity may be a useful approach in the treatment of cancer. VX-680 is very early in clinical development and will be entering phase 1 clinical trials later this year.

Novel small-molecule cancer drugs that target specific pathways are a hot item in the drug industry right now, and Merck had to pay up to land this one. It's paying Vertex $20 million up front, another $14 million in research funding, and up to $350 million in milestones if VX-680 weathers the grueling clinical trials process to reach the market. If VX-680 is commercialized, Merck would pay Vertex a royalty on sales.

The financial aspects of this collaboration are similar to the deal Roche struck with ArQule (NASDAQ:ARQL) earlier this year. Pharma companies that are looking to beef up their oncology presence are having to pay a steep price to acquire these drugs. For the time being, the value of novel cancer drugs early in development has gone way up. Investors in small drug companies may not have to wait until the drug gets to market for a big payoff, but just until a pharma comes along with an open checkbook.

To read more by Charly on the exciting biotech industry, check out his recent articles:

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Fool contributor Charly Travers owns shares of Vertex Pharmaceuticals and ArQule.