What: Shares of Avanir Pharmaceuticals Inc (NASDAQ:AVNR), a biotechnology company focused on developing central nervous system therapies, added as much as 11% after announcing a marketing pact with Merck (NYSE:MRK).
So what: This is a little odd because you usually see this happen in reverse (i.e., the smaller biotech seeks out the marketing expertise of the big pharmaceutical company), but this morning, Avanair and Merck forged an agreement whereby Avanir will receive a fixed fee plus incentives to help co-promote Merck's type 2 diabetes products, led by Januvia. According to a covering analyst at Jefferies, the deal is for three years and worth as much as $60 million. The move will help Merck expand its reach further into nursing homes, which is a smart strategic move since diabetes risk does increase with age. For Avanir, the marketing deal adds much-needed revenue without diverting its sales force away from selling its lead drug to treat pseudobulbar affect, Nuedexta.
Now what: This looks like a win-win for both parties involved. For a fixed fee plus selling incentives, Merck gets a bigger push into medical care facilities within the U.S., and with relatively minimal expansion of their current marketing campaign, Avanir gets extra revenue to help co-promote Merck's type 2 diabetes products without taking away from its lead drug, Nuedexta. There's a chance the extra revenue generated from this marketing pact could actually get Avanir to break even with its annual results by fiscal 2014, which would certainly be enough reason to justify today's rally. Plus, Januvia is protected by patents through 2022, which means, if successful for both parties, this marketing agreement may extend for many years to come beyond its initial three-year run.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.