If You Can't Beat 'Em, Use 'Em to Beat Your New Rival

Merck (NYSE: MRK) doesn't seem to have gotten the memo when it bought Schering-Plough. It's supposed to be a bitter rival to Roche in the hepatitis C space. Instead, it's extending the hand of friendship.

Merck and Roche sell competing pegylated introns: PegIntron and Pegasys, respectively. But their long-standing rivalry apparently pales in comparison to Merck's newer, potentially more costly competition with Vertex Pharmaceuticals (Nasdaq: VRTX) and its marketing partner Johnson & Johnson (NYSE: JNJ).

Vertex is on the verge of gaining approval for a new hepatitis C drug, Incivek, which will compete with Merck's recently approved Victrelis. The two haven't been tested head to head, but Incivek has generally posted better data. Both are used in combination with either Pegasys or PegIntron.

The partnership between Roche and Merck allows Roche to market Victrelis in combination with Pegasys and its branded generic Copegus. Merck gains an additional sales force promoting the product. There's potential for Merck to lose some PegIntron sales to Pegasys, but Roche was already dominating the market, so it isn't sacrificing much.

Roche was in a no-lose situation setting up the partnership. It's unlikely that Vertex will recommend using PegIntron. And besides, the deal isn't exclusive, so Roche could presumably set up a similar marketing partnership with Vertex, too.

In addition to this pact, Merck and Roche also plan to work on combining Victrelis and pipeline drugs of the two companies. Merck has a couple of additional hepatitis C drugs in the works, and Roche has a few as well, including RG7128, which it licensed from Pharmasset (Nasdaq: VRUS).

While it's clear that the future of hepatitis C treatment involves a cocktail of drugs like those currently used for HIV, it's not clear which drugs will be part of that cocktail. Some companies like Gilead Sciences (Nasdaq: GILD), which has six hepatitis C drugs in its pipeline, will try to develop a combination on their own. But we're also likely to see many more of these types of partnerships. This is just the first of many deals that will be struck to counteract moves from competitors.

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