Merck is spending $3.85 billion, paying a price per share triple what investors think it’s worth, on liver drug maker Idenix. It’s a bold move to gain share of this market.
Peter Loftus wrote for The Wall Street Journal that the move signals Merck is betting that the market for liver treatments will only grow:
Merck & Co.’s $3.85 billion deal to acquire a developer of hepatitis C drugs underscores the pharmaceutical industry’s bet that improved medicines for the liver disease represent a large, long-term market opportunity.
Merck agreed to acquire Idenix Pharmaceuticals Inc. for $24.50 a share in cash, more than triple the stock’s Friday closing price of $7.23 The premium was fueled by a competitive bidding process, according to Merck. Idenix shares soared to $24.03 in midday trading Monday, while Merck shares were unchanged at $57.85.
The treatment of hepatitis C, a liver-damaging virus estimated to infect up to 150 million people world-wide, is undergoing a dramatic transformation. Newer medicines have higher cure rates, with fewer side effects and shorter treatment durations than older drugs. Rapid scientific advances the past few years have fueled a flurry of acquisitions, licensing deals and partnerships among drug companies jockeying for position.
Idenix, of Cambridge, Mass., has about 85 employees and no products on the market, and posted less than $1 million in revenue last year. But it is developing several potential new treatments for hepatitis C that have caught the attention of bigger drug companies.
The New York Times story by Andrew Pollack said that Idenix isn’t even the market leader, but that its treatment could transform the market:
Gilead Sciences is the leader in the hepatitis C race. Its new pill, Sovaldi, recorded sales of $2.3 billion in the first three months of this year, shattering the pharmaceutical industry’s record for sales of any drug in its first full quarter on the market but also raising concerns about affordability. Gilead obtained the rights to Sovaldi through its own daring acquisition of a smaller company, Pharmasset, for $11 billion in late 2011.
Merck is in late-stage clinical trials of a combination of two hepatitis C drugs, which could get to market in two years. But that combination is aimed at only certain subtypes of the hepatitis C virus and requires 12 to 18 weeks of treatment.
Adding a drug from Idenix to those two drugs could allow for a once-a-day pill that could treat all subtypes of the virus in as little as four weeks, Dr. Roger Perlmutter, who heads research and development for Merck, said in an interview.
Forbes writer Matthew Herper said that Merck was buying its way into competing with Sovaldi with purchase of the “nuke” or nucleoside analog class drug:
Nukes have been among the most difficult hepatitis C drugs to develop, and among the most valuable. Gilead acquired Sovaldi when it bought Pharmasset for $11 billion. Bristol-Myers Squibb BMY -1.4% bought a company called Inhibitex for $2.5 billion, but then had to half development on Inhibitex’s lead drug after nine patients were hospitalized and one died. Worries about those toxicities also held Idenix back. After Bristol abandoned the Inhibitex compounds, the Food and Drug Administration told Idenix to stop clinical trials of its two lead drugs, both a type of hepatitis C drug called a nucleotide polymerase inhibitor. In February, Idenix abandoned those drugs, continuing instead with the two medicines that led to Merck’s purchase of the company.
Many investors have doubted that Idenix could catch up in a market that seemed owned entirely by Gilead. Those who believed now stand to make a heady, all-cash profit. Merck’s Idenix purchase is a huge win for Seth Klarman, the most revered value investor in America, and his Boston-based hedge fund, the Baupost Group. According to a filing made by Idenix with the Securities and Exchange Commission in April, Baupost owns 35.4% of Idenix shares, which will be worth $1.3 billion should the deal close. The drug giant Novartis owns 22% of Idenix, meaning that Merck will be paying its rival a hefty $816 million. If Merck really can emerge as a challenger to Gilead, it will have been money well spent.
Ransdell Pierson said in a piece for Reuters that the premium price was justified given the market size:
Hepatitis C drugs have a history of being expensive, largely because some 170 million people worldwide have the often-fatal liver disease and have not had good treatment options.
Bristol paid a 163 percent premium for Inhibitex. Gilead acquired Sovaldi by agreeing in 2011 to pay $11 billion in cash for biotech company Pharmasset, an 89 percent premium for a company with no marketed products.
Perlmutter said Merck hopes the triple combination will cure patients in 4 to 6 weeks, substantially more quickly than current treatments and those in clinical trials.
Leerink Partners analyst Seamus Fernandez said IDX21437 has not shown any of the skeletal or cardiac toxicity signals that were seen with Bristol’s failed drug. Moreover, he said safety of the Idenix drug, at least from preclinical studies, looks very similar to Sovaldi.
“Merck’s presentation supports a much larger and longer market opportunity in hepatitis C” than expected, justifying the price of the deal, Baird Equity Research analyst Brian Skorney said in a research note.
It’s nearly unheard of for a company to pay so much over market value, which brings up the question of how well do investors truly understand drug makers. Obviously the industry is complicated and treatments fail at any stage, but it seems few people actually understood the potential market as well as the quality of this drug, if Merck’s price is justified. Maybe it’s time for people to take a deeper look at companies’ pipelines and the true potential sitting there.
