Healthy Skepticism Library item: 7139

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Publication type: news

Zimm A.
Merck's Clark Skips Big Purchases to Buy Science
Bloomberg.com 2006 Dec 11
http://www.bloomberg.com/apps/news?pid=20601202&sid=aEMldGIGfRQM&refer=healthcare

Abstract:

Merck & Co., the second-biggest U.S. drugmaker by market value, would rather buy small companies to sharpen its research than make multibillion-dollar acquisitions that add products, says Merck’s top science scout.

``It’s difficult to find value’‘ in purchases designed to bring in drugs immediately, Mervyn Turner, Merck’s senior vice president of worldwide licensing and external research, said in a Dec. 5 interview. ``We have to be prepared to move wherever the science takes us.’‘

Chief Executive Officer Richard Clark may provide details on how Merck will invest its $16 billion in cash when he meets analysts tomorrow at the company’s Whitehouse Station, New Jersey headquarters. Merck this year agreed to buy three companies for a combined $1.6 billion, acquiring methods for making antibodies, biotechnology tools and a gene technology.

Abbott Laboratories by comparison is paying $3.7 billion for Kos Pharmaceuticals Inc. to gain a cholesterol treatment that Merck is developing in-house.

Clark’s acquisition strategy may not add to sales for years. Revenue from the cholesterol pill Zocor may fall by $3 billion next year because of generic competition, and new medicines for diabetes and cancer won’t make up the lost sales right away.

Delayed Payoff

``Merck’s transactions have been different from other companies in the industry,’‘ said Vincent Aita, who helps manage $200 million in health stocks for Kilkenny Capital Management in New York. He doesn’t own Merck shares. ``They seem inclined to acquire trophy acquisitions of innovative technologies to give their in-house scientists new tools and toys. It’s strategic rather than financial.’‘

Merck’s shares rose 38 percent this year as the company introduced five medicines, more than any other drugmaker, including the cervical cancer vaccine Gardasil and the diabetes pill Januvia. The gains made Merck the best performer among the 14 members of the Standard & Poor’s 500 Pharmaceuticals Index and the fifth-best performer in the Dow Jones Industrial Average.

The stock rose 8 cents to $44.01 as of 4:23 p.m. in New York Stock Exchange composite trading.

Buying Research, Not Drugs

Merck has never made a purchase that brought with it a marketed medicine. While the company spent $2 billion in the past five years on acquisitions that added scientists, tools and technology for its research labs, rival Pfizer Inc., the world’s biggest drugmaker, spent $67 billion, the bulk of it to acquire Pharmacia. That deal brought Pfizer the cholesterol pill Lipitor, the source of a quarter of its revenue and almost half of profit.

Sirna Therapeutics Inc., which Merck agreed to buy for $1.1 billion, is the company’s biggest acquisition this year. The purchase will give Merck experimental compounds that draw on the new science of RNA interference, a genetic function that won the Nobel Prize this year for the two U.S. researchers who discovered the mechanism. The company expects to complete the transaction early next year.

Therapies based on RNA interference work by turning off genes responsible for certain diseases. Sirna has been testing RNA interference compounds to treat eye, lung and skin diseases. Merck plans to use the technology to develop cancer drugs, a new area of research for the company and a focus for acquisitions, Turner said.

Vaccines, Other Biologics

Other areas guiding Merck’s research and acquisition strategy include obesity, heart disease, diabetes, vaccines and pain and sleep disorders. The company is also focusing on strengthening its capability for developing vaccines and other biologic therapies, which are treatments derived from living organisms, such as human proteins, antibodies or bacteria.

Merck’s $400 million acquisition of GlycoFi Inc. earlier this year added methods for growing medicines in yeast. Its purchase of Abmaxis Inc. for $80 million brought technology for producing antibody drugs.

Analysts say it’s too early to say whether Merck’s acquisitions can pay off.

``I’m not convinced that there will be an RNA interference drug,’‘ said Anthony Butler, an analyst with Lehman Brothers in New York, in an interview. ``I don’t think we’ll know for years.’‘

Early Stage Compounds

Merck is also buying early stage compounds through licensing and partnerships. The company has signed about a half- dozen agreements worth more than $1.5 billion this year, including today’s pact with Idera Pharmaceuticals Inc. to add compounds to enhance vaccines. Merck agreed to pay Idera as much as $445 million.

Investors said they hope to learn more about Merck’s experimental drugs that are reaching late-stage development, including obesity and cholesterol medicines.

Of particular interest is a new cholesterol drug similar to Pfizer Inc.‘s failed torcetrapib. Merck has been testing a medication from the same class. The drugs are designed to work by blocking the cholesterol ester transfer protein, or CETP, which converts good cholesterol, or HDL, into bad cholesterol, or LDL.

Merck projected last week that profit will increase next year as it cuts jobs and lifts revenue through sales of Januvia and Gardasil. At the same time, the company predicts sales of Zocor, which generated $4.4 billion last year, will plummet to $600 million to $900 million. Merck’s second-biggest drug, the osteoporosis treatment Fosamax, will lose patent protection in 2008.

``Their problems are Zocor and Fosamax, and that’s pretty much it until the end of the decade,’‘ Miller Tabak & Co. analyst Les Funtleyder in New York said in an interview. ``I don’t think Merck is in dire trouble. Mega mergers in the pharmaceutical industry haven’t proven themselves to be value added.’‘