Why Did Merck Pay Such A Huge Premium For Idenix

by Trefis Team
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Merck (NYSE:MRK) recently announced a definitive agreement to acquire Idenix at $24.50 a share for cash, offering a hefty premium of about 240% over last Friday’s i.e. June 6, closing price. [1] The acquisition will strengthen Merck’s Hepatits C portfolio and help it stem the revenue decline resulting from patent expiry of major drugs. The company will be conducting phase 3 trials for a combination treatment for Hepatitis C, which could potentially rejuvenate the pharmaceutical giant’s revenue growth. The clinical data for a combination of drugs MK-5172 and MK-8742 has showed high cure rates among patients with genotype 1 of the disease, and this has encouraged Merck to move to phase 3 trials. Acquisition of Idenix could be a game changer considering the possibility that a combination treatment leveraging Idenix’s drugs could potentially reduce the treatment window to four to six weeks.

Our current price estimate for Merck stands at $55, implying a discount of over 5% to the market price.

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How The Deal Will Be Additive To Merck’s Efforts In Hepatitis C Drug Development

Idenix currently has three Hepatitis C drugs under development. Out of these IDX21437 and IDX21459 are nucleotide prodrugs and samatasvir is a NS5A inhibitor. Merck’s combination therapy that includes MK-5172 and MK-8742, has shown good success against gentoype 1 of the virus. However, Idenix’s IDX21437 has shown effectiveness against all genotypes in early stage trials. The company hopes to combine this particular drug with its current combination therapy to create a more effective treatment procedure which will also reduce the window time of treatment. As a nucleotide inhibitor, IDX21437 blocks a protein that the hepatitis C virus needs to replicate.

Hepatitis C Market Is Worth Paying Such A Huge Premium For

Gilead Sciences is currently the market leader in Hepatits C treatment and is on its way to make a fortune selling its breakthrough drug Sovaldi. The drug’s sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group. [2] The high magnitude and wide range of estimates point towards Sovaldi’s tremendous potential. Much of this can be attributed to its high pricing. Gilead Sciences has come under attack from politicians in the U.S. for Sovaldi’s $84,000 for 12-week treatment cost. [2] However, the company states that the pricing is justified as the drug is superior to the alternatives due to its higher efficacy, much shorter treatment time and minimal side effects. It goes on to make the case that Sovaldi is, in fact, cheaper since Hepatitis C can eventually lead to liver transplant which costs over half-a-million dollars. [3]

The essence is that there is a lot of potential. The demand is high as close to 150 million people suffer from Hepatitis C globally. [4] The overall market for Hepatitis C treatment could reach $20 billion by 2020 and Gilead Sciences could capture around 80% of this market according to Deutsche Bank, unless viable alternatives emerge. [4] Clearly there is lot of incentive for Merck to join the race, and it may do so, provided its phase 3 trials are successful. However, there are other contenders as well, including AbbVie, Bristol-Myers Squibb and more. The pricing could come down once competition increases. If Merck can capture roughly 30% of this market by 2020, it will lead to $6 billion in incremental revenues, resulting in 10% upside to our price estimate.

What Else Does Merck Have In Its Pipeline?

Merck is also directing some of its focus on developing immuno-oncology drugs to help stem the decline in its revenues. MK-3475 (lambrolizumab or, as it was just renamed, pembrolizumab) is Merck’s investigational PD-1 specific monoclonal antibody for the treatment of advanced malignancy. The drug essentially enables a patient’s immune system to detect cancerous cells that are otherwise extremely hard to identify. T cells can then target and kill these exposed tumor cells. In June 2013, Merck reported that 38% of cancer patients under trial responded positively to this drug. Investors have welcomed the company’s decision to investigate the drug’s effectiveness in combination with other investigational agents. The drug is currently being studied in 17 clinical trials involving over 4,000 patients across more than 30 types of cancer. [5] MK-3475 is a new class of drugs and could well be the future of cancer treatment. Bristol-Myers Squibb has a similar drug in clinical trial under the name Nivolumab and is expected to garner $6 billion in peak sales. Currently these drugs are being tested for melanoma (skin cancer), and if their usage expands to other cancer types, it could open a much bigger market for these pharmaceutical companies. Merck has already initiated a study to identify other cancer types where the drug can have a therapeutic effect. The company could revive its oncology division if MK-3475 is successful.

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Notes:
  1. Merck to Acquire Idenix, Merck’s Press Release, June 9 2014 []
  2. Politicians add fuel to the firestorm over Gilead’s hep C drug pricing, FiercePharma, Mar 24 2014 [] []
  3. Gilead leads rivals in race to cure hepatitis C, SFGate, Mar 2 2014 []
  4. Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters, Mar 21 2014 [] []
  5. Merck’s Q1 2014 Earnings Transcript []
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