Merck's Big Play in RNA

Its deal to acquire Sirna puts the spotlight on a Nobel-prize winning medical breakthrough -- and boosts the shares of other biotechs

Merck's (MRK) announcement after the close of trading Oct. 30 that it would acquire Sirna Therapeutics (RNAI) for $1.1 billion struck Wall Street as a vote of confidence in RNA interference (RNAi), a Nobel-Prize winning medical breakthrough that has yet to prove itself commercially.

Whitehouse Station (N.J.)-based Merck will pay $13 for each Sirna share, more than twice the Oct. 30 closing price of $6.45. Shares in Sirna ended the Oct. 31 session up more than 95% at $12.63.

The enthusiasm was contagious. On Tuesday, Oct. 31, shares in Cambridge (Mass.) based biopharmaceutical company Alnylam (ALNY), a developer of RNAi treatments, closed more than 18% higher Oct. 31 after Merck-Sirna deal was announced. An outfit with RNAi therapeutics in preclinical stages, Nastech Pharmaceutical (NSTK), gained almost 7% on the session. Meanwhile, Merck closed the session at $45.42, down almost 0.5%

Sirna and Alnylam are developing drugs based on RNA interference (RNAi) a mechanism that can work to block the expression of genes within cells. RNAi's advocates believe it may be the basis of treatments for a wide swath of illnesses. Merck says it has been involved in the field since its 2001 acquisition of Rosetta Inpharmatics. The company also has a collaboration with Alnylam to develop RNAi treatments for spinal cord injury.

"I haven't seen RNAi emphasized as much by any other firm" as Merck says Morningstar analyst Heather Brilliant. She says it was a "very rich" deal for a company that is years away from a commercial therapy. Sirna reported $4.9 million in revenues in 2005 and a net loss of $23.9 million on the year. It is not uncommon for development stage drug companies to spill red ink with investors holding out for the prospect of a big payday.

Sirrna's most advanced therapy is aimed at age-related macular degeneration, a leading cause of blindness. Though the drug is in early stage clinical trials, treatments for the condition are widely regarded to have the potential to become blockbuster drugs.

Standard & Poor's equity analyst Herman Saftlas was warmer on the Merck-Sirna deal, calling it a "bold move." "It's very hard to value these things," he says. "In the long run maybe it's cheap." Prices for promising companies have gone up and "every [Big Pharma] company that's worth it's salt is moving ahead in biotech." (S&P, like, is a unit of The McGraw-Hill Cos.).

Alnylam's most advanced drug candidate targets lung infections caused by respiratory syncytial virus. It is also in early stage clinical trials. The company also has partnerships with Cystic Fibrosis Foundation Therapeutics and Swiss pharma giant Novartis (NVS).

In late September Alnylam said it had received a $23 million government contract to advance the development of a RNAi anti-viral treatments against hemorrhagic fever viruses such as ebola. To present an idea of the degree of potential uses of RNAi, Alnylam also has programs targeting pandemic flu and Parkinson's Disease.

In a note following the Merck-Sirna deal, Needham analyst Mark Monane says the Sirna acquisition "validates the efforts of RNAi therapeutics companies" like Alnylam and Nastech Pharmaceutical. Monane has a buy rating on both stocks. (Needham makes a market for and has an investment banking relationship with Alnylam and Nastech.)

Monane believes the purchase indicates a major shift in the perception of RNAi's potential by big pharma and biotech players. He says it could indicate that more acquisitions, co-promotions and licensing agreements on the way as the larger companies look to fatten their early stage pipelines.

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