Merck Pays Record Premium in Hepatitis Drug Bet: Real M&A

Merck & Co. is making a record bet that an experimental disease treatment is worth more than Coppertone and Dr. Scholl’s.

The U.S. drugmaker offered Idenix Pharmaceuticals Inc. shareholders $24.50 a share, or $3.85 billion, for the developer of hepatitis C drugs. That’s almost quadruple the stock’s average unaffected price over the previous 20 days, the highest premium on record for any health-care deal of at least $100 million, according to data compiled by Bloomberg.

With the Idenix deal, Merck is doubling down on the potentially $20 billion market for hepatitis C treatments after agreeing last month to sell its consumer-health division to Bayer AG. The moves signal the $169 billion company is increasing its focus on riskier businesses that have the potential to yield bigger returns.

“If you’ve got a $20 billion industry and you can pay $4 billion to get into it, I think that’s great,” Scott Redmond, founder of Richmond, Virginia-based Redmond Asset Management LLC, said in a phone interview. “It’s a huge market and for the next 10 years or so, there are going to be very, very few competitors whereas in the consumer products, there are competitors all over the place.”

Redmond said his firm, which oversees about $235 million, sold its shares of Idenix after the takeover was announced.

The deal marks Merck’s first acquisition of size since it bought Schering-Plough Corp. for more than $40 billion in 2009, according to data compiled by Bloomberg.

Idenix Logic

Idenix’s lead drug, IDX21437, works by stopping the hepatitis C virus from replicating within the body. Combining that with Merck’s existing regimen could improve potency and reduce treatment duration, Brian Abrahams, an analyst at Wells Fargo & Co., wrote in a report yesterday.

That will better position Merck to compete against rivals such as Gilead Sciences Inc. in the race to develop a more effective treatment for the estimated 170 million hepatitis C patients worldwide. Gilead and Merck plan to create drug combinations in the next few years that promise to work against most forms of the disease, and take less time to do it than current therapies.

Gilead received U.S. approval in December for Sovaldi, the $1,000-a-pill treatment it acquired in its $11 billion purchase of Pharmasset Inc. in 2012. The deal represented an about 90 percent premium for Pharmasset shareholders.

The 290 percent premium Merck is paying for Idenix is more than double the previous record set by Bristol-Myers Squibb Co. in its 2012 acquisition of Inhibitex Inc., another hepatitis C drug developer, according to data compiled by Bloomberg. Bristol-Myers ended up having to take a $1.8 billion charge and discontinue development of the drug after a patient experienced heart failure.

Better Odds

Merck’s purchase has a higher probability of success, though there’s still risk tied to the development of Idenix’s hepatitis C drug, Mark Schoenebaum, a New York-based analyst at International Strategy & Investment Group LLC, wrote in an e-mail.

“If it works, it’s worth it,” Schoenebaum wrote.

With its record premium for Idenix, Merck may have been seeking to avoid a bidding war with another company developing hepatitis C treatments, such as AbbVie Inc., said Redmond, the former Idenix shareholder. AbbVie may now consider a takeover of Achillion Pharmaceuticals Inc., a $411 million company, to expand in that market, Redmond said. Shares of Achillion rallied as much as 67 percent yesterday.

Today, Achillion climbed another 83 percent to $7.79, reaching a record after U.S. regulators let it restart trials of a hepatitis C product. Shares of Idenix fell 0.6 percent to $23.66.

Representatives for New Haven, Connecticut-based Achillion and North Chicago, Illinois-based AbbVie declined to comment.

Confidence Vote

Merck’s deal signals a vote of confidence in the future of the hepatitis C treatment market, according to Howard Liang, a Boston-based analyst at Leerink Partners LLC.

The takeover of Idenix “makes strategic sense,” Liang wrote. “While the transaction strengthens Merck’s competitive position, we believe Merck’s commitment to the space also demonstrates its belief that there is a long-term market for” hepatitis C treatments.

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