Who might be on Merck's shopping list?

Analysis

When Merck & Co’s chief executive Richard Clark revealed last week that the US pharma giant is “aggressively looking” for a suitable biotech company to buy, it initially sounded like any number of big pharma CEO interviews in recent months, reassuring shareholders that they are striving to bolster thin pipelines and plug patent expiry holes with the “right” acquisition.

What was more interesting, however, was the level of detail revealed about the type of company under consideration, namely one with a mid-sized market cap, products already on the market and a research focus to complement Merck’s efforts. Using those parameters, EvaluatePharma comes up with some interesting potential targets.

A biotech to match this profile isn’t going to come cheap and suggests a possible acquisition far greater than the $1.1bn paid for Sirna Therapeutics in 2006, its biggest acquisition to date.

However, Mr Clark’s comments may be taken a bit more seriously considering the recent run of set backs the group has suffered, notably the Vytorin debacle and the FDA’s rejection of Cordaptive. The disappointments have contributed to the group’s 35% share price slump this year to $38, a swift downturn from the five-year high of $60.8 touched in December.

Merck is also expected to suffer significantly from the so-called “patent cliff” affecting its peers, with $13bn or 50% of its current revenues coming from products with patent expiries between 2008 and 2012. Blockbusters facing generic competition include osteoporosis treatment Fosamax, off-patent since February, hypertension drug Cozaar in 2010 and asthma therapy Singulair in 2012.

Merck’s strengths

Merck & Co: WW Rx & OTC sales by therapy area (US$m) Market Rank
 Therapeutic category 2007 2012 CAGR (07 - 12) 2007 2012
  Systemic Anti-Infectives 6,187 9,952 +10% 2 2
  Endocrine 754 4,255 +41% 10 3
  Respiratory 4,266 3,826  -2% 3 4
  Cardiovascular 4,842 2,991  -9% 5 10
  Musculoskeletal 3,438 1,131  -20% 1 14
  Central Nervous System  467 990 +16% 30 26
  Gastro-Intestinal 204 541 +22% 27 17
  Dermatology 405 530 +6% 6 8
  Oncology & Immunomodulators 11 388 +104% 54 33
  Sensory Organs 918 333  -18% 5 8
 Genito-Urinary 411 218  -12% 17 23
 Blood 87 90 +1% 34 37
  Other Rx & OTC sales 3,831 4,726 +4% 5 5
Total WW Rx & OTC Sales 25,820 29,972 +3% 8 7

Mr Clark says they want a biotech that will “complement Merck’s research efforts”. This raises the question of whether the group focuses on therapy areas that are predicted to generate the most rapid sales growth over the next five years, such as oncology, endocrine or CNS, or whether it seeks companies that match therapy areas in which it has historical expertise, but needs products to cover for generic erosion, such as musculoskeletal, cardiovascular or respiratory.

The answer is provided by a review of Merck’s current pipeline by therapy area and suggests the emphasis is being firmly placed on those areas of strong sales growth.

Merck & Co: no. of R&D products by therapy area (latest)
Systemic anti-infectives 29
Central Nervous System 25
Oncology & Immunomodulators 20
Cardiovascular 17
Endocrine 11
Sensory Organs 6
Genito-urinary 4
Musculoskeletal 4
Gastro-intestinal 3
Respiratory 3
Blood 1
Various 1
Total 124

The first four categories of anti-infectives, CNS, oncology and cardiovascular represent almost 75% of Merck’s current research effort, suggesting any potential target will have to demonstrate a decent track record and potential in at least one of these areas.

Bearing in mind the criteria set out by Mr Clark for a biotech of mid-sized market cap with already marketed products, EvaluatePharma’s peer group analyzer reveals the following top three most attractive companies in each therapy area:

Anti-infectives CNS
Company 2012 sales (US$m) CAGR (2007 - 2012) Market cap (US$m) Company 2012 sales (US$m) CAGR (2007 - 2012) Market cap (US$m)
Vertex Pharmaceuticals 733 n/m 3583 Biogen Idec 2700 6% 17784
Cubist Pharmaceuticals  654 18% 1090 Cephalon 1658 3% 4227
ViroPharma 286 7% 641 Elan 1254 40% 12417
               
Oncology Cardiovascular
Company 2012 sales (US$m) CAGR (2007 - 2012) Market cap (US$m) Company 2012 sales (US$m) CAGR (2007 - 2012) Market cap (US$m)
Celgene 1082 16% 27078 Actelion 1515 8% 6335
Cephalon 424 65% 4227 United Therapeutics 586 24% 1890
Genzyme 361 20% 18775 CV Therapeutics 282 33% 555

This assumes the larger biotech players such as Genentech, Amgen and Gilead Sciences are simply out of Merck’s budget, although Gilead’s portfolio of HIV treatments would complement the group’s anti-infective franchise. However, Gilead’s current market cap of $47.6bn, now the industry’s 15th biggest company, suggests it is well outside the “mid-sized” range Mr Clark refers to.

Interestingly, the only company that appears in more than one therapeutic category is Cephalon, the biotech which traditionally focuses on neurological disorders, but which has recently acquired a niche oncology portfolio, with Treanda granted FDA approval last month for chronic lymphocytic leukaemia.

Swiss company Actelion, a perennial acquisition target, appears as a top-ranked company within the cardiovascular segment, boasting a robust anti-hypertension franchise based around Tracleer. Recent concerns over Tracleer sales in the face of strong competition from Gilead’s Letairis has added pressure to the group’s share price.

Within CNS, although Carl Icahn appears hell bent on putting Biogen Idec up for sale again, the reasons the auction failed last year, mainly the complexity of its key product deals with Elan and Genentech, remain as stumbling blocks to a smooth acquisition and make it difficult for any potential suitor to assess its true value. The same reason would probably rule out a bid for Elan as well.

Vertex Pharmaceuticals’ anti-infective portfolio may initially appear attractive, although the fact all of their marketed products and key hepatitis C treatment in development, VX-950, have already been out-licensed to big pharma partners could be a hurdle.

Celgene, having just bought Pharmion for $2.9bn to bolster its oncology franchise, could be a target if Merck wishes to become a bigger player within cancer than it currently is. However, its total product NPV $15.6bn only represents 58% of its market cap of $27.1bn, suggesting the biotech is already over-valued. This would mean making a suitable offer to their shareholders quite difficult, and pricey.

Virgin territory

Either way, if an acquisition materialises along the lines of what Mr Clark has outlined and with valuations of the companies listed above in the multiple billion dollar range, it would break Merck’s acquisition record and signal a shift in strategy.

Takeda’s recent 53% premium offer for Millennium Pharmaceuticals suggests the kind of lengths Mr Clark may have to go to if and when he and his team settle on their target.

Within its peer group, Merck sits at the bottom of the pile in terms of product revenues generated as a result of a company acquisition, with the bulk of its sales growth derived from organic or in-licensed products. A multi-billion acquisition would be significant shift in strategy for the company, but Merck is clearly of the thinking that, in these unpredictable times, it may be time to buy itself out of trouble.

  % pharma sales by strategy in 2012 - ranked on company acquisition
  Organic     In-licensed   Company Acquisition   Product Acquisition   Other (e.g. JV; subsidiary; royalties)    Total WW 2012 sales (US$m)
Pfizer 24% 3% 53% 1% 19% 37,413
Abbott Laboratories 15% 20% 50% 0% 15% 21,275
Sanofi-Aventis 25% 3% 50% 0% 22% 48,939
Johnson & Johnson 20% 28% 39% 1% 13% 31,972
Amgen 9% 4% 25% - 61% 19,007
Wyeth 42% 18% 22% 2% 16% 20,294
Schering-Plough 21% 35% 15% - 30% 22,332
Bristol-Myers Squibb 20% 33% 13% 8% 27% 19,508
Roche 35% 19% 10% 0% 36% 50,448
Eli Lilly 70% 16% 9% - 5% 21,458
GlaxoSmithKline * 51% 19% 8% 1% 21% 43,958
AstraZeneca * 60% 26% 6% 2% 6% 26,294
Genentech 53% 27% 5% - 15% 16,264
Novartis * 47% 11% 5% 1% 36% 44,326
Merck & Co 52% 20% 1% - 27% 32,278
 * Mergers between Glaxo Wellcome & SmithKline Beecham; Astra & Zeneca; Sandoz & Ciba Geigy, all treated as merger-of-equals, with 'Organic' applied to the individual product sales

Data correct as of 30 Apr 2008.

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