Merck's Targeted Endeavors

Its bid for Sirna is the latest push to invest in nascent technologies.
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When

Merck

(MRK) - Get Report

executives use the term "targeted acquisition," it's wise to take them at their word, because they likely aren't talking about a takeover of some Big Pharma competitor.

Maybe the

recent bid for

Sirna Therapeutics

(RNAI)

will be enough to persuade Wall Street of Merck's intentions.

The Sirna offer, plus a pair of smaller deals earlier this year, should demonstrate to Wall Street that Merck wants to buy or license products, prospects and technologies rather than spend large sums for big companies with their huge selling, general and administrative expenses.

"We view this as a smart move," says Barbara Ryan of Deutsche Bank Securities in a recent report. Ryan doesn't need any persuading; she has a buy rating on Merck.

Buying Sirna "provides Merck with a powerful drug-discovery platform, while at the same time integrating the new technology into its own research and development efforts," says Ryan, who doesn't own shares. Her firm does, or seeks to do, business with companies mentioned in research reports.

Merck is paying $1.1 billion for Sirna, which has no products close to commercialization and just one compound in early-stage clinical testing. The $13-a-share offer was double Sirna's closing price on Oct. 30, just before the deal was announced.

Merck is convinced that Sirna's work in RNA interference (RNAi) -- a technology that turns off genes -- will produce many products down the road. The goal is to create drugs that enter cells in the body and make genes stop producing disease-causing proteins or viruses. Rather than treat a disease after damage has been done, Sirna wants to interrupt the body's signaling system that tells genes to make dangerous proteins.

Many analysts remain cautious but intrigued. "The potential is enormous, but it will take some time," says John Boris of Bear Stearns, who has a peer perform rating on Merck.

"Although therapeutic RNA interference is a very attractive emerging technology we are not likely to see the first drug approval until the next decade," he says in a recent research report. "And even after that, we're not likely to see widespread and dramatic medical advances from RNA interference drugs until the next decade."

Boris says his most immediate concern is how Merck can overcome the revenue-wrecking impact of the recent patent expiration for the cholesterol drug Zocor and the 2008 patent expiration for the osteoporosis drug Fosamax. He doesn't own shares; his firm has had a non-investment banking relationship.

Merck isn't the only Big Pharma company trying to bolster its technology foundation via collaborating and buying. However, Merck is making

the biggest bet on RNA interference. In 2003, it signed a collaboration with

Alnylam Pharmaceuticals

(ALNY) - Get Report

.

Alnylam's other partners include

Novartis

(NVS) - Get Report

,

Medtronic

(MDT) - Get Report

and

Biogen Idec

(BIIB) - Get Report

. Sirna's partners include

GlaxoSmithKline

(GSK) - Get Report

and

Allergan

(AGN) - Get Report

.

Buying Into Collaborative Efforts

As it pursues new ways to make new drugs, Merck is shedding its reputation as a company that prefers to rely on its own R&D rather than make licensing deals with, or acquisitions of, small research-oriented companies. Richard Clark, who became CEO in May 2005, says he will be more active in collaborations and "targeted acquisitions." His predecessor, Raymond Gilmartin, started expanding Merck's dealmaking in his final years as CEO.

In fact, the inflection point for strategic behavior modification was 2001 when Merck bought

Rosetta Inpharmatics

. The Rosetta research "has led to a deeper understanding of the biological circuits that control the activity of cells, and thus the identification of many novel targets which can now be approached through the use of RNA interference-based treatments," said Dr. Alan Sachs, vice president at Merck's Rosetta laboratories, when the Sirna deal was announced.

Still, some analysts are bound to get antsy when they hear Merck discussing how it is learning to make new drugs rather than showing proof of compounds in late stages of clinical testing. However, many say the bet on new technology is worth the down payment on Sirna.

"While exciting, RNA interference-based drugs are still very early in development and there still remain many unresolved issues," says Roopesh Patel of UBS Securities in a recent research report. "The main value for Merck is the technology and its intellectual property." Patel, who doesn't own shares, has a neutral rating. His firm has an investment banking relationship with Merck.

Boris, of Bear Stearns, adds that the Sirna deal continues the theme of acquiring technology, as illustrated in back-to-back buyouts in May of two private companies,

Abmaxis

of Santa Clara, Calif., and

GlycoFi

of Lebanon, N.H. Merck paid $80 million of Abmaxis and $400 million for GlycoFi.

Merck has been collaborating with both companies. Abmaxis specializes in developing monoclonal antibodies, genetically engineered versions of natural substances in the body that fight bacteria or viruses. Monoclonal antibodies provide reinforcements to the body's immune system.

GlycoFi specializes in glycoengineering, a way of improving the ability of proteins, such as monoclonal antibodies, to be more specific in their therapeutic activity. GlycoFi makes these proteins in yeast, which Merck says provides greater speed and lower cost than current production methods.

"We are encouraged by Merck's willingness to invest in nascent technologies," says Boris. "We view RNA interference as a high-risk, high-reward technology completing other therapeutic areas."