Merck's Idenix Deal Could Deliver Bad News For Gilead Sciences

Merck & Co. (MRK) took upon a risky acquisition to boost its hepatitis C drugs portfolio, by recently entering a definitive agreement to acquire Idenix Pharmaceuticals (IDIX).

A consolidation of Merck’s lawsuits with Idenix’s would impose possible settlement for Gilead (GILD). The nearly $4 billion transaction has analysts predicting that Idenix’s value is ascribed to its intellectual property.

Merck’s market valuation is estimated at $170 billion, at $58 per share. The pharma giant’s shares initially dropped by a percent following the deal announcement, but quickly recovered end of day with modest gains.

The acquisition could strengthen Merck’s case if a consolidated suit is filed against Gilead for IP rights of Sovaldi. Anything that encourages settlement is going to benefit the company that can enter the marketplace, because settlement provides certainty that patent litigation just does not have, said experienced biotechnology patent lawyer, Kevin E. Noonan a partner with McDonnell Boehnen Hulbert & Berghoff LLP.

Pharmaceutical patents are tricky. Merck and Idenix have both separately claimed IP rights of Sovaldi.

“Big firms use patents to negotiate with other big firms, and most of the thousands of patents granted to these companies are either relatively narrow, never litigated or not significant to the companies business,” said Noonan.

Patents compel pressure to innovate. The government permits firms to create discoveries by granting multi-year monopolies via the patent system and in return, firms receive monopoly fees based on what the market perceives for a given amount of time to further the process.

When looked at from a larger scale, pharma R&D risk could pose negative correlation with market uncertainty. Any change of standard deviation of a  firm’s stock price over the prior 3 years of one, would result in fallen market value per sales dollar.

Competitors are actively partaking in patents within areas such as internal R&D cost reduction or to benefit IP cross-licensing. Open innovation today requires IP management being offered through a variety of strategies.

A recently published interim report by IP Wales highlighted several companies traded on the London Stock Exchange’s Alternative Investment Market (AIM). The report suggested that patent owners can elicit a positive response from investors by emphasising collaborative aspects of their IP strategies.

Investors have been known to view IP as a double-edged sword. Intellectual property law in relation to consideration-based regulation and open innovation in patent law is still fairly new.

“The problem with “consideration-based regulation” is that it is uncertain – Congress could always change the 12-year data exclusivity provisions of the BPCIA to 7 years, for example – and that sort of uncertainty inhibits investment” said Noonan. “The same is true regarding “open” innovation – if there is no possibility of exclusivity, than the only entities who can get investment to innovate are those with enough economic power to out compete smaller entities (which raises antitrust problems),” he said.

IP-based stock investing remains reserved for high risk investors with specialized knowledge. The existing challenge appears to lie with paucity of relevant information that can assist investors to make properly informed decisions.

Merck’s interest in Idenix's “nucs”hepatitis C drug will nonetheless complement its own advanced efforts to cure patients. Merck aims to combine IDX21437 with its existing high-profile experimental oral treatments, a protease inhibitor called MK-5172 and a NS5A inhibitor called MK-8742.

Gilead is also set to launch its three-drug combination hepatitis C pill this fall. The highly priced $1,000 Solvaldi pill reported a record $2.27 billion in first-quarter sales.

Merck’s plans are for the future.

Investors of Merck’s all-cash Idenix deal is a big win payoff but for the long term. A triple-combination therapy will take time to bring to market. Merck’s single pill drug would rapidly deliver between 4 to 6 weeks, substantially faster than current treatments and those in clinical development.

Prospects for Merck are promising. Pharmaceutical and biopharmaceutical sector shares have risen on 15% interest this year. Merck can take lead of the market because Gilead’s Sovaldi cannot be treated by a given number of patients who may have many illnesses or can't be taken by a hepatitis C subtype.

Merck’s moving in. How long can Gilead remain the market leader?