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Summary

  • Merck is acquiring Idenix for its hepatitis C pipeline.
  • Gilead, which had $2.3 billion in hepatitis C revenue in Q1, sold off on the news.
  • The state of the combined Merck-Idenix pipelines indicates Gilead remains well ahead.
  • The valuation of Idenix indicates its therapies are unlikely to beat Gilead's.

Merck (NYSE:MRK) announced it would buy Idenix Pharmaceuticals (NASDAQ:IDIX) today for $3.85 billion, or $24.50 per share. It is a great day for Idenix shareholders, whose stock closed Friday at $7.23 per share.

Gilead Sciences (NASDAQ:GILD) declined on the news to under $79.00 per share, from a close of $82.39 on Friday. Press releases claim that the Idenix pipeline for the hepatitis C area will help Merck with its efforts to stay meaningful in that market. If true, that could imply lower hepatitis C revenues for Gilead at some point in the future. But if you look at what investors thought of Idenix as late as last Friday, and Gilead's dominance in the field, the story begins to look improbable, or perhaps desperate.

Gilead is noted for its anti-viral expertise, being the leading maker of oral therapies for HIV infections (but having several disease therapies commercialized as well). While Gilead had its own hep-C program, it bought Pharmasset, including what we know call Sovaldi, for $11 billion in 2011. Not only did Sovaldi record sales of $2.3 billion in Q1, but an even more effective combination of Sovaldi with ledipasvir is highly likely to be on the market before the end of the year. [Total Q1 revenue was $5.0 billion.]

Looking back over the last year, Idenix's 52-week low was $2.93, corresponding to a market capitalization of $442 million. This would indicate that investors did not think much of Idenix's hepatitis C pipeline. Even the near-$4 billion paid by Merck seems to say the IDIX pipeline probably does not have likely winners against Sovaldi. Just a guess, but if I had a Sovaldi-killer in my pipeline, I'd want $15 billion for it.

A quick look at the Idenix pipeline shows none of the three clinical-stage therapies has made it to Phase III trials. The most advanced, Samatasvir, an NS5A Inhibitor, is in Phase II. Phase III trials for hep-C drugs do not have the long time scale of, for instance, cancer drugs, but combined with the time the FDA takes to make a decision, commercialization would be at least a year away. There is both a chance of failure (lack of efficacy, or from adverse events) in Phase III, and roughly a year to go before FDA approval can be obtained. Also, separate trials would be required for any combination therapy. Recall, Gilead acquired Pharmasset in 2011, but did not begin selling Sovaldi until Q4 2014.

Merck, of course, is a formidable company. Perhaps if it had bought Pharmasset, it would not be so desperate today, but it missed that opportunity. The Merck Idenix acquisition press release uses the word "promising" at least twice, once to describe Idenix's candidate therapies and once to describe Merck's own hepatitis C therapies. Merck's therapies, at least MK-5172 and MK-8742, began Phase III trials in April. Promising is not proven.

Certainly, Gilead looked at Idenix's pipeline and did not feel it was worth buying back, when it might have been got for under a billion dollars.

There is also a patent issue. With tens, if not hundreds of billions of dollars at stake, everyone with hepatitis C patents is suing everyone. Gilead would have checked the patent basis of Pharmasset before paying $11 billion. Patent lawsuits will make some lawyers rich, but are not likely to invalidate Gilead's.

A smarter move by Merck would have been to buy Gilead.

I continue to believe that Gilead will generate so much cash in 2014 and 2015 that the stock price will rise well above the $80 per share range it has been hovering around.

The Idenix story is a distraction from the Gilead story. Gilead is very aware of the competition in hepatitis C. Gilead can also add new molecules to its proven (but not yet approved by the FDA) Solvadi-ledipasvir combination.

Merck will likely someday offer a decent hepatitis C therapy. But nothing it has so far indicates it, or any other company, can catch up with Gilead in the near term. That could change, but not before Gilead has been able to generate a lot of value for its current shareholders.

Source: Gilead Down On Merck-Idenix Deal, But Little To Fear