WSJ: Merck’s Dick Clark Has Opportunities, but All Are Risky
By Deal Journal
Jacob Plieth, of Dow Jones Investment Banker, reports:
So Richard Clark is on the hunt. The Merck CEO said early this month that he is looking to acquire biotechnology companies, preferring to spend in the single-digit billions of dollars.
Well, a look at publicly traded U.S. biotechnology companies reveals some interesting and obvious targets, but each has risks that might not suit Clark’s palate.
Merck CEO Richard Clark at the 2006 World Economic Forum in Davos, Switzerland.One company in particular–Amylin Pharmaceuticals–could fit in terms of strategy and price tag, given that Clark pinpointed diabetes, an area where Merck has historically been active. Amylin sells the diabetes drug Byetta through an alliance with Eli Lilly. Its shares also have yet to recover from concerns over Byetta’s safety and a recent proxy fight with Carl Icahn. Still, a regulatory warning over Byetta’s link with pancreatitis turned out less severe than feared, and the Icahn battle served to highlight possible improvements to the business.
True, Amylin’s sales of Byetta have stagnated at around $700 million a year. But Icahn clearly thought bold moves could revitalize the business, and Merck would have the muscle to effect radical change if it wanted to, even if it didn’t involve Icahn’s more-sweeping suggestions, such as dissolving the Lilly deal.
How much would it cost? Prices of recent U.S. biotechnology takeovers have ranged from the meager 16% premium Johnson & Johnson paid for Cougar recently to the 64% Biogen Idec is offering for Facet Biotech. But assuming a 50% premium to the current price, Amylin could be had for $2.7 billion–the level at which it was trading a little more than a year ago.
Having just bought Schering-Plough, Merck has $19 billion of total debt but, even before planned $3.5 billion annual cost savings, its debt to forecast 2010 earnings before interest and tax multiple of 1.4x, plus $8 billion in cash on hand, suggest a move of this size would easily be within its reach.
The uncertainty lies with whether Merck could breathe new life into Amylin’s diabetes franchise. There also would be a change-of-control provision, which would speed repayment of a $900 million debt facility.
Merck could look to smaller, more easily digestible takeovers, but here the risks might be steeper. Take MannKind, the only inhaled insulin developer left standing after last year’s shock decision by Pfizer to withdraw Exubera on concerns of safety and a lack of commercial acceptance. MannKind’s inhaled product, Afresa, is awaiting U.S. approval, and at a 50% premium the company could be had for a little more than $1 billion.
But buying into the tried and failed concept of inhaled insulin would likely be a step too far for Clark. The same applies to looking at obesity, a related area that Merck knows all too well. Two U.S. biotechs, Vivus and Orexigen Therapeutics, impressed recently with pivotal data of their obesity projects and are valued at well below $1 billion each.
But Merck still has still fresh memories of taranabant, an obesity drug it pulled after Phase III trials, and the big drawback to VIVUS and Orexigen is that their products are smart combinations of established drugs, patent-protected though they may be.
Inhaled insulin and obesity are probably too hot to handle, and the historically conservative Merck might just end up doing more licensing in preference to takeovers.
But it would do well to take a close look at Amylin, if only to say “no thanks |
