Merck's risky bet on a little biotech

Purchase of Sirna could lead to profitable cancer drugs, or nothing at all.

By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Merck's billion-dollar deal for Sirna could lead to profitable new drugs for treating cancer but the acquisition is a risky bet on a biotech with no proven products on the market, industry analysts said.

Merck & Co., (down $0.17 to $45.47, Charts) the No. 4 U.S. drugmaker, agreed late Monday to buy Sirna Therapeutics (up $6.18 to $12.63, Charts), a San Francisco-based biotech, for $1.1 billion in cash.

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The price was about double the market value of Sirna, whose stock soared Tuesday. The deal is expected to close in the first quarter of 2007.

Barbara Ryan, who tracks the drug industry for Deutsche Bank North America, said the purchase price reflects potential future earnings at Sirna had it remained independent. In a published note, Ryan called the deal a "smart move" because it demonstrates that Merck is "forward-looking and continues to make substantial and aggressive investments to fuel longer-term progress."

But some analysts said that while buying biotechs with promising pipelines is key for big drugmakers that want to keep growing, the acquisition of Sirna comes with considerable risks.

Merck and Pfizer (down $0.56 to $26.64, Charts), the world's largest drug company, have been buying up biotechs and licensing their experimental products, because their in-house research isn't enough to ensure sales growth. Big Pharma is under growing pressure to buy, discover or license new products to make up for patent losses on some of their top-selling products.

So why exactly did Merck buy Sirna? Because the biotech specializes in RNA interference technology, also known as RNAi, which could conceivably be used to control gene activity to destroy cancer cells without harming healthy cells. In 2001, Merck bought another biotech, Rosetta Inpharmatics, which specializes in this "targeted" type of RNAi technology.

Sirna has no products on the market. The most advanced experimental product in the biotech's pipeline, a potential treatment for a type of eye disease that can cause blindness, is years away from market approval, assuming its tests are successful. But that experimental product, called Sirna-072, is not the big draw for Merck, according to Ding Ding, analyst for Maxim Group.

"I think Merck paid $1.1 billion in cash really to buy the technology platform," said Ding. "I'm not convinced that Merck is going to continue the current pipeline that Sirna has. The key pipeline that interests Merck is oncology."

Merck could now find itself competing with Alnylam (up $3.06 to $19.66, Charts), another biotech that specializes in RNAi technology, said Ding. She added that Alnylam is an unlikely takeover target for Merck because it's already about 20 percent owned by the Swiss drug giant Novartis (up $0.41 to $60.81, Charts).

Though the cancer industry has great potential, trying to develop profitable drugs with RNAi is risky. Jonathan Aschoff, analyst for Brean Murray, Carret & Co., said one of the biggest challenges in developing RNAi-based drugs is figuring out how to successfully deliver them to diseased parts of the body.

"The delivery of these drugs is the Achilles' tendon of the RNAi industry," said Aschoff, who said they were being sent in what amounted to "unaddressed envelopes." But if Merck can overcome this hurdle, the company could have cancer drugs in the early stages of testing within two years, said Aschoff.

But Les Funtleyder, analyst for Miller Tabak, said he was "skeptical" of Merck's acquisition, because its purchase of Rosetta had failed to produce tangible results in the last five years.

"I still like Merck as a company and I think they're going to be fine, but I'm skeptical of the return potential of the deal," said Funtleyder.

Hey Big Pharma: it's a bad time to botch a blockbuster

Bristol-Myers is not for sale: interim CEO Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.