Merck Continues Looking For The “Right” Biotech Buying Opportunity

Speaking at a Goldman Sachs investor conference, CEO Clark discusses Merck’s plans in biotech.

Merck is aggressively evaluating opportunities to buy biotech companies - big or small - as part of its business strategy, but it has to "do it the right way," CEO Richard Clark told investors at a Goldman Sachs health care investors meeting Jan. 7.

"Looking at strategic opportunities is a critical part of our strategy ... and I still believe that the ability to look at ... an external acquisition capability is the right answer, but having said that, it would have to be financially smart and contribute long-term value," he said in response to a question from Goldman Sachs analyst Jami Rubin. With large pharmaceutical companies facing a dearth of innovative new products and all but the biggest biotechs scrambling for cash, Wall Street has been waiting to see if big pharma deal-making activity picks up (¹ (Also see "Can Big Pharma Save Biotech Investors?" - Pink Sheet, 1 Dec, 2008.), p. 12)

Most of Clark's discussion revolved around Merck's plans to change its general business model in 2009, but, in response to questions, he touched on a few biotech highlights. Rubin noted that Wall Street has been hearing about Merck's efforts to pursue big biotech partnering or acquisition opportunities for the past two years, but pointed out that such opportunities are now expensive and rare, even as 100 or so biotechs are trading at or below cash value.

"I think you'll see both Merck and other companies have done a fairly good job of looking at licensing and acquisitions over time," Clark responded, citing the company's acquisition of NovaCardia in 2007, which is the source of a new heart failure drug it expects to file an NDA for this year. Nevertheless, he noted, most of Merck's deal-making activities have been incremental, which is "certainly important, but given the state of the industry, where it is from a pricing pressure, political, regulatory and environmental standpoint, if you just look at incremental opportunities, and you don't change your business model" that's not enough.

In a recent interview with "The Pink Sheet," Mervyn Turner, Merck's new chief strategic officer, noted that Merck plans to make acquisitions, but even as prices for biotechs have declined, there are still significant hurdles to deal-making.

Referring to Merck's new BioVentures business unit, Clark told the Goldman Sachs conference that the business would focus on follow-on biologics or "bio-betters" and "novel biologics," not generics. The announcement of the new business on Dec. 9 came as a surprise to many on Wall Street, especially because of the scale of Merck's ambitions. The company plans to launch six or more follow-on biologics between 2012 and 2017, starting with an FOB of Amgen's Aranesp , a pegylated erythropoietin for anemia (² (Also see "Merck Announces Major FOB Initiative With Its New Business Unit" - Pink Sheet, 9 Dec, 2008.)).

Rubin asked why Merck sees an opportunity in the space, given its plethora of regulatory, patent, and scientific hurdles and likely fierce competition.

With the acquisitions of GlycoFi and Abmaxis in 2006, Merck has competitive advantages over others looking to enter the field because it has new technologies that are differentiated, IP-protected, and enable the company to get certain products to market earlier without violating other companies' patents, Clark said (³ (Also see "Merck’s Biotech Pipeline Gets A Boost From Two Acquisitions" - Pink Sheet, 9 May, 2006.)). Over the years, the company, through its vaccine business, has amassed expertise in biologics production and R&D, and plans to seek out external resources to fill in gaps, he told investors.

"Where we think we have competitive advantage is we think we have unique technology and unique ways to develop a product that is IP protected," he said. Many pharmaceutical companies are moving into over-the-counter and other businesses to hedge against the high risks of the traditional prescription drug business, but Merck's diversification efforts are focused on biologics, he said.

-Wendy Diller ([email protected])