Mergers and acquisitions continue in the pharma sector with Merck (MRK) recently announcing its intention to acquire specialty pharma company Inspire Pharmaceuticals, Inc. (ISPH). The companies have entered into a definitive merger agreement which has been approved by the boards of both companies. Moreover, Warburg Pincus Private Equity IX, L.P., which owns 28% of Inspire Pharma’s shares, has agreed to tender all of its shares.
Deal Valued at $430 Million
Per the terms of the deal, Merck will pay $5 per share in cash to Inspire Pharma shareholders. The price represents a 26% premium to Inspire Pharma’s closing price on April 4, 2011. The entire deal has been valued at $430 million.
Inspire Pharma’s shares plunged more than 55% in early Jan 2011 when the company announced disappointing top-line results on its phase III cystic fibrosis candidate, denufosol. Since then, the shares have been struggling to regain lost ground and have been trading in a tight range.
Deal Makes Sense for Both Merck and Inspire Pharma
The deal makes sense for both Inspire Pharma and Merck. Inspire Pharma has been struggling following the late-stage failure of its cystic fibrosis candidate. The acquisition is a decent deal for Inspire Pharma’s shareholders. Inspire Pharma was left with a weak pipeline following the termination of the development of the cystic fibrosis program. The company also faced a setback with another phase III ophthalmology candidate, Prolacria, whose development is on hold for now.
Meanwhile, Merck has been working on expanding its ophthalmology product portfolio. The company currently has a glaucoma candidate, Saflutan, under US Food and Drug Administration (FDA) review. Saflutan became a part of Merck’s pipeline following the company’s April 2009 worldwide licensing agreement with Santen Pharmaceutical Co., Ltd.
Other candidates in Merck’s ophthalmology portfolio include Cosopt/Trusopt. However, US marketing exclusivity on both products have expired with sales declining 4% in 2010 to $484 million. While Trusopt has already lost marketing exclusivity in several European markets, Cosopt is slated to lose market exclusivity in several major European markets in March 2013.
With the Inspire Pharma acquisition, Merck will gain access to AzaSite, which is approved for bacterial conjunctivitis. AzaSite revenues increased 22% to $42.7 million in 2010. AzaSite is also being developed for blepharitis.
Besides AzaSite, Merck will be entitled to receive co-promotion revenues/royalties on two other eye care products, Elestat and Restasis, from Allergan, Inc. (AGN). Additional royalties will come from Santen Pharma on Diquas sales in Japan.
Neutral on Merck
We currently have a Neutral recommendation on Merck supported by a Zacks #3 Rank (short-term Hold rating). Merck is currently facing issues such as patent expirations of key drugs, EU pricing pressure, US health care reform and pipeline setbacks. We believe the company will have to resort to cost-cutting initiatives to drive the bottom-line. Meanwhile, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.
ALLERGAN INC (AGN): Free Stock Analysis Report
INSPIRE PHARMA (ISPH): Free Stock Analysis Report
MERCK & CO INC (MRK): Free Stock Analysis Report
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