Merck & Co., Inc. (MRK) recently announced an agreement that should help strengthen its diabetes franchise. The company entered into a definitive agreement with SmartCells, Inc. whereby it will acquire the latter.
Terms of the Agreement
Per the terms of the agreement, Merck will acquire all outstanding stock of SmartCells for an upfront payment and additional payments based on the achievement of development and regulatory milestones. The entire deal could be worth more than $500 million. Merck will also make payments based on product sales.
Deal Should Strengthen Diabetes Franchise
The deal, which has been approved by SmartCells’ Board, will provide Merck with access to SmartCells’ glucose responsive insulin formulation which is being developed for the treatment of diabetes. SmartCells’ technology platform employs a technique which allows an insulin therapeutic to be available only for a specific glucose concentration range.
Diabetes Market Highly Lucrative
The diabetes market is highly lucrative and represents significant commercial opportunity. It is estimated that more than 230 million people are afflicted with the disease across the world. The prevalence of diabetes should continue increasing due to factors like sedentary lifestyles, excessive weight and obesity, unhealthy diets and aging population.
Merck’s diabetes franchise currently consists of products like Januvia and Janumet. The diabetes product portfolio posted sales of $2.6 billion in 2009. SmartCells’ technology could help develop a new treatment option in the form of glucose-responsive insulins. This would help drive sales significantly. Major players in the diabetes market include Novo Nordisk (NVO), Eli Lilly (LLY), Sanofi-Aventis (SNY) and GlaxoSmithKline (GSK) among others.
Neutral on Merck
We currently have a Neutral recommendation on Merck, which is supported by a Zacks #3 Rank (short-term “Hold” rating). Merck is currently facing issues like patent expirations of key drugs and EU pricing pressure. However, the company has a deep pipeline that should act as a cushion when its key products lose patent protection in the next few years.
Moreover, some of Merck’s recent launches should start contributing significantly to the top line in the forthcoming quarters. The restructuring initiatives undertaken by the company should also improve its bottom line. We are also positive on Merck’s efforts to expand its portfolio through acquisitions and in-licensing deals.
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