Merck Pays a High Price for Idenix

 Merck (MRK) announced the acquisition of Idenix for close to $3.85 billion. While Merck gains access to important next-generation hepatitis C drugs, we believe the acquisition price overvalues the pipeline assets. However, we don't expect any changes to our fair value estimate for Merck based on the highly priced acquisition, largely due to the relatively small size of the deal not moving the needle for the company's valuation. We don't expect any changes to our wide-moat rating for the firm, but we believe the acquisition slightly strengthens Merck's hand in the competitive hepatitis C market.

We don't expect the newly acquired assets to cause a major shift in future market shares for hepatitis C drugs. Merck's in-house all-oral regimen was positioned as a relatively late entrant to market, and Idenix's nucleotide analogs have not yet entered combination studies. The strength of leading all-oral regimens from  Gilead (GILD) and  AbbVie (ABBV) will make differentiation difficult in this increasingly competitive market. Additionally, several clinical holds in past development with Idenix's hepatitis C drugs increase our skepticism of the company's early-stage drugs (Phase I/II).

Nevertheless, if development is successful, Idenix's nucleotide analogs could cover all genotypes of hepatitis C without the need for ribavirin and with a short duration of treatment. In addition, the worldwide hepatitis C market will likely approach $20 billion over the long term, and even a slight advantage gained from the Idenix assets will likely translate into hundreds of millions of dollars annually.

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