The announcement that Merck (MRK) plans to acquire Idenix Pharmaceuticals (IDIX) for $3.85 billion, or $24.50 per share, is having a ripple effect on the biotech sector on Monday. Shares of Achillion Pharmaceuticals (ACHN) spiked 41.6% in pre-market trading as investors speculate that the company, one of just a few remaining small-cap hepatitis C players, is ripe for a takeout. The Idenix purchase also ends a dry-spell in small- and mid-cap biotech M&A, which many are taking as a signal that the sector is not as ‘bubbly’ as headlines suggested through the first quarter correction.
Achillion’s rally makes sense considering the parallels – both companies are in phase 2 with NS5A and protease inhibitors, and have been dogged by clinical holds and halts – though being long ACHN on acquisition speculation alone is a poor thesis, in our view. Idenix and Achillion Investors have been crying “buyout” for years with nothing materializing until this week. Has anything besides the whopping 240% premium paid for Idenix changed fundamentally? if hopes of a large pharma buyout don’t materialize, reversion to the mean could be an ugly surprise for new ACHN owners on Monday.
Merck’s Head of R&D, Roger Perlmutter, indicated that the acquisition gives Merck access to the final piece of a three-drug combo to treat Hepatitis with Idenix’s nucleotide polymerase inhibitors. The company has high expectations for a competitor to Gilead’s (GILD) Sovaldi that can work in just over half the time.
