Why Did Merck Spend $4 Billion on a Tiny Biotech Firm?

Source: Thinkstock

Source: Thinkstock

Merck & Co. Inc. (NYSE:MRK) has had its sights set on conquering the hepatitis C market for a long time now, and the recovering drugmaker is hoping that a small Cambridge, Massachusetts-based biotech company, Idenix Pharmaceuticals, Inc. (NASDAQ:IDIX), can help it move forward in the race to develop a serious competitor to Gilead Sciences’ (NASDAQ:GILD) blockbuster treatment, Sovaldi.

It won’t be easy to produce a contender to Sovaldi, however. The drug, which is the first of its kind, boasts a 94 percent cure rate and is expected to generate between $7 and $12 billion in 2014. The drug swept onto the stage early last year and in its first-quarter alone tallied $2.27 billion in sales, setting a new record as the fastest (and one of the most profitable) drug launches ever.

Merck and Idenix came to an official arrangement Friday, The Wall Street Journal reported; Merck paid $3.85 billion for Idenix, three times the company’s worth, in the hopes that the small biotech can help Merck expand its hepatitis C portfolio. “The goal here is to cure everyone,” said Merck’s Roger Perlmutter, chief of the company’s research and development unit.

Investors might be wondering just what does Idenix have going for it that Merck would shell out nearly $4 billion for a non-existent drug that no one can guarantee will work, or will work as well as Sovaldi? If Merck’s hepatitis C cure fails in clinical trials, or is unable to capture enough of the market share, what then? After all, Idenix currently has no products on the market, a staff of just 85 and posted less than $1 billion in revenue last year — what’s all the hullabaloo about?