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Merck to buy Cambridge’s Idenix in $3.85b deal

AP

The pharmaceutical giant Merck & Co. agreed on Monday to pay $3.85 billion for a Cambridge biotech that is developing drugs to cure hepatitis C, a staggering price for a small company with fewer than 100 employees.

Merck’s agreement to buy 16-year-old Idenix Pharmaceuticals Inc. is the latest sign the Boston-area biotechnology cluster has become a powerful magnet for global drug makers in search of breakthrough medicines — and huge profits.

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Among those that stand to capitalize on the deal is the largest hedge fund in Boston, Baupost Group, run by billionaire Seth Klarman. Baupost owns about 35 percent of Idenix, a stake that’s now worth $1.36 billion.

Idenix’s drugs are still in relatively early stages of development, considering the price tag they fetched. Merck agreed to pay $24.50 a share for the company, or 3.4 times the Friday closing price of $7.23.

Seth Klarman of the Baupost Group

Bloomberg News/File/2009

Seth Klarman of the Baupost Group

After the sale was made public on Monday, the share price surged more than 229 percent to close at $23.79 on the Nasdaq exchange.

The market for hepatitis C treatments, estimated at $200 billion worldwide over the next decade and an half, is currently dominated by Sovaldi, a fast-selling pill made by California’s Gilead Sciences Inc.

Idenix has been working on experimental compounds known as nucleotides, or “nukes,” that prevent genetic material in the virus from replicating. Scientists believe that, when combined with other drugs, such nucleotides can help cure hepatitis C, which is believed to infect about 3.2 million people in the United States and tens of millions more worldwide.

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If untreated, the hepatitis C virus can ravage the liver, causing scarring and cancer.

Drug companies competing for a piece of the growing hepatitis C market “know they have to take a risk” on companies like Idenix, said Alethia Young, a biotechnology analyst with Deutsche Bank in New York.

“You have to get a nuke to be competitive,” Young said during a conference call with investors.

Idenix executives declined to discuss the sale.

Hepatitis C specialists, who have pointed to major advances in recent months, say the next stage of treatment will involve multidrug cocktails that include nucleotides. That bodes well for Merck and its investment, as well as for patients.

“Idenix has a very potent nucleotide,” said Dr. Nezam Afdhal, director of hepatology at Beth Israel Deaconess Medical Center in Boston. “By combining it with Merck’s drugs, they have the potential to be well in excess of a 95 percent cure rate against all types of hepatitis C. And it could shorten the duration of treatment from 12 weeks to six to eight weeks.”

Pharmaceutical analyst Seamus Fernandez, managing director at the Boston health care investment bank Leerink Swann, called the deal a “bold strategic move by Merck” in a “politically charged environment.” He was referring to complaints from some health insurers and lawmakers about the price of newer hepatitis C treatments. Sovaldi costs about $1,000 a pill and $84,000 for a full treatment, plus the cost of companion medicines.

The booming demand for Sovaldi has been straining private and government payers. A half-dozen Massachusetts insurers that contract with Medicaid, the government health insurance program for low-income earners, paid out a combined $23.3 million in Sovaldi-related claims between January and March, according to the Massachusetts Association of Health Plans, an industry group.

MassHealth, the government Medicaid program that insures many patients directly, spent about $10.8 million on the new hepatitis C treatment during the first three months of the year.

Merck, based in Whitehouse Station, N.J., last month struck a deal to sell its consumer health care business to the German drug maker Bayer AG for about $14.2 billion. At a May meeting with stock analysts at the company’s research laboratory in Boston’s Longwood Medical Area, Merck executives said they might use money from the sale to buy companies with promising experimental treatments, particularly in biotechnology, where Merck has been lagging.

Dr. Eliav Barr, vice president of infectious diseases at Merck Research in West Point, Pa., said his company is planning to combine Idenix’s lead drug candidate later this year with two of Merck’s experimental medicines in a cocktail that it will take into advanced clinical trials. Each of the three drugs works in different ways but could complement one another, he said.

“We want to hit the virus simultaneously at three weak points so it puts up the white flag,” Barr said. The goal is an oral treatment that only has to be taken for eight weeks or less, rather than drugs that must be injected for a longer period.

“What we need to gain for our patients is a regimen that is highly effective, well tolerated, short, and convenient,” Barr said.

Idenix’s chief executive, Ron Renaud, who joined the company as chief financial officer in 2007 and was promoted to the top job in 2010, would not comment on the acquisition.

The company has 70 employees in Cambridge and 20 at a lab in Montpellier, France.

The company, which has kept a low profile in recent years, has been embroiled in patent-infringement lawsuits against Gilead in the United States and the European Union.

Initially called Novirio Pharmaceuticals Inc., the company was founded in 1998 by Jean-Pierre Sommadossi, a French professor of pharmacology at the University of Alabama who worked for years on the development of antiviral drugs to treat HIV and hepatitis. It was started in the Boston area partly because the region was a center for biomedical talent and partly because an early venture capital investor, MPM Capital, is located here.

After the name was changed in 2002, Idenix brought a hepatitis B treatment, Tyzeka, out of its labs and signed an agreement to co-market it with the Swiss drug maker Novartis AG, whose worldwide research and development is based in Cambridge. Under that arrangement, Novartis received a right of first refusal for all other drugs in the Idenix pipeline.

But the deal was modified in 2012 to give Novartis full control of Tyzeka. Idenix agreed to forgo royalties on the hepatitis B medicine, but took back all rights to the remaining drugs it was working on, including the three hepatitis C treatments. Regaining control of those promising medicines made Idenix more attractive to potential buyers.

More coverage:

Boston Capital: An unlikely bet pays off

2/11/14: At last, Putnam has something to crow about

1/28/14: Abby fight may be with mediocrity

12/31/13: Putnam’s David Glancy the Boston Capital fund manager of 2013

7/3/12: Stock pickers need years to regain trust

12/28/12: Manager took mutual fund from beaten to best

Robert Weisman can be reached at robert.weisman@globe.com. Follow him on Twitter @GlobeRobW.

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