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Why Does Merck Want Rosetta? Motives Still Murky in Wake of Recent Acquisition

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Over the past few months, as the stock market has dropped sharply, analysts and industry insiders have speculated that bioinformatics companies with valuable technologies were likely acquisition targets. So, when Merck announced on May 11 that it intended to buy Rosetta Inpharmatics for $620 million in stock, no one seemed particularly surprised.

But the acquisition has raised a host of questions about what Merck was shopping for, how the deal will affect Rosetta’s relationships with its current partners and customers, and whether this transaction will trigger a snowball effect.

“If I was a pharmaceutical company, I’d be putting together a plan and looking at all the various scenarios,” said Jim Thompson, a partner with Frontline Strategic Management, a consultancy firm in San Francisco. “The question is, if other technology companies get acquired can you go forward without access to these technologies.”

In the case of Rosetta, considered to have some of the best gene expression technology on the market, Merck has said that it would continue to operate its new holding as a wholly owned subsidiary, allowing Rosetta to maintain its previous relationships and alliances. Last Wednesday, Merck went so far as to put out a joint announcement with Agilent stating that Agilent, which has an exclusive license to market the Rosetta Resolver, would continue to sell the product.

Some analysts, however, noted that, despite the business-as-usual promise, the post-acquisition relationship between Rosetta and its customers and partners would inevitably be more complex. They asked whether Merck would actually want to sell its prized possession to its competitors. And, conversely, they wondered whether the notoriously secretive pharmaceutical companies would actually invite Merck employees into their facility to install the Rosetta Resolver system, a process that would give the competition access to proprietary information.

In fact, these issues caused some people to speculate whether Merck was solely interested in Rosetta’s software or if its motives went beyond bioinformatics.

“It never works to sell to the competition,” said Winton Gibbons, an analyst with William Blair in Chicago, estimating that there was only a 20 percent chance that Merck would continue to support the development of Rosetta’s software.

“But what we don’t know is whether Rosetta had a great target that could help to justify the valuation.”

Although it might sound like a risky strategy to invest $620 million in a target that may or may not lead to a blockbuster drug, Gibbons noted that through the acquisition Merck also helped the pharmaceutical company to score a team of top-notch bioinformaticists, a hard-to-find resource these days.

Time will likely help to elucidate Merck’s motives and intentions, but in the meanwhile, industry players agreed that more acquisitions are likely in the offing. In fact, immediately after Merck announced that it was buying Rosetta, a Reuters report surmised that Gene Logic was likely next on the block.

Although some analysts, such as Gibbons, wondered why a big pharmaceutical company would want to buy a gene expression data and tools company rather than a proteomics company, other insiders said they were surprised the feeding frenzy hadn’t started sooner.

“I can’t believe it took so long for a pharmaceutical company to buy an informatics company,” said Gunnar Weikert, CEO of Inventage, a German venture capital firm, and a former Bayer executive, who helped to broker its genomics deals. “You don’t have to be a genius to know that information technology will be important [for drug discovery]. Data is an issue.”

— JF

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