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Sirna Buy Contributes to Drop in Merck's Q4 Profits; RNAi Shop to Keep Some Autonomy

Merck reported this week a sharp decrease in fourth-quarter earnings despite a slight increase in sales as the company incurred a number of special charges, including one related to its late-2006 acquisition of RNAi drugs shop Sirna Therapeutics.
That deal, which valued Sirna at $1.1 billion, is expected to lead to a number of layoffs at the RNAi firm. At least three of its senior executives have already left the company, according to one Sirna official, but specific details about staff reductions remain undisclosed.
However, the official told RNAi News this week that, despite any layoffs, Sirna is expected to continue operating out of its San Francisco and Boulder, Colo., facilities as a relatively independent entity.
By the Buy

Earlier this month, Merck announced that it had closed its previously announced acquisition of Sirna for $13 per share in cash, a 100-percent premium to the RNAi drug developer’s stock price before the deal was disclosed (see RNAi News, 1/4/2007).
Bharat Chowrira, vice president of legal affairs and patent counsel for Sirna, told RNAi News late last year that the deal stemmed out of drug-development collaboration talks, rather than any plan by Sirna to put itself up for sale (see RNAi News, 11/2/2006).
But based on documents filed with the US Securities and Exchange Commission, which stated that Merck was one of several pharmaceutical firms in a bidding war over Sirna, it seems that a buyout of the RNAi drug developer was only a matter of time.
As Chowrira had put it, “what we do is build shareholder value … and when the shareholders are going to realize a 100-percent premium [through a acquisition offer], it’s hard not to take it seriously.”
Whether the acquisition of Sirna can build value for Merck’s shareholders is still to be determined. However, according to statements made by Merck President and CEO Dick Clark, the big pharma thinks its billion-dollar gamble will pay off.
“RNAi [has the potential] to completely transform the drug-discovery and -development process,” he said this week during a conference call to discuss the company’s year-end financials. “We believe once [Sirna is] integrated into our existing capability, this $1.1 billion investment … will pay off for many years to come.”
Clark did not provide additional details on how the Sirna integration will occur, and Merck officials did not return requests for comment.
Chowrira, however, told RNAi News this week that Merck is expected to apply to Sirna the same sort of laissez-faire approach it has used with Rosetta Inpharmatics, a bioinformatics company it acquired in 2001.
Under that model, Sirna “will continue to do RNAi work in San Francisco and Boulder,” Colo., at its existing facilities, he said, adding that a Merck representative, Alan Sachs, will act as site manager for both locations. Sachs is currently a vice president at Rosetta.
Chowrira noted, however, that “Merck has stated that there will be some redundancies [between the companies] that will lead to some people leaving” Sirna.
Earlier this month, Nektar Therapeutics announced that it had named former Sirna President and CEO Howard Robin as its new president and CEO. Chowrira noted that Sirna’s CFO Greg Weaver and senior vice president of corporate development Michael French have also left the company.
Prior to the Merck acquisition, Sirna had between 80 and 90 employees. Chowrira declined to comment on the expected size of the company’s staff after the integration is completed.
By the Numbers
For the quarter ended Dec. 31, 2006, Merck’s net income dropped 58 percent to $474 million, or $0.22 per share, from $1.1 billion, or $0.51 per share, a year earlier.
Contributing to the drop in earnings was a fourth-quarter acquired research charge of $466 million related to the acquisition of Sirna. Also driving down Merck’s income is an ongoing restructuring effort that included the elimination of about 900 positions during the fourth quarter and the company’s continued efforts to fight thousands of lawsuits over its small-molecule arthritis drug Vioxx.

“We believe once [Sirna is] integrated into our existing capability, this $1.1 billion investment … will pay off for many years to come.”

Excluding these and other special items, Merck earned $0.50 per share in the fourth quarter.

Merck’s sales in the quarter rose 5 percent to $6 billion, while its research and development spending surged 55 percent to $1.7 billion from $1.1 billion in the same period a year earlier.
Merck’s marketing and administrative expenses in the fourth quarter edged up 10 percent to $2.3 billion as its materials and production costs climbed 13 percent in the quarter to $1.7 billion.
For full-year 2006, Merck’s net income slipped to $4.4 billion, or $2.03 per share, from $4.6 billion, or $2.10 per share, while its full-year sales rose 3 percent to $22.6 billion. The company posted a 24-percent increase in research and development spending for 2006 to $4.8 billion, while full-year marketing and administrative expenses increased 14 percent to $8.1 billion and materials and production costs jumped 17 percent to $6 billion.
Looking ahead, Merck said it continues to expect earnings in 2007 to arrive between $2.51 and $2.59 per share, excluding restructuring charges and layoffs. Including these and other charges, the company said its earnings per share for the year should be in the range of $2.36 and $2.49.
Merck also said it “remains on track to deliver double-digit compound annual EPS growth, excluding one-time items and restructuring charges, by 2010 from the 2005 base.”

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