Merck plays it smart

Pharma acquires SmartCells and a unique preclinical insulin injection program for more than $500 million

Amy Swinderman
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BEVERLY, Mass.—Seeking to claim a stake in the rapidly growing, multibillion-dollar diabetes market, Merck & Co. Inc. announced in December that it will acquire SmartCells Inc., a young, low-profile private company located here.

The deal—which gives Merck access to SmartCells' SmartInsulin, a preclinical insulin injection for the treatment of types 1 and 2 diabetes—involves an unspecified upfront cash payment and development and regulatory milestone and sales payments that could exceed $500 million.

SmartCells' board of directors has unanimously approved the transaction, which is subject to regulatory approval.

Both companies declined to comment beyond what was stated in their Dec. 2 press release. Merck has identified diabetes and obesity as one of its development priorities, among such other commercially important disease areas as cardiovascular, oncology, infectious disease, immunology, endocrinology and women's health. As of Merck's third-quarter earnings statement, the company has two diabetes programs in development: MK-3102, a treatment for diabetes mellitus in Phase II development, and MK-0431C, a diabetes treatment in Phase III development. Merck sells Januvia and Janumet, which treat type 2 diabetes by inhibiting the body's DPP-4 enzyme.

SmartCells' SmartInsulin, a once-daily insulin injection that aims to automatically adjust to fluctuating levels of blood glucose, represents Merck's foray into insulin therapies. SmartInsulin deploys an insulin therapeutic only in the presence of a specific glucose concentration range. According to SmartCells, if this approach is successful in the clinic, it has the potential to produce insulin analogs that may result in a lower risk of hypoglycemia, compared with standard insulin analogs, and improve control over both fasting and post-meal glucose levels.

"Maintaining control of blood glucose levels represents a daily challenge for people living with diabetes," said Nancy Thornberry, senior vice president and head of Merck's diabetes and obesity franchise, in a statement. "Through the acquisition of SmartCells, we have obtained innovative technology that may enable us to develop glucose-responsive insulins. If this investigational technology is ultimately approved for use with patients, it could provide an important new therapy for the treatment of diabetes. This holds the potential to significantly impact the treatment of this disease."

SmartInsulin was originally developed as part of SmartCells' technology platform at the Massachusetts Institute of Technology by its president, co-founder and CEO, Dr. Todd Zion, who said in a statement that Merck's acquisition "positions our novel technology for success in the hands of a leading pharmaceutical company with proven expertise and exceptional resources to deliver breakthrough diabetes products to patients."

"At SmartCells, we have made important progress in rapidly advancing from early concept towards clinical development," Zion stated.

That advancement has in large part been supported by grants from the National Institutes of Health and equity investments from members of Boston Harbor Angels, Angel Healthcare Investors, Beacon Angels and Cherrystone Angel Group.

At least one analyst has been critical of SmartCells' path of growth. The In Vivo Blog points out, "in its seven-year lifespan, SmartCells has raised less than $20 million, relying heavily on grants from the Juvenile Diabetes Research Association, National Institutes of Health and angels … without traditional VCs in the picture, the company's founders seem likely to make a pretty penny even if the upfront is in the tens of millions."

Indeed, Zion told The Boston Globe that SmartCells wanted to avoid raising more money than necessary so its team could retain a significant ownership share.

"We've always had a philosophy here that we let our operating plan dictate our financing plan, and not the other way around," he told the newspaper.

Still, the In Vivo Blog approves of the structure of Merck's agreement, adding, "The medicine presumably overcomes some of the stigmas associated with insulin therapy—the potential risks of either hyper- or hypoglycemia and the frequent daily monitoring required to maintain appropriate blood glucose levels. Being preclinical, the company will have to show the compound has the commercial chops to survive the rise of long-acting GLP-1s, another reason an earn-out deal was a smart move on the part of the Merckies."

The Motley Fool agreed, calling Merck's acquisition "a smart move—assuming it didn't overpay."

"SmartInsulin is rather risky, since it uses an unproven technology, but it's a potential blockbuster if it works," The Motley Fool noted. "The SmartCells technology could even extend beyond insulin. It could be used to sense any molecule and then release a drug. Drugs that have a tight therapeutic window—where too much is bad and too little doesn't do enough—would be good candidates. If SmartCells succeeds, its purchase will make Merck look like a downright genius no matter how much it paid upfront to buy the company."

Amy Swinderman

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