Large pharmaceuticals buy small private companies all the time, often paying so little that they are not even obligated to report the transactions to shareholders. With Merck's (NYSE: MRK) deal to buy SmartCells, though, things are a little different on two levels. Not only is the purchase price large enough to get some attention, but the technology could be a real game-changer down the road.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Deal
Rumors had been creeping around for a little while on this deal, but Merck made it official Thursday morning that it was acquiring SmartCells in an all-cash deal. Although the companies did not discuss the upfront payment, it is a comprehensive deal that includes potential milestones and follow-on payments that could all total in excess of $500 million. Given the size of the transaction and the timing of the payments, I am not sure that Merck will have to file an 8-K for this, so investors may be hard-pressed to find more details on the transaction. (For more, see The Wacky World Of Mergers And Acquisitions.)

High Risk, Incredible Reward
For those of us who are proud to be life science nerds, SmartCells really rings the bell on the "neat" scale. SmartCells is developing SmartInsulin - a glucose-responsive insulin formulation. What that means is that SmartInsulin releases insulin into the bloodstream in response to the current glucose levels of the diabetic.

How SmartInsulin works is a little technical, but here is the short form: The product is a layered biocompatible polymer that is bound to a specially engineered molecule that, in turn, binds to glucose. As the amount of glucose in the patient's blood changes, the polymer can release more (or less) insulin.

All in all, then, SmartInsulin promises to be a once-per-day injectable insulin that can serve a diabetic's basal and mealtime needs all in one. That could be something of a Holy Grail for many patients, as the hassle and difficulty of monitoring blood glucose levels throughout the day and administering insulin as needed is a major source of non-compliance (and both short-term and long-term side effects) in diabetes. (For more, see Measuring The Medicine Makers.)

A Potential Game-Changer
It is important to note that SmartInsulin is a very long way from the market and has not even entered human testing yet (according to the company's website). So not only will Merck have many years of clinical testing to look forward to (probably six years at the low end), but the nature of this therapy and the risks of failure are such that the FDA will likely be extremely rigorous and cautious.

Still, if the product works, it could really shake up the field. Sanofi-Aventis (NYSE: SNY), Novo Nordisk (NYSE: NVO) and Eli Lilly (NYSE: LLY) all make significant profits from their various insulin formulations, but none of them has an all-in-one, once-per-day formulation. Moreover, if SmartInsulin really does work, it could very well be a threat to the insulin pump businesses of companies like Medtronic (NYSE: MDT), Roche (OTCBB: RHHBY) and Insulet (Nasdaq: PODD). After all, if a Type 1 diabetic can choose a once-per-day shot, the tubing, operational hassles and expense of pump therapy may no longer seem so compelling.

The Bottom Line
It will be interesting to see what, if any, impact this deal has on the trading in other insulin biotechs like Biodel (Nasdaq: BIOD), MannKind (Nasdaq: MNKD) and Halozyme (Nasdaq: HALO). All of these companies are closer to approval than SmartCells (assuming Biodel can rebound from an FDA rejection), but this deal presumably takes one Big Pharma buyer off the board for those companies in terms of partnerships or buyout.

For Merck, this seems like a potential winner (especially as the technology has applications in many other indications beyond diabetes), but it will take a long time to know. Plenty of "future blockbusters" have never panned out across the sector, and only time will tell if this deal vaults Merck into a potential leadership position in insulin therapy, or whether it becomes an expensive yet fruitless shot on goal. (For more, see Stocks On Drugs: What It Takes To Get High.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  2. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  3. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  4. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Trading Center