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Avanir Pharmaceuticals, Inc. (AVNR - Snapshot Report) recently announced an exclusive multi-year agreement with Merck & Co., Inc. (MRK - Analyst Report) for the co-promotion of Merck’s type II diabetes drug, Januvia and the sitagliptin family of products in the U.S.

As per the deal, Avanir is entitled to fixed as well as incentive-based payment.

Avanir will promote the sitagliptin family of products in long-term care institutions from Oct 2013. In all other settings, Merck will promote these products. Merck is also responsible for all other aspects of research, manufacturing and marketing of these products.

Key products in Merck’s diabetes franchise are Januvia and Janumet. Januvia, a DPP-IV (dipeptidyl peptidase) inhibitor for type II diabetes, was approved in Oct 2006. The company combined Januvia and metformin (an oral diabetes drug) into a single pill called Janumet. Januvia revenues increased 1% to $1.1 billion and Janumet revenues grew 16% to $ 474 million in the quarter ended Jun 2013. Combined sales of the two drugs were $5.7 billion in 2012.

Both Avanir and Merck carry a Zacks Rank #3 (Hold). This deal is a major positive for Avanir. The collaboration provides Avanir with funds in the form of fixed as well as incentive payments. This deal brings together Merck’s leadership in diabetes and Avanir’s well established sales force in the institutional setting. This collaboration signifies Merck’s efforts to strengthen its diabetes franchise sales.

Currently, companies like Pharmacyclics, Inc. (PCYC - Analyst Report) and Actelion Ltd. (ALIOF) look well positioned in the pharma space with a Zacks Rank #1 (Strong Buy).

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