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Merck & Co., Inc. (MRK - Analyst Report) recently announced a strategic deal with Pfizer Inc. (PFE - Analyst Report) for the development and commercialization of Pfizer’s ertugliflozin. The companies will also evaluate fixed dose combinations of ertugliflozin with metformin and Merck’s Januvia.

The Candidate

Ertugliflozin is an investigational oral sodium glucose cotransporter (SGLT2) inhibitor which is being developed for the treatment of type II diabetes. Phase III studies on ertugliflozin are expected to commence later this year.

We note that Pfizer and Merck are not the only companies pursuing the development of SLGT2 inhibitors. While Invokana is approved in the US, Forxiga is approved in the EU. Meanwhile, empagliflozin is under development.

Terms of the Deal

Under this deal, Pfizer got $60 million in the form of upfront and milestones payments from Merck. Additionally, Pfizer is eligible for payments on the achievement of pre-specified clinical, regulatory and commercial milestones. Revenues and a few cost items will be shared between Merck and Pfizer in the ratio of 3:2.

Our Take

This collaboration signifies Merck’s efforts to strengthen its diabetes franchise. Merck’s diabetes franchise has Januvia and Janumet for the treatment of type II diabetes. Januvia, a DPP-IV (dipeptidyl peptidase) inhibitor for type II diabetes, was approved in Oct 2006. Since then, the product has done very well. Sales have leapfrogged from $42.9 million in 2006 to $4,086 million in 2012. Merck combined Januvia and metformin (an oral diabetes drug) into a single pill called Janumet. Combined sales of the two drugs were $5.7 billion in 2012, up 22.6%. Currently, Merck has a phase III type II diabetes candidate, MK-3102, in its pipeline.

Merck and Pfizer carry a Zacks Rank #3 (Hold). Currently, companies like Cleveland BioLabs, Inc. and AbbVie Inc. (ABBV - Analyst Report), carrying Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) respectively, appear more attractive.

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