A New Diabetes Duo Emerges

Even when you're a behemoth, you've got to know your strengths.

That's the message from today's announcement that Pfizer (NYSE: PFE  ) is out-licensing its diabetes drug candidate ertugliflozin to Merck (NYSE: MRK  ) . The pharma giant is usually the one bringing in products rather than sending them elsewhere.

But Pfizer isn't exactly known for diabetes. It could certainly make the push, but having a partner that's experienced in the space should produce higher sales with lower expenses, hopefully making up for whatever it has to give up.

And what a good partner Pfizer picked. Merck has lots of experience in the space selling Januvia. Sales of the Januvia-containing drugs -- it comes alone or in combination with other diabetes drugs -- were up 23% last year to $5.7 billion .

As part of the deal, Merck paid Pfizer $60 million now and is on the hook for other unspecified clinical, regulatory, and commercial milestones. Merck and Pfizer will split the revenue and cost on a 60/40 basis.

In addition to developing ertugliflozin, which is ready to enter phase 3 trials later this year, the duo plans to develop pills combining ertugliflozin with metformin and Januvia.

The ertugliflozin-Januvia combination could be a big blow to Johnson & Johnson's (NYSE: JNJ  ) recently approved Invokana. The drug is an SGLT-2 inhibitor, the same class as ertugliflozin. Invokana will have a couple of years' head start, but it'll have a hard time competing against a ertugliflozin-Januvia combination pill for patients that need to take both drugs. Doctors and patients both prefer fewer pills, so assuming that the efficacy and safety are similar, the combination product should win out.

AstraZeneca (NYSE: AZN  ) and Bristol-Myers Squibb (NYSE: BMY  ) are also developing an SGLT-2 inhibitor called Forxiga, but the Food and Drug Administration issued a complete response letter for the drug, requesting more data. If the duo can ever get Forxiga approved in the U.S., it won't have an issue competing with an ertugliflozin-Januvia combination because AstraZeneca and Bristol have a drug, Onglyza, that's in the same class as Januvia. They can develop a combination product internally.

Forxiga's rejection in the U.S. highlights another reason why this is a good move for Pfizer: Sharing the cost of the phase 3 program, which will likely entail many clinical trials, reduces the company's risk should something go wrong.

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