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Wednesday, September 27, 2006

Longer-Term Implications of FoxHollow's Pact With Merck

FoxHollow Technologies.Inc. (FOXH) is trading up this morning by over 20% pre-market because Merck (MRK) is expanding its pact for atherosclerosis of the legs in its quest to treat peripheral artery disease. FOXH is at $34.00 on over 250,000 shares, up from its $27.25 close and now closer to the mid-point of its $20.37 to $54.04 trading range of the last 52-weeks. FOXH had 2.9 million shares, or 16% of the float, in its short interest for September and it trades only 373,000 per day on average.

We have the guts of this release below, but please read further to the implications:

Merck will acquire a stake in FoxHollow with the purchase of $95 million in common stock at $29.629 per share, representing approximately an eleven percent stake in the company;

Merck will pay $40 million to FoxHollow over four years in exchange for FoxHollow's agreement to collaborate exclusively with Merck in specified disease areas;

Merck will also provide a minimum of $60 million in funding to FoxHollow over the first three years of the four year collaboration program term as royalties.

It was in September 2005 that FoxHollow and Merck announced the first pharmaceutical-medical device partnership.

The expanded collaboration remains focused on the analysis of atherosclerotic plaque collected from patients treated with FoxHollow's SilverHawk(TM) Plaque Excision System.

"For the first time in any pharmaceutical company's history, we have the ability to capture and evaluate atherosclerotic plaque from thousands of patients," said Peter S. Kim, Ph.D., president of Merck Research Laboratories. "Our first year of collaboration with FoxHollow has given us novel insights into cardiovascular disease, and we're very pleased to enlarge our relationship today to continue this focus on cardiovascular disease while including other important disease areas as well."

"We hope our collaboration will lead to the development of novel, individualized cardiovascular therapies," noted Richard C. Pasternak, M.D., vice president of Cardiovascular Research, Merck Research Laboratories, who has worked closely with FoxHollow in the past year. "We look forward to the expansion of what has been a most productive partnership with FoxHollow."

IMPLICATIONS

OK, saying this is a big deal for FoxHollow would be, um, stating the obvious. What is even more important is that this shows the expansion of Big Pharma. It is no secret that the drug companies have been in the soup over drug problems and it is no secret that many blockbuster drugs (over $1 Billion in annual sales) are coming off patent this year and next. We will stop short of saying that this will ultimately lead the Big Pharma drug companies acquiring the medical device companies. It does increase the chances of further pacts between device makers and drug companies, and if you take this two steps further it does at least increase the chances that deals could be struck. This won't begin the instant inclusion of a bunch of device makers into our BAIT SHOP of takeover candidates, but if you read what we said before on Biomet (BMET) and what we said in August on Medtronic (MDT) it may give a bit more insight into what the landscape is looking like.

So far most of the Big Pharma names like Merck (MRK) and Pfizer (PFE) have avoided combining the drug operations with medical device operations; and PFE recently announced the sale of its consumer products line to J&J (JNJ). J&J is the one company that is the exception to this as it is the culmination of consumer products, medical devices, and pharmaceuticals. This is not the first such collaboration out there between drug companies and device companies, but it certainly will not be the last.

FOXH is not currently a member of our BAIT SHOP of takeover candidates.

Maybe we are getting a few steps ahead of the current situation. Right now Wall Street is selling companies on the "Focus on core operations" model for conglomerates to “de-conglomerize”, but this cycle changes over and over and you know the bulge bracket firms will be reselling many spun-off operations back to prior parents and competitors in a few years time. That is part of the great game.

Jon C. Ogg
September 27, 2006
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