UPDATE 2-Merck, Roche forge hepatitis C sales deal

* Merck to co-promote hepatitis C drug with Roche

* Analyst says deal challenges rival Vertex drug (Adds sales forecasts, analyst comment)

By Ransdell Pierson

NEW YORK, May 17 (Reuters) - Merck & Co Inc (MRK.N) will co-promote its Victrelis hepatitis C drug with Roche Holding AG (ROG.VX) in the United States, a partnership that could give the medicine a competitive edge against another new treatment deemed more effective.

Victrelis will go head to head against Vertex Pharmaceuticals Inc's (VRTX.O) telaprevir, or Incivek, in the multibillion-dollar hepatitis C market.

Incivek, which demonstrated a cure rate as high as 79 percent in clinical trials, is expected to win U.S. approval next week. The Merck drug cured 66 percent of patients in its pivotal studies, while current standard treatments cure only 40 percent or less.

"The Merck/Roche agreement effectively tries to shut telaprevir out of the market to some degree," wrote Sanford Bernstein analyst Tim Anderson. "Physicians will still use telaprevir regardless of the Merck/Roche agreement because of its better efficacy ... but Victrelis' competitive position is undoubtedly strengthened by the new collaboration."

The drugmakers did not provide financial terms. Merck said the deal will not affect its expected returns from Victrelis, the first in a new class of medicines that could transform treatment and reap blockbuster sales.

Merck and Roche compete in selling their own forms of pegylated interferon, an injectable protein that has long been used alongside anti-viral pill ribavirin to attack the hepatitis C virus.

Roche's interferon, Pegasys, has roughly 75 percent market share compared with 25 percent for Merck's brand, called Peg-Intron. Either of the drugs must be used as part of the underlying treatment with Victrelis, along with ribavirin.

Merck spokesman Ian McConnell said the agreements with Roche were nonexclusive and therefore do not prevent Roche from forming other partnerships. He declined to say whether Roche would keep any sales or profit from Victrelis.

Merck shares were little changed on Tuesday. Vertex fell 1.3 percent on the Nasdaq exchange.

BIGGER SALES SEEN FOR VERTEX DRUG

Victrelis, like Incivek, is a pill that blocks the protease enzyme that hepatitis C needs to replicate. It won approval from U.S. regulators on Friday.

Industry analysts expect eventual annual sales of up to $3 billion for Incivek, which will be sold overseas by Johnson & Johnson (JNJ.N). Victrelis is seen garnering sales of more than $1 billion. Combined sales of all hepatitis C drugs are expected to top $11 billion by 2014.

The new drugs, aside from higher cure rates, can dramatically cut treatment durations for some patients.

Roche spokeswoman Tara Iannuccilo also noted the deal with Merck was "nonexclusive" but would not say whether Roche might also forge a marketing and research deal with Vertex.

She said the company's main objective for the Merck deal is to "ensure and extend market leadership of Pegasys."

Moreover, she said Roche will also benefit by testing its already marketed drugs, as well as ones now in clinical trials, with Merck's molecules.

Merck's drug pipeline includes two other protease inhibitors against hepatitis C, called vaniprevir (MK-7009) and MK-5172, now in mid-stage trials.

Roche is testing three drugs, including a protease inhibitor called danoprevir now in mid-stage trials. Two other experimental medicines, mericitabine and RG7432, block another enzyme, called polymerase, that the virus needs to reproduce itself.

The Swiss drugmaker is also combining the drugs in various ways, including with Pegasys and ribavirin. (Reporting by Ransdell Pierson and Bill Berkrot; Editing by Andre Grenon and Steve Orlofsky)