Here's Our Take On The Inotek Pharmaceuticals Corp (NASDAQ:ITEK) Merger

A couple of months ago, Inotek Pharmaceuticals Corp (NASDAQ:ITEK) reported that it was on the lookout for what it referred to as strategic alternatives in order to maximize future shareholder value. As many reading will already know, this phrase generally means it's looking either to sell itself in entirety or to auction off its assets piece by piece.Fast-forward around eight weeks and we just got word that Inotek is joining forces with a private biotechnology company called Rocket Pharmaceuticals.What does this mean for shareholders and what can we expect going forward?Let's take a look.The first thing to get straight is that, regardless of how the company worded the press release, this is a reverse merger and it essentially writes Inotek and its pipeline out of the equation. We see this quite often at this end of the biotechnology space, with a private company looking for a quick and easy way to gain access to public market capital and reverse merging into and already NASDAQ listed entity in an attempt to do just that. ITEK Daily ChartThe deal itself will see the two companies combine to create one entity, with shareholders of Inotek set to represent and account for 19% of the newly created company and shareholders of Rocket, in its current form, set to account for 81% of the new company.Right off the bat that doesn't look particularly attractive for Inotek shareholders, but it might not be as bad as it seems. 100% of Inotek in its current situation isn't particularly valuable. If just shy of 20% of Rocket's pipeline is worth more than Inotek right now, and there's a strong argument that it is, Inotek shareholders are getting a pretty nice deal.The company's lead development asset is rooted in lentiviral gene therapy and its spread across, right now, four different target indications. The primary of these is called Fanconi anemia, which is a disease passed down through families (inherited) that mainly affects the bone marrow. It results in decreased production of all types of blood cells.This primary indication is the only one of the assets in the clinic right now and, therefore, it accounts for the vast majority of the company's current valuation. In turn, it's this asset and its potential that Inotek shareholders need to keep an eye on and are pinning their hopes on in terms of whether or not 20% of its potential outweighs the integrity of Inotek.So does it?This isn't a large population we are talking about – there are somewhere in the region of around 2000 patients in the US and Europe and the complementation group, which is the group that the company is going to be targeting with this asset, accounts for around 70% of these patients. This translates to around 250 treatable patients per year.With that said, however, this is a rare disease and, as many reading will already know, these sorts of orphan designations allow for premium pricing.After this primary indication, second, third and fourth targets are Leukocyte Adhesion Deficiency-I (LAD-1), Pyruvate Kinase Deficiency (PKD) and Infantile Malignant Osteopetrosis (IMO). Again, these are small target populations, but the technology that underpins the treatment type is broadly attributable to each one, so it won't cost too much in terms of initial outlay to expand the market for Rocket and the company should be able to do it relatively quickly.Bottom line here is that Inotek (or rather, its shareholders) is being paid 19% of Rocket in return for its cash on hand and its NASDAQ ticker. We are going to have to keep an eye on the lead anemia program, which is set to initiate a trial next year, as indicative of whether this 19% can represent more of the two above-mentioned elements going forward or not.We will be updating our subscribers as soon as we know more. For the latest updates on ITEK, sign up below!Image courtesy of brownpau via FlickrDisclosure: We have no position in ITEK and have not been compensated for this article.