updated 10/31/2006 7:43:58 AM ET 2006-10-31T12:43:58

Pharmaceutical company Merck & Co. said Monday it agreed to pay an eye-popping $1.1 billion to buy Sirna Therapeutics Inc., a tiny biotechnology firm developing drugs based on new technology at the heart of last month’s Nobel Prize for medicine award.

Merck’s $13-per-share offer for the San Francisco-based company is almost a 102 percent premium over Sirna’s closing Nasdaq Stock Market price of $6.45, which fell 5 cents before the bid was made public after the stock markets closed. Sirna’s stock surged 98 percent to $12.74 in after-hours trading. The stock’s high for the past year is $8.52, set in April.

Merck’s stock fell 45 cents to $45.64 at the close of trading on the New York Stock Exchange and remained unchanged in after-hours trading.

Sirna is developing drugs using so-called RNA interference technology. There are at least a half-dozen biotechnology companies developing drugs that silence genes by interfering with the messenger-carrying RNA, a technique discovered by this year’s Nobel winners, Andrew Fire of Stanford University and Craig Mello at the University of Massachusetts. There are eight U.S. and European patents specifically related to the technology.

Analysts said the deal could spur other similar acquisitions of some of Sirna’s handful of competitors who are racing to commercialize a discovery made only eight years ago — a short time in the scientific world.

Normally skittish venture capitalists already have invested hundreds of millions in the nascent technology and now Merck has made its second, most substantive bet on RNA interference. The Whitehouse Station, N.J.-based company previously had invested in Alnylam Pharmaceuticals, a Sirna competitor.

The closest drug Sirna has near market is for the treatment of the eye disorder, macular degeneration, a leading cause of blindness in the elderly. However, that drug is still at least two years from regulatory approval and probably further out because its experimental treatment will require the successful completion of at least two costly, time-consuming and large-scale human trials testing for safety and effectiveness.

“It’s kind of surprising and I don’t think anyone saw it coming,” said Leerink Swann analyst William Tanner. “Big pharmaceutical companies tend to buy biotechnology companies with nearer term prospects.”

But Tanner and other analysts said Sirna’s technology is promising, as evidenced by the Nobel award this year.

“We believe that RNAi could significantly change the way in which we go about discovering and developing drugs, and could become a new way to treat patients with unmet medical needs,” said Merck president Peter S. Kim.

Drug makers and researchers have long sought to create drugs that target bad cells while leaving healthy ones alone, hoping to rely less on dangerous, blunt treatments such as chemotherapy. Many are betting RNA interference will be a powerful tool in customizing drugs.

The idea, essentially, is to mug the messenger RNA before it can deliver its genetic information and thereby “silencing” genes.

But Nobel winner Fire recently said there are several significant scientific hurdles to overcome before the technology can be turned into drugs, including figuring out how to ensure the drug reaches its intended target while leaving healthy cells unharmed.

For Sirna, Merck’s bid vindicates the dramatic overhaul company officials took in 2003, when the struggling company was named Ribozyme Pharmaceuticals Inc. and was based in Boulder, Colo.

In April 2003, stockholders approved of a reverse stock split and a renaming of the company to Sirna to reflect its new embrace of RNA interference. The company changed most of its board of directors to appoint members from the stable of venture capital firms that invested a combined $48 million that April.

“The company made a really good call early on to focus on therapeutics and that focus has really paid off,” said Jim Niedel, a venture capitalist who made half the $48 million investment on behalf of The Sprout Group. That investment made Sprout the company’s largest shareholder and is worth a little less than $250 million based on Merck’s bid, said Niedel, who served as the company chairman until earlier this year.

Merck said stockholders holding 36 percent of Sirna’s outstanding shares already have committed to support the deal, which still needs antitrust clearance to close. The two companies hope to complete the deal in the first quarter of 2007.

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