Merck Nabs Prometheus Bio For $10.8 Billion As Keytruda Patent Expirations Loom

Merck is buying Prometheus Bio for $10.8 billion in order to keep Keytruda's patent from expiring.

Merck (MRK), a pharmaceutical company specializing in immunology, has acquired Prometheus (RXDX), a drugmaker whose products are marketed under the name Prometheus. The $10.8 billion acquisition is a timely move ahead of Keytruda losing its patent. RXDX's stock soared Monday after the news.

Merck will pay 200 dollars per share for Prometheus. The deal represents an increase of 75% over the closing price of RXDX on Friday. Prometheus' shares soared 69.7% today to close at 193.51. Merck shares fell by a small amount to 115.01.

Gregory Renza, an analyst at RBC Capital Markets, called the deal "victory" and "validation" of Prometheus’s lead asset as well as its drug class. Prometheus tests a treatment against inflammatory bowel diseases that binds to a ligand named TL1A. TL1A has been linked to intestinal inflammation and fibrosis.

Renza wrote in a client note that "we believe the solid data so far and overwhelmingly bullish outlook on Prometheus has helped to produce this result (which may not come as a surprise to many)."

He added that Prometheus efforts to expand the TL1A beyond inflammatory bowel diseases and its entire pipeline "shouldn't be overlooked." The TL1A directed drug is called PRA023.

Merck's timing of the deal is crucial, since its flagship cancer drug Keytruda begins losing patent protection by 2028. Renza stated that Merck's revenues are skewed towards oncology and vaccinations. These two areas will represent 44% and 21 % of the top line for the company in 2022.

Thomas Smith, an analyst at SVB Securities, echoed Renza. Both have given RXDX a rating of outperform.

Smith wrote in a note to clients that "Overall, the Prometheus purchase offers Merck a strategic fit to diversify its near-term catalyst pipeline and revenue outside of oncology." We believe that the premium reflects Merck's confidence in PRA023 as well as Prometheus precision medicine approach to immune-mediated disease.

Prometheus reported in December that 26.5% patients with ulcerative bowel disease (a type of inflammatory bowel disorder) reached clinical remission during a midstage PRA023 test. In contrast, only 1.5% of those who were given a placebo achieved remission.

Tiago Fauth, Credit Suisse analyst, says PRA023 may be the best drug of its kind.

Merck and Prometheus are going to be competing against Pfizer and Roivant Sciences. These two companies have created a new entity to develop and market their TL1A assets. Teva Pharmaceuticals (TEVA), too, has a TL1A in the testing phase.

Evercore ISI analyst Umer Raffat said that the Prometheus drug appeared to have an edge over Pfizer's and Roivant’s in a recent report. He also noted that the tests were designed differently by each company.

He gave Merck stock an outperform, but did not give RXDX a rating.

Raffat pointed out that Merck pays a much higher price for Prometheus, and its TL1A product, than Roivant did to work with Pfizer on TL1A. Pfizer gave Roivant a TL1A drug asset in exchange for a stake in a newly created company to manufacture the drug.

He said that if Pfizer/Roivant was competitive enough, it also raised the question of whether Roivant had paid too little or Merck too much.

Raffat stated that RXDX shares were already trading higher due to takeover expectations.

Renza, an analyst at RBC, pointed out that Prometheus went public in March 2021, when the stock was 19 years old. The takeover price of 200 per share represents an investment return that is 10 times higher than the initial investment. Comparatively, the SPDR S&P Biotech exchange-traded funds (XBI) has dropped 46%.

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