On April 16, pharmaceutical company Merck announced its intentions to acquire a clinical-stage biotechnology company, Prometheus, for $200 per share in cash. The total equity value of the deal is around $10.8 Billion as announced in the company’s press release.
The move comes following a slowed 2022 for the Healthcare and Life Sciences Industry that saw total deal volume drop by 30% and average deal size fall by 15% — at least in comparison to the record year that was 2021.
Still, healthcare has been much more pervasive than other industries when it comes to merger and acquisitions (M&A) activity and incentives. According to a report by Bain, “1 percent of growth has an average of four times as much impact on total shareholder return as 1 percentage point of EBITDA margin expansion.”
What’s more,these companies are now coming into a position to make acquisitions using what is typically the cheapest and most effective form of financing — cash. According to that same Bain report, the top 25 pharmaceutical, medical technology, and payer companies all have at least 15% of their last twelve months (LTM) revenues on hand in the form of cash.
In this particular case, Merck is targeting Prometheus’ lead clinical-stage candidate, PRA023, which is “a humanized monoclonal antibody (mAb) directed to tumor necrosis factor (TNF)-like ligand 1A (TL1A), a target associated with both intestinal inflammation and fibrosis.”
Dr. Dean Li, President of Merck Research Laboratories, stated that the results of PRA023 were extremely promising to the team, a sentiment echoed by Chief Executive Robert Davis, who stated that the promise behind the Phase II clinical trial drove Merck to “pounce.”
In that particular trial for ulcerative colitis (UC), 26.5% of recipients of the anti-TL1A antibody PRA023 went into clinical remission by week 12 compared to 1.5% on placebo. Shares in Prometheus rose 170% during intraday trading back in December 2022 upon the news.
Given the deal proceeds as planned, it is projected that Merck could launch the next stages of clinical trials for the drug in Q3 2023 or early 2024.
Merck has been looking for new revenues given that the patents on their cancer immunotherapy medicine, Keytruda, are set to expire beginning at the end of the decade. Davis stated in a release that revenue from Prometheus could begin to significantly accumulate around the time the $21 Billion in annual Keytruda sales begin to phase out due to patent expirations.
The deal continues the norm in pharma M&A of acquiring companies with upcoming promise in clinical trials and selling off their expiring patents. With a ton of dry powder in the Private Equity space at its disposal and the potential for rate hikes to cease following the recent turbulence in the financial services industry, there could be a flurry of moves in store for healthcare.
