Merck CEO Robert Davis sees “a multibillion-dollar opportunity” with the acquisition of Acceleron. Merck’s Keytruda will lose patent exclusivity in seven years.
Courtesy Merck
Merck has a problem. In just about seven years, its megablockbuster cancer drug Keytruda, which is expected to contribute more than a third of Merck’s revenue this year, will hit the end of its exclusivity period.
Investors are already counting the impending patent cliff against Merck (ticker: MRK). The stock trades at 12.1 times earnings expected over the next 12 months, according to FactSet, below its five-year average of 14.6 times earnings, and well below shares of competitors such as Eli Lilly (LLY), which trades at 27.6 times earnings, and Johnson & Johnson
(JNJ), which trades at 16 times earnings.
On Thursday, the company’s new CEO, Robert M. Davis, made a big move aimed at shoring up the company’s revenue picture when Keytruda begins to falter. Merck announced it had reached a deal to buy the biotech Acceleron Pharma (XLRN) for approximately $11.5 billion.
It’s the biggest biotech acquisition yet in a year that’s been short on big biotech acquisitions.
“We do ultimately see it as a multibillion-dollar opportunity and revenue potential, and, importantly, expect it to grow well into the next decade,” Davis told Barron’s, describing sotatercept, Acceleron’s lead pipeline drug. “It provides a really nice revenue and earnings stream in the end of this decade, in an important period as we see the loss of exclusivity of Keytruda.”
Sotatercept is currently being tested in Phase 3 trials as a treatment for pulmonary arterial hypertension, a rare cardiovascular condition that can be fatal. The drug is not yet approved in any indication, but if and when it is, analysts expect it to be a serious blockbuster.
Piper Sandler’s Christopher Raymond wrote Thursday that he expects the drug to launch in 2024, and to hit worldwide revenue of $1.4 billion by 2027. Sales could grow even more if the company pursues additional indications for the drug.
Of course, that’s only if sotatercept performs well in the ongoing Phase 3 trials. Merck has placed a very large bet that it will.
“We have high conviction in the belief that we will be able to see this through to commercialization,” Davis says. “That was part of the gamble.”
Davis notes that offsetting that risk is Reblozyl, a drug to treat certain forms of anemia now being sold by Bristol Myers Squibb (BMY), on which Acceleron receives a significant royalty.
Dr. Dean Li, the president of Merck Research Laboratories, said that the Phase 2 trials of sotatercept were very promising. “The best indication of how confident we are is, for us, we look at the Phase 3 design, but we also scrub every part of the Phase 2 trial, and that’s what gives us confidence,” he says.
The Acceleron acquisition is only one piece of puzzle for Merck as it seeks to rebuild beyond Keytruda. “You’ll see us continue to pursue opportunities both in oncology as well as outside of oncology,” Davis says. “We’ve got some exciting things internally that obviously start to help.”
Davis lists a number of promising pipeline assets within Merck, as well as Gardasil, the company’s vaccine to prevent cancers caused by human papillomavirus, which he says can continue to grow for a long time. “A multibillion-dollar growth opportunity still sits in front of it,” he says.
None of those individual acquisitions or pipeline products will fill the gap left by Keytruda. “You start adding them all up, and we have a meaningful opportunity for sustainable growth well into the next decade,” Davis says.
Davis succeeded longtime Merck CEO Kenneth Frazier in July after serving as the company’s chief financial officer since 2014. Preparing the company for the Keytruda patent cliff is among his most important tasks.
Merck is paying $180 per share in cash for Acceleron. At midday, Acceleron stock was trading at $174.02, while Merck shares were up 0.5% to $75.44.
Analysts covering Acceleron were mixed on the deal. Piper Sandler’s Raymond wrote that the valuation, at 15 times its 2025 revenue estimate, “seems to represent a fair valuation to us.” SVB Leerink’s Dr. Geoffrey Porges, on the other hand, wrote that the price “is in line with fair value” in his model assuming sotatercept is approved in pulmonary arterial hypertension, but that it does not include value for other indications, or for the company’s pipeline.
“The announcement is not surprising given the multiple leaks from the negotiation process but suggests that other bids have not been forthcoming,” Porges wrote.
Rumors of the deal had been circulating for days, with Acceleron shares beginning to spike in the middle of September. Bloomberg reported Friday that the biotech was in acquisition talks with an unidentified big pharma, and The Wall Street Journal followed up late Monday, reporting that Merck was the buyer.
Write to Josh Nathan-Kazis at [email protected]
