Merck is acquiring immunology-focused drugmaker Prometheus Bio in a well-timed $10.8 billion deal ahead of Keytruda's patent loss. The news sent RXDX stock flying Monday.
Under the terms of the deal, Merck will pay $200 per share of Prometheus stock. The deal represents a 75% premium to RXDX stock's closing price on Friday. Meanwhile, on the stock market today, Prometheus shares skyrocketed 69.7% to close at 193.51. Merck stock fell a fraction to 115.01.
RBC Capital Markets analyst Gregory Renza called the deal a "victory and validation" for Prometheus's lead asset and its drug class. Prometheus is testing a treatment for inflammatory bowel disease that binds to a ligand called TL1A. TL1A is associated with intestinal inflammation and fibrosis.
"We believe the solid data to date and overwhelmingly bullish view on Prometheus have helped to produce this outcome (which may come as little surprise to many)," Renza said in a note to clients.
But Prometheus's efforts to broaden the TL1A drug beyond inflammatory bowel disease and its full pipeline "should not be overlooked," he added. The TL1A-directed drug is known as PRA023.
RXDX Stock Is A Well-Timed Deal For Merck
The deal timing is key for Merck, as its bread-and-butter cancer drug Keytruda will begin losing patent protection in 2028. Currently, Merck's revenue skews toward oncology and vaccines, which represented 44% and 21% of the company's top line in 2022, respectively, Renza said.
SVB Securities analyst Thomas Smith echoed Renza's sentiment. Further, both have outperform ratings on RXDX stock.
"Overall, we believe the Prometheus acquisition offers a strategic fit for Merck to diversify its revenue and near-term catalyst pipeline outside of oncology," Smith said in his note to clients. "We view the significant premium as reflecting Merck's strong conviction in PRA023 and Prometheus' precision medicine approach in immune-mediated diseases."
In December, Prometheus said 26.5% of patients with ulcerative colitis, a form of inflammatory bowel disease, reached clinical remission in a midstage test of PRA023. Meanwhile, just 1.5% of patients who received a placebo entered remission.
Credit Suisse analyst Tiago Fauth says PRA023 could be the best drug in its class.
Pfizer, Roivant Are The Nearest Rivals
Merck and Prometheus will be going up against Pfizer and Roivant Sciences. The latter two companies created a new company to develop and commercialize their TL1A asset. Teva Pharmaceutical also has a TL1A drug in testing.
The Prometheus drug appears to have a slight edge on Pfizer and Roivant's, Evercore ISI analyst Umer Raffat said in a report. Also, he noted key differences in how the companies designed their tests.
He has an outperform rating on Merck stock, but didn't list a rating for RXDX stock.
Raffat noted Merck is paying a far higher premium for Prometheus and its TL1A drug than Roivant paid to work with Pfizer in TL1A. Pfizer handed a TL1A asset over to Roivant in exchange for an equity stake in a newly developed company created to produce the drug.
"Ultimately, if Pfizer/Roivant is competitive enough, this also begs the question: Either Roivant paid too little, or Merck paid too much," he said.
Raffat said RXDX stock was already trading higher on takeover expectations.
To that point, Renza, the RBC analyst, noted Prometheus stock went public at 19 in March 2021. Further, the takeover price at 200 per share represents a 10 times greater return on that initial investment. In comparison, the SPDR S&P Biotech exchange-traded fund has fallen 46%.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
