Merck/Prometheus: Big Pharma must swallow bigger premiums

At Merck, 2028 is circled on the calendar. The New Jersey pharmaceutical titan’s share price has doubled in the past five years, well ahead of the wider S&P 500 index. The catalyst is cancer treatment Keytruda, which generated one-third of Merck’s $60bn revenue last year. But Keytruda is expected to lose its patent protection in five years’ time.

The future is now. On Sunday, Merck announced that it would acquire Prometheus Biosciences for $10.8bn. It is paying Prometheus shareholders a 72 per cent premium over the three-month average share price. Yet the company’s monoclonal antibody treatment for inflammatory bowel disease has yet to be fully approved. In a quieter deal environment, this deal underscores that Big Pharma has the means to make big bets.

Prometheus was born in the early 2000s from research at Cedars-Sinai hospital in Los Angeles (Cedars-Sinai is a shareholder). Scientists there noted the association of Crohn’s Disease and ulcerative colitis with a particular protein known as TL1A. Its drug which inhibits this protein, PRA023, has only reached Phase 2 approval.

Merck is either optimistic or desperate if it is willing to pay $5bn more than Prometheus’ valuation three days ago. But it has the funds. Merck’s market capitalisation is $300bn and it has more than $13bn in cash. Its shareholders understand that these gambles are required ahead of blockbuster drugs rolling off patent.

Large cash balances along with stable businesses in a wobbly economy allow pharma companies to pursue such deals. Prometheus comes just weeks after Pfizer spent $43bn acquiring SeaGen, a maker of cancer treatments, previously pursued by Merck. Late last year, Amgen bought Horizon Therapeutics for $28bn.

Biotech and life science valuations have moderated since 2021. But the chance for premium buyouts has not disappeared.