Merck: Prometheus Acquisition Adds Important Pipeline Drug at a Reasonable Value

Merck’s MRK $10.8 billion acquisition of Prometheus Biosciences adds the well-positioned late-stage immunology drug PRA023 at largely a fair price, in our view. We don’t expect any major changes to our fair value estimate based on the deal, but strategically, this helps position Merck to cope with the eventual patent loss (starting in 2028) on cancer drug Keytruda. This deal combined with the 2021 Acceleron acquisition shows solid redeployment of cash flows (heavily supported by Keytruda sales) to augment internal research and development efforts and mitigate biosimilar Keytruda threats over the longer term. While we don’t see this purchase as significantly affecting Merck’s wide moat, it does help diversify the company’s late-stage pipeline.

PRA023 has shown strong phase 2 data with leading efficacy and a strong safety profile that support peak sales over $1 billion annually. In a phase 2 study in refractive ulcerative colitis, 26.5% of PRA023-treated patients achieved clinical remission versus 1.5% in the placebo arm, with no major safety concerns. Data from a phase 2a Crohn’s disease study was also supportive. Efficacy of the drug was improved using a biomarker that might be able to differentiate the drug more fully. However, confirmatory phase 3 studies are needed. Within the Crohn’s and ulcerative colitis markets, PRA023 holds the potential to take close to 10% share if the phase 2 data can be replicated in phase 3. We expect phase 3 studies to begin in early 2024, with data likely by 2025. With PRA023 patents going out beyond 2040, the drug holds potential to drive long-term cash flows.