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Merck & Co.'s largest buy since 2009 set to diversify past blockbuster Keytruda

Merck & Co. Inc.'s $11 billion acquisition of Acceleron Pharma Inc. marks the U.S. pharmaceutical giant's largest purchase in more than a decade and gives the company a chance to diversify beyond its blockbuster cancer drug Keytruda, analysts said.

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Merck CEO Robert Davis

Source: Merck & Co.

Merck gained Keytruda in the 2009 acquisition of Schering-Plough Corp. for $41 billion, and the drug accounted for 37% of the company's worldwide sales in the second quarter of 2021. Despite the success of the drug, first approved in the U.S. in 2014, analysts have previously identified Merck's dependence on Keytruda as a potential weak spot when competition eventually enters the market.

The Acceleron buy announced Sept. 30 would fulfill a promise Merck CEO Robert Davis made in April — prior to taking over from former CEO Kenneth Frazier — to bring in new assets through business development. At the time, he pointed to the $9 billion spinoff of the company's women's health and biosimilars unit as a way to capitalize for such a deal.

Through Acceleron, Merck will gain access to the company's late-stage cardiovascular drug sotatercept. With an expected launch in 2024 or 2025 and exclusivity in the market as far as 2037, Merck's executives said the drug could peak at multibillion-dollar sales.

The company's scientists have tracked Acceleron and its progress for many years and the acquisition adds to a list of bolt-on deals and partnerships that have backed up business development commitments, Davis told analysts on a Sept. 30 call.

"We're excited to add Acceleron to our growing list of important recent business development transactions and collaborations, including Pandion, Gilead Sciences Inc., VelosBio, Seagen Inc., Ridgeback Biotherapeutics LP and Peloton [Therapeutics]," Davis said. "Business development remains an important priority for Merck."

The partnership with Ridgeback led to Merck's latest clinical success as the two companies announced Oct. 1 positive results from a study investigating an antiviral pill in patients infected with COVID-19.

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Merck will "continue to bring in the best external science to build upon and complement our strong internal research pipeline," Davis added on the call.

"We feel very good about what we're starting to build in our own discovery engine," Davis said. "We continue to believe we need to augment it, and we've consistently said we're looking for the best science both internally and externally."

J.P. Morgan analyst Chris Schott confirmed that business development at Merck would be largely unchanged by the Acceleron announcement with "significant capacity for future deals."

Cardiovascular shift

The deal signaled a shift toward a larger cardiovascular focus for Merck, Cantor Fitzgerald analyst Louise Chen said in a Sept. 30 note. Sotatercept "complements and strengthens Merck's growing cardiovascular portfolio and holds the potential to build upon Merck's legacy in cardiovascular disease," Chen said.

A strengthened cardiovascular focus could potentially take pressure off Merck's cancer franchise even if it did not solve all of the company's future competition issues, Chen said. "Although the acquisition of Acceleron will not fully remove the overhang of generic competition for Merck's single largest drug Keytruda ... it does help diversify sales, which addresses a large shareholder concern."

Similarly, Cowen analyst Steve Scala saw promise in the Acceleron acquisition as a tool for Merck to evolve past its main blockbuster.

"We believe the Acceleron acquisition is a good step in a long journey of diversifying and growing Merck beyond Keytruda in areas that are relevant to the company," Scala said in a Sept. 30 note.

In addition to sotatercept's potential as a sales titan down the road, Merck will also gain Acceleron's 20% royalties in anemia treatment Reblozyl, which is marketed by rival Bristol-Myers Squibb Co. Acceleron's stake generated almost $55 million for the company in 2020, a number that could rise to $333 million by 2025, Scala said.

Activist investors balk

The deal with Merck received pushback from Avoro Capital, an activist investor that owns about 7% of Acceleron, which felt the price tag was too low.

At $180 per share, the acquisition represents a premium of 38% — but Avoro pointed out that premiums in the biopharmaceutical sector have averaged 89% since the beginning of 2020.

"We believe there should be no urgency to sell at a low price now since the value of the company will only increase as additional clinical trial data is released," Avoro said in a Sept. 30 statement. "Based on our own analysis and that of other prominent scientific observers, we have full confidence that Acceleron's pipeline will continue to perform well and only further demonstrate the value of the company."