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Merck & Co.'s $1.05B Peloton deal signals cancer trajectory beyond Keytruda

Merck & Co. Inc.'s $1.05 billion acquisition of private company Peloton Therapeutics Inc. is a relatively small bolt-on deal, but one that aligns with the company's trajectory in the oncology space, which has been largely reliant on blockbuster Keytruda for half a decade.

Dallas-based Peloton's specialty is one familiar to Merck — a focus on renal cell carcinoma — where Keytruda and Pfizer Inc.'s Inlyta scored a key U.S. Food and Drug Administration approval in April. Peloton's lead asset is PT2977, which is in mid-stage trials to treat metastatic clear cell renal cell carcinoma.

"While maybe not the size of deal that some have been hoping Merck to pursue, Peloton's initial focus on renal cell carcinoma is complementary to where Merck is already finding success with the recent approval of Keytruda and Pfizer's Inlyta in first-line renal cell carcinoma based on the positive Keynote-426 trial," Credit Suisse analyst Vamil Divan said. Credit Suisse is a financial adviser in Merck's acquisition of Peloton.

Peloton priced its IPO earlier in May at $15 per share to $17 per share but had not made it to the opening bell before being bought by Merck.

A Merck spokesperson told S&P Global Market Intelligence that the Peloton acquisition is "consistent with Merck's strategy to follow the most promising science and aligns with our areas of focus."

"We plan to evaluate the use of PT2977 as monotherapy and as part of combination regimens in various lines of therapy in renal cell carcinoma as well as other indications," the spokesperson added.

The Merck spokesperson also said the Peloton acquisition comes with a preclinical treatment called PT2657 for pulmonary arterial hypertension and that the New Jersey-based pharmaceutical giant would evaluate the drug in the context of its overall pipeline.

Cantor Fitzgerald analyst Louise Chen said the deal suggests trends in the pharma and biotech sector overall.

"The deal announced today should also underscore the opportunity for other small and mid-cap biotech names in the cancer biology space," Chen said in a research note. "And this is yet another example of a recent step-up in M&A activity by large-cap pharma companies which started earlier this year."

Moving past Keytruda's success

While Merck has multibillion-dollar assets in diabetes and vaccines, its future is heavily dependent on Keytruda's story, analysts have said. Of the company's $42.3 billion in 2018 worldwide sales, $7.2 billion came from its immuno-oncology cancer mainstay Keytruda, representing 17% of sales.

Merck has over 900 ongoing trials in play and has seen more successes than failures in recent years. But a recent failure in late-stage triple-negative breast cancer study Keynote-119 is a rare setback for Keytruda, and it is the second phase 3 loss of 2019.

Cantor's Chen said the Peloton deal supported a positive investment thesis on the company's stock and that Merck's "future growth prospects and pipeline outside Keytruda are underappreciated."

Credit Suisse's Divan said the company's well-being still hinged too heavily on its main product.

"As bullish as we have been on the Merck story for nearly three years now, the pushback from investors has been increasing on how leveraged the company is becoming to Keytruda's success," Divan said.

Divan pointed out that while Merck has not engaged in a large acquisition since those of Cubist and Idenix in 2014, smaller deals and collaborations have often gone overlooked and could signal where the New Jersey company is headed in the longer term.

A deal with AstraZeneca PLC in 2017 to develop the cancer drug Lynparza and another with Eisai Co. Ltd. to develop cancer treatment Lenvima stand out as important collaborations, Divan said in an email to S&P Global Market Intelligence. He also noted a partnership with Moderna Inc. to use RNA drugs against cancer, as well as acquisitions of Immune Design and Viralytics — both immunotherapy companies — that serve to showcase the trajectory of the company.

The timing of the Peloton deal, which comes with the potential for up to another $1.15 billion in milestone payments, could also signal that Merck is trying to sway the conversation at the upcoming annual meeting of the American Society of Clinical Oncologists, which will take place from May 31 to June 4. The company will present results from several Keytruda trials there as well.

Divan said more details from Merck both on Keytruda and the rest of its business will be made clear at the company's June 20 investor day, which he said would be "an important event to boost investor comfort on the strength and durability of the longer-term Merck story."