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Merck’s $10.8bn Acquisition of Prometheus Biosciences

By Athean Myat, Coby Lai, Michelle Liu, Carden Olsson and Angelina Gart (Cornell University)

Photo: Sangharsh Lohakare (Unsplash)

 

Overview of the deal


Acquirer: Merck

Target: Prometheus Biosciences

Total Transaction Size: $10.8bn

Expected Closed date: Q3 2023

Target advisor: Centerview Partners, Goldman Sachs (Financial), Latham & Watkins LLP (Legal)

Acquirer advisor: Morgan Stanley (Financial), Paul, Weiss, Rifkind, Wharton & Garrison LLP (Legal)


On April 16th, Merck, also known as MSD outside of Canada and the US, announced that it is acquiring Prometheus Biosciences Inc for $200.00 per share in cash for a total equity value of $10.8 billion. Through the acquisition, Merck aims to expand its presence in immunology, targeting the discovery, development, and commercialization of novel therapeutic and companion diagnostic products to treat immune-mediated diseases.


Prometheus’ lead candidate, PRA023, is a monoclonal antibody directed to tumour necrosis factor (TNF)-like ligand 1A (TL1A), a target associated with intestinal inflammation and fibrosis. The company is developing PRA023 to treat several immune-mediated conditions, including ulcerative colitis (UC), Crohn’s disease (CD), and other autoimmune diseases. The acquisition is subject to Prometheus Biosciences’ shareholder approval and is expected to close in the third quarter of 2023. Ultimately, the transaction will strengthen Merck’s immunology pipeline, and should spur an increase in overall company growth and innovation.


“This transaction adds diversity to our overall portfolio and is an important building block as we strengthen the sustainable innovation engine that will drive our growth well into the next decade.” - Robert M. Davis, Chairman and CEO (Merck)

Company Details (Acquirer - Merck)


Merck is a global healthcare company that focuses on delivering innovative health solutions through the research, development, and manufacturing of pharmaceutical products and vaccines. Founded in 1891, the company is headquartered in Kenilworth, New Jersey, United States.


Founded in 1891, headquartered in Kenilworth, New Jersey, United States

CEO: Robert M. Davis

Number of employees: ~69,000 (as of 2022)

Market Cap: $296.5bn (as of 3/25/23)

EV: $311.7bn

LTM Revenue: $59.3bn

LTM EBITDA: $22.2bn

LTM EV/Revenue: 5.3x

LTM EV/EBITDA: 14.1x

Recent Transactions: $1.35bn acquisition of Imago BioSciences (Nov 2022); $3.85bn acquisition of Idenix Pharmaceuticals (Jun 2014); $1.1bn acquisition of Sirna Therapeutics (Oct 2006)


Company Details (Target - Prometheus Biosciences)


Prometheus Biosciences is a clinical-stage biotechnology company focused on immune mediated diseases. Its flagship candidate, PRA023, has completed stage 2 clinical trials to target Ulcerative Colitis, Crohn's Disease, and Systemic Sclerosis.


Founded in 2016, headquartered in San Diego, California, United States

CEO: Mark C. McKenna

Number of employees: 97

Market Cap: $9.2bn (as of 02/05/2023)

EV: $8.6bn

LTM Revenue: $6.8mn

LTM EBITDA: $(145.1)mn


Projections and Assumptions


Short-term consequences


Merck’s acquisition of Prometheus can provide immediate access to new pharmaceutical products or technologies that the acquiring company did not have access to prior, including products that develop precision therapies for immune-mediated diseases. These technologies can expand Merck’s product portfolio and enhance its competitive position in the marketplace. Additionally, there is the opportunity to increase market share in the lucrative immunology department. Given the strong market for immunology products such as Roivant Sciences and Immunovant, the acquisition helps Merck gain a stronger foothold in Immunology, which has had multiple products in the space pass clinical trials in the past few months.


The acquisition can result in cost savings for Merck through economies of scale, such as combining manufacturing, research, and development, or sales and marketing operations. The acquisition also strengthens Merck’s research and development in immunology. The results of Prometheus’ PRA023 during successive clinical trials has the potential to add millions of dollars to Merck’s portfolio of anti-inflammatory products such as Simponi and Remicade.


Moreover, there is the potential for changes in the regulatory environment, such as additions or changes in existing regulations. This can substantially impact the operations and profitability of pharmaceutical and biotechnology companies such as Merck and Prometheus. Finally, there is the potential for competitive pressures among other companies. The pharmaceutical industry is highly competitive, and launching, expanding, or researching additional products can impact the sales and profitability of such companies as Merck and Prometheus.


Long-term Upsides


Merck’s recent acquisition reflects its search for new revenue generators after patent expiration. Keytruda, Merck’s cancer immunotherapy, is a notable standout, earning Merck $20.9bn in revenues in 2022. However, the product will expire by the end of the decade, and Merck is currently searching for new blockbuster products. The immunology space is a promising location as several immunology studies in the past year have yielded positive results - an enticing option for firms with expiring patents. Major pharmaceutical companies including Sanofi, Pfizer, and Amgen have capitalised on these results in the past two years, most recently evidenced by Sanofi’s acquisition of Provention Bio. With an estimated CAGR of around 8.5% in the following years, immunology is a sound bet for Merck.


However, Merck’s acquisition and bets do not rest on immunology alone. Its acquisition of Acceleron Pharma in 2021 expanded the firm’s cardiovascular options, and its failed bid for Seagen last June indicates an interest in continuing to invest in cancer treatments. Merck remains open to acquiring more companies throughout the rest of the year, though agnostic on price. Time will tell which bets will pay off for the firm.


Risks and Uncertainties


With an acquisition that expands beyond its traditional research, Merck has to strategically implement Prometheus in a way that does not neglect its focus on oncology or steer away from its brand. In addition to the expensive cost of the deal, Merck will have to account for the costs of research and development with this new portfolio expansion. Additional risks and uncertainties include the timing of the merger and the question of competing offers with more desirable prices. Merck will also need to secure the requisite vote of Prometheus’s stockholders to follow through with the acquisition. This may be affected by the potential impact of the deal announcement and upcoming transactions on Prometheus’ business.


Legal risks include indemnification, liability, and regulation of the pharmaceutical and healthcare industry in the US and internationally. Merck must focus carefully on technological advances and the development of new products since it is now expanding into a new competitive market. This includes obtaining patents and acquiring consistent approval and trust in the immunology sector of the healthcare industry. Merck must depend on its patents to develop innovative products and thrive because of this acquisition.


“This agreement with Merck, a leader in biopharmaceutical research and development, allows Prometheus to maximise the potential for PRA023, while continuing to apply our technology and expertise to fuel further discoveries to address the needs of patients with immune disorders.” - Mark C. McKenna, Chairman and CEO (Prometheus)

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