By Tudor Popescu and Bella Chen (University of Chicago), Ivan Chung, Justin Leung, and Ryan Chan (HKUST)
Photo: Louis Reed (Unsplash)
Overview of the deal
Acquirer: Merck
Target: Acceleron Pharma
Total Transaction Size: $11.5 billion
Closed date: Fourth quarter of 2021
Target advisor: Credit Suisse
Merck, through a subsidiary, will acquire Acceleron, a clinical-stage biopharmaceutical company focused on rare diseases for $11.5 billion. Merck is a multinational pharmaceutical company known most for its product Keytruda, a medication used to treat various types of cancer. Their acquisition gives the company access to Acceleron’s drug candidate, Sotatercept, which is a treatment for pulmonary arterial hypertension. Merck plans to launch sotatercept in 2024-2025, with sales estimated to be more than $2 billion. In addition, Reblozyl, a protein used to treat anemia in certain rare blood disorders which are being marketed by Acceleron, will also contribute to an increase in revenue. This deal will diversify Merck’s portfolio, as the company has been relying heavily on its sales from Keytruda as of late.
“Acceleron’s innovative research has yielded an exciting late-stage candidate that complements and strengthens our growing cardiovascular portfolio and pipeline and holds the potential to build upon Merck’s proud legacy in cardiovascular disease.” Rob Davis, chief executive officer and president
Company Details (Acquirer - Merck & Co., Inc.)
Merck is a leading publicly-listed biopharmaceutical company (NYSE: MRK) that offers medicines and vaccines for various diseases. Merck invents and brings forward vaccines, medications, and consumer and animal health products for many of the world’s most challenging diseases. It is at the forefront of research to prevent and treat diseases that threaten people and animals – including cancer, infectious diseases, such as HIV and Ebola, and emerging animal diseases.
Founded in 1891, headquartered in Kenilworth, New Jersey, United States
CEO: Robert M. Davis
Number of employees: 74000
Market Cap: $207.42B (as of 08/10/2021)
EV: $225.45B
LTM Revenue: $50.382B
LTM EBITDA: $ $12.053B
LTM EV/Revenue: 4.47x
LTM EV/EBITDA: 11.33x
Company Details (Target - Acceleron Pharma, Inc.)
Acceleron Pharma, Inc. is a publicly-listed biopharmaceutical company (NASDAQ: XLRN). The company engages in developing, manufacturing, and commercializing novel biotherapeutics that modulate the growth of bone, muscle, fat, and the vasculature to treat musculoskeletal, metabolic, and cancer-related diseases.
Founded in 2003, headquartered in Cambridge, Massachusetts, United States
CEO: Habib Dable
Number of employees: 225
Market Cap: $10.715B (as of 08/10/2021)
EV: $10.08B
LTM Revenue: $101.125M
LTM EBITDA: $(220.118M)
LTM EV/Revenue: 99.63x
LTM EV/EBITDA: -45.77x
Projections and Assumptions
Short-term consequences
By purchasing Acceleron Pharma Inc., Merck can gain direct access to Acceleron’s rare disease drug candidate, Sotatercept, which is believed to be a core rationale of the acquisition. The drug, being a pioneer of its kind in the cardiovascular disease sector is projected to be a billion worth revenue stream for Merck, owing to its uniqueness. The deal is a critical step for Merck to consolidate their market-leading status in the lung cancer treatment sector, as it allows product diversification of Merck’s current product portfolio and aids Merck to better deal with the growing generic competition towards Keytruda, a lung cancer star product of Merck. The introduction of Acceleron’s product portfolio, including a co-developed blood-related disorder drug with Bristol Myers Squibb. From a cost perspective, lung cancer treatment is one of the major business lines of Merck, accounting for approximately 37% of Merck’s 2021 Q2 revenue, the deal can create significant cost synergies through the sharing of pharmaceutical manufacturing and R&D facilities.
The $11.5b deal, funded in both cash and debt implies a 34% premium over Acceleron’s trading price of $134 a couple of weeks ago. Merck’s share price had remained nearly constant on the day of the announcement (September 30) with a slight bump from $75.09 to $75.11 compared to the previous trading day. Instead, the announcement of Merck launching the world’s first COVID pill on a subsequent day (October 1) fueled Merck’s stocks to rise to $81.40, implying a growth of 8.37%.
Long-term Upside
This acquisition deal serves as a crucial strategic investment in a sustainable growth strategy for Merck. Keytruda, an immunotherapy drug that works with the immune system to fight cancer cells, is Merck’s Superdrug and revenue-generating machine. Analysts estimate that the drug could hit over $24 billion in global sales, and is on the trajectory to dethrone AbbVie’s Humira as the world’s best-selling drug in 2023.
Undoubtedly, such a drug dominates Merck’s portfolio in revenue generation (over 30%), but that also indicates that Merck needs to prepare before the drug falls off from the patent safety net in 2028. There are a few internal R&D programs that could compensate for that gap, but none of which will be likely to fill Keytruda’s revenue shoes. Therefore, Merck sought an external business development opportunity - Acceloron’s blockbuster drug sotatercept.
This acquisition means Merck will gain access to Sotatercept, Acceleron’s leading therapeutic candidate. It is a treatment for a rare and life-threatening high-blood pressure disorder that is in Phase 3 clinical trials.
This deal not only can boost and complement Merck’s cardiovascular pipeline, but it can also help diversify Merck’s portfolio of the pipeline of drugs, given that Acceleron also develops multiple therapies for certain cancer types and rare diseases. Merck said it was targeting a launch for Sotracept in 2024-25. If successfully commercialized as a foundational therapy, this could turn into a multibillion-dollar revenue opportunity for Merck for many years.
Risks and Uncertainties
Currently, Merck heavily relies on the immune-oncology drug Keytruda to generate revenue, with $4.2 billion (which represents more than one-third of the company’s total revenue) solely coming from it. This imposed a high risk due to the dependency on a single drug, especially when Keytruda is going to lose its market exclusivity in 2028. If the acquisition is approved, it is expected that this can diversify the revenue base of the company to ensure steady long-term growth. However, the current financials of Acceleron do not provide any reference for the future outlook of the company, showing that it is a risky move for Merck to propose the acquisition. In the second quarter, Acceleron had revenue of $28 million, with $25.6 million coming from the royalty revenue from Reblozyl, and a loss of $63.5 million. Although it is common practice to acquire a target with mid-to-late stage pharmaceutical studies in the biotech sector, it still can’t deny that the move is risky and depends on the management's belief in the future successful product launch. In this case, Merck expects the market of the pipeline drug Sotatercept will be as large as $7.5 billion by 2026, which is yet to be proven.
The proposed acquisition may also face opposition from the current shareholder of Acceleron. Avoro Capital, a global life science investment firm that owns 7% of Acceleron stock, said the deal undervalues the drugmaker. The investment fund mentioned that it does not have much intention to sell the stock at this moment as the acquisition price is low. It also believes the value of the company will increase as additional clinical trial data is released. This reflects the acquisition process may not be as smooth as Merck is thinking since there will be objections from institutional and strategic investors of the target.
“Acceleron’s innovative research has yielded an exciting late-stage candidate that complements and strengthens our growing cardiovascular portfolio and pipeline and holds the potential to build upon Merck’s proud legacy in cardiovascular disease.” - Merck CEO and President Rob Davis