- Jonathan Poyer
M&A Is Pushing the Biotech Rally - Less is More
M&A Monday powered the S&P select biotech index back above both the 50 and 100 day moving averages following a near 2 sigma rally.
Merck (MRK) announced the intention to acquire Prometheus Biosciences (RXDX) for $10.8 billion in enterprise value driving the stock up ~70%. Analysts were generally positive on RXDX's recently reported phase 2 data of lead TL1A antibody in ulcerative colitis (UC), but the high price paid for a mid-stage asset highlights MRK's desperation to augment its pipeline. MRK's leading Keytruda franchise generates >40% of the company's revenue and loss of exclusivity is expected by 2029. RXDX's TL1A is expected to reach the market in 2026-2027 after initiation and completion of large pivotal, phase 3 clinical trials. This provides MRK the opportunity to bring online another potential blockbuster (peak ests range from $2-5 billion) before Keytruda starts to decline at the cost of pushing out a potential ROI from the deal until the 2030s, if ever.
Similar to Pfizer's (PFE) acquisition of Seagen (SEGN), the high price highlights pharma's willingness to pay potentially value-destroying premiums to have a chance at combating loss of exclusivities. This should generally be positive for SMID biotechs with differentiated data and / or a de-risked path forward to address a large market. PFE showed it is not willing to pay up for just anything; however, as it sought to but the assets of Lucira Health, Inc. (LHDX) out of bankruptcy. LHDX generated >$500 million in revenue from an at home COVID-19 test, but was unable to remain as a going concern due to a high burn rate and inability to improve margins.
Ironically, MRK dropped out of the SGEN bidding due to valuation while Pfizer (PFE) out licensed its own TL1A antibody program last year to smid cap company Roivant (ROIV) for very modest economics (25% of the equity, some ROW commercial rights and an option on a next-gen compound). ROIV's Phase 2 TL1A data showed similar activity to RXDX in a phase 2 UC trial and time will tell how differentiated these assets will be once phase 3 trials are completed. Both MRK and PFE M&A deals also focused on biologics as opposed to small molecules, presumably due to the longer duration of protection of the former from price controls in the so called Inflation Reduction Act.
Eli Lilly (LLY) and Teva (TEVA) reminded investors manufacturing complex biologics can be challenging. FDA issued complete response letters (CRLs) for LLY's Mirikizumab and TEVA's bHumira due to manufacturing issues despite both companies' long histories of producing commercial biologics.
Novo Nordisk (NOVOB) was expected to have a strong 2023 as its Wegovy was approved in December for obesity, but still shocked to the upside with a preannouncement. NOVOB now expects revenue CER growth +24 [_30] (from +13 [_19] ) and operating profit CER growth +28 [_34] (from +13 [_19] ).
Clearly less (weight) is worth more.