Merck & Co justifies paying up for Acceleron

 Once Acceleron added clinical validation with sotatercept to a promising launch for its first drug, Reblozyl, it became an obvious takeover target. The big question today is why it should have fallen not to Bristol Myers Squibb but to Merck & Co, noted Jacob Plieth on Evaluate Vantage.

It was Bristol, after all, that inherited a key deal with Acceleron – one of the few Celgene transactions to have truly delivered – and this should have given it first-mover M&A advantage. Bristol did feature in early speculation over who would buy Acceleron, but appears to have been unwilling to part with the $11.5 billion that Merck paid up.

As investment cases go, Acceleron’s was pretty simple. The group was focused on TGF-β superfamily biology, with three assets that targeted it in slightly different ways: Reblozyl, approved for anaemia in beta-thalassaemia and myelodysplastic syndromes (MDS); sotatercept, in pivotal development for pulmonary arterial hypertension (PAH); and ACE-1334, an early project that did not feature in sell-side models. A legacy Celgene deal concerned Reblozyl and sotatercept, resulting in Bristol owing Acceleron a low to mid-20% royalty on the former, and Acceleron owing Bristol a low-20% interest on the latter.

However, sell-side forecasts never caught up with buyside expectations. Evaluate Pharma consensus suggests NPVs of $7.4 billion for Reblozyl – only a fraction of which would accrue to Acceleron – and $1.7 billion for sotatercept. Against this Acceleron reached a market cap of $8 billion before rumors of a takeover surfaced this month, and the $180 a share Merck agreed today amounts to a valuation of $11.5 billion.

Overall, Acceleron is the latest example of Merck putting to use the cash its Keytruda blockbuster is throwing off, following the acquisitions of Pandion, Peloton and Velosbio. The group told analysts that Acceleron would provide growth when Keytruda loses patent exclusivity later this decade, though low-cost competition could come even earlier.

Kyle Blenkenship, managing editor of EndPoints News noted that the acquisition doesn’t come at much of a premium: Shares of Acceleron closed Wednesday at around $175, suspiciously plummeting from a high of around $186 earlier in the day. The company’s stock had ticked up for days after reports from Bloomberg and the Wall Street Journal quoting insider sources mostly outlined the terms of the deal with Merck.

For Merck, the Acceleron buyout confirms the drugmaker’s intent to make a splash in rare disease as a new team of executives lead the way following the departures of CEO Ken Frazier and R&D czar Roger Perlmutter, the brain trust behind Merck’s massively successful Keytruda I/O franchise. Now, under CEO Rob Davis and R&D head Dean Li, formerly the head of early discovery R&D, Merck is looking outside of oncology for value as part of what could be a string of deals for the nascent leadership team.

Geoffrey Porges, analyst at SVB Leerink Research, said the price seemed fair given that a buyer would get 25% to 30% of the value of Reblozyl, which is likely to become a $2 billion-plus brand by the late 2020s. Merck would also get access to other drugs in Acceleron’s pipeline, including sotatercept, he said. “Acceleron will offer a buyer a relatively secure $1 billion to $1.5 billion in estimated revenue by 2025, increasing to an estimated $2.7 billion by 2030,” he said.

https://www.thepharmaletter.com/article/look-back-at-pharma-news-in-the-week-to-october-1-2021