Merck Paid $208 Million to Stop Its Drugs From Working. Here's Why That's Bullish.

In biopharma, it sometimes makes sense for companies to spend a lot of money on buying or developing technical capabilities that seem to be counterproductive at first glance. For instance, on April 5, Merck (MRK -0.82%) spent $208 million to acquire a business called Abceutics, which is developing a technology to nullify the effects of certain medicines that Merck is heavily invested in producing.

Buying Abceutics is bullish for Merck, because in this context, stopping the drugs from working is a key capability that'll help to differentiate any future products from the competition. Here's why.

Controllable therapies will have an advantage on the market

To fully appreciate why Merck's purchase of Abceutics is a positive sign for the stock, it's necessary to understand what Abceutics actually offers for its pipeline, which requires a quick discussion of the relevant science.

As you may know, antibody-drug conjugates (ADCs) are a very popular area of oncology drug research and development (R&D) right now, and many big pharma companies are trying their hands with them. In an ADC, the engineered antibody behaves as a homing missile or loitering munition that circulates through a patient's body and gravitates toward certain features on the surface of tumor cells. The payload of the missile is a chemotherapeutic drug, typically one that'd be too toxic to a patient's healthy cells to administer systemically as part of a standard chemotherapy regimen. But thanks to the highly targeted nature of the therapy, the chemotherapy molecules are delivered preferentially to where they can do the most good without causing excessive collateral damage (in theory).

Merck has six ADCs in late-stage clinical trials, all of which are indicated for treating cancers like small cell lung cancer, non-small cell lung cancer (NSCLC), endometrial cancer, and others. Other companies have ADCs that are approved for sale, as well as next-generation designs that are in early to-mid-stage clinical testing.

According to Mordor Intelligence, the global market for ADCs will reach $44 billion by 2029, up from $12 billion this year, so it's an important segment to be competing in. As Merck's trailing-12-month (TTM) revenue is just over $60 billion, it stands to grow by an appreciable amount over time if it can successfully grab a decent slice of the market regardless of the hot competition. It now has a leg up on doing that.

One of the challenges with ADCs as a class of medicine is that their high potency entails the possibility of intense side effects too, which makes calibrating the appropriate dose rather difficult. To address that obstacle, Abceutics is working on what it calls payload-binding selectivity enhancers (PBSEs), which are best understood as kill switches that deactivate an ADC's chemotherapy payload.

The point of having a tool that neutralizes the payload is to shut down any off-target activity once the circulating ADCs have had sufficient time to find their quarry in the patient's body. Remember, the ADCs target tumor cells preferentially, but on a long enough timescale (on the order of an hour or so), healthy cells could start to get caught in the crossfire more frequently. So the idea is to administer an ADC, give it a little bit of time to work, then extinguish its action with a PBSE before the circulating nonexpended ADCs have a chance to cause trouble.

And Merck now owns the technology and the rights for producing and developing those PBSEs. That means its ADCs could potentially have significantly fewer side effects than the medicines produced by other players. Even if its candidates arrive to the market late, assuming they get approved by regulators, it's a no-brainer that clinicians will be more apt to prescribe them than the alternatives.

After all, safer and more tolerable cancer medicines are cancer medicines that can be administered more frequently to the same patient, dramatically improving the chances of successful treatment.

Financial context is key

Merck's new purchase will probably help it to grow over the coming years as it rolls out more ADCs and as the ecosystem for ADCs gets more crowded for various cancers. Expect more acquisitions or perhaps licensing of other valuable technologies for squeezing out more functionality and reducing the risks of its ADCs.

But don't expect it to miss the cash it used on the latest transaction. In the most recent quarter, it had more than $7 billion in cash and equivalents on hand. What's more, across its entire oncology portfolio, it expects to make more than $20 billion in revenue between now and the next decade.

Boosting that sum by investing $208 million in new tech could prove to be a stellar move. And that's why the stock is worth buying, especially if you're typically a fairly conservative investor with a lower tolerance for risk.