Earlier this week, Merck (MRK 0.10%) went shopping and purchased the precision-medicine company Prometheus Biosciences (RXDX) for $200 a share, for a total value of $10.8 billion. The transaction is expected to close in the third quarter of 2023.
The deal centers around PRA023, the late-stage autoimmune disorder therapy poised to enter phase 3 testing for ulcerative colitis and Crohn's disease later this year.
Prior to this deal, Merck was widely expected to add another late-stage asset to its pipeline. The core reason is that the pharma company is barreling toward the patent expiration of its most important commercial asset, Keytruda, in 2028.
Keytruda is a cancer therapy indicated for a wide variety of solid tumors. It generated over a third of the company's total sales in 2022. As such, it was imperative for the company to add high-value assets to its pipeline ahead of this all-important patent expiration.
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Is Merck's stock a table-pounding buy after this midsize immunology acquisition? Let's dig deeper to find out.
Pros and cons of the deal
On the pro side of the ledger, PRA023's mid-stage data in both ulcerative colitis and Crohn's disease imply that the biologic might turn out to be a best-in-class therapy. Wall Street analysts, in turn, think that if PRA023 can replicate these results (or at least come close) in late-stage trials, it will have a chance at garnering no less than a 10% market share for both indications.
A 10% market share would translate into approximately $2 billion in annual sales as things stand now. But these markets are expected to grow modestly by low single digits over the course of the decade, giving PRA023 a chance to perhaps hit $2.5 billion in peak sales for its lead indications by the end of the decade. If this line holds true, Merck's $10.8 billion investment will prove to be money well spent.
In terms of deep value, Prometheus seemingly had plans to test PRA023 across a wide range of autommune disorders worth over $200 billion in potential sales. Merck, for its part, is likely to accelerate this plan in an effort to transform PRA023 into a franchise-level immunology medication. So, under a best-case scenario, this biologic therapy could one day generate upward of $20 billion in annual sales.
On the con side, Merck will have two entrenched competitors in immunology, AbbVie (ABBV -1.03%) and Johnson & Johnson, along with several other big pharma players in the space. Moreover, Merck has long been more of an oncology, infectious disease, and cardio/metabolic specialist. Immunology, in effect, wasn't the company's biggest strength going into this deal. So competing against the likes of AbbVie on its home turf will be a tough ask, to put it mildly.
The verdict
All things considered, Merck's splash in immunology is very interesting. The drugmaker might have nabbed a top-flight immunology therapy at a steep discount. That being said, there's no guarantee that PRA023's "pipeline in a drug" thesis will pan out or that Merck will be able to wrestle market share away from AbbVie.
After all, there have been multiple challengers to AbbVie's dominance in immunology over the past decade, and no one has really come all that close to rivaling the drugmaker in this field. Consequently, investors might not want to base their buy (or sell) decision for Merck stock on this acquisition quite yet.
