There's nothing quite like a big acquisition to turn a business around. Consider how CVS Health acquired health insurer Aetna to broaden its operations; AbbVie acquired Botox-maker Allergan, which also helped diversify its business; and most recently, Pfizer announced plans to buy cancer company Seagen. 

Now, Merck (MRK 0.23%) is making a similar move, recently announcing plans to acquire Prometheus Biosciences (RXDX). While it's not nearly the same scale of the aforementioned acquisitions, it may still be a game changer for the business. Let's see what it could also mean for investors.

The potential blockbuster at the heart of the deal

Prometheus Biosciences is an unprofitable business that incurred losses totaling $141.8 million last year on revenue of only $6.8 million. But this is a company with some exciting prospects, which is why Merck has made an aggressive bid to buy the company for $10.8 billion. It all centers around one prized asset: PRA023.

PRA023 is a potential treatment for ulcerative colitis and Crohn's disease that has the potential to be much more than your average blockbuster drug. Some analysts see the drug generating as much as $20 billion in annual revenue at its peak.

That would put it in the realm of some of the best and most promising drugs in the healthcare industry, including Humira, which generated over $21 billion last year, and Mounjaro, which is a potential weight-loss treatment that analysts believe could rake in $25 billion or more in annual sales. Merck's star cancer drug, Keytruda, brought in just under $21 billion last year.

The Food and Drug Administration (FDA) hasn't approved PRA023 yet, but it has clearly shown some exciting potential that could be a game changer for Merck. Late last year, Prometheus announced plans to launch phase 3 studies for PRA023 in 2023. It's not a guarantee that PRA023 will make it across the finish line and obtain approval, but it has been doing well in phase 2 trials and demonstrating efficacy thus far.

Prometheus has other programs in its pipeline, but none that are as promising or as far along as PRA023.

Diversifying its business and replacing its Keytruda revenue

The big advantage for Merck from this transaction, which may close later this year, is that its portfolio would be much more diversified and less dependent on Keytruda, which is losing patent protection later this decade. Keytruda's revenue last year accounted for 40% of Merck's total pharmaceutical sales ($52 billion) and 35% of total revenue for the business ($59.3 billion). 

It won't be until 2028 that Keytruda faces competition from biosimilars and that gives Merck time to wait for PRA023 to potential obtain approval FDA approval, should it arrive. It's a bit of a risky move because at such a hefty price tag for Prometheus' business, a lot hinges on whether PRA023 is successful.

And if it is, it can help Merck build out its immunology portfolio, which last year generated just $913 million in sales from two drugs, Simponi and Remicade.

Does this deal make Merck a buy?

Merck's stock is currently trading near its 52-week high and it's at a forward price-to-earnings ratio of 16, based on analyst estimates. That's less than the average multiple of 18 for stocks in the healthcare sector.

By showing that it's serious about finding a replacement for Keytruda's inevitable decline in revenue later this decade, Merck does look to be a better buy. It comes with risk, but it's a calculated one that could pay off significantly for the company.

Merck has also generated nearly $40 billion in free cash flow over the past four years and so I'm confident that its strong operations would enable it to pursue other deals in the future should this one not pan out.

Overall, this transaction is a promising development for Merck that makes the stock a more attractive buy today.