Merck on deals hunt as patent cliff looms for top cancer drug
Merck’s cancer immunotherapy Keytruda is a wonder drug that has transformed not just the survival odds of thousands of patients but also the pharmaceutical company’s fortunes. However, with the drug poised to lose patent protection in 2028, recently-appointed chief executive Rob Davis must find new treatments to plug an eventual decline in sales when rivals launch cheaper versions.
Last week investors saw the first glimpse of Davis’s strategy when Merck agreed to pay $11.5bn for Acceleron Pharma, a biotech company that develops protein-based therapies to treat a rare blood pressure disorder and some cancers. Davis said the deal would help to diversify Merck’s portfolio and that he was scouring for other targets to help the company contend with the looming patent cliff.
“I’m confident we have the firepower, the capability, the focus and urgency to do that,” Davis told the Financial Times. “This is the first step on a journey to continue to build out our pipeline so that we have the ability to grow sustainably well into the next decade . . . We won’t be limited by the balance sheet.”
Davis, who replaced veteran Merck chief executive Kenneth Frazier in July, told investors last week that he would accept a one-notch credit rating downgrade if he needed to spend big to secure the right target.
Although 2028 might sound like a long way off, it is a relatively short time in “pharma years” given that it takes on average a decade and $2.6bn of investment to take a new drug from initial discovery to the marketplace. Just one in eight drugs that enters clinical trials is eventually approved, according to industry estimates.
Merck, a $213bn company with a portfolio spanning human and animal health, is not alone in facing a patent cliff. Pfizer, AbbVie and Bristol-Myers Squibb all have blockbuster drugs due to lose exclusivity soon and have recently sealed multibillion-dollar deals.
However, Merck’s shares have lagged behind most of its peers over the past 18 months due to concerns about its reliance on Keytruda and a failure to launch any Covid-19 vaccines or treatments. On the Covid front, the company appears at last to be on the cusp of success after the publication on Friday last week of positive data from a clinical trial of an antiviral pill, which prompted its shares to jump almost 9 per cent to $81.60.
The Covid drug, molnupiravir, reduced the risk of hospitalisation or death by approximately 50 per cent compared with a placebo in the trial. If authorised it would be the first oral pill given to patients soon after diagnosis and SVB Leerink, an investment bank, forecasts it could net $12bn in cumulative sales by the end of 2025.
But that is not enough to replace Keytruda, which has transformed Merck, bringing in just under a third of the company’s total revenue of $48bn last year. SVB Leerink predicts that the proportion will only grow as the company lurches towards patent expiration, with the cancer medicine accounting for more than half of sales by 2028, when it will face the threat of competition from cheaper alternatives.
PlantForm, a Canadian biotech company, and Sydney-based NeuClone Pharmaceuticals are already working with partners in Brazil and India to launch “biosimilars” that are almost identical to Keytruda.
“You have one of the best drugs in history and Merck appears to have an embarrassment of riches. But [Keytruda] has become so big investors worry really early — in this case seven years from now — how the company will fill the revenue gap,” said Daina Graybosch, analyst at SVB Leerink.
Some of the investor panic surrounding the patent cliff is overdone given the efforts Merck has made to combine Keytruda with other drugs to treat a long list of cancers, a process that can extend a medicine’s longevity. “There is a perception out there that Keytruda revenue will just fall off post 2028 but that isn’t going to happen,” Graybosch said.
Merck has filed 129 patents linked to Keytruda, which could extend the period of exclusivity to 2036 and beyond, according to research by the Initiative for Medicines, Access & Knowledge, a non-profit group that campaigns for cheaper drugs. Keytruda will cost the American healthcare system about $137bn during that eight-year period, I-MAK claims.
Nevertheless, Merck’s failure to begin diversifying its portfolio away from Keytruda more quickly has unnerved investors. Last month Morgan Stanley downgraded Merck to equal weight from overweight, and reduced its price target on the company from $90 to $85.
“Investors want to see that you have a couple of assets that are going to grow through the patent cliff,” said Matthew Harrison, an analyst at Morgan Stanley, who welcomed Davis’s renewed focus on “business development”.
Acceleron is developing sotatercept, a potential blockbuster drug to treat pulmonary arterial hypertension, a disease caused by high pressure in the blood vessels leading from the heart to the lungs. Because it is in late-stage clinical trials, the company has relatively high confidence it can launch the drug in 2024-25 and generate revenue ahead of Keytruda’s loss of exclusivity.
“This is a 2025 product — so they [Merck] can give investors some confidence about the growth rate of the business. It’s a step in the right direction but it doesn’t solve the whole problem,” Harrison said.
Like all large pharma companies, Merck’s business development team maintains a long list of potential targets, ranging from smaller biotechs with exciting but unproven drugs to larger companies with medicines already on the market or that have shown promise in human trials.
Mirati Therapeutics, a clinical-stage biotech company with a market value of $8bn that is focused on therapies for lung cancer, is one possible target, according to people briefed on the matter. Strand Therapeutics, a developer of mRNA therapeutics for cancer immunotherapy, and Arcturus Therapeutics, which is using mNRA to combat cystic fibrosis, are also potential targets, the people said.
But placing bets on early stage companies is a high-stakes game and some investors want to see Merck invest in later stage companies such as Acceleron, which can generate revenue more quickly. The US biotech giant Biogen, which won US approval for its Alzheimer’s drug Aduhelm in June, could also become a potential target for Merck despite its market capitalisation of $41bn, according to people close to Merck.
But others believe Davis is unlikely to pursue the type of megamerger that could cause integration problems or invite scrutiny from global regulators, who announced in March a review into whether big pharma deals are reducing competition in the market for prescription drugs.
“Merck is the responsible dad of large pharma and they will do things the right way,” Graybosch said. “They don’t do things to make a big splash and in terms of doing deals like Acceleron they won’t overpay . . . That is the culture at Merck and I don’t see the new leadership changing that.”