Dow Jones component Merck (MRK) could seek a megamerger with Amgen (AMGN) or AstraZeneca (AZN) to diversify from blockbuster cancer treatment Keytruda, an analyst suggested Thursday.
XKeytruda excitement has sent Merck stock flying 25.2% this year. But its second biggest product, a diabetes drug called Januvia, will lose patent protection in mid-2022. And Merck's internal pipeline is "underwhelming," Credit Suisse analyst Vamil Divan said.
"Intriguing BD (business development) possibilities remain for the team to consider, in addition to the possibility of separating the Animal Health business as another way to generate shareholder value," Divan said in a report to clients.
Although Merck is more likely to engage in smaller, bolt-on acquisitions, investors are keenly interested in a "large, transformational deal," Divan said. The biggest rumors circle around U.K. giant AstraZeneca and Amgen, the biggest biotech by market cap.
Keytruda In Cancer Treatment
Combining with AstraZeneca would boost Merck's oncology presence. Keytruda is an immunotherapy cancer treatment known as a PD-1 inhibitor. AstraZeneca sells a similar drug, Imfinzi, a PD-L1 inhibitor.
Further, Merck would gain full control of Lynparza, a PARP inhibitor approved in ovarian cancer, as well as fellow cancer treatments Tagrisso and Calquence, Divan said. It would also add another immunotherapy cancer treatment called tremelimumab.
Tremelimumab blocks a protein called CTLA-4, and would rival Bristol-Myers Squibb's (BMY) Yervoy. This could act as a "hedge against Yervoy, should Bristol succeed in further establishing CTLA-4 as an important combination agent in immuno-oncology."
"Given how much both companies are currently investing in R&D in immunotherapy-oncology, we would assume there would be room for significant synergies in this area," Divan said.
The two companies also have extensive diabetes treatment portfolios. A merger with AstraZeneca would give Merck access to a more established SGLT2-class drug than its own, as well as what's known as a GLP-1 agonist.
But Merck would likely face a reluctant AstraZeneca board. Dow Jones' component Pfizer (PFE) also tried to buy AstraZeneca in 2014. Divan notes "there may be strong political resistance to a U.S. company acquiring AstraZeneca, especially in the current Brexit environment."
Merging With Biotech Companies
A merger with Amgen would also be "disruptive, but could boost oncology presence and biologic capabilities," Divan said.
He notes a number of Amgen alumni now work at Merck, including Roger Perlmutter, president of Merck Research Laboratories. Before his current role, Perlmutter was the head of research and development for Amgen.
But merging with Amgen would require a vast amount of capital. Merck has a market cap around $184 billion. Amgen's market cap is just north of $127 billion. This would be "the largest of possible deals for Merck in the traditional biotech space."
From a product perspective, the two companies would overlap in cancer treatments and cardiovascular disease drugs. This could also help Merck in developing biosimilars, nearly identical copies of branded biologic drugs.
Other M&A opportunities among biotech companies include Vertex Pharmaceuticals (VRTX), Alexion Pharmaceuticals (ALXN) and BioMarin Pharmaceutical (BMRN). Each of these biotech companies would help move Merck into rare diseases, Divan said.
These wouldn't offer as many synergies, but would "limit the amount of disruption that the deal would bring, while still providing new innovation and helping diversify the company away from Keytruda and oncology to some extent," Divan said.
Merck Stock Gets Price Boost
Divan raised his price target on Merck stock to 81 from 71 and reiterated his outperform rating. Expectations for immunotherapy Keytruda are particularly bullish with the consensus modeling $14 billion in global sales in 2022.
On the stock market today, Merck stock dipped 3%, to 68.37, in line with broader pharmaceutical stocks.
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The post Merck Has A Keytruda Dependence Problem: Could A Megamerger Fix It? appeared first on Investor's Business Daily.
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