Heard on the Street: Merck's Patent Cliff Doesn't Look So Frightening Anymore -- WSJ
By David Wainer
(Dow Jones) -- Many of the country's largest pharmaceutical companies, from Merck & Co. to Bristol-Myers Squibb, are under pressure to do deals right now because they are staring at huge patent cliffs for their top-selling drugs.
For investors considering whether to buy into these companies, figuring out which management teams are going to make the right acquisitions is a bit of a crapshoot. It can be difficult to build a financial model for a company without knowing who it will acquire. Further uncertainty comes from the fact that many pharma acquisitions involve drugs still in development. So the next best thing can be to look at management's acquisition track record. In that respect, Merck just earned some credibility with investors.
The crown jewel of its $11.5 billion purchase last year of Acceleron Pharma is a drug called Sotatercept for a rare type of high blood pressure known as pulmonary arterial hypertension (PAH). Sotatercept appeared to deliver positive results, potentially paving the way for a multibillion-dollar drug.
Merck said Monday that the late-stage trial of the drug for PAH met its primary endpoint, significantly extending how far patients could walk in six minutes compared with a placebo. The company added that eight of nine secondary endpoints achieved statistical significance. It didn't disclose detailed results, which will be presented at a coming conference.
Jared Holz, a healthcare-sector specialist at Oppenheimer, says any management team is going to be judged by how well their last major acquisition has fared. And right now, making smart deals is as important as ever for the industry because more than $200 billion in annual drug sales could face competition from generics later this decade as patent protection for top-selling medicines expires. "The sector depends on business development in a way that it hasn't in a while," says Mr. Holz.
Merck is perhaps the company with one of the biggest holes to fill. Its top drug, Keytruda, is going off patent in 2028, at which point it is expected to have been generating north of $30 billion in sales, amounting to about 50% of the company's forecast revenue.
A key part of its strategy to replenish its product line is to rebuild its cardiovascular and pulmonary portfolio, for which Merck has set a target of eight approved drugs bringing in about $10 billion in sales in 2030. That is an ambitious goal that is by no means assured, but it is part of a broader trend as the heart-drug market makes a comeback. Drugmakers are investing in a generation of new products after many blockbuster drugs for things like blood pressure and cholesterol faced generic competition.
Sotatercept can't replace Keytruda alone, of course. If the drug is approved, Guggenheim analysts see it fetching sales of about $4 billion in 2031. But Sotatercept's success could help win investor trust in Chief Executive Rob Davis as his team looks for its next acquisition.
Merck has engaged in intensive talks to acquire biotechnology firm Seagen for about $40 billion in recent months, but it is unclear whether that deal has been called off. Several other biotechs, including Argenx, BioMarin Pharmaceutical, Alnylam Pharmaceuticals and Biogen could present attractive targets for Merck and other big pharma companies.
As in the case of Acceleron, it often takes some time for investors to know for certain if a deal will pan out. In the meantime, management teams need all the support they can get, and it helps when their most recent deal shows signs of panning out.
Write to David Wainer at david.wainer@wsj.com
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 12, 2022).
(END) Dow Jones Newswires
