After report of a potential Seagen acquisition by Merck & Co. emerged in The Wall Street Journal, industry watchers have been busy assessing whether a deal would indeed help Merck reduce its dependence on Keytruda and boost return for investors.
Merck could buy Seagen for about $39.5 billion, or $215 per share, SVB Securities analysts assumed in an assessment Tuesday, while declining to comment on the probability of the deal. Seagen has been trading at around $170 per share after The Wall Street Journal reported the possibility of a takeover Friday.
For Seagen, most investors agreed that the $215-per-share model deal price would be a fair offer, the analysts said in a separate note Wednesday. But Merck shareholders have doubts about the potential transaction, according to SVB.
The price tag would be slightly higher than Seagen’s all-time-high stock price of $212 in 2020, “a highly welcomed outcome” given the depressed biotech investment market these days, SVB said. Even before the deal speculation, Seagen’s share price had already included some acquisition premium, suggesting investors would be receptive to a full buyout, SVB said.
It’s worth noting that Seagen’s stock reached its highest in the fall of 2020 mostly thanks to Merck’s $1 billion investment and a licensing deal for the Seattle biotech’s LIV-1-targeting antibody-drug conjugates (ADCs).
When it came to Merck investors, though, the feedback on a potential Seagen buy was mixed, SVB said.
Merck has been trying to lower its reliance on PD-1 inhibitor Keytruda, which contributed 35%, or $17.2 billion, to Merck’s total sales in 2021. As the cancer immunotherapy quickly expands to more indications and geographies, its share of Merck's revenue is only expected to grow.
An acquisition of Seagen could help Merck diversify. In 2021, Seagen's four commercial cancer drugs brought in $1.39 billion, and SVB figured the number could reach $6.41 billion in 2026 from five total products. The analysts also projected that buying Seagen could help Merck lower its Keytruda revenue share in 2028 to 42.5% from an expected 48.4%.
However, Merck’s investors questioned whether the deal would fundamentally address the challenge of Keytruda’s forthcoming patent loss around 2028, SVB noted, given that the dependence would fall by only six percentage points.
The SVB analysts agreed with that investor comment, arguing that the Seagen assets don’t extend Keytruda’s market exclusivity, for example, as a part of a fixed-dose combination. Besides, a large deal as Seagen would reduce Merck’s ability to pull off other acquisitions, the team said.
Further, buying Seagen would likely pressure earnings per share for Merck shareholders in the near term, they added.
Naturally, all these calculations are built on the premise that Merck can pull off the acquisition, but investors fear that heightened antitrust scrutiny might derail that plan.
Between Merck and Seagen’s commercial and pipeline drugs, investors counted overlap in at least classical Hodgkin’s lymphoma, bladder cancer and cervical cancer. For example, Seagen and Genmab’s ADC Tivdak won FDA approval last year in cervical cancer, where Keytruda is also available.
The outcome of an antitrust review would rest on whether the U.S. Federal Trade Commission would be “receptive to the assets being from separate mechanistic classes with potential to create new therapies in combination,” the SVB analysts said.
But what the SVB team didn’t say is that FTC officials have stated a clear intention to examine proposed pharma deals beyond basic product overlaps in its future reviews. This could mean a more holistic approach featuring general aversion to major pharma consolidation. WSJ’s people who were cited as familiar with the Merck-Seagen deal talks also cautioned a combination may draw regulatory concerns.