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Here's What Merck Is Really After With Peloton Buyout

- By Matt Winkler

One day before Peloton Therapeutics was scheduled for a $750 million initial public offering, Merck snapped it up at a near 200% premium. Why such a premium over what Peloton was aiming to raise? Attention is being almost exclusively focused on Peloton's flagship candidate PT2977 for kidney cancer, which would compete with Merck mega-blockbuster Keytruda if approved, but this is only part of the story.

Keytruda only just gained FDA approval for kidney cancer last month as a combination therapy together with Pfizer (PFE)'s Inlyta. Keytruda is already approved in 12 other indications. The timing of the latest Keytruda approval and Merck's acquisition aside, kidney cancer alone does not explain the huge premium of just over $1 billion up front plus another billion in milestone payments. Peloton was looking to raise about $160 million with its planned IPO, but Merck obviously sees much higher value here.

The answer may lie in another one of Poloton's assets that is getting decidedly less attention, its CD73 program. CD73 is an enzyme that has been linked to resistance to anti PD-1 immune checkpoint therapies like Keytruda. This program is still in its infant stages, but over the long term, this is the one that could lead to unlocking much more value from Keytruda than its flagship PT2977 program alone.

PT2977 is on its way to Phase 3 after showing promising Phase 2 results with a clinical benefit rate of 78% on renal cell carcinoma patients. This rate includes objective response and stable disease rates. This is what gives Peloton value in the near term, but what makes the PT2977 program a particularly good fit for Merck is what it has in common with CD73. PT2977 inhibits HIF-2?, which stands for hypoxia inducible factor. This factor encourages blood vessel growth in low oxygen (hypoxic) environments and is switched on aberrantly in 90% of renal cancer cases, causing extra blood vessel growth to feed tumors. Where Keytruda comes on is that HIF-2? also upregulates CD73, which in turn is thought to be a biomarker of resistance to Keytruda therapy.

It seems then that Merck is thinking more long term here than just another drug for kidney cancer. If PT2977 succeeds, this would predict increased chances of success for Peloton's CD73 program as well, since both candidates inhibit the same factor. Merck may then be able to trial a combination therapy consisting of Keytruda and an eventual CD73 candidate not just for kidney cancer, but for any cancer involving that biomarker.

As successful as anti PD-1 therapies like Keytruda are, overall objective response rates to these drugs are no different from those of other standard of care cancer therapies. After data from 12 studies totaling 6,700 patients was compiled in a metastudy analysis in 2018, it was found that while patients on anti PD-1 therapies had better complete response and partial response rates, progressive disease (basically nonresponse) rates were identical between the anti PD-1 patients and those on standard of care. Essentially then, Keytruda improves response quality for those who do respond to it, but it offers little for patients who would otherwise be nonresponsders anyway.

If Peloton's HIF-2? platform can succeed in kidney cancer, it could also succeed in broadening Keytruda's addressable market. For a mega-blockbuster like Keytruda, this could be invaluable for Merck, and puts its $2.2 billion price tag for Peloton into context.

Disclosure: No positions.

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This article first appeared on GuruFocus.