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- By Barry Cohen
Seeking to beef up a product line dominated by the cancer drug Keytruda, Merck & Co. Inc. (NYSE:MRK) has made another in a series of acquisitions. The Kenilworth, New Jersey-based drug giant is paying nearly $2 billion to acquire Pandion Therapeutics Inc. (NASDAQ:PAND), a Watertown, Massachusetts-based biotech developing drugs for autoimmune diseases.
The deal follows several other relatively modest purchases: $425 million to buy OncoImmune, a Maryland-based biotech; almost $3 billion for VelosBio, a San Diego-based maker of antibody cancer drugs; and Themis, a privately held developer of vaccines and therapies for infectious diseases and cancer.
Analysts and shareholders hope the acquisitions will help shake Merck stock out of the doldrums. Shares of the fifth-biggest drugmaker, as measured by sales, plummeted more than 11% in 2020, while the S&P 500 Health Care Sector Index rose by about the same percentage and the broader S&P 500 rose 15.3%.
The company paid a substantial premium to acquire Pandion, which has several drugs being tested to treat autoimmune diseases. The acquisition, which is scheduled to close in the first half of the year, valued Pandion at $60 a share, more than double what the stock was trading for prior to the announcement.
Typical treatments for autoimmune diseases subdue the immune system. This approach can work, but it can also leave the patients prone to infections and other health issues. BioPharma Dive reported that Pandion's goal is to develop safer drugs that cut the immune response at the specific site of inflammation.
Pandion's most advanced drug candidate is called PT101. Early this year, the company reported positive results from a phase 1 clinical trial showing the medication was well-tolerated and triggered its intended targets, without doing the same for other, pro-inflammatory T cells. The company said a phase 1/2 study of PT101 for ulcerative colitis should start in mid-2021, while a phase 2 trial for a chronic disease that causes inflammation in connective tissues, such as cartilage and the lining of a blood vessel, is expected to get underway in the second half of the year. Pandion is also working with Astellas Pharma (ALPMY) on treatments for autoimmune diseases of the pancreas.
The Pandion deal gives Merck the chance to shore up its own family of immunology drugs, which are coming under increasing pressure from copycats. Its leading medications in this arena are Remicade and Simponi, which came to Merck in the 2009 purchase of Schering Plough. Merck splits the commercialization of the products with Johnson & Johnson (JNJ).
Beyond that, Merck needs treatments that can fill the gap when its blockbuster cancer drug Keytruda begins to feel the full effects of competition. A biosimilar is under development by privately held NeuClone Pharmaceuticals Ltd. of Australia. Meanwhile, Coherus BioSciences Inc. (NASDAQ:CHRS), a maker of copycat biologics, recently inked a deal with Junshi Biosciences Co. Ltd. (HKSE:01877) for rights to a cancer immunotherapy that could compete with Keytruda and Bristol-Myers Squibb Co.'s (NYSE:BMY) Opdivo.
Keytruda sales were about $4 billion in 2020, accounting for nearly a third of Merck's revenue. Other big sellers were the vaccine Gardasil, nearly $1 billion, and diabetes drug Januvia, $1.3 billion.
Analyst recommendations provided by FactSet show that the consensus forecast for Merck is "overweight". Of the 21 analysts offering their recommendations, five rate Merck a hold and three have it as overweight. Thirteen analysts rate the stock a buy.
Kiplinger thinks Merck is a bargain that can't be ignored. The financial advice publication notes that analysts forecast Merck to generate average annual earnings growth of almost 8% over the next three to five years. The company should also benefit as the pandemic eases and physician offices reopen, elective surgeries resume and pet owners return to veterinary offices, points out Argus Research.
Investors seeking income along with the potential for appreciation should find Merck attractive given that its $2.60 dividend yields nearly 3.5%.
Disclosure: The author has positions in Eli Lilly, Amgen, Bristol-Myers and Johnson & Johnson.
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This article first appeared on GuruFocus.