Merck transforms itself through dealmaking as clock ticks on top-selling drug
Acquisitions fuel pharma group’s evolution as it prepares to lose patent protection on cancer drug Keytruda
Merck chief executive Rob Davis has turned the pharmaceutical company into the industry’s most aggressive dealmaking machine.
The group has spent nearly $26bn on acquisitions over the past year — more than any of its competitors — as Davis leads the oncology and vaccines powerhouse into medicines for infectious diseases and respiratory conditions.
“We have as rich a phase 1, phase 2 and phase 3 pipeline as we’ve ever had in this company and that . . . is not appreciated,” Davis told the FT.
Merck’s need to diversify is urgent. It owns the world’s best-selling drug, a cancer killer that generated $31.7bn of revenue last year. Called Keytruda, it comprises nearly half of Merck’s total revenues, but it is losing its patent protection in 2028, forcing Davis to hunt for bolt-on biotech deals.
Acquisitions have been crucial to Merck’s transformation. No other pharma CEO has had to navigate as dramatic a boom-and-bust cycle caused by a blockbuster medicine losing patent protection as Davis, according to analysts and shareholders.
“The main risk you have with big companies is just complacency,” said Bill Smead, founder of Phoenix-based Smead Capital Management, a Merck shareholder. At Merck, “there doesn’t seem to be a whole lot of evidence of that”.
Investors have rewarded Davis’s efforts. Merck’s share price is up roughly 45 per cent since its $10bn acquisition of respiratory drugmaker Verona Pharma last July kick-started a trio of biotech deals.
By comparison, rival Eli Lilly, a stock market darling thanks to its popular weight-loss drugs, is up about 30 per cent over the past 12 months.
Merck deserved “high marks” for its shrewd dealmaking as it had eschewed some of the more “overpriced” biotech sales in recent years, said Daniel Barasa, a portfolio manager at Gabelli Mutual Funds.
Merck was in discussions earlier this year with Revolution Medicines over an up to $32bn deal to buy the biotech developing a new pancreatic cancer treatment, the FT previously reported. The talks, which had they materialised, would have led to the biggest deal ever for a biotech without a drug for sale.
“People have given us credit for frankly not only the deals we’ve done but the deals we haven’t done,” Davis said, skirting any mention of the Revolution Medicines talks as he spoke to the FT at the company’s New Jersey headquarters.
“The earlier we bet, the more conviction my scientists have to have.”
Barasa said a deal as large as Revolution, which on Monday reported positive clinical data for its lead drug, could signal Merck “moving a bit away from that ethos” of disciplined transactions and could invite “more scrutiny on the management team”.
Merck also dropped its pursuit of cancer drugmaker Seagen, leaving Pfizer to clinch a $43bn deal in 2023 that has so far failed to excite investors.
Among the deals it has picked over the past year, Merck agreed a $9.2bn deal for flu-prevention biotech Cidara Therapeutics in November and in March sealed a $6.7bn takeover of Terns Pharmaceuticals, a biotech developing a medicine to treat a rare blood cancer. Davis also oversaw the acquisitions of Acceleron Pharma and Prometheus Biosciences earlier in his tenure.
About $83.9bn of biopharma deals were struck globally in the first three months of this year, the fourth busiest quarter ever for deals in the sector, according to Dealogic.
Many of these sale processes were competitive, with Merck’s dealmakers outmanoeuvring other bidders, according to regulatory filings.
The result is that Merck has 22 medicines in the final stage of clinical trials, compared with 15 medicines in phase 3 trials in 2023.
The pharma industry’s appetite for dealmaking has come roaring back after the industry was jolted last year by the threat of significant US price cuts, tariffs on imported medicines and chaos at the Food and Drug Administration, the US medicines regulator. Merck is one of 16 drugmakers to strike a drug-pricing deal with the Trump administration.
“I’ve probably been more calm in this role in the past two years than I have at any other point during my career,” Davis said. “Think how many black swan events we’ve faced: Covid . . . [‘most favoured nation’] drug-pricing changes, now the conflict in Iran. There have been so many you just have to accept the pace at which the world is changing.”
Merck’s troubles have included sales in China. Last year, it halted shipments to the country of its vaccine for human papillomavirus, which is linked with cervical cancer. The vaccine was Merck’s best-selling drug after Keytruda, but sales growth disappeared after Chinese hospital systems switched to cheaper domestic copycats.
In February, Merck separated its oncology operations from its non-cancer drugs in part to pivot from cancer to other treatments.
Merck is awaiting a decision from the FDA due later this month on the approval of its latest HIV drug. The FDA is also reviewing an application for the wider usage of its heart disease drug Winrevair.
Despite its push into new medicines, these drugs do not automatically translate into revenue that will compensate for the loss of Keytruda, Barasa said. “The narrative is slowly transitioning away from ‘Merck is a one-drug company’, but we are not there yet.”
