Of all of the deals announced this "Manic Monday", I think that maybe the one that I find the most interesting is the one that seems to be making the smallest ripples upon the pond. Obviously, the Nvidia (NVDA) deal for Arm Holdings is gigantic. Obviously, Oracle (ORCL) is top of the news this morning. Gilead Sciences (GILD) , and Verizon (VZ) all deserve the attention that the financial news services are giving them. But, and I mean but, did you kids catch that deal between Merck (MRK) and Seattle Genetics (SGEN) ? Just wow !!
Noticed This Late
I saw Merck move higher after the close on Friday night. The Wall Street Journal had reported late that the firm had started testing an experimental Covid-19 vaccine candidate on healthy human volunteers. I thought that great, but the fact is that Merck is approaching this problem differently than are some rivals such as Pfizer (PFE) , and Moderna (MRNA) that are using new, but unproven messenger RNA technology to race toward a useful vaccine. AstraZeneca (AZN) , another rival that is getting close, is using yet another technology known as a viral-vector based approach.
Merck is using a weakened version of the virus that causes Measles that it believes could deliver the spike protein that would trigger an immune response to Covid. Merck is enrolling just 260 patients in this trial (in Belgium) that is not projected to be completed until April 2022. In other words, Merck is going after a more complete, proven vaccine that maybe will not require booster shots. Long term potential usually does not drive stock performance after the closing bell on a Friday night. It wasn't this time either.
The Deal
Or should we say "deals"? There are apparently two rather complex deals between Merck and Seattle Genetics. First the larger, financially of the two. The two firms will globally develop and commercialize Ladiratuzumab Vedotin, which is an investigational antibody drug conjugate that Seattle Genetics has already been working on to target LIV-1 for breast cancer and various other solid tumors. The firms will evaluate this drug candidate as monotherapy, as well as in cocktail, or combination with Keytruda, which is Merck's anti PD-1 therapy meant for triple negative breast cancer, and other LIV-1 solid tumors.
The terms for this larger of two deals require that Seattle Genetics receive a $600 million upfront payment from Merck, as well as a $1 billion equity investment where Merck receives five million shares of common stock at $200 per. SGEN closed at $149.97 on Friday night. I see the shares were trading in the mid-$160's early in the pre-opening session. Seattle Genetics will then be eligible to receive in addition, progress-dependent milestone payments that could add up to another $2.6 billion. All told, if everything works like a charm, Merck ends up paying Seattle Genetics $4.2 billion over the course of this first of two deals.
The second of two deals grants Merck the exclusive licence to commercialize TUKYSA, which is a small molecule tyrosine kinase inhibitor, meant to fight HER2-positive cancers. The deal covers Asia, the Middle East, Latin America, and other areas exclusive of the U.S., Canada, and Europe. Seattle Genetics will retain commercial rights in these regions. For this license, Merck will pay $125 million upfront, up to $65 million in milestone payments and $85 million in prepaid research and development costs, as well as a tiered system of royalty payments in parts of the globe controlled under Merck by agreement.
Not Complaining
I am long Merck, not Seattle Genetics, though the one to own this morning is obviously SGEN. Merck, for me, is a solid well run pharmaceutical company run by an excellent CEO, Kenneth Frazier, that pays a steady dividend yielding 2.9%. Now, Merck's and Frazier's method of operations is always, in my opinion... well developed and aimed at longer-term strategies. The route that this firm took in the fight against Covid is proof in that pudding. This is why I am sure (as sure as a kid typing away in his own office could be) that this deal with Seattle Genetics is not half baked. Frazier saw growth and decided to pay for it. Very smart in this no-growth, cheap money environment. Jimmy Chill told us to buy SGEN a while back, didn't he? Probably should have listened. He saw the growth before anyone.
Investing
I will remain long MRK. The shares are trading at pivot ($85). My target price is $103. I intend to panic around $77. Have we missed the move in SGEN with the last sale at $165? Merck seems willing to pay $200 for a few more shares than I might buy. These shares were trading in the high $180's in late July. Not this morning, but soon, the next day that they hit the Health Care sector with vigor, I am going to have to buy some of these shares. Company does not make money. I'm thinking that changes.
(NVDA and SGEN are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
