For pharmaceutical giant Merck (MRK) , sales of Keytruda increased 23% to $4.8B for the March quarter over the same period for the year prior. This allowed Merck to beat Wall Street for Q1 and boost forward looking guidance at the time. Merck upped the firm's FY 2022 earnings outlook as being good for adjusted EPS of $7.24 to $7.36. Wall Street sees Keytruda possibly amounting to 40% of Merck's total sales by FY 2027.
For those scratching their heads, Keytruda is a humanized antibody used in cancer immunology meant to treat melanoma, lung cancer, head and neck cancer, some breast cancers, stomach cancer, and cervical cancer.
Merck is facing the loss of patent exclusivity for Keytruda in 2028, setting up the likelihood that any number of generics or biosimilars could enter the market from that year on. There is the possibility that several biosimilars could be in Phase 3 trials well ahead of 2028.
Around The Block...
Back in 2020, Gilead Sciences (GILD) laid out $21B for Immunomedics, primarily for that firm's antibody drug Trodelvy, targeting breast cancer. Merck had shown interest in Immunomedics at the time. Then in 2021, chief rival Pfizer (PFE) paid out $2.3B for Trillium Therapeutics, a smaller firm specializing in oncology.
Solution?
Seagen (SGEN) is a Bothwell, Washington (You were going to say Seattle, weren't you?) based biotech that has been pivotal in developing a class of cancer therapeutics that attack tumors with toxins in a direct strike. These therapies are known as antibody drug conjugates. They kill the weeds without killing the lawn, if you catch my drift. They minimize unintended side effects.
Currently, one such therapy is Adcetris for the treatment of relapsed or refractory Hodgkin lymphoma, one type of non-Hodgkin lymphoma, and systemic anaplastic large cell lymphoma. Another therapy is Padcev, which is meant to treat urothelial cancers of the bladder. Sales of Adcetris reached $1.4B last year alone.
News
The Wall Street Journal broke the story on Wednesday night. Merck was apparently in advanced talks to potentially acquire Seagen , and the talks appear to be headed, if they indeed end in a deal, at a deal price north of $200 for SGEN, which closed at $175.13 last night. The stock has been trading in the low $180's overnight. MRK closed at $93.13, and has only been down fractionally overnight.
There is some urgency to the talks. It is said that Merck would like to reach any potential agreement prior to releasing the firm's Q2 earnings on July 28th. For that matter, Seagen, which is not profitable, is set to release that firm's second quarter numbers on July 29th.
While such a deal would solve a problem for Merck as there is certainly consolidation in the specialized oncology space, and Ketruda heads for the end of patent exclusivity, there is concern that a deal reached may only be half of the battle.
The WSJ article cites analysts at Cowen predicting the possibility of litigation from the Justice Department or the FTC. In addition, on CNBC Thursday morning, former FDA Commissioner Dr. Scott Gottlieb said that such an acquisition could come under scrutiny from the FTC and certain divestments could be demanded of Merck in order to proceed.
Numbers
As far as Merck is concerned, expectations are for adjusted EPS of $1.69 (range of $1.57 to $1.85) on revenue of $13.8B (range of $13.4B to $14.7B). At consensus, this would be good for earnings growth of 29% on revenue growth of 22%.
Now, for the target... For Seagen, expectations are for an adjusted EPS loss of $0.87 (range of $-1.02 to $-0.47) on revenue of $438M (range of $417M to $512M). At consensus, these results would be comparable to an EPS loss of $0.47 on revenue of $354.3M (+23.5%) one year ago.
For the first quarter, MRK generated $1.49 per share in free cash flow, leaving the balance sheet with a net cash position of $8.932B. MRK ended that quarter with a current ratio of 1.39, which is solid. The firm already has $30.586B in long-term debt on the books, which is a little much for my blood. At the end of the March quarter, intangibles made up 41.5% of total assets. Merck stood with a tangible book value of $-1.34 per share. That ain't' so hot. In fact, it's ice cold.
On the other side of this potential deal, SGEN ended the March quarter with a net cash position of $1.951B and an awesome current ratio of 5.22. Though not currently profitable, Seagen has no long-term debt on the balance sheet, claims very little in the way of intangible assets and runs with a tangible book value of $13.43.
My Thoughts
I can certainly see why Merck would like to acquire Seagen. This is a biotech with leadership precisely where big pharma wants to go. Seagen is in fantastic shape, fundamentally, with the one huge exception that they don't make money. At least Merck would not be buying more debt, they already have enough of their own. I don't know how such a deal would be financed, but I can imagine that it might involve either stock or more debt or both.
From a financial perspective, I would be real cautious about investing in Merck until the dust settles. Given the balance sheet and the potential deal price, I could see speculatively betting on Seagen in a smallish way. That said, if there is no deal at the end of the day, then even with a clean balance sheet and growing sales, Seagen does not make money and will be punished for it.
Trade Idea?
Long Seagen small.
If one does purchase 100 shares of SGEN at $179 and change, don't forget to write the August $200 calls for a rough $2.65.
Merck? At 12 times forward earnings and facing a potentially large outlay? No thank you. Bristol Myers Squibb (BMY) trades at 10 times, AbbVie (ABBV) trades at 10 times, and Pfizer (PFE) trades at seven times.
