Prometheus Biosciences (NASDAQ:RXDX) stock surged almost 70% after agreeing to be bought by Merck (NYSE:MRK) for $10.8 billion in cash.
The agreement values Prometheus at $200 per share. The stock was trading at $193.75 in pre-market trading on April 17. Prometheus’ market capitalization before the deal was just $5.4 billion. Merck stock was essentially flat over the weekend at $115.25, representing a market cap of $292 billion.
RXDX Stock: What Merck Bought
Prometheus did not generate much revenue in 2022. But it has a compound called PRA023 for treatment of ulcerative colitis and Crohn’s disease. The company announced positive Phase 2 results for the drug in December for moderate-to-severe cases of the two conditions. Merck Research President Dean Y. Li said the studies identified a promising late-stage drug candidate. Prometheus has a total of 5 clinical and pre-clinical drug candidates.
Phase 2 drug testing is designed to see if a compound is effective. Prometheus must now go through Phase 3 testing to see if its compound is also safe. The deal is expected to close in the third quarter.
Merck President Robert Davis predicted the Prometheus drugs will generate billions of dollars in revenue. He said the deal gives Merck sustainable growth into the 2030s and a stronger position in immunotherapy.
Merck ended 2022 with $13.7 billion in cash, after generating $14.7 billion of free cash flow during the year.
Merck is able to make deals like the one with Prometheus thanks to Keytruda, its immunotherapy drug for cancer that scored $22 billion in revenue last year. Patents on that drug, however, start to expire late in this decade.
Prometheus is Merck’s biggest acquisition since it bought Acceleron in 2021 for $11.5 billion. That brought it a hypertension drug called sotatercept, expected to launch in 2024.
What Happens Next?
Merck continues to build its pipeline against the day Keytruda patents expire. Prometheus had negative operating cash flow of $124 million last year, which it covered with over $400 million in new stock.
On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
