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Trouble builds for Merck’s $11.5B Acceleron buy as activist investor behind Gilead’s Immunomedics deal says too early, too cheap

October 3, 2021
Life sciences

Merck hopes its $11.5 billion Acceleron buy will quickly wrap up in the fourth quarter. But revolt from an activist investor threatens to derail that plan.

Hours after Merck’s Thursday announcement, Avoro Capital slammed the New Jersey pharma’s $180-apiece price, arguing it “drastically undervalues” Acceleron. The investment shop owns about 7% of Acceleron shares.

Avoro argues that, instead of going on sale right now, Acceleron should wait for more clinical trial data from the deal centerpiece—pulmonary arterial hypertension (PAH) candidate sotatercept—to get a better price. The investment manager feels “incredibly strongly” that the transaction would hurt Acceleron shareholders if allowed as is, it said in a statement.

Avoro, previously known as venBio, has intervened in a portfolio company’s dealmaking activity before. The company is perhaps best known for nixing Immunomedics’ $2 billion tie-up with Seattle Genetics, now known as Seagen, in 2017.

Seagen in February 2017 proposed up to $2 billion for rights to what would later become Trodelvy. The TROP2-targeting antibody-drug conjugate was then close to an FDA filing in triple-negative breast cancer. But venBio, led by Managing Partner Behzad Aghazadeh, criticized the low price. It took control of Immunomedics’ board of directors with Aghazadeh as chairman and installed a new management team.

Trodelvy went on to snag its first U.S. approval in April 2020. Then, last September, Gilead Sciences, yearning for an expansion in oncology, shelled out $21 billion for Immunomedics, with Trodelvy at the center. Aghazadeh himself reaped a massive $2.35 billion payout from selling his ownership in Immunomedics.

Now, Avoro and Aghazadeh are advocating the same “patience is a virtue” argument for Acceleron.

Merck’s current markup to Acceleron’s share price ranks at the bottom of 19 other comparable biopharma transactions since the beginning of 2020, Avoro said.

When Bloomberg and The Wall Street Journal first reported on the deal a few days ago, SVB Leerink analyst Geoffrey Porges noted that the $180-per-share price would represent a 45% premium to Acceleron’s average share price from mid-April to mid-August. Avoro calculated the premium at 38% against Acceleron’s stock price before the rumor and noted that the premiums of biopharma M&As since 2020 have averaged about 89%.

Porges’ team has put the per-share value of Acceleron at $182 if sotatercept successfully makes to the market, suggesting Merck’s offer is fair. Piper Sandler’s Christopher Raymond, in a Thursday note, said Merck is pricing Acceleron at about 15 times the biotech’s estimated 2025 revenue, which he also labeled as fair.

Avoro’s conversations with industry watchers also tell it Acceleron is getting the highest premium available. But the unsatisfied activist investor raised the question: “Why sell now at such a price?”

“Based on our own analysis and that of other prominent scientific observers, we have full confidence that Acceleron’s pipeline will continue to perform well and only further demonstrate the value of the company,” Avoro said in a statement.

Sotatercept is currently in phase 3 testing in three trials, with first results expected in 2024. Merck has touted the drug’s first-in-class potential as the first disease-modifying agent for PAH among many existing treatments that target symptoms by dilating blood vessels.

Porges has put sotatercept’s peak sales at over $2 billion. Raymond currently estimates the drug could reach $1.4 billion sales by 2027 but also noted the number could go higher given Acceleron is moving it beyond PAH and into pulmonary hypertension with left heart disease.

by Angus Liu


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