Merck pays premium for breakthrough oncolytic immunotherapy developer Viralytics

One of the world’s largest biopharmaceutical companies has surprised the market by announcing a sweeping takeover of oncolytic immunotherapy developer Viralytics (ASX: VLA) for around A$502 million (US$394 million).

Through one of its subsidiaries, Merck (NYSE: MRK) has proposed a takeover of Viralytics for A$1.75 per share after market close in Australia, with Viralytics shares finishing down around 2% at $0.615 per share at the closing bell.

Merck has opted to pay a 160% premium to the one month volume weighted average price (VWAP) for Viralytics primarily due of its lead development candidate CAVATAK, a clinical-stage immunotherapy with strong potential to treat several different cancers including melanomas.

The deal is a sign of booming merger and acquisition activity in the biotech sector in both the US and Australia as both junior and mature US biotech developers have emerged to spend in excess of US$27.5 billion on transactions in January alone.

As one of the world’s largest biotech developers, Merck is currently implementing a pronounced development program to expand its proprietary “anti-PD-1 therapy” across more than 30 tumour types — thereby widening the range of cancers its drug products are able to target.

According to Merck, it is pursuing a policy of “strengthening our immune-oncology portfolio through strategic acquisitions” and “prioritising the development of several promising immunotherapeutic candidates with the potential to improve the treatment of advanced cancers.”

The proposed takeover of Viralytics, therefore, constitutes the actioning of its global strategy of conducting cornerstone acquisitions and progressing its broader biotech pipeline development.

Takeover details

The proposed takeover remains subject to several hurdles including shareholder approval, independent verification and two formal court hearings over the coming 6 months.

By the end of June 2018, Merck expects to formalise the full acquisition of Viralytics including rights to CAVATAK and all other technologies developed by the company.

Post-completion, Viralytics will become a wholly-owned subsidiary of Merck and is expected to continue its work within the oncolytic immunotherapy field.

The proposed takeover of Viralytics constitutes a significant addition to Merck’s growing portfolio of oncolytic immunotherapy products and offers Viralytics shareholders a significant payday.

The largest shareholder in Viralytics, Lepu Medical Group who owns 13%, has gone on record to confirm its intention of voting in favour of the proposed deal at the forthcoming shareholder meeting scheduled for 28 May 2018.

In parallel, the Viralytics board of directors has said that it “unanimously recommends that its company’s shareholders vote in favour of the Scheme, subject to there being no superior proposal and an independent expert concluding that the Scheme is in the best interest of the company’s shareholders.”

The jewel in the crown

The prime reason behind Merck’s audacious move to acquire Viralytics is the commercial potential locked up in CAVATAK, its lead investigational product and a biotechnology potentially marketable to millions of patients worldwide.

CAVATAK has been formulated to preferentially bind to specific ‘receptor’ proteins that are highly expressed on multiple cancer types.

The drug is then designed to kill both local and metastatic cancer cells through cell lysis, as well as inducing an immune response from the human body against the cancer cells — a unique two-pronged mechanism of action known as ‘oncolytic immunotherapy’.

CAVATAK is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials aimed at treating melanomas, as well as bladder and lung cancers.

In a joint announcement, Viralytics and Merck have said that CAVATAK is being trialled as both an intratumoral and intravenous agent, including in combination with Merck’s KEYTRUDA drug, a high-priority anti-PD-1 therapy.

Furthermore, Viralytics is currently progressing three CAVATAK-KEYTRUDA combination trials in the US, in collaboration with Merck.

One of the trials is focusing on patients with bladder cancer and non-small cell lung cancer (NSCLC) while the other two Phase 1 trials are targeting patients with advanced melanoma and NSCLC.

Given the close-quarters work on existing therapies, the proposed acquisition intends to create multiple operational synergies for Merck and for CAVATAK’s progress towards full certification and marketability.

Biotech commentary

Spanning several years, the painstaking work done by teams at both biotech developers is finally coming to fruition with Viralytics MD and CEO Dr Malcolm McColl saying that the acquisition “represents an opportunity for significant value creation for our shareholders” and that Merck “is best suited to advance CAVATAK for the benefits of patients globally, after years of dedicated work by the Viralytics team.”

“Viralytics’s approach of engaging the innate immune system to target and kill cancer cells complements our immuno-oncology strategy, which is focused on the rapid advancement of innovative monotherapy approaches and synergistic combinations to help the broadest range of cancer patients,” said Dr Roy Baynes, Senior Vice President and Head of Global Clinical Development at Merck Research Laboratories.

“We are eager to further build on Viralytics’s science as we continue our efforts to harness the immune system to improve long-term disease control and survival outcomes for people with cancer,” Dr Baynes added.

With the news announced in the US, Merck shares on the NYSE were trading at $54.82 per share, down around 0.29% with 40 minutes of trade left.

However, Viralytics shares are likely to open significantly higher than yesterday’s closing price of $0.615 per share given the buyout proposal soon winging its way to investors.