Though falling short of the outright takeover that some may have hoped for, Merck & Co. Inc.’s dual tie-ups with Seattle Genetics Inc. (Seagen) put the latter in solid position to shop for acquisitions of its own.

“Last year, we did a couple of different deals, bringing in very early stage drugs that are not material at this point” but could become so, given “our intensity and passion,” CEO Clay Siegall said during a conference call with investors.

“We’re very careful – we don’t spend in crazy ways. We’ve always been prudent with our capital, but we spend up when we see things that are exciting.”

In an early 2018 move, for example, Seagen snatched up Cascadian Therapeutics Inc. for $10 per share in cash, valuing the transaction at about $614 million. The Seattle-based firm’s lead compound, tucatinib, “needed a ton of work,” Siegall said, and in Seagen’s hands was approved by the FDA as Tukysa in April of this year. “If we see a platform that we really like a lot, we would not hesitate to do a business development deal,” he said.

Meanwhile, Merck is taking a $1 billion equity stake in Seagen as the companies enter a setup to develop the latter’s antibody-drug conjugate (ADC), ladiratuzumab vedotin (LV), worldwide. At the same time, the duo disclosed a pact whereby they aim to widen the global reach of Tukysa for HER2-positive cancers in regions outside the U.S., Canada and Europe.

Clay Siegall, president and CEO, Seattle Genetics

For breast cancer and other solid tumors, LV has reached the phase II stage. The arrangement between Kenilworth, N.J.-based Merck and Seagen, of Bothell, Wash., will investigate the ADC in combination with Merck’s Keytruda (pembrolizumab) – “the heavyweight of all the immuno-oncology drugs,” Siegall noted – in triple-negative breast cancer (TNBC) and hormone receptor-positive disease as well as other LIV-1-expressing solid tumors. Merck is paying $600 million up front along with the $1 billion equity investment in 5 million shares of Seagen at $200 each. The stock (NASDAQ:SGEN) closed Sept. 14 at $171.79, up $21.82, or 14.5%. Seagen is “no slouch,” he said. “We do really good work. We get drugs approved, but Merck can continue to elevate our game,” he said.

LV, which consists of a LIV-1-targeted monoclonal antibody linked to a microtubule-disrupting agent (monomethyl auristatin E) by a protease-cleavable linker, is being evaluated in late-line breast cancer as a monotherapy and when combined with Merck’s Keytruda (pembrolizumab). The latest update from the monotherapy arm came in 2017 and included 63 TNBC patients who’d had a median of four previous therapies. In 60 evaluable patients treated at a dose of at least 2 mg/kg, the overall response rate (ORR) was 25% (including unconfirmed responses). The median progression-free survival turned up at 11 weeks. Investors most recently heard about the combo experiment at the San Antonio Breast Cancer Symposium meeting last year, where the pairing yielded an ORR of 54% (14/26) in first-line TNBC.

R&D Day teaser

Separately, Seagen granted Merck an exclusive license to commercialize the small-molecule tyrosine kinase inhibitor Tukysa in Asia, the Middle East and Latin America and other regions. Seagen is banking $125 million from Merck as an up-front payment and is eligible for progress-dependent milestones of up to $65 million, the companies said.

With LV, the pair will equally share costs and profits. Seagen could pull down $2.6 billion in milestone payments, including $850 million related to development and $1.75 billion connected to sales goals. The companies will co-commercialize in the U.S. and Europe, with Seagen responsible for marketing applications for approval in the U.S. and Canada, and for recording sales in the U.S., Canada and Europe. Merck will be responsible for marketing applications for approval in Europe and in countries outside the U.S. and Canada, and will record sales in countries outside the U.S., Canada and Europe.

With Tukysa, Seagen retains commercial rights and will record sales in the U.S., Canada and Europe. Merck will be responsible for marketing applications for approval in its territory, supported by the positive results from the trial called HER2Climb. Merck will also co-fund a portion of the Tukysa global development plan, which involves several ongoing and planned studies across HER2-positive cancers, including breast, colorectal, gastric and others. Seagen will continue to lead Tukysa’s global development planning and operational work, with Merck solely funding and conducting country-specific trials needed for approvals. Added to the up-front payment and potential milestone rewards, Seagen takes in $85 million in prepaid research and development payments to be applied to Merck’s global development funding obligations. Included in the deal are tiered royalties for Seagen on sales in Merck’s territory. Shares of Merck (NYSE:MRK) closed at $84.16, up 29 cents.

J.P. Morgan analyst Cory Kasimov deemed the LV pact “about as good as a deal can get. It’s essentially creating billions of dollars in value where there previously was none,” he said in a report, noting that Seagen continues with weekly dose optimization, with an eye to registrational trials next, though details will be worked out with Merck.

Cowen’s Boris Peaker, like Kasimov, “had assigned little value to LV, based on the relatively modest data seen to date,” though CEO Siegall promised that Seagen’s R&D Day, slated for Nov. 16, would “go past” what’s currently known by Wall Street about the company’s efforts. Peaker called the deal for the ADC “a strong win for the company” and, on Tukysa, pointed out in a report that “the regions licensed to Merck for Tukysa were unlikely to be monetized by Seagen” without help. RBC’s Kennen MacKay said in a report that the LV agreement “de-risks and adds value to an asset that has seen a challenging development history with clear signals of efficacy, but an apparent narrow pharmacologic dosing window with prolonged dose-refinement.”

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