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With the acquisition of biotech start-up Peloton Therapeutics, Merck will strengthen its portfolio as well as its position in oncology immunotherapy.

The American pharmaceutical giant will pay over $1 billion in cash for Peloton, and could pay an additional $1.2 billion in milestones. Peloton’s flagship kidney cancer drug, called PT2977, is of particular interest. Kidney cancer is one of the 10 most common forms of cancer in the U.S. By gaining access to PT2977, Merck can use it to extract more value from Keytruda, its highly successful immunotherapy. Otherwise the two drugs would likely have competed. Keytruda is used for various types of cancer, and was approved for treating kidney cancer in the U.S. last month.

In mid-stage trial testing, PT2977 showed promise in treating patients whose cancer had spread after treatment with at least one other therapy, such as Merck’s Keytruda. The drug is expected to enter late-stage trials later this year. PT2977 is also being tested as a treatment for GBM, an aggressive brain cancer. If successful, it might have posed a challenge to Merck’s Temodar.

“This is a classic bolt-on deal. Peloton has a drug that looks promising in renal cell carcinoma, and there’s actually been a lot of success in the field in recent years,” said Brad Loncar, who runs the Loncar Cancer Immunotherapy ETF.

The move on Merck’s part came just days after Dallas, Texas-based Peloton filed for an initial public offering. The company had said that it was seeking $183 million, Reuters reports. It has raised more than $300 million privately. “We are a clinical stage biopharmaceutical company focused on translating novel scientific insights into first-in-class medicines for patients with cancer and other debilitating or life-threatening conditions,” Peloton said in its filing. Peloton was founded in 2010 and is led by CEO John A. Josey, who joined the firm as President and Chief Scientific Officer.

“This acquisition exemplifies Merck's strategy to pursue novel therapeutic candidates based on exceptionally promising and innovative research,” said Roger Perlmutter, Executive Vice President of Merck & Co. and President of Merck Research Laboratories. “We look forward to advancing this late-stage asset as part of our broad oncology R&D program.”

Cantor Fitzgerald analyst Louise Chen said that the deal “should also underscore the opportunity for other small and mid-cap biotech names in the cancer biology space.” The two companies anticipate the acquisition will close in the third quarter of 2019.

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