Prometheus and Merck: Under the bonnet of the largest pre-Phase III M&A deal

In April 2023, Merck & Co. (known as MSD outside North America and Canada), acquired California-based clinical-stage biotech Prometheus for $10.8 billion. The deal saw Merck gain Prometheus’ monoclonal antibody (mAb) candidate, PRA023, aimed at treating ulcerative colitis, Crohn's disease, and other autoimmune conditions.

At the BIO 2024 conference in San Diego, California McKenna told attendees “you never go into this exercise thinking that you are going to build a company to sell it. […] That does not mean you should not be thinking about how to play for optionality, and it does not mean you should not be thinking about various points to engage pharma.”

Prometheus’ journey prior to being acquired should not be considered as smooth sailing. To set the stage for what led to the acquisition, McKenna described how there were “a lot of pieces of the puzzle [that] had to be put together to make this company look and feel like a public company [that would be] attractive to investors in the public market.”

After raising the first round of capital worth $130 million where the firm “did not have any professional investors,” he described how he flew to Europe using his United Airlines points to meet with a partner about licensing the firm’s second asset, because he “did not know how much longer the lights were going to be on.”

Additionally, McKenna shared with the audience how he had to convince the board that the diagnostics company it had recently purchased “was not the right [decision] for the company.” He succeeded in his mission and Prometheus spun the diagnostics business “off to shareholders” with the argument that the company should “focus on where 99% of the value is; and it is going to therapeutic assets, not over here on the diagnostics [side].”

Fast forward to 2022, Prometheus engaged in dialogue with 17 pharma companies and went from having an empty table to “a number of people” sat around it with the requirement to “conduct a partnering process in advance for our data.”

For sale? Sure, but keep it under wraps

However, McKenna said conversations at this stage were conducted with “the goal of creating interest, not having a for sale sign up.”

The 17 parties signed confidential disclosure agreements (CDAs) and McKenna said the team “spent meaningful time educating them on our programs, our platform, and [then] we got our data back from the Phase II [studies], and it exceeded all expectations.”

The positive data spurred him to pick up the phone and call the CEOs of the companies to advise them “we have really enjoyed the dialogue, but your team should not be working over the holidays, because there is just not a deal to be done here.”

McKenna described this as a move to show the parties that Prometheus “is confident in its position” and that “we really appreciate the dialogue, and we would love to engage with them further down the road.”

Just “30 to 60 days later” at the 2023 JP Morgan Healthcare conference in San Francisco, McKenna attended a partnering dinner. He painted a picture for the audience of CEOs of companies gathering and “looking at who is talking to who and who is sitting next to who, like a dating game.”

He took a seat at the table next to the senior vice president, head of corporate development and business development and licensing at Merck, Sunil Patel. In what McKenna pointed out as “a pretty bold statement,” Patel said to him, “Why are you talking to all those guys? They are not going to buy you, we are.”

Playing the long game 

“Merck played this very smart; they were playing the long game.” McKenna added, “they wanted to win based on having the most information and doing the most diligence, so they knew how far they could push.”

While complimentary about Merck’s approach, McKenna made it clear Prometheus considered and engaged with “three of four other parties as per the final year, and those parties were real.” However, the other parties in question had “competing programs” or “were creating a new business unit.”

He reflected on the company’s journey and said, “we went from no one wanting to invest in the company to three chats in all in the same week” with companies coming to talk to Prometheus about acquiring this business, “coming in with their own angle, and how to win.”

However, due to the sheer amount of work carried out, Merck was “the obvious partner” for Prometheus.

“They looked at patient level data, they had done the work, they knew exactly how to build up the indications, [and] they knew how they were going to run the trial. Other parties would make comments, [such as] if you give us time with the patient level data, we’ll get back to you with offers.”

But for McKenna, this showed to him that the other considered parties “maybe did not hear me earlier, [as] this train is moving.” In turn, the firm decided to “optimize for value, for speed, and certainty.” 

Equally important as the deal making process itself is what happens post-deal. According to McKenna, “pharma struggles at dealing with integrations and often there is a turf battle within the pharma company about how you are going to structure this [and] who is going to report to who.”

The devil in the details

When it comes to employees at the company, McKenna said “out of 120 people we had at the company, I think 115 of them became millionaires. So, I think everyone did win when they came to the company.”

However, the integration process can be “very bittersweet” and there are sometimes feelings of “we did not get to finish everything that we had [started].” But “depending on how much leverage you have in the field of negotiation, [that is] how you can continue to lobby for additional rewards for the team.”

He told delegates this is about understanding what the intention of the other party has with regards to existing infrastructure. McKenna warned listeners about the danger of “losing the historical knowledge too quickly.”

To ensure this did not happen, Prometheus went to Merck that night and said “here is what needs to be done to do a deal. And oh, by the way, you have til tomorrow morning to reply to our term sheet.”

This meant that McKenna laid out his terms and then had the ability to “choose [whether] to take it or not,” while protecting his people and making sure “that they have severance, and all the bonuses are paid out as they should.”

These steps are “part of the process” where you work with your advisor or your attorney to ensure you get those things right. “At the end of the day, sometimes the devil is in the details” and you need to make “sure you get these agreements done right, particularly when it comes to your people.”