A price tag of $10.8bn would look hefty for most acquisitions of smallish and newish companies. But for Merck, a drugs giant known as msd outside America, the money it is spending to buy Prometheus Biosciences, a biotech firm based in California, is relatively small change. In the world of big pharma such deals have the potential to generate enormous returns.

Even though Prometheus makes no profits to speak of and has no approved drugs on its slate, the big prize for Merck is pra023, a drug approaching the late-stage of clinical trials developed by Prometheus to treat ulcerative colitis, Crohn’s disease and other nasty autoimmune conditions. For now, Prometheus is burning through cash at a fast-rising rate. Merck’s decision to scoop it up is a bet on what comes next.

The American giant badly needs promising new treatments to replenish its drugs pipeline. Like other pharma companies, it is facing a cliff-edge as patents on money-spinning treatments come to an end. Keytruda, Merck’s cancer-immunotherapy drug, accounted for over a third of its sales in 2022, but will face competition from cheaper copycats once key patents expire in 2028 in America and in Europe two years later.

Pharma bosses are spending big to plug the gaps. The industry has long turned to dealmaking as a way of compensating for the potential loss of revenue from expiring patents. Despite a dearth of mergers and acquisitions in other sectors, drugmakers are driving a wave of consolidation across the sector. pwc, a consultancy, estimates that the value of takeovers in the pharma and life-sciences industries could reach $275bn in 2023, up by almost three-quarters from last year.

So far, the prices buyers are willing to pay have come with huge premiums. Merck is forking out $200 per share for Prometheus, a whopping 75% above the firm’s closing price just before the offer was made. Another acquisition unveiled in March will see Pfizer pay $43bn for Seagen, a loss-making cancer biotech firm. The industry’s richest deal in three years came at a 33% premium to Seagen’s share price. And on April 18th gsk, another pharma giant, agreed to buy Bellus Health, a Canadian biotech firm with a promising treatment for chronic coughs, at around double the company’s pre-deal value.

The benefits of paying out vast sums for drugs that are close to regulatory approval are clear. It can take more than a decade to bring a new drug to market, and many cures fail along the way. With a healthy $1.4trn in cash piles waiting to be deployed, big pharma is choosing to buy its way out of trouble instead.■

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