There’s yet another big acquisition from the biotech sector. Merck (NYSE: MRK), the American pharmaceutical multinational, is acquiring Prometheus Biosciences (NASDAQ: RXDX), a biotech upstart developing treatments for autoimmune diseases.

• Merck will pay $10.8bn in cash for Prometheus, a stellar exit for a drug developer founded barely seven years ago. Prometheus is a clinical-stage company with no approved drugs on the market. The acquisition price represents a 75% premium to Prometheus’s market value before the announcement.

Billion-dollar acquisitions of clinical-stage, pre-revenue companies are common in the biotech sector. The idea is for a moneyed, established drugmaker to acquire promising drugs that may yield big profits in the future. Sometimes, the drugs fail to get approval to hit the market. Sometimes, they do and reap considerable rewards for the acquirer. Sometimes, they get approval but suffer poor sales. Such is business.

Prometheus is working on potential treatments for Ulcerative Colitis and Crohn’s Disease. These two treatments are currently in Phase 2 clinical trials. It’s expected that Merck wants to diversify its pipeline, especially as key patents on its blockbuster cancer drug, Keytruda, are set to expire in the U.S. in 2028 and Europe in 2030. Keytruda generated roughly $21bn in revenue in 2022.

Merck was reportedly in recent talks to acquire Seagen, an American cancer drugmaker. However, rival pharma giant Pfizer sealed the deal to buy Seagen for $43bn this March.

• Prometheus was founded in 2016 as Precision IBD before switching to its current name in 2019. The company raised $450mn in private funding and held a public listing in 2021 that raised $219mn. It was valued at $700mn in its public listing and is exiting for nearly 16x that amount two years later.

• Barring regulatory hurdles, the transaction is expected to close in this year’s third quarter.

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