Acquisitions, Research Collaborations and License Agreements

9 Months Ended

Sep. 30, 2020

Acquisitions, Research Collaborations and License Agreements

The Company continues to pursue acquisitions and the establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.

In November 2020, Merck and VelosBio, Inc. (VelosBio) announced that the companies had entered into a definitive agreement pursuant to which Merck, through a subsidiary, will acquire all outstanding shares of VelosBio for $2.75 billion, subject to certain customary adjustments. VelosBio is a privately held clinical-stage biopharmaceutical company committed to developing first-in-class cancer therapies targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1). VelosBio’s lead investigational candidate is VLS-101, an antibody-drug conjugate targeting ROR1 that is currently being evaluated in a Phase 1 and a Phase 2 clinical trial for the treatment of patients with hematologic malignancies and solid tumors, respectively. The closing of the transaction, which is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions, is expected by the end of 2020.

In September 2020, Merck and Seagen Inc. (Seagen, formerly known as Seattle Genetics, Inc.) announced an oncology collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational antibody-drug conjugate targeting LIV-1, which is currently in Phase 2 clinical trials for breast cancer and other solid tumors. The collaboration will pursue a broad joint development program evaluating ladiratuzumab vedotin as monotherapy and in combination with Keytruda (pembrolizumab) in triple-negative breast cancer, hormone receptor-positive breast cancer and other LIV-1-expressing solid tumors. The companies will equally share profits worldwide. Under the terms of the agreement, Merck made an upfront payment of $600 million and a $1.0 billion equity investment in 5 million shares of Seagen common stock at a price of $200 per share. Merck recorded $622 million in Research and development expenses in the third quarter and first nine months of 2020 related to this transaction reflecting the upfront payment as well as a $22 million mark-to-market loss on the purchase commitment (forward contract) relating to the equity shares (calculated based on the closing price of Seagen common stock on September 30, 2020). The closing of the equity investment occurred in October 2020 and resulted in the recognition of a $6 million reduction to Research and development expenses based on the price of Seagen common stock on the closing date. Seagen is also eligible to receive future contingent milestone payments of up to $2.6 billion, including $850 million in development milestones and $1.75 billion in sales milestones.

Concurrent with the above transaction, Seagen granted Merck an exclusive license to commercialize Tukysa (tucatinib), a small molecule tyrosine kinase inhibitor, for the treatment of HER2-positive cancers, in Asia, the Middle East and Latin America and other regions outside of the United States, Canada and Europe. Merck will be responsible for marketing applications seeking approval in its territories, supported by the positive results from the HER2CLIMB clinical trial. Merck will also co-fund a portion of the Tukysa global development plan, which encompasses several ongoing and planned trials across HER2-positive cancers, including breast, colorectal, gastric and other cancers set forth in a global product development plan. Merck will solely fund and conduct country-specific clinical trials necessary to support anticipated regulatory applications in its territories. Under the terms of the agreement, Merck made upfront payments aggregating $210 million, which were recorded as Research and development expenses in the third quarter and first nine months of 2020. Seagen is also eligible to receive future contingent regulatory approval milestones of up to $65 million and will receive tiered royalties ranging from 20% to 33% based on annual sales levels of Tukysa in Merck’s territories.

Additionally in September 2020, Merck acquired a biologics manufacturing facility located in Dunboyne, Ireland from Takeda Pharmaceutical Company Limited for €256 million ($302 million). The transaction was accounted for as an acquisition of an asset. Merck recorded property, plant and equipment of $289 million and other net assets of $13 million. There are no future contingent payments associated with the acquisition.

In July 2020, Merck acquired the U.S. rights to Sentinel Flavor Tabs and Sentinel Spectrum Chews from Virbac Corporation for $410 million. Sentinel products provide protection against common parasites in dogs. The transaction was accounted for as an acquisition of an asset. Merck recognized intangible assets of $401 million related to currently marketed products and inventory of $9 million at the acquisition date. The estimated fair values of the identifiable intangible assets related to currently marketed products were determined using an income approach. Actual cash flows are likely to be different than those assumed. The intangible assets related to currently marketed products will be amortized over their estimated useful lives of 15 years. There are no future contingent payments associated with the acquisition.

Also, in July 2020, Merck and Ridgeback Biotherapeutics LP (Ridgeback Bio), a closely held biotechnology company, closed a collaboration agreement to develop molnupiravir (MK-4482, formerly known as EIDD-2801), an orally

available antiviral candidate currently in clinical development for the treatment of patients with COVID-19. Merck gained exclusive worldwide rights to develop and commercialize molnupiravir and related molecules. Under the terms of the agreement, Ridgeback Bio received an upfront payment and also is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval milestones, as well as a share of the net profits of molnupiravir and related molecules, if approved. Merck and Ridgeback are committed to ensure that any medicines developed for SARS-CoV-2 (the causative agent of COVID-19) will be accessible and affordable globally.

In June 2020, Merck acquired privately held Themis Bioscience GmbH (Themis), a company focused on vaccines and immune-modulation therapies for infectious diseases and cancer for $366 million. Merck may make additional contingent payments of up to $740 million, including up to $80 million for development milestones, up to $260 million for regulatory approval milestones, and up to $400 million for commercial milestones. Themis has a broad pipeline of vaccine candidates and immune-modulatory therapies developed using its innovative measles virus vector platform based on a vector originally developed by scientists at the Institut Pasteur and licensed exclusively to Themis for select viral indications. The acquisition builds upon an ongoing collaboration between the two companies to develop vaccine candidates using the measles virus vector platform and is expected to accelerate the development of the COVID-19 vaccine candidate (V591), which is currently in Phase 1 clinical development. The transaction was accounted for as an acquisition of a business. The Company determined the fair value of the contingent consideration was $97 million at the acquisition date utilizing a probability-weighted estimated cash flow stream using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized intangible assets for in-process research and development (IPR&D) of $136 million, cash of $59 million, deferred tax assets of $71 million and other net liabilities of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $229 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. Actual cash flows are likely to be different than those assumed. In connection with the transaction, Merck has entered into a memorandum of understanding that reflects the parties’ commitments to address the COVID-19 pandemic by developing, manufacturing and distributing the vaccine on a global basis and with pricing that makes the vaccine both available around the world and accessible to those who need it.

In May 2020, Merck and the International AIDS Vaccine Initiative, Inc. (IAVI), a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, announced a new collaboration to develop V590, an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19. This vaccine candidate will use the recombinant vesicular stomatitis virus (rVSV) technology that is the basis for Merck’s approved Ebola Zaire virus vaccine, Ervebo (Ebola Zaire Vaccine, Live), which was the first rVSV vaccine approved for use in humans. Under the terms of the agreement, Merck made an upfront payment of $6.5 million and may make additional contingent payments of up to $100 million for sales-based milestones, as well as royalty payments. Merck has also signed an agreement with the Biomedical Advanced Research and Development Authority (BARDA), part of the office of the Assistant Secretary for Preparedness and Response within an agency of the United States Department of Health and Human Services, to provide initial funding support for this effort. Under the agreement, IAVI and Merck will work together to advance the development and global clinical evaluation of a SARS-CoV-2 vaccine candidate designed and engineered by IAVI scientists. The vaccine candidate is currently in Phase 1 clinical development. Merck will lead regulatory filings globally. Both organizations will work together to develop the vaccine and make it accessible and affordable globally, if approved.

In January 2020, Merck acquired ArQule, Inc. (ArQule), a publicly traded biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases. Total consideration paid of $2.7 billion included $138 million of share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of ArQule. The Company incurred $95 million of transaction costs directly related to the acquisition of ArQule, consisting almost entirely of share-based compensation payments to settle non-vested equity awards attributable to postcombination service. These costs were included in Selling, general and administrative expenses in the first nine months of 2020. ArQule’s lead investigational candidate, MK-1026 (formerly known as ARQ 531), is a novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies.

The estimated fair value of assets acquired and liabilities assumed from ArQule is as follows:



($ in millions)	January 16, 2020
Cash and cash equivalents	$	145
IPR&D MK-1026 (formerly ARQ 531) (1)	2,280
Licensing arrangement for ARQ 087	80
Deferred income tax liabilities	(389)
Other assets and liabilities, net	34
Total identifiable net assets	2,150
Goodwill (2)	540
Consideration transferred	$	2,690

(1) The estimated fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 12.5%. Actual cash flows are likely to be different than those assumed.

(2) The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.

In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly known as PT2977), is a novel investigational oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.2 billion; additionally, former Peloton shareholders will be eligible to receive $50 million upon U.S. regulatory approval, $50 million upon first commercial sale in the United States, and up to $1.05 billion of sales-based milestones. The transaction was accounted for as an acquisition of an asset. Merck recorded cash of $157 million, deferred tax liabilities of $64 million, and other net liabilities of $6 million at the acquisition date and Research and development expenses of $982 million in the third quarter and first nine months of 2019 related to the transaction.

On April 1, 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt. The transaction was accounted for as an acquisition of a business.

The estimated fair value of assets acquired and liabilities assumed from Antelliq is as follows:



($ in millions)	April 1, 2019
Cash and cash equivalents	$	31
Accounts receivable	73
Inventories	93
Property, plant and equipment	60
Identifiable intangible assets (useful lives ranging from 18-24 years) (1)	2,689
Deferred income tax liabilities	(589)
Other assets and liabilities, net	(82)
Total identifiable net assets	2,275
Goodwill (2)	1,376
Consideration transferred	$	3,651

(1) The estimated fair values of identifiable intangible assets relate primarily to trade names and were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.

(2) The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Animal Health segment. The goodwill is not deductible for tax purposes.

The Company’s results for the first nine months of 2019 include five months of activity for Antelliq. The Company incurred $47 million of transaction costs directly related to the acquisition of Antelliq, consisting largely of advisory fees, which are reflected in Selling, general and administrative expenses in the first nine months of 2019.

Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $156 million, cash of $83 million and other net assets of $42 million. The excess of the consideration transferred over the fair value of net assets acquired of $20

million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. Actual cash flows are likely to be different than those assumed.