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Merck’s Peloton Therapeutics Purchase: Taking the Novel UT Southwestern to the Global Stage

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Biotechnology

TrialSite News covered the Merck acquisition of Peloton Therapeutics (Peloton). As the Dallas TX-based venture published an S-1 in anticipation of going public, we offered a brief summary of this venture heavily infused with UT Southwestern-born innovation. In this brief, we provide more detailed information on the transaction and Peloton itself. Merck announced its acquisition of Peloton Therapeutics, 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 PT2977, is a novel oral HIF-2α inhibitor in late-stage development for renal cell carcinoma (RCC) (kidney cancer).

Merck’s Rational

Dr. Roger M. Perlmutter, president Merck Research Laboratories stated, “This acquisition exemplifies Merck’s strategy to pursue novel therapeutic candidates based on exceptionally promising and innovative research” and explained, “Peloton scientists have applied their unique expertise in HIF-2α biology to develop PT2977, which has already shown intriguing activity in the treatment of renal cell carcinoma. We look forward to advancing this late-stage asset as part of our broad oncology R&D program.”

Merck has one of the largest oncology development programs, targeting over 30 tumor types. The Peloton acquisition is part of their ongoing effort to strengthen their oncology portfolio through strategic acquisition, evidencing a prioritization in the development of several promising oncology candidates. As part of its oncology focus, Merck is strategically intent on expanding further into immuno-oncology.

Merck has built a powerful franchise with cancer drug Keytruda (pembrolizumab), totaling sales of over $2 billion per quarter.  This performance boosted its share price and underlying value. However, investors fear one-franchise dependency. For example, in the first three months of 2019 Keytruda represented almost 25% of its total sales. Therefore, Merck will be on a strategic hunt for acquiring intellectual property with big potential in immuno-oncology.

It is possibly this underlying investor concern (and managerial oversight) that drove Merck to further develop its pipeline and buy several smaller ventures of late. Examples include Viralytics ($394m) and Immune Design ($300m) as well as partnership with Modern Therapeutics (expansion of mRNA cancer vaccine alliance). Undoubtedly, competition for small to mid-sized cancer focused biotech ventures may intensify as large-cap pharma, understanding market dynamics and trends (e.g. aging populations with more wealth, etc.) seek to position and build valuable franchises and ultimately value.

Terms

Merck, through a subsidiary, will acquire Peloton for $1.05 billion in cash. Additionally Peloton shareholders will be eligible to receive an additional $1.15 billion contingent upon successful achievement of future regulatory and sales milestones for certain candidates.  

Peloton Therapeutics, Inc.

It is a clinical-stage biopharmaceutical company focusing on translating novel scientific insight into first-in-class medicines for patients with cancer and other debilitating or life-threatening conditions. TrialSite News summarized its background just in April, 2019. Herein, we republish some of our findings. The company’s lead program is evaluating a small-molecule inhibitor of HIF-2α, a transcription factor implicated in then development and progression of clear cell RCC and a variety of other disorders. HIF-2α  was previously thought to be intractable using small molecules.

What is HIF-2α?

Hypoxia-inducible factors (HIF-1α, -2α -3α, and -β) are key factors that control hypoxia-induced carcinogenic pathways. HIF-1α is predominantly involved in the early stages of cancer, whereas HIF-2α is actively involved in the later stages; additionally, chronic (prolonged) rather than acute (short) hypoxia (deficiency in amount of oxygen reaching tissues) is a feature of metastasis and chemoresistance that occur during the later stages of cancer.  

Peloton Background

Founded in 2010, the biotech venture has focused on targeting hypoxia-inducible factor-2a, or HIF-2a, in renal cell carcinoma—the most common form of kidney cancer, reports Shah.  Apparently, Peloton’s protein triggers regulation and management of body’s response to reduced oxygen. This mechanism, however, “can be hijacked to drive disease, including kidney cancer.” Its inception was not without a little controversy. At launch it was infused with $11 million grant from the Cancer Prevention and Research Institute (CRIT) of Texas. This transaction placed scrutiny on executive director Bill Grimson who would resign due to complaints that he supported an improper gift. Apparently, CRIT was funded by the public, including an actual bond offering, and as such, could be expected with money and prestige and “Texas style politics” made for a lively situation. But novel, innovative scientists were driven to attempt to commercialize what would become PT2977.

Peloton will also look to develop PT2977, its lead candidate, for von Hippel-Lindau (VHL) disease  and glioblastoma multiforme as well as other diseases. Peloton will immediately utilize the funds to develop PT2977, including as Shah reports, the enrollment of patients and preliminary results in a Phase 3 clinical trial as well as complete ongoing Phase 2 trial of PT2977 in patients with VHL disease. Peloton cautioned that these funds will probably not be sufficient to drive products all the way to regulatory filing—they will go back out to the market for more capital—and dilution.

Investigational Product Risk

HIF-2a is a novel and unproven therapeutic approach and their development of PT2977 and PT2567 may never lead to a marketable product. They have developed PT2977 for its ability to bind to HIF-2a and inhibit HIF-2a’s role in the recognition specific DNA sequences in targeted genes, thereby preventing the expression of potentially disease-promoting proteins. They are developing PT2567  as an HIF-2a inhibitor for non-oncology indications. They know of no biotech venture advancing a drug candidate with this mechanism of action into clinical development.

The industry sponsor reports that the scientific evidence to support the feasibility of developing these drug candidates is both preliminary and limited. A fundamental risk investors face reflects the reality that despite the early state success for PT2977 it may not succeed in demonstrating safety and efficacy in larger scale clinical trials. They note in their prospectus obtaining regulatory approval of a HIF-2a inhibitor from the FDA, EMA or other agency has never been done before. With the Merck acquisition, a number of risk factors are fully or partially mitigated. For example, PT2977 will be backed by a global giant—with significant regulatory operational know-how, assets and resources to manage cutting-edge new regulatory filings.

Clinical Trials Risk

Peloton reports clinical trials of their drug candidates may not evidence safety and efficacy to the satisfaction of the FDA or other agencies. If not, they must obtain regulatory approval for clinical testing—an incredibly expensive process—not to mention difficult to design and implement, and it could take many years, if not over a decade. Key elements of risk during clinical trials faced by Peloton include challenges in finding and negotiating the right CRO contract, securing institutional review board (IRB) approval for each clinical site, recruiting suitable patients for each site and a whole range of other risks. As mentioned above, the Merck acquisition mitigates at least some of this risk. For example, Merck has a massive global clinical trial infrastructure—operations teams, systems and processes and a stable of CROs. They maintain relationships with all major IRB’s and understand the clinical trials process in and out, from site activation through study start up and conduct to database lock and close out.

UTSW Deal

Peloton entered into a license agreement with the University of Texas System on behalf of the University of Southwestern Medical Center (UTSW), which was amended in February 2013 and June 2015.  In the agreement UTSW grants to Peloton an exclusive worldwide license to develop and commercialize products covered by the UTSW licensed intellectual property for all therapeutic, diagnostic and prophylactic applications. For consideration, Peloton issued 15,000 shares to UTSW. With the Merck deal, this turns into a win. We do not know the purchase share price value and hence cannot calculate a value.  

Peloton makes milestone payments to UTSW aggregating up to $750,000 upon achievement of specified clinical development and regulatory milestones per product if covered by the license agreement (or up to $1.5 million per product if covered by the licensed iron overload technology). With the Merck acquisition UTSW has better probability now of receiving future milestone payments given the reduction in certain risk factors (e.g. those controllable such as regulatory or operational and importantly, financial risk).

By March 31, 2019 Peloton had only paid an aggregate of $150,000 in clinical development milestones to UTSW. Peloton is also obligated to pay single-digit royalties on net sales of products if covered by the licensed technology in each country till the patents expire.

CPRIT Deal

In 2010, Peloton entered into an agreement with the Cancer Prevention and Research Institute of Texas (CPRIT), under the terms of which they were awarded a grant to support qualifying research efforts in several areas, including the discovery of HIF inhibitors. We mentioned some of the controversy around this grant earlier. CPRIT was entitled to receive milestones and royalties on any products resulting from supported research. Although the grant was to be paid to them in several tranches, they received only one payment of $3.2 million during 2011 which was used to fund the research and development of their programs. In May 2017, they entered into an agreement with CPRIT terminating the original grant contract.

Under the terms of the 2017 agreement, they will be obligated to make payments to CPRIT of up to $3.8 million in aggregate if certain development, regulatory and commercial milestones are successfully achieved. The commercial milestones are subject to minimum annual sales targets, and they are not obligated to make such commercial milestone payments unless and until annual sales of a product under the agreement exceed a designated threshold.

As of March 31, 2019, none of these milestones had been achieved and as a result, such contingencies have not been recorded in their financial statements. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of these development, regulatory and commercial milestones, and have not been included in the above table. There is uncertainty regarding the various activities and outcomes needed to reach these milestones, and they may not be achieved.

Financials

Peloton is a pre-revenue venture like so many other biotech. In 2017, it lost $24.9 million in 2018 it lost $36 million. Based on previous capital raises it maintains approximately $45 million cash in the bank. The firm is estimated to perhaps bring in $5 million at the most as well as employ 30 employees. Of course, the Merck acquisition changes the ball game—no more living paycheck to paycheck. Assuming the Peloton team is offered the support within the Merck global R&D operation, they can now focus 100% on the science and not worry about the finances as would be the case as a small standalone. On the other hand, there will be new forms of financial oversight in the form of big company budgets, processes and politics. Many a scientist enjoy the entrepreneurial energy, dynamism and mission associated with the small biotech. The world has changed for them, but it was inevitable. Its chances for success are far greater—now than before—even if they pulled off the IPO.

 

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