Merck (NYSE: MRK), known as MSD outside the United States and Canada, and Viralytics Limited (ASX: VLA, OTC: VRACY) has announced that the companies have signed a definitive agreement under which it is proposed that Merck, through a subsidiary, will acquire Viralytics, an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers by way of a scheme of arrangement (Scheme) for AUD 1.75 cash per Viralytics share. The proposed acquisition values the total issued shares in Viralytics at approximately AUD 502 million (USD 394 million). The cash consideration of AUD 1.75 per share represents a premium of 160% to the one month volume weighted average price (VWAP) of Viralytics shares.

On completion of the transaction, Viralytics will become a wholly-owned subsidiary of Merck, and Merck will gain full rights to CAVATAK^® (CVA21), Viralytics’s investigational oncolytic immunotherapy. CAVATAK is based on Viralytics’s proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect and kill cancer cells.

CAVATAK is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an intratumoral and intravenous agent, including in combination with Merck’s KEYTRUDA^®(pembrolizumab), an anti-PD-1 therapy. Under an agreement between Viralytics and a subsidiary of Merck, announced in November 2015, a study is investigating the use of the CAVATAK and KEYTRUDA combination in melanoma, prostate, lung and bladder cancers.

“Viralytics’s approach of engaging the innate immune system to target and kill cancer cells complements our immuno-oncology strategy, which is focused on the rapid advancement of innovative monotherapy approaches and synergistic combinations to help the broadest range of cancer patients,” said Dr. Roy Baynes, senior vice president and head of global clinical development, chief medical officer, Merck Research Laboratories. “We are eager to further build on Viralytics’s science as we continue our efforts to harness the immune system to improve long-term disease control and survival outcomes for people with cancer.”

“This proposed acquisition culminates years of dedicated work by the Viralytics team and represents an opportunity for significant value creation for our shareholders. Viralytics is proud to have progressed its lead investigational candidate CAVATAK to Phase 1 and Phase 2 clinical trials and, we believe that Merck, the leader in immuno-oncology, is best suited to advance CAVATAK for the benefit of patients globally, and to realize its potential,” said Dr. Malcolm McColl, managing director and chief executive officer, Viralytics.

The board of directors of Viralytics unanimously recommends that its company’s shareholders vote in favor of the Scheme, subject to there being no superior proposal and an independent expert concluding that the Scheme is in the best interest of the company’s shareholders. It is the intention of Viralytics’s directors to vote all the shares of Viralytics held or controlled by them in favor of the Scheme, subject to those same qualifications. Merck and Viralytics anticipate the transaction will be implemented by the second quarter of 2018. Implementation of the transaction is subject to a Viralytics’s shareholder vote and customary regulatory approvals.

Viralytics’s largest shareholder, Lepu Medical Group, which currently holds voting power in 13 percent of the Viralytics’s shares, has informed Viralytics that it intends to vote the shares it holds at the time of the Scheme meeting in favor of the Scheme, in the absence of a superior proposal and subject to the Viralytics directors maintaining their recommendation to vote in favor of the Scheme.

Chairman of Lepu Medical Group, Dr. Pu stated, “Lepu Medical Group acknowledges this is an attractive opportunity for Viralytics and, as such, is supportive of the transaction. In line with its existing strategy, Lepu Medical Group intends to continue to focus on developing immuno-oncology therapies, including in collaboration with companies globally.”

Transaction Terms and Implementation Process

The Scheme proposes that Merck acquires 100 percent of the issued shares in Viralytics. Implementation of the Scheme will be subject to customary conditions, including Viralytics shareholder approval, court approval, regulatory approval, an independent expert concluding, and continuing to conclude, that the Scheme is in the best interest of shareholders, and no material adverse change or prescribed event occurring.

More information on the Scheme and conditions is provided in a copy of the scheme implementation agreement which has been appended to this announcement. The agreement also contains exclusivity provisions that are customary in Australia, including “no shop”, “no talk” and “no due diligence” provisions, a break fee, as well as a notification obligation and matching right. The “no talk”, “no due diligence” and notification obligation provisions are subject to the directors’ fiduciary obligations.

A scheme booklet is expected to be dispatched to Viralytics shareholders in April 2018. The scheme booklet will contain information relating to the Scheme, the independent expert’s report on whether the Scheme is in the best interests of Viralytics shareholders, the reasons for the directors’ unanimous recommendation and details of the Scheme meeting and other matters relevant to Viralytics shareholders’ vote on the Scheme.

Indicative timetable

A number of expected key dates relevant to the proposed acquisition have been outlined below.