(Reuters) - U.S. drugmaker Merck & Co, already one of the leaders in the hot area of cancer immunotherapy, said on Wednesday it had agreed to buy Viralytics for 502 million Australian dollars ($394 million) to expand its pipeline in the sector.

FILE PHOTO: The logo of Merck is pictured in this illustration photograph in Cardiff, California April 26, 2016. REUTERS/Mike Blake/Illustration/File Photo

Merck will pay 1.75 Australian dollars per share for the Sydney-based biotech company, which uses viruses to infect and kill cancer cells.

The idea is to cause cancer cells to rupture and die, while also stimulating a wider immune system response in the body.

The deal, which is conditional on no better offer emerging from a counter-bidder, represents a premium of 160 percent to the average stock price over the past month - another example of the outsized offers often needed to clinch biotech takeovers.

Viral immunotherapy represents a new way of treating cancer and a number of companies are working to harness the power of specific viruses to fight tumours. Amgen became the first company to win approval for such a treatment in 2015.

Merck’s current research chief Roger Perlmutter was responsible for acquiring the Amgen product during his previous job as head of R&D at the U.S. biotechnology giant.

Viralytics’s leading experimental product, Cavatak, uses a proprietary formulation of a common cold virus and is currently being studied in multiple Phase I and Phase II clinical trials.

DRUG COMBINATION

Evercore ISI analyst Umer Raffat said the acquisition represented “a very nice tuck-in” for Merck and came at an interesting time since Viralytics is expected to have news on clinical tests of its oncolytic virus with Merck’s immunotherapy drug Keytruda in the second quarter of 2018.

Trials testing Cavatak with Keytruda include experiments to treat melanoma, prostate, lung and bladder cancers.

Roy Baynes, Merck’s head of global clinical development, said Viralytics’s approach complemented the U.S. drugmaker’s immuno-oncology strategy and opened up the possibility of new synergistic drug combinations.

The board of Viralytics said it unanimously recommended shareholders vote in favour of the Merck offer, “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”.

The deal comes at a time of booming merger and acquisition activity in the biotechnology sector, with $27.5 billion of transactions agreed in January alone as large drugmakers look for promising assets to improve their pipelines.

On completion of the transaction - expected by the second quarter of 2018 - Viralytics will become a wholly-owned subsidiary of Merck.

Credit Suisse is advising Merck on the transaction, while Lazard is working for Viralytics.

($1 = 1.2740 Australian dollars)