* Merck (NYSE:MRK) to 1.75 AUD/share, 160 pct above one-month average
* Viralytics uses viruses to infect and kill cancer cells
* Agreement subject to there being no superior proposal (Adds product details, more on deal terms, context on biotech M&A)
By Ben Hirschler
Feb 21 (Reuters) - U.S. drugmaker Merck & Co MRK.N , already one of the leaders in the hot area of cancer immunotherapy, said on Wednesday it had agreed to buy Viralytics VLA.AX for 502 million Australian dollars ($394 million) to expand its pipeline in the sector.
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 deal represents a premium of 160 percent to the average stock price over the past month. It is conditional on no better offer emerging from a counter-bidder.
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 AMGN.O became the first company to win approval for such a treatment in 2015.
Viralytics's leading experimental product, Cavatak, is currently being studied in multiple Phase I and Phase II clinical trials. These include tests in combination with Merck's immunotherapy drug Keytruda as a potential treatment for 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. completion of the transaction - expected by the second quarter of 2018 - Viralytics will become a wholly-owned subsidiary of Merck.
Credit Suisse (SIX:CSGN) is advising Merck on the transaction, while Lazard is working for Viralytics.
($1 = 1.2740 Australian dollars)