Merck pays $4B upfront for rights to 3 Daiichi ADCs in huge bet on post-Keytruda future

Merck & Co. has secured a seat at the productive Daiichi Sankyo antibody-drug conjugate (ADC) factory. While AstraZeneca picked up the first two ADCs off the production line, its rival and collaborator Merck is paying $4 billion upfront to co-develop Daiichi’s next three prospects.

Daiichi is at the forefront of work to validate the long-latent potential of ADCs, developing Enhertu, the AstraZeneca-partnered HER2 therapy that is transforming breast cancer treatment, and advancing a R&D pipeline led by the TROP2-directed candidate datopotamab deruxtecan (Dato-DXd). AstraZeneca bought rights to Enhertu and Dato-DXd, paying $2.35 billion before milestones in 2019 and 2020, but has missed out on the other assets.

Merck, flush with Keytruda cash and eyeing the loss of exclusivity on its megablockbuster, has agreed to pay $4 billion upfront to co-develop and co-commercialize three Daiichi ADCs. The numbers past that point rise to eye-watering levels. Merck has committed to $1.5 billion in continuation payments over the next 24 months and up to $16.5 billion in sales milestones.

The maximum value of the deal? $22 billion.

The outlay, plus R&D costs (discussed below), will give Merck an even share of the profits from three ADCs in development at Daiichi. The most advanced of the candidates is patritumab deruxtecan (HER3-DXd), a HER3-directed ADC that is in a pivotal trial in EGFR-mutated non-small cell lung cancer. Merck and Daiichi plan to file for approval in March. BioNTech recently picked up a rival, early-stage HER3-directed ADC.

Ifinatamab deruxtecan (I-DXd), a B7-H3-directed ADC, is the next candidate off the production line. The drug, which is aimed at an immune checkpoint overexpressed in various cancers, is in phase 2 testing in patients with small-cell lung cancer. The final asset, raludotatug deruxtecan (R-DXd), is aimed at a target, CDH6, that is overexpressed in cancers of the kidney, ovaries and other organs. Daiichi is currently enrolling kidney and ovarian cancer patients in a phase 1 trial.

Merck forecasts the three programs could collectively “have multi-billion dollar worldwide commercial revenue potential for each company approaching the mid-2030s.” Ramping up those growth drivers over the next decade could soften the patent cliff for Keytruda, a $20 billion-a-year Merck drug that is set to start losing key pieces of intellectual property in 2028.

The deal puts ADCs at the heart of Merck’s vision for its post-Keytruda future. The Big Pharma has made multiple bets on the red-hot modality in recent years, paying Seagen $600 million upfront for rights to a now-shelved candidate in 2020, buying VelosBio for $2.75 billion that same year and forming a trio of pacts with Kelun-Biotech in quick succession.

Merck’s simple financial summary of its latest deal hides a complex structure. The Big Pharma is paying $1.5 billion upfront per asset, but half of the payment for one ADC is due after 12 months, and half of the payment for another ADC is due after 24 months. 

The staggered structure gives Merck a chance to opt out of the HER3-DXd and R-DXd deals after 12 and 24 months, respectively, and skip the second payments. If that happens, Daiichi will retain the money paid up to that point and full rights to the candidates. 

Merck is also paying $1 billion, split 50/50 between HER3-DXd and I-DXd. A prorated portion of the fee may be refundable if the programs are stopped early. Merck will cover 75% of the first $2 billion of R&D expenses. Beyond that, the new partners will share costs and profits, except in Japan, where Daiichi will retain exclusive rights and pay Merck royalties.