Daiichi Sankyo: Out-Licensing Deal With Merck Reinforces Our View of Daiichi’s ADC Platform

On Oct. 19, narrow-moat Daiichi Sankyo 4568 announced an out-licensing deal with Merck for three of Daiichi’s antibody-drug conjugate, or ADC, candidates. The total upfront payments are $5.5 billion, up to $16.5 billion of potential milestones, and a 50/50 split of profits and costs excluding Japan where Daiichi retains rights. This massive deal reinforces our positive view of Daiichi’s ADC platform beyond Enhertu. We reiterate our fair value estimate of JPY 5,100 per share and continue to view shares as modestly undervalued.

The $5.5 billion upfront payments are divided into $3 billion nonoptional payments due upon execution and $2.5 billion which can be refunded or forgone if Merck chooses to return rights to Daiichi. The nonrefundable payments are $1.5 billion for I-DXd (targeting B7-H3), $750 million for HER3-DXd (targeting HER3), and $750 million for R-DXd (targeting CDH6). Considering this and the complex optional payments, we think Merck may view I-DXd as having the most certainty in commercial prospects, followed by HER3-DXd and then R-DXd.

We think Merck is paying more than AstraZeneca did for Enhertu and Dato-DXd, considering the total deal sizes, the nonoptional upfront payments, and the respective stages of development. The total deal sizes of I-DXd, HER3-DXd, and R-DXd are $7 to $7.5 billion each, whereas they were $6.9 billion for Enhertu and $6 billion for Dato-DXd. Also, the nonoptional upfront payments were $675 million for Enhertu and $350 million for Dato-DXd, whereas Merck will pay a minimum of $750 million to $1.5 billion for each asset. At the time of the transactions, Enhertu and Dato-DXd were still early stage but their targets HER2 and TROP2 were already validated by approved ADC’s from competitors. By contrast, the three drugs Merck is in-licensing are potentially first-in-class.

We think the deal should be supportive of Daiichi’s stock price and look forward to future disclosures on development plans, especially I-DXd and R-DXd.