Merck: Posts Leading Early-Stage Keytruda Data in Lung Cancer, Creates Important Daiichi Partnership

We are holding firm to our Merck MRK fair value estimate following the presentation of leading efficacy data for Keytruda in periadjuvant non-small-cell lung cancer and the announcement of a partnership with Daiichi for three new antibody-drug conjugates. Merck’s continued strong innovation with Keytruda and fair deployment of capital reinforce its wide moat.

At the annual meeting of the European Society for Medical Oncology, Merck presented leading efficacy data for Keytruda in early-stage NSCLC, which should provide the firm with a first-mover advantage, given approval in the setting (already gained days ago) and the only survival benefit so far among competitors. While Bristol and Roche could eventually catch up with similar studies, the first mover in cancer settings tends to gain close to 80% of the market unless subsequent competitive data is significantly stronger on efficacy or side effect profile. Over the next five years, we expect Keytruda to add over $10 billion in incremental annual sales, with a large portion of those gains in the early-line lung cancer setting.

Merck also announced a deal with Daiichi, gaining 50/50 partnership rights on three ADCs for up to $22 billion (including milestones), which looks like a fair price. The deal includes $5.5 billion in up-front payments: $3 billion in nonoptional payments due upon execution and $2.5 billion that 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 in phase 2 and focused on lung cancer and other solid tumors), $750 million for HER3-DXd (targeting HER3, in phase 3 and focused on EGFR NSCLC and breast cancer), and $750 million for R-DXd (targeting CDH6, in phase 1 focused on ovarian cancer). 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 R-DXd.