The ADC Pivot: Why Daiichi Sankyo and MSD's Setback is a Buying Opportunity

The withdrawal of the Biologics License Application (BLA) for patritumab deruxtecan—a HER3-directed antibody-drug conjugate (ADC)—by Daiichi Sankyo and Merck & Co. (MSD) marks a critical inflection point for the companies. While the Phase III failure to meet the overall survival (OS) endpoint has triggered immediate skepticism, the strategic resilience of the partnership and the broader ADC pipeline suggest this setback could be a catalyst for long-term value creation. For investors, this moment demands a nuanced analysis of risk and reward, with the potential for outsized returns looming large.

The Clinical Crossroads: Why Patritumab Failed, and What It Means

The collapse of the HERTHENA-Lung02 trial, which compared patritumab deruxtecan to platinum-pemetrexed chemotherapy in EGFR-mutated NSCLC patients, underscores the brutal realities of oncology drug development. While the Phase II trial (HERTHENA-Lung01) had shown a 29.8% objective response rate and a median progression-free survival (PFS) of 5.5 months, the Phase III trial's inability to demonstrate a statistically significant OS benefit—a gold-standard endpoint in late-stage cancer trials—was a fatal blow.

Critically, this failure was not due to safety concerns or manufacturing defects. The FDA's 2024 Complete Response Letter (CRL), which cited issues at a third-party manufacturing facility, was resolved separately, and the drug's clinical safety profile remained consistent. The true culprit was the trial design itself: in a heavily pretreated population with limited treatment options, the control arm (platinum-pemetrexed) may have outperformed historical benchmarks, narrowing the gap against patritumab. This highlights the razor-thin margins in late-stage oncology trials, where even small deviations in trial execution can upend years of research.

The market's reaction has been swift, with Daiichi Sankyo's shares down ~15% since the BLA withdrawal announcement and Merck's stock dipping ~5%. Yet this volatility masks a deeper truth: the ADC pipeline remains intact, and the strategic partnership retains its transformative potential.

The ADC Pipeline: Beyond Patritumab

While patritumab's withdrawal is a significant blow, Daiichi and MSD's ADC portfolio remains robust. Their collaboration encompasses three other HER3-targeted ADCs:
- Ifinatamab deruxtecan: In Phase III trials for HER2-positive gastric/gastroesophageal junction cancer.
- Raludotatug deruxtecan: Exploring multiple solid tumors, including triple-negative breast cancer.
- Gocatamig deruxtecan: Added in August 2024, targeting HER2-expressing cancers.

Combined with ongoing trials across 15 cancer types, this pipeline represents a diversified bet on ADC technology's dominance in oncology. The companies' commitment to biomarker-driven subpopulation analysis—e.g., identifying patients whose tumors overexpress HER3—could salvage patritumab's prospects in niche indications, even after the Phase III failure.

Moreover, the ADC platform's broad applicability is a strategic moat. Unlike single-target therapies, these conjugates can be reconfigured for multiple oncogenic pathways, reducing reliance on any one drug's success. This adaptability is especially critical in an era where resistance mechanisms and heterogeneous tumor biology challenge traditional therapies.

The Collaboration Model: A Blueprint for Resilience

The Daiichi-MSD partnership, valued at over $6 billion, exemplifies a modern biopharma collaboration: co-development, shared commercialization (excluding Japan), and risk mitigation through diversified portfolios. The withdrawal of patritumab's BLA tests this model's flexibility, but early signals are encouraging. Both companies have reaffirmed their commitment to the partnership, with Daiichi retaining rights to Japan—a critical market for oncology drugs—and MSD leveraging its global salesforce for broader reach.

This model's true test will come in 2025–2026, as key trials for ifinatamab and raludotatug report data. Positive outcomes here could reposition the duo as leaders in ADC-driven oncology, particularly in HER2-positive and HER3-dependent cancers. Investors should monitor these trials closely, as their results could recalibrate valuation metrics for both companies.

Valuation: A Buying Opportunity in a Priced-Out Sector

Daiichi Sankyo's stock now trades at ~12x 2025E EV/EBITDA, down from 15x pre-announcement, while Merck's oncology division—already a $25 billion business—remains undervalued relative to peers like Roche (RHHBY) or AstraZeneca (AZN). The pullback in share prices presents a rare entry point into two companies with:
1. A Proven ADC Platform: Demonstrated in the success of Enhertu (trastuzumab deruxtecan), which generated $2.3B in sales in 2024.
2. Strategic Diversification: 15+ cancer indications across their pipeline reduce single-drug dependency.
3. Operational Turnaround: Merck's post-Bystolic (another recent setback) resilience and Daiichi's cost-cutting initiatives since 2023.

The Call to Action: Buy the Dip, Play the Long Game

Investors should view the patritumab withdrawal as a temporary stumble, not a terminal injury. The Daiichi-MSD partnership's pipeline depth, the ADC platform's scientific promise, and the companies' track record of adapting to setbacks position them to capitalize on a $300B+ oncology market.

For contrarian investors, now is the time to accumulate shares of both companies. Daiichi's undervalued stock and Merck's undaunted oncology pipeline create a compelling risk/reward profile. The upcoming ASCO 2025 conference, where HERTHENA-Lung02 data will be presented, offers a near-term catalyst for revaluation.

In the long term, the ADC arms race—driven by conjugate precision, biomarker innovation, and partnership synergies—will reward those who bet on resilience. Daiichi Sankyo and MSD are not just surviving this setback; they're recalibrating to dominate it.

Act now—before the market catches up to the opportunity.