ADCs at the Crossroads: Why Merck's Withdrawal Signals a New Era in Oncology Investment

The withdrawal of Merck and Daiichi Sankyo's U.S. application for patritumab deruxtecan marks a pivotal moment for the antibody-drug conjugate (ADC) space, exposing vulnerabilities in oncology pipelines and reshaping investment strategies. While the decision was driven by a phase 3 trial failure—not manufacturing issues as previously feared—the incident underscores the dual risks of regulatory rigor and clinical unpredictability haunting ADC developers. For investors, this is a wake-up call to prioritize assets with robust survival data, diversify into manufacturing resilience plays, and avoid overvalued biotechs relying on “promising” early-stage results. Here's why the stakes have never been higher.

The Strategic Implications of a Phase 3 Setback

Patritumab deruxtecan's withdrawal stems from its failure to demonstrate statistically significant overall survival (OS) in the HERTHENA-Lung02 trial, despite showing progression-free survival (PFS) benefits in earlier studies. This outcome reflects a harsh reality: the FDA's insistence on OS as the gold standard for accelerated approvals is not negotiable. While Daiichi Sankyo and Merck had initially faced a June 2024 Complete Response Letter (CRL) citing manufacturing concerns at a third-party facility, the companies voluntarily withdrew the application after the phase 3 data missed the OS target—a far graver issue.

The $22 billion deal between Merck and Daiichi Sankyo, finalized in 2023, now faces scrutiny. While the partnership remains intact for ongoing trials in 15 cancer types, the loss of a lead asset in EGFR-mutated non-small cell lung cancer (NSCLC)—a $4 billion market—depletes Merck's oncology pipeline. Investors must question whether the collaboration's value hinges on unproven ADCs like patritumab deruxtecan or stronger candidates in other indications.

Competing in a Crowded ADC Landscape

Merck's stumble opens the door for rivals in EGFR-mutated NSCLC. Johnson & Johnson's Datopotamab Deruxtecan (Dato-DXd) and AstraZeneca's lurbinectedin (Zepzelca) are advancing in late-stage trials, with both targeting similar unmet needs. J&J's ADC, which combines an anti-HER3 antibody with a topoisomerase I inhibitor, has shown promise in phase 1b trials, while AstraZeneca's lurbinectedin leverages a novel mechanism to combat treatment-resistant tumors.

The withdrawal also highlights a broader competitive dynamic: companies with diversified ADC pipelines or alternative therapies in advanced NSCLC are better positioned. Roche's Tecentriq (atezolizumab) plus chemotherapy, approved in 2020, remains a standard of care, but its efficacy plateau in later-line settings creates opportunities for next-gen ADCs.

Regulatory Hurdles: Manufacturing and Clinical Risks Collide

While this withdrawal was not manufacturing-related, the earlier CRL underscores a systemic risk for ADC developers reliant on third-party manufacturing. The FDA's scrutiny of facilities—whether for patritumab deruxtecan or other ADCs—adds operational uncertainty. Investors should favor companies with vertically integrated manufacturing or partnerships with audited facilities.

The phase 3 OS failure, however, is a starker warning. The FDA's shift toward requiring OS data for accelerated approvals—seen in recent rejections of drugs like sotorasib (Lumakras)—suggests ADC developers must now prove survival benefits, not just PFS or response rates. This elevates the risk for biotechs betting on “breakthrough” status based on early-phase data, such as those in the HER3/EGFR space.

Opportunities in the Ashes of Setbacks

The withdrawal creates opportunities for investors to pivot to safer bets:
1. Manufacturing Plays: Companies like Lonza (LONNZ) or Catalent (CTLT), which offer GMP-compliant ADC manufacturing, gain strategic value.
2. Diversified ADC Platforms: Firms with broad pipelines, such as Seagen (SGEN), which owns the DXd technology behind patritumab deruxtecan, may outperform if their other programs succeed.
3. Non-ADC Oncology Assets: Immuno-oncology (IO) platforms like Checkmate Pharmaceuticals (CMPS) or targeted therapies with proven OS data, such as Amgen's lisocabtagene maraleucel (Ide-cel), offer lower-risk avenues.

Caution: Biotech Valuations Hang by a Thread

Biotechs reliant on accelerated approvals—such as those in the ADC or immuno-oncology space—are particularly vulnerable. Consider companies like Turning Point Therapeutics (TPTX) or Mirati Therapeutics (MRTX), whose valuations depend on late-stage data. A single phase 3 failure could trigger a selloff, as seen with Merck's stock drop post-withdrawal.

Conclusion: Navigating the New ADC Reality

Patritumab deruxtecan's withdrawal is not just a setback for Merck and Daiichi Sankyo—it's a cautionary tale for investors. The ADC space is now a high-stakes game requiring assets with ironclad OS data, robust manufacturing, and diversified pipelines. While the $22 billion deal's future is clouded, the broader ADC market remains promising. Investors must discriminate between assets with clinical credibility and those overvalued on hope.

The next few months will be critical: Daiichi Sankyo's ASCO presentation in June 2025 could reframe the narrative if biomarker analyses identify a responsive patient subset. Until then, prudence dictates favoring manufacturing resilience, proven survival data, and diversified oncology platforms over speculative ADC plays. The ADC era is here, but its winners will be decided by execution, not hype.

Invest now in the infrastructure and assets that can weather regulatory and clinical storms—or risk being swept away.