It’s easy to think that the only excitement in the world of drug research centers around weight-loss drugs. However, there is one other area that is also creating a lot of buzz in the pharmaceutical industry - a class of molecules known as antibody-drug conjugates (ADCs).
Think of ADCs as guided missiles that attack cancer. They use antibodies to deliver chemicals directly to tumors. ADCs have been around for decades, but they have recently improved so much that now there is much talk about how ADCs will replace conventional chemotherapy.
Currently, there is a lot of money pouring into ADCs, showing just how important oncology is to the pharmaceutical sector, even if obesity drugs steal the limelight.
Oncology is the industry’s biggest source of sales, with projected 2028 revenues of $440 billion, according to data provider IQVIA. A big chunk of that growth will likely come from drugs that precisely target cancer cells.
There were nearly $100 billion worth of ADC-focused merger and acquisition activity, as well as partnership transactions in 2023. These included the $43 billion acquisition of Seagen by Pfizer (PFE), and the $10.1 billion acquisition of ImmunoGen by Abbvie (ABBV). That trend has continued into 2024, with the likes of Johnson & Johnson (JNJ), Roche Holdings (RHHBY), and Genmab (GMAB) all inking deals.
Let’s take a closer look at ADCs and the companies leading the way in this promising new medical field.
The Leader in ADCs
In late October 2023, AstraZeneca (AZN) revealed a “massive achievement” in presenting two clinical trial results - in lung cancer and breast cancer - that showed the company’s new treatment was better than chemotherapy.
The Anglo-Swedish firm has partnered with the Japanese pharmaceutical company Daiichi Sankyo (DSNKY) on the development of two key antibody drug conjugates.
The first ADC is Enhertu, which is already transforming the treatment of breast cancer. One in eight women will get breast cancer in their lifetime, and Enhertu has the potential to be a game changer for half of them.
Enhertu was first approved in the U.S. in 2019 for patients with cancer that have high levels of a protein called HER2. About 15% to 20% of breast cancers are HER2-positive.
In June 2022, a trial showed that the drug could double the time patients can live without their cancer progressing, even if they have low levels of this protein. About a fifth of the participants with metastatic cancer - usually seen as incurable - had complete responses; scans could not detect their tumors.
This gave investors high hopes for successful trials of the second ADC, known as Dato-DXd. In 2020, AstraZeneca partnered with Daiichi Sankyo on Dato-DXd in a deal worth up to $6 billion, following its agreement on Enhertu, worth up to $6.9 billion, the year before.
AstraZeneca considered the full data from the trial “clinically meaningful,” especially in a large segment that makes up about 70% of the patients - those with “non-squamous” lung cancer. And the ADC treatment was found to have better tolerability than standard chemotherapy in that patient population.
However, Daiichi Sankyo isn’t tying its fortunes to just its efforts with AstraZeneca. In October 2023, the company announced it had partnered with Merck (MRK) on three new potential antibody drug conjugates in a deal worth up to $22 billion, if the drugs are approved and hit several sales milestones.
Buy Daiichi Sankyo
The fact is that ADCs have very exciting potential to replace conventional chemotherapy across a wide range of different tumor types.
Daiichi Sankyo is expected to be the ADC leader in 2028, with nearly $10 billion of sales, according to the pharma intelligence firm Evaluate. That’s why the stock is trading at a hefty price/earnings multiple of 50 times. That’s the kind of high multiple where weight-loss drug companies like Eli Lilly (LLY) and Novo Nordisk (NVO) are trading.
That is not surprising - the estimates of the long-term market potential for ADCs is similar to obesity drugs. Morgan Stanley forecast the ADC market could eventually be worth more than $140 billion. That bullish estimate is based on a one-for-one switch from conventional chemotherapy, which accounts for more than 37% of U.S. cancer prescriptions.
That said, ADCs will likely run into the same type of resistance that Lilly and Novo Nordisk are currently facing from the health insurance firms. Most chemotherapies have lost their patent protection, and are relatively inexpensive compared to ADCs treatments.
Nevertheless, eventually ADCs will become widely adopted, because it is better for cancer patients than current chemotherapies.
Daiichi Sankyo (DSNKY) stock is a buy below $37.
