Merck & Co. is making a major investment in the future of its cancer drug business, agreeing to one of the largest pharmaceutical licensing deals by value to secure access to three experimental medicines developed by Japan’s Daiichi Sankyo.

In a deal announced Thursday, Merck will pay Daiichi Sankyo $5.5 billion over the next two years for rights to co-develop and co-market the three medicines, which are in various stages of clinical testing as treatments for solid tumors. Merck is also promising up to another $5.5 billion in additional payments per medicine if future sales of each hit certain milestones.

Overall, the alliance is worth up to $22 billion for Daiichi Sankyo, which said in a presentation that Merck offered the highest valuation for the three drugs among multiple companies that expressed interest.

The treatments are what’s known as antibody-drug conjugates, targeted medicines that pair a homing antibody with a toxic chemical to seek out and destroy cancer cells while better sparing healthy tissue. The technology is decades old, but has only recently become a tool of choice among cancer drug developers, leading to a surge of investment in the field.

A good part of the pharma industry’s current enthusiasm for antibody-drug conjugates, or ADCs, is due to Daiichi Sankyo. The Japanese company developed a highly effective breast cancer drug called Enhertu that AstraZeneca licensed four years ago. Global sales over the first six months of 2023 topped $1.1 billion.

The two companies are also collaborating on another ADC, datopotamab deruxtecan, that they think can be a blockbuster lung and breast cancer medicine.

Merck is betting Daiichi Sankyo’s next three medicines will work just as well. “The pioneering work by Daiichi Sankyo scientists has highlighted the far-reaching potential of ADCs to provide meaningful new options for patients with cancer,” said Merck CEO Rob Davis in a statement on the alliance.

The most advanced of the three, patritumab deruxtecan, has shown in testing it can shrink non-small cell lung tumors among people whose cancer has progressed after treatment with other drugs. Daiichi Sankyo plans to submit an application for Food and Drug Administration approval of the treatment by March 2024.

The other two are in Phase 2 and Phase 1 trials, respectively, for small cell lung, kidney and ovarian cancers.

“The promising results from clinical trials … continue to demonstrate the broad applicability of Daiichi Sankyo’s … technology across multiple targets, with each of these medicines having the potential to change clinical practice as has been already seen with Enhertu,” said Sunao Manabe, executive chair and CEO of Daiichi Sankyo, in the companies’ statement.

Merck has previously invested in ADCs, having struck smaller licensing deals with Seagen and Kelun Biotech and buying out VelosBio. The company was also reportedly in discussions last year to acquire Seagen, which pioneered the field. Pfizer agreed to buy Seagen in March for $43 billion.

The stepped-up dealmaking reflects the looming patent cliff Merck faces with Keytruda, the company’s dominant cancer immunotherapy and one of the pharma industry’s most lucrative products. Sales of the drug accounted for more than one-third of Merck’s $59 billion in revenue last year. Patents protecting the drug expire in 2028 in the U.S., however, putting pressure on Merck to find other products it can use to replace the sales it’s likely to lose.

Under terms of the alliance with Daiichi Sankyo, Merck will pay $3 billion on contract signing to share rights to the three drugs. It will pay another $1.5 billion in two $750 million installments, at one year and two years following signing. These payments are attached to two of the three drugs and Merck can choose to opt out of the collaboration on either, in which case the installment payment would not be due.

Merck is also paying another $1 billion upfront tied to research and development costs, a pro-rated share of which would be refundable if Merck decides to opt out on either of the drugs. For the third, Merck has agreed to finance 75% of the first $2 billion in R&D expenses.

Otherwise, Merck and Daiichi Sankyo will equally share costs and any future profits globally, except in Japan, where Daiichi Sankyo retained full rights and will pay Merck a royalty on any sales. Daiichi Sankyo will book sales in countries where it has local operations.

As a result of the deal, Merck is recording a pretax charge for $5.5 billion to reflect the upfront payments it’s making to Daiichi Sankyo, which will impact its fourth quarter and full-year results.

Shares in Merck rose by nearly 2% in Friday morning trading, which Daiichi Sankyo shares rose by 14% on the Tokyo Stock Exchange.