The deal, under which Lenvima will be developed for several types of cancer alone and in combination with Merck's immunotherapy Keytruda, could be worth up to $5.76 billion (4.14 billion pounds) to Eisai, but most of that would be contingent on eventual sales.
Eisai shares surged 10 percent on the news, with the Japanese drugmaker saying Lenvima may become a blockbuster drug generating annual sales of at least $1 billion in the year ending March 2021.
U.S. drugmaker Merck will be entitled to half of all global Lenvima sales revenue, even for its already approved uses for thyroid cancer and in combination with another drug for kidney cancer.
The deal is similar to a multibillion-dollar oncology collaboration Merck struck with AstraZeneca Plc on its cancer drug Lynparza and another medicine last July.
"Like the Lynparza deal with AstraZeneca, this starts to really broaden out Merck's portfolio," Frank Clyburn, head of Merck's commercial oncology business, said in an interview. "And Merck will start to receive revenue right away."
Under the deal, Eisai will receive an upfront payment of $300 million and up to $650 million for certain option rights through March 2021. Eisai could receive another $385 million in clinical and regulatory milestones, while Merck will receive $450 million as reimbursement for research and development costs.
The collaboration gives Eisai access to Merck's R&D and sales clout as well as a means of maximizing the potential of Lenvima in combination with the leading immunotherapy drug.
Following positive trial data showing that Lenvima with Keytruda led to tumor shrinkage in 63 percent of advanced kidney cancer patients, the combination received breakthrough designation from the U.S. Food and Drug Administration.
The combination also appeared to enhance the impact of Keytruda on advanced kidney cancer.
Breakthrough status is a designation given to treatments demonstrating substantial improvement over existing therapies in treating a serious or life threatening illness.
The companies said they will develop the combination for 11 different potential uses across six other cancer types, including skin cancer and bladder cancer.
"It makes sense ... to try to develop the drug to the full extent possible as monotherapy and in combination with Keytruda," Roger Perlmutter, president of Merck Research Laboratories, said in an interview.
Lenvima, an oral drug known chemically as lenvatinib, was discovered by Eisai scientists and belongs to a class of medicines known as tyrosine kinase inhibitors that block the blood vessel supply to tumors and tumor growth.
The injection of funds following the deal will be used to accelerate research and development of treatments for Alzheimer's disease and cancer, Eisai Chief Executive Haruo Naito told a news conference in Tokyo.
Eisai's shares, currently worth some $17 billion, have been hit in recent months by setbacks for two Alzheimer's drugs in development with Biogen Inc.
One drug, BAN2401, failed to meet the main goal of a mid-stage trial, Biogen said in December. In February, the U.S. drugmaker said it was enrolling more patients for its late-stage trial drug aducanumab, heightening concerns about the challenges of Alzheimer's drug studies.
(Reporting by Bill Berkrot in New York and Sam Nussey in Tokyo; Additional reporting by Chang-Ran Kim, Minami Funakoshi in Tokyo; Editing by Lisa Shumaker and Edwina Gibbs)
By Bill Berkrot and Sam Nussey