When AstraZeneca (NASDAQ:AZN) spurned overtures from Pfizer (NYSE:PFE) to combine in one of the biggest merger deals of all time, it told investors not to worry. It had plenty of irons in the fire that could fuel significant increases in sales, profit, and share price.

At the time, a lot of AstraZeneca's confidence was due to a new cancer drug -- Imfinzi -- and Imfinzi's potential to rack up billions of dollars in sales as a first-line treatment for previously untreated non-small cell lung cancer (NSCLC). Unfortunately, that confidence appears misplaced, following news that Imfinzi failed to improve progression-free survival in AstraZeneca's Mystic trial, dashing chances for a speedy approval from the U.S. Food and Drug Administration.

A man holds his head in his hands while looking at a declining stock-price chart.


The failure delivered a sharp blow to the big-cap pharmaceutical company's shares today, erasing $12 billion of AstraZeneca's market cap, or about 15% of its value.

What was at stake?

If Mystic had been a success, then investor response would likely have been much, much different.

Imfinzi is a checkpoint inhibitor of PD-1, a protein that cancer cells hijack to prevent a patient's immune system from attacking, and PD-1 drugs already on the market are racking up billions of dollars in annual sales. For example, Bristol-Myers Squibb's (NYSE:BMY) Opdivo and Merck & Co.'s (NYSE:MRK) Keytruda are approved for use in patients with non-small cell lung cancer. In the second quarter, Opdivo's sales were $1.2 billion. Merck hasn't reported Q2 numbers yet for Keytruda, but its sales were $584 million in the first quarter.

Now, following Imfinzi's stumble, it seems Opdivo and Keytruda's leadership in the indication remains safe. Of the two drugs, Merck's Keytruda appears to be the bigger beneficiary; Keytruda recently got an FDA nod for use in first-line NSCLC patients, following a positive trial outcome last year. A similar trial for Opdivo came up short in 2016, giving Keytruda the advantage.

What's next for AstraZeneca?

AstraZeneca isn't giving up hope it can salvage Imfinzi in this indication. It expects to have overall survival data in hand early next year, and if that data is positive, it could still allow Imfinzi to win a regulatory nod of approval someday.

Nevertheless, delivering on the overall survival endpoint now appears to be more of a long shot than it was previously, a belief that's reinforced by management's increasing efforts to focus industry-watchers on other trials in its pipeline. While relaying the bad news today, CEO Pascal Soriot told Reuters that AstraZeneca's pipeline "was delivering," adding "there's a lot more in our pipeline than Mystic."

One of the drugs Soriot is referring to is Lynparza, a PARP inhibitor that helps prevent cancer cells from repairing damage to their DNA. Its sales have been growing nicely since it won FDA approval in 2014 for use in ovarian cancer patients.

In Q2, Lynparza revenue was $59 million, but total peak sales someday could be much higher. AstraZeneca believes it can become a valuable weapon used alongside other medications in various cancers, including breast cancer and prostate cancer. The potential to significantly expand Lynparza's addressable market is backed up by Merck's decision today to team up with AstraZeneca on it.

Merck & Co. will pay AstraZeneca up to $8.5 billion to share Lynparza's profits, including payments of $1.6 billion up front, $750 million for certain license options, and up to an additional $6.15 billion in future regulatory and sales milestones. Clearly, Merck thinks Lynparza has multibillion-dollar blockbuster potential, but the real question from investors following Imfinzi's failure is how quickly this potential can be realized.

In taking a pass on the Pfizer deal, AstraZeneca announced a goal to double sales by 2023. Today, it's looking like that goal is in jeopardy. If that's true, then skipping out on its chance to merge with Pfizer could go down in the record books as a very bad decision.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.