Last month, Japan's Pharmaceuticals and Medical Devices Agency (PMDA) gave the green light to Merck's (MRK -0.34%) oncology drug Keytruda to treat patients with metastatic triple-negative breast cancer (TNBC) in combination with chemotherapy. The PMDA also approved Keytruda as a monotherapy for a specific form of colorectal cancer.

The two approvals marked Keytruda's 14th and 15th indications in Japan to date. But what does the PMDA's approval of Keytruda paired with chemotherapy to treat TNBC mean for pharma stock Merck and its shareholders?

Let's take a look at why the PMDA approved the combo, as well as why this could be great news for both TNBC patients living in Japan and Merck's shareholders.

A patient has an appointment with their doctor.

Image source: Getty Images.

A trailblazing therapy to enhance quality of life

Prior to discussing the data from the Keytruda-and-chemotherapy pairing in treating TNBC, let's first define TNBC, the prevalence of the condition, and its typical prognosis.

According to Merck, TNBC is a "type of breast cancer that tests negative for estrogen hormone receptors, progesterone hormone receptors and excess HER2 protein." TNBC is a highly aggressive breast cancer that also brings with it a higher chance of recurrence after treatment. TNBC is known to be more common in Japan than in the U.S., affecting approximately 15% of the 94,000 breast cancer patients diagnosed in Japan last year.

The five-year relative survival rate compares patients with the same stage and type of breast cancer to the overall population, according to the American Cancer Society (ACS). When TNBC is localized or confined specifically to the breast, the five-year relative survival rate for patients being treated between 2010 and 2016 was rather high at 91%, per the ACS. But when TNBC is metastasized or spreads to distant parts of the body such as the lungs or bones, the prognosis is especially grim, with just a 12% five-year relative survival rate.

This is what makes early detection and the availability of more effective treatments critical to providing better health outcomes to TNBC patients, which is where the Keytruda-and-chemotherapy solution comes into play.

Keytruda in combination with chemotherapy helped patients achieve a much greater improvement in the primary endpoint of progression-free survival (PFS). This is defined by the National Cancer Institute (NCI) as "the length of time during and after the treatment of a disease, such as cancer, that a patient lives with the disease but it does not get worse."

Keytruda and chemotherapy resulted in a 35% reduction in the risk of disease progression or death, with a median PFS of 9.7 months compared to just 5.6 months for chemotherapy alone. Every single patient receiving Keytruda and chemotherapy reported a longer PFS time period, with a range between 7.6 months and 11.3 months total PFS (compared with 5.3 months to 7.5 months of total PFS for chemotherapy alone).

This suggests that Keytruda is positioned to fill a massive unmet need and that the PMDA was justified in its approval of the indication, which will undoubtedly result in improved quality of life for TNBC patients in Japan.

A key indication

With a clearer understanding of Keytruda's efficacy in treating TNBC in conjunction with chemotherapy, let's dive into the potential market of the TNBC indication in Japan.

With about 14,100 patients in Japan diagnosed with TNBC each year (94,000 diagnosed in Japan last year times the 15% prevalence), we can assume that at any given time, there are about that many people receiving treatment for TNBC. I believe this is a conservative estimate given that the recurrence rate of distant TNBC was found to be over 20% (91 of 414 patients) in an average follow-up period of six years in a study conducted several years ago.

Further assuming that Keytruda can seize 25% of the TNBC market in Japan (doable in my opinion considering the efficacy of Keytruda when used with chemotherapy), this would represent a pool of approximately 2,800 patients.

Conservatively adjusting Keytruda's $171,000 annual list price in the U.S. down to $80,000 in Japan (where drugs are an average of 50% cheaper), this indication should realistically generate at least $200 million annually.

While this is a fraction of Merck's overall $46.4 billion to $47.4 billion revenue forecast for this year, it's an additional steady revenue stream that will continue for many years.

A solid dividend growth pick

Keytruda's two additional oncology indications in Japan came just two weeks after the drug was approved by the U.S. Food and Drug Administration (FDA) in combination with Eisai's (ESALY -1.52%) Lenvima to treat advanced renal cell carcinoma (RCC).

While the oncology segment is a major part of Merck's business, at 40.2% of this year's $22.03 billion in first-half revenue, it isn't the only piece of Merck's growth puzzle.

Merck's vaccines segment accounted for 17.7% of first-half revenue and was up 14% year over year, from $3.42 billion last year to $3.90 billion this year. Merck's animal health segment comprised 13.1% of the company's total first-half revenue and grew 24.9% year over year, from $2.31 billion last year to $2.89 billion this year.

Merck is a balanced business, which is why analysts are forecasting 12.8% annual earnings growth over the next five years. This should allow management to reward shareholders with mid- to high-single-digit annual dividend increases to its current 3.4% yield for years to come.