Recently, the Food and Drug Administration (FDA) approved Pfizer's (PFE -0.61%) Xeljanz to treat adult patients with active ankylosing spondylitis who had failed to respond to at least one tumor necrosis factor (TNF) inhibitor, including AbbVie's (ABBV -0.08%) Humira. This came just weeks after the European Commission approved the drug for the same indication in the European Union. 

Let's look at why the FDA authorized Xeljanz as a treatment for ankylosing spondylitis and what that means for pharma stock Pfizer.

A doctor speaks with a patient.

Image source: Getty Images.

Encouraging phase 3 clinical results for a serious condition

According to the Cleveland Clinic, ankylosing spondylitis is a type of arthritis that produces chronic spinal inflammation in the sacroiliac joints between the pelvis and base of the spine. The symptoms include lower back pain, joint pain, and fatigue.

There's no cure, but implementing and tracking a treatment plan with a medical professional improves the likelihood of adequately controlling the disease and living a fulfilling life. Because nearly a quarter (22.5%) of all ankylosing spondylitis patients fail to respond to TNF inhibitors, many are in desperate need of more-potent treatments. So the recent FDA approval of Xeljanz for ankylosing spondylitis (the drug's fifth approved indication in the U.S.) could be great news for countless patients struggling with the condition. 

Xeljanz could be life-changing for many ankylosing spondylitis patients because 269 adult patients with active cases of the disease were randomly assigned to take either 5 milligrams of Xeljanz twice daily or a placebo. Nearly 41% of patients receiving Xeljanz achieved a significant improvement in their symptoms at week 16, which was greater than three times the 12.5% of placebo patients with the same level of improvement over that time.

An incremental revenue boost for Pfizer

With its FDA approval, Xeljanz gains access to a large addressable market. But what could that mean for the drug's sales potential for this indication?

Approximately 350,000 people are affected by ankylosing spondylitis in the U.S. And with 22.5% of patients failing TNF inhibitors, that means the overall market for Xeljanz is roughly 80,000 patients. Since there are a variety of other drugs on the market to treat the disease, like Eli Lilly's (LLY 2.35%) Taltz and Novartis' (NVS 1.23%) Cosentyx, it will be tough for Xeljanz to seize significant market share. Also, with a moderate rate of significant improvement of 41%, some patients might need to try treatments from the competitors. That's why I'm projecting it will be able to achieve an 8% market share of its patient pool, which works out to about 6,400 patients.

The annual list price of Xeljanz treatment is approximately $60,000. But the vast majority of patients have health insurance and pay far less than this when considering Pfizer's negotiations with health insurers and out-of-pocket maximums on insurance plans. That's why I'll use an annual net revenue of $35,000 per patient for Pfizer.

This comes out to nearly $225 million in annual sales potential for Xeljanz's ankylosing spondylitis indication in the U.S. While this is chump change against the $81.5 billion in revenue that Pfizer expects for this year at the midpoint of its guidance, the impact within the immunology segment will be more profound. That's because an additional $225 million in annual sales potential is a 5% boost compared to the $4.3 billion that the immunology segment is on track to generate this year.

Pfizer is an undervalued stock

Despite the 35% surge in Pfizer's share price this quarter as a result of its COVID-19 pill Paxlovid, the stock still appears to offer growth at a reasonable price. For instance, Pfizer's forward price-to-earnings ratio of 9.8 is moderately lower than the pharmaceutical industry average of 11.4. Pfizer also offers superior growth potential over the next five years compared to the rest of the industry. Analysts forecast that Pfizer will deliver 19% annual earnings growth during that time, while the industry average will be 10%.

If anything, Pfizer should be trading at a premium to its peers given its tremendous track record of innovation, especially during the pandemic. And while investors wait for the market to award the stock with a higher valuation multiple, they can receive a market-beating 2.7% dividend yield. This is what makes Pfizer a compelling buy for 2022.