On Dec. 27, Merck (MRK 0.10%) announced that Keytruda secured another approval from Japan's Ministry of Health, Labour and Welfare (MHLW) in combination with Eisai's (ESALY -0.05%) Lenvima. The agency gave the combo the green light to treat patients with unresectable, advanced, or recurrent endometrial carcinomas that progressed after chemotherapy.
What led the MHLW to authorize Keytruda and Lenvima for certain endometrial cancer patients? And what level of sales could this mean for the pharma stock? Let's go over the efficacy of the drug pairing and the endometrial cancer market in Japan to answer these questions.
Image source: Getty Images.
A game-changing treatment option
Before getting into the data from the Keytruda and Lenvima pairing in treating endometrial cancer patients, let's first define endometrial cancer and the types of cancer.
Endometrial cancer is a type of cancer that begins in the uterus, which is the organ where fetal development occurs, according to the Mayo Clinic. One of the most common symptoms of the condition is pelvic pain. Unresectable cancer refers to cancer that cannot be surgically removed. Advanced or metastatic cancer means that cancer has spread from the original site to more distant organs in the body. And finally, cancer that is recurrent means that the cancer has come back after a period of remission.
The 5-year overall survival rate of endometrial cancer ranges from 97.1% for stage 1A patients to 24.7% for stage 4B patients. This is why early detection and treatment are of utmost importance to promoting optimal outcomes for endometrial cancer patients. Fortunately, endometrial cancer patients in Japan that aren't responding to treatment options like chemotherapy can now potentially be treated with the Keytruda and Lenvima combo. What data prompted the MHLW to approve this pairing?
In phase 3 clinical trials, patients receiving Keytruda and Lenvima experienced a 38% reduction in the risk of death compared to chemotherapy. And patients taking the combo benefited from a 44% reduction in the risk of their disease worsening (i.e., disease progression) or death over chemotherapy, which demonstrates the efficacy of Keytruda and Lenvima together. This data helps to explain why the Keytruda and Lenvima combo is also approved in the U.S. and Europe to treat certain types of endometrial cancer.
More incremental revenue for Merck
Keytruda and Lenvima will make a huge difference in the lives of countless endometrial cancer patients living in Japan. But what will this mean for Merck's financial results going forward?
There were 17,000 patients diagnosed with endometrial cancer in Japan in 2020. Conservatively, let's assume that in any given year, there are at least 17,000 patients with unresectable, advanced, or recurrent endometrial cancer. Since the Keytruda and Lenvima combo has proven itself to be a highly effective treatment option, I'll estimate that it can capture 20% of this market or approximately 3,400 patients in Japan.
While Keytruda's annual list price is around $175,000 in the U.S., drug prices in Japan are roughly 50% cheaper than in the U.S. That's why I'll use an annual list price of $85,000. And factoring in insurance adjustments for patients in Japan, I'll assume that the annual net price per patient for Keytruda in Japan is $60,000.
This works out to an additional $200 million in annual revenue for Merck (not considering that Merck receives a portion of Lenvima's sales as well due to its partnership with Eisai). Although this is minuscule against the $47.7 billion in midpoint revenue that Merck is forecasting for 2021, this is a decent amount of revenue for a single indication in just one market. For big pharma, success hinges on securing regulatory approvals around the world for as many indications as possible. Merck has proven itself to be a master of this craft, which explains how Keytruda will become the top-selling drug in the world in a couple of years.
A discounted dividend growth stock
Despite the fact that analysts expect Merck's non-GAAP (adjusted) earnings per share (EPS) to grow at 15% annually over the next five years, the stock appears to be cheaply priced. That's because the stock is trading at just 14 times the anticipated non-GAAP EPS for 2021, which is a price-to-earnings-growth (PEG) ratio below 1. Shareholders can also sit back and collect a market-beating 3.4% payout that should grow at a nice rate while they wait for the market to hand out a higher valuation multiple. Thus, the stock appears to have attributes that appeal to income, value, and growth investors.
