Last month, GlaxoSmithKline (GSK 5.60%) announced that it had reached an agreement to purchase United States-based Sierra Oncology for a total of $1.9 billion.
With finalization of the deal expected in the third quarter of 2022, GlaxoSmithKline will soon own a bone marrow cancer drug candidate in late-stage clinical trials called momelotinib. The pressing question is: Will this prove to be a savvy move for the pharma company? Let's take a look at the phase 3 clinical trial results for the drug and the sales potential for GlaxoSmithKline to answer this question.
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A game-changing treatment option
Myelofibrosis is a condition where scar tissue replaces bone marrow over time. This interferes with the capability of the body to produce blood cells, which can result in reduced blood cell counts, fatigue, and shortness of breath.
As a result, approximately 40% of patients are anemic at the time of myelofibrosis diagnosis. And worse, nearly all patients will develop anemia through the course of their illness. This can lead to dependence on regular blood transfusions for treatment, which comes with a poor prognosis and diminished overall survival rates.
The severity of myelofibrosis is assessed using the Myelofibrosis Symptom Assessment Form, which includes input from both the patient and their healthcare provider. Fatigue and quality of life are considered to arrive at a Total Symptom Score (TSS). The efficacy of a myelofibrosis treatment is determined based on how much it can reduce a patient's TSS from their pretreatment baseline.
Fortunately, treatments for myelofibrosis are advancing. And with an application to the U.S. Food and Drug Administration (FDA) expected this quarter, the oral treatment momelotinib could come to market sometime next year. But what's the data behind the company's confidence that the drug will be approved in 2023?
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Key Data Points
Momelotinib helped 25% of myelofibrosis patients achieve at least a 50% reduction in their TSS during the phase 3 clinical trials. This was nearly triple the 9% of the control arm group receiving danazol and a placebo, which achieved at least a 50% drop in their TSS.
And with an adverse event rate of 54% among momelotinib patients compared to a 65% rate for the danazol plus placebo group, momelotinib has demonstrated itself to be a relatively safer drug.
The deal looks like a good move
Momelotinib seems like it will improve the quality of life for many myelofibrosis patients upon FDA approval. But what amount of sales could the indication generate for GlaxoSmithKline?
There are around 20,000 myelofibrosis patients in the U.S. It's difficult to estimate how many of those patients actively have anemia, which is the market that momelotinib will be targeting. But since 40% of patients already have anemia at diagnosis and nearly all eventually develop anemia, I will conservatively estimate that 70% of the overall patient population has anemia. This works out to an eligible patient population of 14,000.
Momelotinib is on its way to being one of the few common treatments for myelofibrosis other than Incyte's Jakafi, and chemotherapy. Because Jakafi and chemotherapy don't always yield results, I believe that momelotinib can seize 35% of the overall market. This is equivalent to 4,900 patients.
Pricing information won't be available for momelotinib until shortly after its potential FDA approval, but the $120,000 average annual cost of cancer treatment is a good place to start with an estimate. Including patient assistance programs and downward adjustments in price from negotiations with health insurers, I will assume that the annual net price paid between an insurer and patient is $80,000 per patient.
This works out to about $400 million in annual sales potential in the U.S. alone. And with the U.S. making up 40% of global drug spending, there is a viable path to $1 billion in annual sales for momelotinib.
For context, $1 billion in additional annual revenue would be a 2.2% boost over the $45.9 billion in revenue that analysts expect GlaxoSmithKline to produce in 2022. Simply put, this acquisition is enough to move the needle for the drugmaker.
A solid buy for long-term investors
GlaxoSmithKline has dozens of drugs in its pipeline at different stages of clinical development. This explains why analysts are forecasting the company will deliver 8.2% annual earnings growth through the next five years, which is above the industry average of 7.2%.
And investors can snatch up GlaxoSmithKline's market-crushing 4.7% dividend yield at a forward price-to-earnings (P/E) ratio of just 12.2. This is moderately higher than the industry average of 11. But GlaxoSmithKline's above-average growth prospects make this premium a reasonable valuation to pay.
