In combination with Roche's (RHHBY -0.50%) bevacizumab (Avastin), Merck's (MRK 0.25%) oncology medicine -- co-owned with AstraZeneca (AZN 0.39%) and known as Lynparza -- received the nod from China's National Medical Products Administration (NMPA) to treat patients with a form of advanced ovarian cancer. Homologous recombination deficient (HRD)-positive ovarian cancer accounts for approximately half of all ovarian cancer cases.
What led the NMPA to green-light the treatment combo? And how much could this mean in additional annual revenue for the pharma stock Merck? Let's dig deeper into the data for the treatment pairing and the advanced ovarian cancer market in China to find out.
A potent treatment regimen
Ovarian cancer affects the ovaries, which are responsible for the production of the estrogen and progesterone hormones in females. The symptoms of ovarian cancer can include abdominal bloating, weight loss, back pain, and frequent urination.
Unfortunately, 70% of ovarian cancer patients in China are diagnosed with advanced ovarian cancer. This is another way of saying that the cancer has spread from the ovaries to distant organs, such as the liver, lymph nodes, or lungs. Unsurprisingly, the prognosis for advanced ovarian cancer is somewhat poor, with a five-year survival rate of just 39%.
But the good news is that more effective therapies are being launched each year. And the combination of Lynparza and Avastin appears to hold promise. This is because patients with HRD-positive advanced ovarian cancer receiving the drug duo benefited from meaningfully longer progression-free survival (PFS) compared to the group receiving Avastin alone during the phase 3 clinical trial.
For context, patients on the drug pairing had no worsening of their condition for a median of 22.1 months versus the median PFS time of 16.6 months for patients taking just Avastin.
If that wasn't enough proof that this treatment combo is a tremendous improvement over the current standard of care, 65% of patients were alive at the five-year mark of treatment. This was substantially higher than the 48.4% five-year survival rate of patients taking Avastin and placebo.
Image source: Getty Images.
Incremental sales potential
The combo of Lynparza and Avastin is arguably an incredible breakthrough in the treatment of HRD-positive advanced ovarian cancer. But what will that mean for Merck's finances?
In 2020, there were more than 55,000 new cases of ovarian cancer diagnosed in China. Considering that there are a reasonable number of survivors from the condition, I will assume that there are around 50,000 patients living with HRD-positive advanced ovarian cancer in the country.
Given the potency of Lynparza coupled with Avastin, I believe that the duo can seize 25% of that patient share. This works out to just over 12,000 patients. The cost of cancer drugs in China is considerably lower than in the U.S. That's why I will assume an annual list price of $70,000 in China. And with financial assistance programs, I'll use an annual net price of $35,000 per patient.
After adjusting for the revenue split with AstraZeneca, this would be $200 million in additional annual revenue for Merck. That's just a 0.4% bump over the average analyst forecast of $58.7 billion in 2022 revenue for the company.
But pharma companies are rarely built on a single indication in a single market. With more than 100 programs in clinical development, Merck is poised to deliver 10.8% annual earnings growth through the next five years.
A pharma stock that has something for everyone
Aside from Merck's strong growth prospects, the company's 3.2% dividend yield is nearly double the S&P 500 index's 1.7% yield. The dividend payout ratio is also set to be less than 40% for this year, which means Merck can provide dependable income for yield-focused investors. And growth and income investors can scoop up shares of the stock at a forward price-to-earnings (P/E) ratio of 11.8. This is a bit below the pharmaceutical industry's average forward P/E ratio of 12.5. In short, Merck is an above-average business at a below-average valuation.
