Despite its humble beginnings and numerous setbacks, immunotherapy is on the cusp of becoming a standard part of cancer care, right alongside chemotherapy and surgery. According to some experts, this new class of treatments could generate somewhere in the neighborhood of $35 billion in annual sales within the next decade and make up over 60% of all cancer drug prescriptions.

Big pharma has thus been racing to develop novel immunotherapies for a diversity of cancers, such as advanced melanoma, prostate cancer, and lung cancer. Nevertheless, the vast majority of this initial work has come from only a handful of companies, namely AstraZeneca plc, Bristol-Myers Squibb, Merck, and Roche.  

Perhaps the most notable name missing from this list is the world's largest drugmaker, Pfizer (NYSE:PFE).

Pfizer Inc

Source: Flickr via Andrés Monroy-Hernández.

Although Pfizer has a deep and abiding interest in oncology, it's been slow to pursue a full-blown immunotherapy program. Indeed, the pharma giant's keen interest in AstraZeneca last year reportedly centered on, at least partially, playing catch-up in this burgeoning area of cancer care. When the deal fell through, though, Pfizer was left on the outside looking in, falling dangerously behind its rivals in the high-growth oncology market. 

As part of Pfizer's overall resurgence, management struck a pivotal deal that could change the immunotherapy landscape in a big way. Here's what investors need to know going forward. 

World's oldest and largest drugmakers team up in immuno-oncology 
Last year, Pfizer announced a deal with the world's oldest pharma company, Merck KGaA (NASDAQOTH:MKGAY) (aka "German Merck") to co-develop the company's anti-PD-L1 drug, avelumab, for a variety of cancers.

Merck Kgaa

Source: Wikimedia.

To do so, the U.S. drugmaker doled out $850 million in cash upfront, agreed to another $2 billion in milestone payments, and handed over some commercial rights to its specialized cancer drug Xalkori to German Merck. In short, Pfizer paid a steep price to play catch-up. 

In the company's most recent conference call, management shed some additional light on the duo's plans for clinical development. Specifically, Pfizer and German Merck are hitting the ground running by initiating 20 clinical studies, with six of them aimed at gaining regulatory approvals. Although the details are still a bit murky, we now know that the plan is to investigate avelumab as both a monotherapy and in combination with several of Pfizer's approved cancer drugs like Inlyta and Xalkori. 

Has Pfizer leapfrogged its competition?
This is certainly a step in the right direction, but its rivals still have the edge. AstraZeneca's immunotherapy program is massive by comparison, Bristol/Merck have both gained regulatory approvals for their lead drugs in this market, and Roche is rapidly progressing its own anti-PD-L1 candidates, among others. 

At some point, Pfizer may decide to go after a smaller company working on immuno-oncology drugs such as Five Prime Therapeutics. After all, many of Pfizer's competitors built their robust immunotherapy pipelines by either gobbling up or partnering with promising clinical-stage biopharmas. So, Pfizer will probably go the same route now that it has delved into the immunotherapy arena in earnest.

How does this news affect Pfizer's valuation going forward?
As immunotherapies have real potential to displace more traditional drugs, Pfizer had no choice but to build its own pipeline. That said, we don't have much insight into the specific markets that will be targeted, making it hard to place a realistic value proposition on this move.

Suffice it to say, Pfizer probably didn't cut such a rich deal with German Merck for anything less than blockbuster-type indications, meaning investors should definitely keep a close eye on this partnership.

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.