Source: Opko Health.

The FDA has given the green light to Varubi, an anti-nausea and anti-vomiting drug for use in chemotherapy drugs that was co-developed by Opko Health (NASDAQ:OPK) and Tesaro (NASDAQ:TSRO).

The approval is the first for a drug tied to Opko Health, and that raises questions regarding just how much it may move the needle for this young company. Let's take a closer look and find out how important Varubi may be to it.

First, a bit of background
In the midst of a high-profile merger with Merck & Co. (NYSE:MRK), Schering-Plough jettisoned various pipeline assets that didn't fit with the newly combined company's strategy, including Varubi, which it sold to Opko Health for only $2 million in 2009. 

At the time of Opko Health's acquisition, Varubi had already completed phase 2 trials for use in chemotherapy patients and in post-operative patients, and shortly after acquiring Varubi, Opko Health turned around and licensed it to Tesaro in 2010.

Tesaro, which was founded by Lonnie Moulder, the former CEO of MGI Pharma, a company that launched the chemotherapy anti-nausea drug Aloxi and that was later sold to Eisai for $3.9 billion, has been responsible for Varubi's development ever since.

Details of the deal
Tesaro paid $6 million up front to Opko Health and agreed to a total package of milestone payments worth up to $121 million.

Included in those payments are a $15 million milestone payable upon the first sale of Varubi in the U.S. and another $10 million milestone payment payable upon the first sale of Varubi in the EU, where it isn't approved yet.

An additional $85 million in milestone payments will be made if the drug eclipses specific annual sales hurdles. Specifically, multimillion-dollar payments will be made to Opko Health if Varubi generates calendar-year sales in excess of $150 million, $300 million, and $500 million.

Opko Health will also receive royalty payments from Tesaro on sales of Varubi that are tiered and based on sales.

Although Opko Health hasn't disclosed the royalty rates that it will receive, combining information provided through annual reports by both Opko Health and Tesaro indicate that royalty percentage rates range from the low teens to the low twenties, and that those rates will be dictated by calendar-year sales.

Further, Opko Health is entitled to a minimum royalty payment within the first five years of commercialization.

Evaluating the marketplace
Because so much of Opko Health's potential revenue is tied to Varubi's achieving sales targets, it's important to gauge Varubi's peak sales potential by considering its efficacy, target market, and competitors.

Varubi is approved for use alongside other commonly used anti-nausea and anti-vomiting drugs to control the delayed onset of nausea and vomiting that occurs in at least half of patients 25 hours to 120 hours after receiving chemotherapy.

In phase 3 trials, patients taking Varubi one to two hours before chemotherapy experienced fewer episodes of vomiting and relied less on emergency anti-nausea and anti-vomiting drugs than patients who didn't take Varubi.

Overall, Varubi's clinical trial results suggest it will be used in patients who have experienced delayed-onset nausea, or that doctors feel are likely to experience delayed onset, as an adjunct to widely used 5-HT3 antagonists, such as Zofran, and corticosteroids, such as dexamethasone.

Based on that addressable market, Opko Health thinks that the U.S. market opportunity for Varubi is $1 billion per year.

However, given that Varubi works similarly to Merck & Co.'s Emend, another NK-1 antagonist, it probably isn't a stretch to think that Emend is a good benchmark for Varubi's sales potential.

Emend, which won approval in 2003 and isn't used in patients who take drugs that interact with CYP3A4, an enzyme in the liver, posted sales of $553 million in 2014, up from $507 million in 2013. In Q3, sales of Emend were $141 million, giving the drug an annualized run rate of $564 million.

How much could Opko Health get?
Because Varubi isn't contraindicated for use in patients taking medicine that interacts with CYP3A4 and Varubi can be dosed both orally and via IV infusion, it should match up well in the market against Emend.

If so, then assuming an 11% royalty rate on the first $150 million in Varubi sales, a 16% rate on the next $150 million in sales, and a 21% rate on sales beyond that, a $500 million annual revenue run rate translates into roughly $82 million in annual revenue, plus one-time milestones, for Opko Health.

Of course, since we don't know the exact royalty rates that Opko Health will receive, investors should probably model for a range of between $50 million and $100 million in royalty revenue on a half billion in Varubi sales.

Regardless, it appears that Varubi could be a solid eight-figure revenue generator for Opko Health's investors in the coming years.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies 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.