The best part of following the drug industry is watching a company develop a product that genuinely helps people. The most exciting advances confound naysayers and point the medical establishment's cruise ship in a new direction. It's just the sort of dangerous endeavor we Rule Breakers love to cover in our newsletter -- before everyone else. A few high-profile examples are Enbrel from Amgen (NASDAQ:AMGN) for rheumatoid arthritis, Gleevec from Novartis (NYSE:NVS) for chronic myeloid leukemia, and Synagis from MedImmune (NASDAQ:MEDI) for respiratory disease in infants.

Recently, the Food and Drug Administration approved another breakthrough: a drug called Tysabri, which treats multiple sclerosis (MS). The data from this drug's clinical trials suggest it will become the dominant force in MS treatment and a clear winner for Elan (NYSE:ELN) and Biogen Idec (NASDAQ:BIIB), which share the rights to the drug.

Now that Tysabri has been approved in the U.S., the big question for investors is: What's the sales potential? Before jumping into my Tysabri forecast, you may want to look at some additional articles I wrote on how to estimate drug sales:

The MS landscape
MS is a chronic neurological disease that damages the nerves and impairs their ability to transmit electrical signals. Patients suffer a range of symptoms, including fatigue and problems with coordination and balance.

Along with Tysabri, the major drugs used to treat MS are Avonex from Biogen, Copaxone from Teva Pharmaceutical Industries (NASDAQ:TEVA), and Rebif from Serono (NYSE:SRA). This is a market laden with blockbusters: Avonex, Copaxone, and Rebif all have annual sales in excess of a billion dollars per year.

Clinical data from the Tysabri studies look superior to historical data for the other products, so I expect Tysabri will quickly become the dominant player. If that happens, Tysabri's sales would be substantial because of the sheer size of the MS market. But how high will sales really go?

Modeling sales
There are two ways to do this. The first takes a top-down approach, which looks at the dollar size of the worldwide market and its expected growth in coming years. All you have to do is estimate how much of that market Tysabri will capture, and you have your sales estimate. For example, if you calculate the MS market will be worth $6 billion in a few years and believe Tysabri can capture one-third, the sales estimate would be $2 billion.

The top-down approach is quick and dirty, and sometimes it's the way to go. However, my preference is to start from the bottom, which makes it easier to factor in variables specific to a certain drug.

The first step is to identify the patient population. The obvious starting point is to find out how many people have MS. Good sources for this information are the FDA and patient advocacy groups. In the U.S., 350,000 people have MS, according to the Multiple Sclerosis Association of America. This was also the figure cited by the FDA in the news release announcing Tysabri's approval. From a number of sources, it appears there are an additional 600,000 patients in the other major markets, for a worldwide total of nearly 1 million patients. This is pretty close to Elan's market estimate. In my model, I increase the figure 1% annually to account for population growth.

However, we cannot assume all patients with MS will use a drug. Some patients won't have symptoms that require treatment, while others might have tried all the available drugs and found nothing worked or the side effects were too severe. Others might be uninsured, or their insurance plans might not cover the treatment.

In November, Elan said approximately 38% of MS patients are treated with drugs. I have incorporated that figure into my Tysabri model, but I increase it to 41% over time because Tysabri might work for patients who are not taking other products.

Next, we guess on a market share for future years. Fact is, nobody knows if Tysabri will have a 25% market share or 40% market share at peak sales. So we make our best guess, unless we use an approach such as a Monte Carlo simulation. Because I think this is a dominant product, I settled on a 35% peak market share in the U.S. and 25% peak in the rest of the world -- because, let's face it, Tysabri is expensive.

This brings us to the last component of the calculation: the drug's selling price. Elan has said the Wholesale Acquisition Cost (WAC) -- what distributors pay before rebates or discounts -- is $1,808 per month in the U.S. That means each U.S. patient who uses Tysabri for an entire year will generate approximately $21,700 in revenue for Elan.

The price of Tysabri in Europe and other areas won't be determined until the drug is approved and the price is negotiated on a country-by-country basis. It's a safe bet prices everywhere else will be lower than in the U.S. I estimate that the annual revenue per patient for the rest of the world will be, on average, 55% of U.S. revenue, or $11,935. I assume annual price increases of 4.5% in the U.S. and 2% in the rest of the world.

Whew. A lot of work, right? That's why we at Rule Breakers do it for you. Here's my estimate of Tysabri's future sales in the MS market:

2005 2010 2015
U.S.
Patients treated* 126,350 143,280 150,600
Market share 15% 35% 35%
Patients using Tysabri 18,950 50,150 52,700
Cost to wholesalers $21,700 $27,040 $33,700
Revenue subtotal $411 million $1.356 billion $1.776 billion
Rest of world
Patients treated* 205,200 232,700 244,600
Market share 5% 20% 25%
Patients using Tysabri 10,260 46,539 61,140
Cost to wholesalers $11,935 $13,177 $14,550
Revenue subtotal $123 million $613 million $890 million
Total $534 million $2 billion $2.7 billion
*By all MS drugs

Final thoughts
Under the assumptions I have used, Tysabri will be a $2 billion drug, from sales for MS alone, by its fifth year on the market. However, I consider this a loose guide. A 5% change in estimated U.S. market share in 2010 would cause a 10% change in total revenue.

To stave off Elan bulls, who will say I'm understating the drug's potential because it may be approved for other uses, let me say I know that. Tysabri is in clinical trials for Crohn's disease and rheumatoid arthritis. Approval for either would make it one of the top-selling drugs in the world. The purpose of this article was to calculate sales potential for MS, not for the drug as a whole.

The process I used today can be used for all drugs. Before investing in any pharmaceutical company with a product in development, I recommend you go through this to estimate the new drug's potential.

Additional articles on the drug industry:

Fool contributor Charly Travers does not own shares of any company mentioned in this article.