How Significant Can Keytruda Be For Merck?
Merck (NYSE:MRK) recently received FDA approval for its new immuno-oncology drug Keytruda (pembrolizumab). The company beat Bristol-Myers Squibb in terms of getting the drug market ready, but the latter sued it for patent infringement. The drug will cost roughly $12,500 per month for treatment and targets advanced melanoma that accounts for most of the deaths from skin cancer cases. It uses a novel technique, under which it leverages patient’s own immune system to fight against the disease. Immuno-oncology has been one of the key research areas for pharmaceutical companies struggling to find replacement for the blockbuster drugs that have lost their patent exclusivity in recent years. In this analysis, we will estimate Keytruda’s revenue generating potential. Our findings suggest that it could generate as much as $5 billion in revenues for the company, and has the potential to end its patent woes.
Our price estimate for Merck stands at $56.80, implying a slight discount to the market price.
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Here Is Why Addressing Melanoma Is Critical
Melanoma is the deadliest form of skin cancer. Even though it accounts for less than 2% of all cancer cases in the U.S., it causes death in a majority cases. [1] It is disturbing that out of the seven most common cancers in the country, only melanoma has shown increase in incidence, going up by 1.9% annually between 2000 and 2009. [1] It is also one of the very few cancers with an increasing mortality rate. Moreover, approximately 86% of melanoma cases can be attributed to exposure to ultra-violet radiation from the Sun, which is something that’s easy to ignore. Considering these facts, there is a great need to address this disease and the demand is likely to be strong.
About 1.7 Million People May Have Melanoma In The U.S. And Europe Combined
Over 3.5 million cancers are diagnosed annually in the U.S. [1] Considering that melanoma accounts for less than 2% of these cases, we estimate that total number of melanoma cases would be somewhere close to 70,000. [1] U.K. and Europe have approximately 115,000 new melanoma cases diagnosed annually, which puts the total annual market for new cases at close to 185,000. However, the total market is much larger as it includes the current patient pool living with melanoma, which could be somewhere around 640,000 in the U.S. alone.
How do we arrive at this figure?
The risk of melanoma increases with age and the average age at which it is diagnosed is 61. U.S. demographic analysis indicates that there are approximately 46 million people aged 64 and above. For the sake of simplicity, we assume that there are about 50 million people living in the U.S. with age 61 and above. It makes sense to assume a heavily skewed distribution (skewed towards age greater than 61) age of adults suffering from melanoma, considering that risk increases with age. We further assume that roughly 75% of the patients belong to this demographic. Given that new melanoma cases each year amount to 70,000 (as estimated before), new patients in the age group 61 and above could total close to 52,000. Assuming an average life span of 75 years, we conclude that the number of people living with melanoma in the age bracket 61 and above could be close to 735,000 (16 years x 52,000 cases per year). However, this calculation assumes that melanoma patients live full life span of 75 years, which is unrealistic. We further eliminate 30% of patients to account for reduced life expectancy due to melanoma. This gives us patient pool of 514,500. As this represents 75% of total patient pool, the number of people living with melanoma with age less than 61 could be more than 128,000. This puts the overall patient count in the U.S. at a little over 640,000.
Considering this figure, the patient pool in Europe could be somewhere over 1 million assuming similar demographics and similar ratio as that of newly diagnosed cases per year. Thus, the total addressable market stands at somewhere around 1.7 million patients.
Incremental Revenues Of $5 Billion Possible?
Merck has stated that its drug will cost roughly $12,500 per month for treatment and targets advanced melanoma that accounts for most of the deaths from skin cancer cases. This means that only patients suffering from advanced melanoma, and not in the initial stages, will be primary customers for Keytruda. Statistics indicate that 33% of breast cancers are diagnosed at late stage. We believe that this percentage would be lower for melanoma because skin abnormalities can be easily spotted and early diagnosis is highly likely. Assuming that this figure is 20% for melanoma, the actual addressable patient pool for Keytruda would be close to 340,000. If Merck can grab even 10% of this patient pool, Keytruda can earn close to $5 billion in annual revenues. Although we have several reasonable assumptions to arrive at this estimate, the essence is that Keytruda could be a blockbuster drug for Merck.
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