This report was prepared by Clifford Goodman, Roy Ahn, Rick Harwood, Deborah Ringel, Kareen Savage, Daniel Mendelson, and Robert Rubin of The Lewin Group. Other staff that contributed to the report included Ansari Ameen, Dawn Bartoszewicz, Timothy Field, Doug Fountain, and George Steinfels of The Lewin Group. This report was prepared under contract for the Office of Health Policy, Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, September 12, 1997.
Purpose
The purpose of this project was to produce an analysis of the market barriers to the development of pharmacotherapies for substance abuse and addiction, and for cocaine abuse and addiction in particular. The analysis is intended to provide ASPE with information related to four areas:
This project emphasized the market for pharmacotherapies for cocaine abuse and addiction in order to focus the market analysis, interviews with industry representatives, and scenarios of new pharmacotherapy development subject to the resources available for the project. Nevertheless, the findings of these inquiries, along with the case studies, description of market barriers, and principal conclusions of this report, have direct relevance to markets for pharmacotherapies for substance abuse and addiction more broadly.
Principal Conclusions
Under current conditions, pursuing development of a new cocaine pharmacotherapy via a typical full product development cycle is not economically viable from the standpoint of industry. Although a variety of hurdles or procedural impediments may affect prospects for new pharmacotherapy development in this area, most of these are regarded as surmountable by the industry. However, three critical market barriers to significant progress in bringing an effective pharmacotherapy to a viable market are:
Methods
This study relied on several types of sources for information about cocaine pharmacotherapies and the market barriers to their development. These included:
The numbers of case studies and industry interviews were expressly limited by the scope of this project. Therefore, the information gathered from these sources cannot be considered to be systematically representative of pharmacotherapy experience or industry opinions pertaining to the market for substance abuse pharmacotherapies.
Principal Findings
Estimate of Cocaine Users in the U.S.
There are more than 2 million addicted or "heavy" cocaine users. Of these, as many as 800,000 to 900,000 may enter treatment at least once in a given year. On any given day, roughly 250,000 cocaine abusers are enrolled in treatment (i.e., who are at a residential facility or have been served at an ambulatory treatment center within the previous 30 days). Thus, of all heavy cocaine users, slightly more than 10 percent are enrolled in treatment on any given day.
Of the estimated 250,000 cocaine abusers, about 150,000 are primary cocaine abusers and about 100,000 are secondary cocaine abusers, i.e., who abuse cocaine secondarily to alcohol or opiates. A national survey data set (Treatment Episode Data Set 1992-1995), indicates that as many as 170,000 daily patients enrolled in treatment are secondary cocaine users. However, because cocaine abuse may be the third or fourth drug problem for many of these patients, a more conservative estimate of 100,000 secondary cocaine abusers is used. This brings the combined estimate of primary and secondary cocaine abusers to 250,000, which is more consistent with other recent estimates of between 200,000 and 250,000 daily cocaine patients in treatment. Indeed, estimates derived from the Drug Services Research Surveys for 1990 indicated there were 210,000 daily cocaine abusers in treatment, only a third of which were primary cocaine abusers.
It is estimated that there are approximately 11,500 centers providing treatment for cocaine abuse. Total spending on treatment exceeds $2 billion, and spending on treatment for cocaine abuse averages about $23.00 per patient enrollment day (including inpatients and outpatients), with spending of $9.00 per day for non-intensive outpatients.
Substance abuse treatment generally emphasizes a psychosocial, rather than medical, model. The most recent surveys that have examined staffing patterns confirm that the substance abuse treatment system involves little or no physician time in the treatment of patients. Even when on staff, physicians are often addressing primary health care needs or other mental disorders, rather than delivering specialized substance abuse treatment services.
Involvement of private practice physicians in treating cocaine addiction is virtually negligible. Of national expenditures for all specialized substance abuse services, including alcoholism, less than 1 percent are for psychiatrist visits. Of all national expenditures for substance abuse services excluding alcoholism, 2 to 3 percent are for visits to physicians of any type.
Expectations of Low Market Penetration
The proportion of the entire population of heavy substance abusers that is considered to be a realistic target market for pharmacotherapy is small relative to the target market of medications for other diseases. Although there are other clinical conditions for which the market penetration of medications is proportionately low, the absolute magnitude of an overall market may be so large that even low penetration of a substantially priced drug can be financially attractive to industry, as in the case of the smoking cessation market.
A combination of factors minimizes the attractiveness of the cocaine abuse market to industry, including: a relatively modest potential market (2.1 million heavy users), low proportion of users currently in treatment (250,000 enrollees on any given day), concerns about compliance in this population, and apparent market expectation of a low price point. This appears to be corroborated by the methadone market, where a relatively effective, low-priced medication in a well-established, long-standing treatment system achieves, at best, a 25 percent penetration of the small population of opiate addicts (i.e., about 125,000 patients enrolled in methadone treatment per day out of about 500,000 opiate addicts). The penetration of LAAM is less than five percent of the methadone market, i.e., less than one percent of the opiate addiction market, and the use of naltrexone for opiate addiction falls below that of LAAM.
Drawing inferences about the potential market for a new cocaine abuse medication from the market experience of other medications for substance abuse must consider the market-limiting characteristics of the treatment systems for opiate addiction to which methadone and LAAM are subject. The market conditions for a new cocaine abuse medication would differ if it is provided via more traditional means of physician prescribing and distribution through pharmacies, rather than if it is a Schedule II or Schedule III controlled substance warranting the forms of controlled treatment delivery required for methadone and LAAM. Nevertheless, their status as medications for illegal substance abuse, similarities in the user populations, and other characteristics make methadone, LAAM, and naltrexone useful, though imperfect, market comparators for a new cocaine abuse medication. As a group, the markets for these medications more closely resemble the potential market for a cocaine abuse mediation than markets for other medications, and industry looks to these markets accordingly when assessing the market for potential cocaine abuse medications.
The uncertainty about the number of cocaine users, especially the secondary users, places a wide confidence interval around the potential size of the market for cocaine abuse treatment. For the purposes of gauging the potential market for a new pharmacotherapy for cocaine addiction, it may be optimistic to use an estimate of 250,000 current daily enrollees in treatment. Projections of market penetration must consider that some primary users and many secondary abusers may be treated for other addictions and with behavioral therapy to the exclusion of pharmacotherapy, particularly in the context of the current treatment system. Given that many cocaine addicts abuse multiple substances and have diverse health and behavioral disorders, it may be that one or a few medications for cocaine abuse will be insufficient for treating this population. To the extent that multiple medications are needed, the market potential for any one medication would be reduced.
Basic Relationships of Price, Market Size, and Revenues
Pharmaceutical companies' decisions to pursue new products are based largely on financial considerations inherent in risk-reward tradeoffs. Financial indicators such as product net present value (NPV) and peak annual revenue (PAR) usually drive investment decisions. Beyond the appreciable risk associated with developing and marketing any new medication, the risk associated with developing and marketing a substance abuse pharmacotherapy is regarded by industry as quite considerable. (NPV is the difference between the present value of all cash inflows from a project and the present value of all cash outflows required for the investment, using an appropriate discount rate or required rate of return to calculate present values. PAR is the highest annual revenue achieved by a product during its market life.)
In principle, companies pursue projects that have positive NPVs. In addition, larger companies are less likely to be interested in pursuing a new drug for which PAR is projected to be less than $200 - $300 million. Of course, alternative projects that offer higher NPVs and PARs tend to be more attractive. This report examines relationships among price, market size, and revenues as they might affect PAR, NPV, and other indicators.
If a new medication were to be used by all 250,000 patients currently enrolled in treatment on any given day, it would have to sell at just over $2.00 per day in order to generate $200 million in PAR, a modest target PAR for most large pharmaceutical companies. If the greatest market penetration reached just 50 percent of currently enrolled patients, the price would have to be more than $4.00 per day. In order to achieve $200 million at a wholesale price of $0.50 per day, there would have to be more than 1 million daily patients.
Relative to current market conditions, optimistic assumptions are required to project a PAR that is comfortably in the target range for the larger pharmaceutical companies, which may be $300 500 million. For example, a market of 500,000 daily cocaine users in treatment (double the current level of 250,000) and retail prices of $2.75 - $5.00 (based on $2.50 wholesale) would achieve a PAR of $455 million. Such requirements would entail payments that would have to be realized in the form of new funding, reallocation of funds from the $2.1 billion currently spent for treatment of cocaine abuse, or a combination of these.
As no approved pharmacotherapy for cocaine abuse has been tested on the market, it is not possible to gauge directly the price sensitivity of that market. However, indirect available evidence from other substance abuse medications and the current nature of cocaine abuse treatment and its financing would indicate that the market would be very sensitive to the price of a cocaine medication. In a market where the average treatment cost is $9.00 per day for non-intensive outpatients, who constitute the great majority of all cocaine abuse patients, a cocaine pharmacotherapy priced at a daily dose of a few dollars would represent a significant proportionate cost increase. This may be particularly so in the estimation of substance abuse treatment providers that are vested in psychosocial approaches to the exclusion of pharmacotherapy. It is important to note that the price sensitivity of the current treatment system may vary considerably from that of more typical pharmacotherapy markets that involve physician prescribing and distribution through pharmacies.
The price of methadone may exert some pull on the price point for a cocaine medication. The price for that relatively effective medication, which is used to treat another stigmatized substance abuse population and is paid for primarily by government sources, is a mere 50 cents per daily dose. Although the price of medications for smoking cessation is considerably higher, payment for those medications does not come primarily from public sources, but rather by a self-pay population. The considerable price sensitivity of treatment programs subject to annual government appropriations has contributed to the disappointing market experience of two substance abuse medications, LAAM and naltrexone, which are priced higher than methadone, yet modestly priced compared to many prescription medications. While a price point that would be palatable to the current treatment system might be economically feasible for a company with a medication used by a very large market, it would not be feasible in the current market for cocaine abuse treatment.
Translating Market Barriers and Policy Options into Financial Parameters
Pharmaceutical companies' decisions to pursue new products are based largely on financial considerations inherent in risk-reward tradeoffs. Despite their diversity, most market barriers can be interpreted as having a direct effect on one or more financial parameters that are factored into these decisions. Similarly, most policy options that exist or that could be implemented to lower market barriers can be interpreted as having a direct effect on these financial parameters.
This report portrays relationships between market barriers and policy options, including those identified in the 1995 Institute of Medicine (IOM) report, Development of Medications for the Treatment of Opiate and Cocaine Addictions, and six basic parameters relevant to decisions to pursue a new therapy: R&D costs, time to product launch, marketing and distribution costs, market size/penetration, price, and duration of market life. These basic relationships were used in part to develop the scenarios for this study, and can be represented in quantitative modeling that generates such financial indicators as NPV and PAR.
Scenarios of Company Decision Making
This report presents several scenarios of pharmaceutical company decision making regarding whether to undertake projects to develop pharmacotherapies for cocaine addiction under various sets of market conditions. Using a quantitative model developed by The Lewin Group, the market conditions were translated into financial and other parameters to generate projected PAR and NPV for each scenario and for certain variations of these scenarios. Modeling these scenarios illustrates some of the key barriers and other limitations to development of medications for cocaine abuse, as well as how certain types of financial and policy options might reduce such barriers. Policy options to lower barriers that are used in these scenarios include some that already exist and some that have been posed by the IOM (1995).
The "Big Pharm Cold Start" scenario indicates that the prospects of developing a new medication for cocaine abuse and taking it through a full product development cycle do not appear favorable given a moderate wholesale price and an optimistic target market (i.e., 50 percent of the estimated 250,000 people currently enrolled in treatment for cocaine abuse). In order to achieve financial indicators that are more in line with traditional targets of large companies (e.g., PAR of $300 million) in this scenario, a considerable increase in price and/or market penetration would have to be realized. On the other hand, a modest and perhaps more realistic penetration of this market of 30,000 to 40,000 patients per day could also yield an acceptable PAR if a cocaine medication were priced at the premium levels (e.g., $25 - $30 per day) that are afforded triple pharmacotherapy for HIV/AIDS.
The "Biotech Gets Help" scenario suggests that, even for a company that is confident that it can develop a highly promising molecule with a relatively modest level of R&D expenditures and somewhat lower targets for financial performance, some combination of additional incentives may be needed. This scenario considers the impact of three government interventions: (a) regulatory reform that would shorten the time to launch by 1 year, (b) provision of market protection similar to orphan drug status, and (c) a significant commitment to expand treatment and financing capabilities at the state level. In this scenario (in which orphan-like status accords R&D tax breaks but no additional market protection because of existing patent protection), the regulatory reform and market protection have modest impacts compared to the expansion of treatment and financing capabilities that effectively doubles market size in this scenario. However, for this and other scenarios, financial prospects for drugs are poor when market penetration is assumed to be at levels comparable to those of LAAM and naltrexone.
The "Guaranteed Handoff" scenario considers the decision facing a company when the government is offering the rights to a drug that is well along in development in exchange for the company's finishing the development process and securing marketing approval. In addition, the government would (a) award orphan drug (or similar) status, (b) provide additional years of market protection from generics, and (c) guarantee purchases for up to 125,000 daily users for the years in which market protection, i.e., (a) and (b), apply. In this scenario, the risk-reward tradeoff is improved by effectively decreasing a company's investment and shortening the time to product launch. Even so, this scenario indicates that some combination of other incentives, such as extended orphan-like protection and a wider or more assured market in the form of guaranteed purchases of a set volume of the drug at an attractive price, may be required to make the arrangement sufficiently attractive to a company. The PAR and NPV generated by such a scenario may be more in line with the thresholds of smaller companies rather than larger ones.
The "Vaccine" scenario poses more of an outlier set of market conditions involving a promising medication that could be taken just once a year (e.g., vaccine with annual boosters). As in the "Guaranteed Handoff" scenario, this involves initial government development of the medication and an offer early in development to transfer rights to a company to bring the product to market. In this scenario, aside from extended generic protection, the government provides for a substantial, assured market in the form of guaranteed purchases at a premium price for a number of users that is twice the current number of daily enrollees in treatment for cocaine abuse. This scenario helps to illustrate that extraordinary conditions may be required to bring PAR and NPV over the thresholds sought by the larger pharmaceutical companies.
The "Second Indication" scenario portrays a decision about whether to pursue a cocaine abuse indication for a drug if doing so might jeopardize a currently successful market for the drug for another indication. Here, it is assumed that the additional development costs required to secure approval for the second indication would be relatively small, and that orphan-like status could be secured for the cocaine abuse indication. Under a base scenario with a moderate price and 50 percent market penetration, the drug would yield a positive NPV and a modest PAR that falls below large company standards but that might be more palatable to smaller companies. Higher prices could push the PAR over the higher thresholds, but such prices would exceed those for LAAM and naltrexone. This scenario illustrates how conservatism regarding expectations for price and market penetration alone can stall a project. Aversion to the prospects of substance abuse stigma transferring to an already successful product may be secondary, but it could contribute to outweighing any perceived financial returns of a second indication strategy.
Case Studies
The purpose of the case studies is to gain insight into the experiences of companies that are relevant to developing and marketing medications for drug abuse and addiction. These include two in-depth case studies of LAAM for heroin addiction and naltrexone for heroin addiction (as Trexan) and alcohol addiction (as ReVia), as well as two smaller case studies on clozapine for schizophrenia and Nicorette for smoking addiction.
The four case studies have several elements in common, particularly with regard to certain aspects of their target patient populations. Three of the four drugs involve treatment for substance abuse, including LAAM and naltrexone for heroin addiction, naltrexone for alcoholism, and Nicorette for smoking. Clozapine was included in this study because the market for schizophrenia pharmacotherapies was regarded as sharing certain characteristics with the market for substance abuse pharmacotherapies including: 1) relatively small market size, 2) treatment funding primarily through public sources, 3) and some patients who need help caring for themselves and complying with medication.
Each of the case studies provided important market lessons. The experience with LAAM demonstrates that the existing delivery system poses significant market barriers due to, e.g., state-by-state rescheduling processes, the methadone orientation of clinics, higher price relative to methadone, limited clinic budgets, and staff resistance to change. Naltrexone demonstrates the importance of understanding factors that affect patient compliance, notwithstanding its excellent pharmacological properties. In this instance, most patients preferred methadone to naltrexone, a non-addictive medication. Further, without being properly linked to sufficient and appropriate psychosocial therapy, a pharmacologically effective medication may not be successful in treating substance abuse. Naltrexone has been unable to gain acceptance into alcoholism treatment given resistance by providers and payers.
The experience with clozapine shows that a high cost of treatment (due in part to required adjunct treatment involving weekly patient monitoring for possible serious side effects) severely limited market penetration. For Nicorette, which entered the market as a prescription drug, the minimal distribution barriers and approval for over-the-counter use boosted sales and led to development and introduction of multiple competing products.
The government played a key role in the development of three of the four case study drugs by lowering some of the market barriers, particularly by funding development work, including clinical trials. For three of four of these case study drugs, the federal government funded a significant portion of the pre-clinical and clinical research necessary for FDA approval. As a group, the four case studies provided examples of other favorable government interventions, including FDA fast-track approval (LAAM, clozapine, and Nicorette) and modified phase IV clinical trial requirements (ReVia), market exclusivity (orphan drug status or other market protection for all four drugs), and mandated Medicaid coverage (clozapine).
Critical Market Barriers
Many of the market barriers identified in the 1995 IOM report were confirmed through the sources used for this study. Although no new general types of new market barriers were identified in this study, certain ones were elaborated or described in a more contemporary context.
Two main categories of market barriers emerged from this study. Critical barriers are those that must be lowered or eliminated in order for pharmaceutical firms to regard the prospects for developing cocaine addiction medications as financially feasible. Non-critical market barriers are those that, if lowered or eliminated, may enhance, though perhaps only marginally, the financial outlook for developing cocaine addiction medications only if the critical barriers are also lowered. That is, without movement on the critical barriers, lowering non-critical ones would be unlikely to transform an otherwise unattractive market into an attractive one.
Among the diverse market barriers perceived by the industry, three emerged as critical in this study, i.e., those that would have to be lowered or eliminated in order to begin to make new drug development attractive to pharmaceutical companies:
Critical Barrier 1: Small and Uncertain Market for Cocaine Addiction and Abuse Pharmacotherapy
The small size and uncertainty of the market for cocaine pharmacotherapies constitutes a critical barrier to development of a cocaine abuse pharmacotherapy. Although all of the company executives interviewed for this study agreed that the total number of cocaine users is appreciable, they recognized that the feasible market for a cocaine abuse treatment is likely to be much smaller than the absolute number of people that use cocaine. Representatives of one pharmaceutical company use a conservative estimate of the number of heavy cocaine users that is about half of the level of 2 million cited in this report.
Uncertain market penetration was another reason for the skepticism in industry. Interviewees stressed that potential patient compliance problems and limited access to patients made them uncertain about the true market size for cocaine treatment. Representatives of two companies noted that most publicly-funded treatment centers are managed by non-physicians who tend to oppose the use of drugs to treat substance abuse, which such staff regard as a "behavioral" condition, thereby further restricting the potential sale of these drugs.
Critical Barrier 2: A Substance Abuse Treatment System that Limits Access to the Market
There are multiple, interrelated aspects of the current substance abuse treatment system that limit the market prospects for any new pharmacotherapy for cocaine addiction. These limitations are apparent in the case studies, were raised by company executives interviewed for this study, and are corroborated by modeling of certain scenarios. Sales of LAAM and naltrexone were restricted by the limited number of heroin and alcohol treatment programs and the limited capacity of these programs. Whereas 25 percent of opiate addicts receive treatment from the methadone maintenance programs, only about 5 percent of those afflicted by alcohol abuse and dependence are in alcohol treatment centers. Distribution of LAAM is restricted to maintenance programs as required by The Narcotic Addict Treatment Act of 1974. Prescription of naltrexone is recommended to be linked to enrollment in comprehensive treatment centers in order to improve patient outcomes. In contrast, because Nicorette, originally a prescription medication, is now an over-the-counter formulation, patients need not visit a treatment center or a provider to obtain treatment, vastly expanding the drug's potential market.
The lack of medical treatment models in substance abuse treatment centers contributes to their being a critical market barrier. Pharmaceutical company executives cited an "anti-medication" climate among the publicly-funded treatment center staff that would severely limit sales of pharmacotherapies through treatment centers. Interviewees indicated that the large number of non-physicians (sometimes referred to as "non-prescribers") at treatment centers often have strong anti-medication sentiments. As noted above, recent surveys that have examined staffing patterns confirm that the substance abuse treatment system involves little or no physician time in the treatment of patients. This observation was confirmed in the LAAM and naltrexone (Trexan) case studies, which found that treatment decisions and funding for heroin addiction are often mediated by state-level substance abuse program administrators who often do not have clinical backgrounds.
Critical Barrier 3: Limited and Uncertain Payment for Pharmacotherapy
Industry decision makers recognize the heavy reliance of the substance abuse market on federal, state, and local government reimbursement. The perception among the drug companies is that many cocaine addicts do not have private insurance and rely on federal and state government sources for treatment, and that only a portion of those individuals with private insurance use their benefits for drug abuse treatment. One executive noted that substance abuse services continue to be subsumed under mental health benefits of entitlement programs, and that the overall budget for mental health services continues to shrink in light of other competing health priorities.
Payment status is a recognized barrier for LAAM, naltrexone, and clozapine. Treatment for heroin addiction (e.g., LAAM and naltrexone) has been funded primarily through federal and state budgets, making reimbursement difficult for pharmaceutical companies. As noted above, price sensitivity to a cocaine medication is another aspect of payment that poses a critical market barrier because price resistance may limit market size.
Industry Perception of Science Base Readiness
There was a divergence of opinion among the pharmaceutical company interviewees about the readiness of the science base for cocaine pharmacotherapies. Representatives of two companies expressed skepticism about the readiness of the science base. One representative indicated that current limitations stem from a lack of understanding regarding the biological and genetic basis of addiction. A representative of a different company indicated that the current science base for achieving long-term efficacy for cocaine abuse and addiction is very weak. Furthermore, scientists from one company judged that the probability of a scientific breakthrough in the area of cocaine abuse and addiction in the near future is very low. In contrast, representatives of another pharmaceutical company indicated strongly that the science base is ready, and consequently that it is no longer a market barrier to development of cocaine pharmacotherapies. This company also reported that it had successfully identified several drug candidates that exhibited cocaine blocking activities in both in vivo and in vitro models. The extent of company interviews was limited by the scope of this project.
Overcoming Critical Market Barriers
Any public policies intended to improve opportunities for developing pharmacotherapies for cocaine addiction must address the three critical barriers described here. It is not within the scope of this study to identify or analyze specific public policies to promote development or marketing of pharmacotherapies for substance abuse. Nevertheless, during the course of this study, certain types of strategies or initiatives emerged that would serve to lower these barriers and make the development of new pharmacotherapies for cocaine abuse more attractive to the pharmaceutical industry, as follows:
The pertinence of such actions is supported by lessons from the case studies, suggestions raised by interviewees, and results of modeling diverse scenarios of new pharmacotherapy development described in this report. These strategies are consistent with certain of the strategies recommended elsewhere, e.g., certain ones raised by the IOM (1995), and merit further attention.
Return to ASPE front page, download copy of full report. (323 Kb, self-extracting MS-Word file, 116 pages, including 36 figures and five appendices).
[ Top | ASPE Home Page ]