Analytical Framework for Examining the Value of Antibacterial Products. 3.4 Threshold Analysis of Incentive Options

04/15/2014

We considered each incentive identified in Section 2 in the context of our private ENPV framework.  This threshold analysis involved calculating the level of each incentive (in dollars) that would equate the private ENPV to $100 million for a drug sponsor that is at the start of pre-clinical phase.  This threshold represents the developer’s opportunity cost of engaging in R&D for a new drug.  For sponsors at later stages of drug development, levels of incentives will likely be different. While the selection of a $100 million threshold value is somewhat arbitrary, the figure is comparable to the figures used in other similar analysis and has been indicated as being the tipping point for smaller companies by some of the experts interviewed for the study.  Figure 5 depicts the amounts needed to achieve a $100 million private ENPV at the start of pre-clinical phase across the different indications studied.  As can be observed, the level of the incentive valued at the start of pre-clinical phase needs to be $104 million to induce a drug sponsor to begin development of an antibacterial drug designed to treat HABP/VABP. On the other hand, for CABP, the level of the incentive needed is $63 million.

Table 14 presents the different incentive values needed to get to the threshold of $100 million for each of the indications.  It is important to note that the estimated incentive levels are geared towards encouraging a drug sponsor that is at the start of pre-clinical phase (i.e., model frame of reference).  The extent and magnitude of the incentives needed for those sponsors that may be at different points along the decision tree (e.g., start of Phase 3), are expected to decrease closer the sponsor is to a successful product launch.  Moreover, the inclusion of the pre-clinical phase, which is the longest at 5.5 years, heavily influences our estimates.  Some of the other key findings from the analysis include the following:

  • Intellectual property (IP) extensions are not sufficient by themselves to incentivize a drug sponsor that is at the start of pre-clinical phase.  This is primarily due to the effect of discounting, whereby the product revenues in out years contribute increasingly less to the net present value.
  • The percentage reduction in the cost of capital needed through tax incentives ranges from 33 percent (ABSSSI) to 81 percent (CUTI) from the baseline level of 11 percent.  For ABOM, CIAI, and HABP/VABP, even a zero cost of capital is insufficient to reach a $100 million private ENPV.
  • Across the different indications, the total time to market varies from 9 years (ABSSSI) to around 12 years (HABP/VABP).  Decreasing the overall time to market through modifications to clinical trial process and approval standards is insufficient for ABOM, CIAI, and HABP/VABP. For the remaining three indications (ABSSSI, CABP, and CUTI), the total time to market needs to reduce significantly to 2 to 4 years from its current level of 9 to 10 years to incentivize those drug sponsors at the start of pre-clinical phase.
  • Grant/award/prize amounts increase substantially if paid out at later stages of clinical development.  This is due to multiple factors, time discounting being one of them. As the drug sponsor moves along the decision tree depicted in Figure 2, clinical research costs and hence risks also increase.
  • Principal-agent problems might be relevant for early stage R&D grants/prizes/awards as there is a greater risk in the early stages that a sponsor could abandon development after receiving funding.

Figure 5: Difference between $100 Million Threshold and Estimated Private ENPV, by Indication (in $ Million)

Figure 5: Difference between $100 Million Threshold and Estimated Private ENPV, by Indication (in $ Million)


Table 14: Incentive Values Needed to Get to the $100 Million Threshold for Private ENPV for a Sponsor at the Beginning of Pre-clinical Phase

Incentive Model Parameter Baseline ABOM ABSSSI CABP CIAI CUTI HABP/VABP
Intellectual Property (IP) Extensions [a]

 

Time to Generic Entry (in Years)

 

12 N/S N/S N/S N/S N/S N/S
Tax Incentives Real Opportunity Cost of Capital 11% N/S 2.4% 7.4% N/S 2.1% N/S
Modifications to the Clinical Trial Process and Approval Standards Total Time to Market (in Years) Varies N/S ~3.5 ~4.0 N/S ~2.0 N/S
Grants/Award/Prizes Paid out Sequentially (in $ Million) [c]                
     Pre-clinical [b]   $0 $98 $59 $46 $79 $53 $103
     Phase 1 [b]   $0 $98 $76 $67 $89 $86 $103
     Phase 2 [b]   $0 $196 $165 $159 $203 $223 $207
     Phase 3 [b]   $0 $586 $495 $477 $617 $694 $621
     NDA/BLA Approval [b]   $0 $147 $124 $119 $154 $173 $155

N/S = No solution

[a] IP collectively refers to patents/DE/ME/PTAs/PTEs/SPCs. The example is more applicable to patent extensions, however.

[b] Because five different grant/award/prize amounts are solved for simultaneously, there are no unique solutions for the computed threshold values.

[c] The amounts are shown by phase of development and would need to be paid out sequentially.  For example, in order to achieve the $100 million threshold for ABSSSI sequential payments (in millions of dollars) of $59, $76, $165, $495, and $124 would be required at each successfully completed phase of development listed in the table for a total payout of $919 million dollars over time.

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