Examination of Clinical Trial Costs and Barriers for Drug Development. E.1 Clinical Trial Decision-making Model


Using data from a variety of sources, we model the decision-making process for a drug sponsor as a stylized decision tree that looks at the process for formulating a clinical trial from the point of view of an expected-revenue-maximizing sponsor in the face of uncertainty (or risk). The simplified clinical decision-making model incorporates the following considerations:
  • Therapeutic area,
  • Potential market size/revenues for the drug, and
  • Clinical stage (Phase 1, Phase 2, Phase 3, and Phase 4) costs that are dependent on a variety of factors, including but not limited to:
    • Physician and nursing (RN) costs;
    • Number of patients needed for the desired statistical precision;
    • Number of Institutional Review Boards (IRBs) involved;
    • Number of investigator sites;
    • Cost of clinical data collection, management, and analysis; and
    • Cost of clinical procedures.
  • Success probabilities by clinical stage

The decision tree adapted from Damodaran (2007) specifies the phases (1 through 4), the development revenue/cost at each phase, success/failure probability for each phase, and the marginal returns associated with each step. Since it takes time to go through the different phases of development, there is a time value effect that is built into the expected returns computation. In the model, we compute the expected net present value at the decision point by working backwards through the tree.


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