The final approach taken to assessing the financial attractiveness to commercial firms is to estimate the affordable level of R&D cost, given the expected peak annual revenue to the company. The base conditions for the model have been used to develop the estimates in Figure 21 (below). In particular, this set of calculations assumes that a company has a potential medication that has completed preclinical development, and only has an expected 8 years until product approval and launch.
The graph represents, for a given PAR, the maximum level of expected development cost that would allow a firm to anticipate a 20 percent IRR. For example, if the acceptable threshold for peak annual revenue of a cocaine medication is as low as $50 million, the maximum anticipated cash outlay would have an expected value of $18 million over 8 years. The expected value takes into account the risk of failure of the development effort; thus, the actual outlays could be as low as $5 - 6 million for a single potential compound.
In this model, only at a PAR near $400 million would a pharmaceutical firm expect a "typical" development effort with cash outlays (adjusted for risk of failure) to have good prospects of yielding a strong payoff. Below $400 million per year, the company would have to either anticipate lower than average development costs, or a higher than average probability of a successful development effort.
Earlier in this report it was suggested that a major pharmaceutical company would want to anticipate a potential peak market of $200 million in order to seriously consider a development project. At this level of expected revenue the company would still have to have very positive prospects for development of a medication in order to proceed. Either there would have to be reason to believe that costs could be kept lower than for an "average" medication development effort, or they would need to anticipate a higher probability of success. These calculations are predicated on the assumption that the annual revenue target will be achieved through successful entry into the market at an adequate price.