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.