In this scenario, a large pharmaceutical company takes on the full product development cycle, i.e., a "cold start" with preclinical discovery and research. The new Product A will require about $150 million in uncapitalized expenditures to develop and will be ready for launch following FDA approval in 13 years. The company anticipates securing a patent 4 years into the 13-year development process, about the time it expects to start phase I clinical trials. The company has a strong CNS product line, and takes a confident view about its chances for success, and therefore uses its typical cost of capital figure of 12 percent.
It will take 5 years post-launch for Product A to reach its peak market of 125,000 daily enrollees, i.e., 50 percent of the current 250,000 daily enrollees in treatment for cocaine abuse. The drug will be priced at $2.50 per daily dose, comparable to the current price of LAAM. The average enrollee will take 13 weeks worth of prescriptions.
A competing drug (not a generic version of Product A) will be in development that will appear on the market 3 years after launch of Product A, and will completely replace Product A on the market after 10 years.
The company is highly reluctant to invest in projects that yield a PAR less than $250-300 million. Although in principle it would pursue project that has a positive NPV, the company is reluctant to pursue projects with NPVs of less than $100 million.
Base scenario. Under the base scenario described above, the company determines that the PAR of Product A would be $102 million, and that the NPV of investing in Product A would be a loss of $52 million. Given the unfavorable indicators of this basic scenario, the company explores the potential effects of certain variations, as follows.
Base + orphan. Given the relatively small size of the current market of people in cocaine abuse treatment, the company considers that Product A could be granted orphan drug (or similar) status. Given that the drug's patent would not expire until more than 7 years after approval, orphan status would not confer additional market protection (including against the competing drug noted above), but it would provide tax credits for qualifying clinical R&D expenditures, assumed here to be about 20 percent of such expenditures. Under this revised scenario, the company determines that the PAR of Product A would remain at $102 million, and the NPV would be a loss of $36 million.
Base + orphan + late competition. The company determines that, if no competing drug (whether a generic version of Product A or another competing drug for the same indication) were to appear on the market for 10 years post-launch, and such a competing drug took another 10 years to overtake Product A on the market, then the PAR would rise slightly to $114 million and the NPV would still be a loss of $15 million.
Base + orphan + late competition + achieve $300 million PAR. The company seeks to determine what price would be required to achieve a PAR commensurate with the company's target for a new drug. Assuming orphan-like status, late entry of any competitor, and 50 percent market penetration as above, the company determines that the wholesale price of the drug would have to be $6.60 per daily dose in order to achieve a PAR of $300 million, with an NPV of $60 million. The company notes that this wholesale price per daily dose is two-to-three times that of LAAM and about 50 percent higher than that of naltrexone. Although price may be only one of multiple contributing factors, company analysts note that both LAAM and naltrexone have fallen far short of penetrating their target markets at 50 percent, as is assumed in this scenario.
Base + orphan + premium price. The company seeks to determine what effect premium pricing would have on its financial outputs. For an upper bound, executives note that payments for triple therapy for HIV/AIDS patients can be $10,000 to $15,000 per patient per year. Thus, assuming orphan status and making the outlier assumptions of payments of $10,000 per patient per year (equivalent to $27.40 per patient per day and perfect compliance all year) and 50 percent market penetration of 125,000 daily patients, the company determines that its PAR would be $1,122 million, with an NPV of $209 million. At the same premium price of $27.40 and other assumptions retained, the company determines that it could achieve a PAR of $300 million with a market penetration of about 33,000 patients, or about 13 percent of the current 250,000 daily enrollees.
Base + low penetration. Some company analysts insist on taking what they consider to be a more realistic view of the potential market. They cite the low market penetration to date of LAAM and naltrexone, the lack of assurance of securing orphan status, and the lack of assurance that no viable competition would enter the market for a full decade after launch of Product A. Assuming a wholesale price of $2.50, peak penetration of just 10 percent of the 250,000 current daily enrollees, no orphan status, and appearance of a competing drug 3 years after launch, they determine that PAR would be $20 million and the NPV would be a loss of $71 million.
The company determines not to go forward with a cold start for a new medication for cocaine abuse.
Key Parameters (base scenario):
Time to patent expiration: 21 yrs.
Time to product launch: 13 yrs.
Premarket R&D expenditures: $150m
Cost of capital: 12%
Orphan drug/similar status: no
Post-launch to peak prescriptions: 5 yrs.
Peak daily patients: 125,000
Average weeks prescription per year: 13 weeks
Average daily dose wholesale price: $2.50
Time post-launch to competing drug: 3 yrs.
Time for competing drug to replace: 10 yrs.