In this scenario, a small biotechnology firm, Company B, takes on the full product development cycle with a new class of compounds based on a recent scientific breakthrough that is highly specific to cocaine receptor neuropharmacology. The company anticipates that a new Product B from this class of compounds will have excellent compliance in the user population.
Company B is confident that Product B would require only about $50 million in uncapitalized expenditures to develop over a typical 13-year period to FDA approval. The company is backed considerably by venture capital, and must use a discount rate of 15 percent, higher than the figure of 12 percent typically used by many larger pharmaceutical firms. Analyzing the competition in the field, Company B estimates that a competing drug that is not a generic version of Product B will enter the market some 7 years after the launch of Product B and will take another 10 years to completely usurp Product B in the market.
Aside from the breakthrough nature of the new product, Company B's optimism is grounded largely on three pending government policies that are "highly likely" to be implemented, as follows.
The first policy is a pending regulatory reform that would effectively reduce the time to market approval by 1 year. This means that Product B would be on the market a year earlier, i.e., in 12 years rather than 13. As such, Product B would also have another year on the market before entry of the competing non-generic product noted above.
The second policy concerns market protection, i.e., providing orphan drug-like status for cocaine medications for indications of populations no larger than 300,000 (as compared to the current figure of 200,000 used for orphan drug status). Company B realizes that such status would provide protection from a generic substitute for 7 years post-launch; however, the company anticipates that this will not affect Product B, whose patent will not have expired during that period. Orphan-like status would provide tax credits for qualifying clinical trial expenditures, assumed to be about 20 percent of R&D expenditures.
The third policy is a federal commitment to expand treatment and financing capabilities at the state level. This commitment would involve the following elements: (a) provide more funding to increase treatment capacity, (b) require all substance abuse block grant recipients to offer approved anti-addiction medications, and (c) assure appropriate financing of new medications by state alcohol and drug agencies and their counterpart Medicaid agencies.
With the new provisions at the state level, Company B is confident that the total number of people seeking treatment will increase substantially, and the proportion of those that will be daily enrollees in treatment per year will increase as well. The company assumes it will take 5 years post-launch for Product B to reach its peak market of 250,000 daily enrollees, equal to the current number of daily enrollees in treatment for cocaine addiction.
The company assumes that the drug will be priced at $2.50 per daily dose, comparable to the current price of LAAM. The average enrollee will take an average of 26 weeks worth of prescriptions per year.
Company B and its backers want a reasonable chance of having a product that will attain a PAR of $200 million and a positive NPV.
Base scenario. The company determines that the PAR of Product B would be $228 million, and that the NPV (at a 15 percent discount rate) of investing in Product B would be $36 million.
Cautious investors note that Company B's determination depends on the three government interventions, as well as an assumption of 100 percent penetration of the current market of cocaine addicts in treatment. These investors want to know how the absence of each intervention would affect PAR and NPV.
Base with no regulatory reform. If the regulatory reform is not realized, Product B will require 13 years to market approval, and the competing non-generic drug will enter the market a year earlier relative to the launch of Product B. The PAR would remain at $228, but the NPV would decrease to $25 million.
Base with no orphan-like status. If market protection is not given based on the higher population criterion, but the other assumptions remain, the resulting loss of tax breaks would decrease the NPV moderately, from $33 million to $28 million. The PAR would remain at $228 million.
Base with no state provisions. In the absence of the commitment to expand treatment and financing capabilities at the state level, but the other assumptions remaining, the market penetration would likely fall far short of the projected 250,000 daily enrollees. If it fell to a still substantial level of 125,000 daily enrollees (50 percent of the current number of daily enrollees in treatment for cocaine abuse), the PAR would be $114 million and the NPV would drop to $7 million.
Base with low penetration. Assuming the provisions of the base scenario but reducing the market penetration to 25,000 (10 percent of the current daily enrollees in treatment for cocaine addiction), the PAR drops to $23 million and the NPV is a loss of $18 million.
Although the company remains optimistic about pursuing Product B, investors seek additional assurances regarding the government initiatives, particularly the state initiatives, and seek more information about the prospects for significant market penetration.
Time to patent expiration: 20 yrs.
Time to product launch: 12 yrs.
Premarket R&D expenditures: $50m
Cost of capital: 15%
Orphan drug/similar status: yes
Post-launch to peak prescriptions: 5 yrs.
Peak daily patients: 250,000
Average weeks prescription per year: 26 weeks
Average daily dose wholesale price: $2.50
Time post-launch to competing drug: 8 yrs.
Time for competing drug to replace: 10 yrs.