In Scenario 3, a government research agency has taken a highly promising compound, Product G, into Phase III clinical trials. The government approaches a large pharmaceutical firm, Company G, that has a strong CNS product line. The government offers to turn over the rights to Product G in exchange for assistance in completing Phase III trials, securing FDA approval, and conducting an active marketing campaign through at least 5 years post-launch. The patent on the drug will expire in 3 years, at about the time the product is expected to be launched. Contingent on FDA approval and the marketing campaign, the government will: (a) award orphan drug-like status, providing 7 years of post-launch protection against generic competition, (b) add an additional 5 years of protection against generic competition at the end of the orphan period, (c) guarantee purchases at a wholesale price of $2.50 per daily dose for Product G for a number of patients that will rise in the first 4 years post-launch to 125,000 users, and remain at that level for the balance of the period of protection against generic competition.
Including R&D expenditures by the government, Product G will have required about $100 million in uncapitalized expenditures to develop, including Company G spending to complete Phase III trials and secure market approval. The figure of 125,000 daily enrollees is 50 percent of the current number of daily enrollees in treatment for cocaine abuse. The price of $2.50 per daily dose is comparable to the current price of LAAM. The average enrollee takes 12 weeks worth of prescriptions. The company assumes that, given what amounts to 12 years of orphan status and market penetration guaranteed by the government for Product G, no significant competing drug (generic or non-generic) will appear before 13 years post-launch. The company assumes that a competing drug (generic or other) will enter the market at that time, and that this new product will completely overtake Product G within 5 years.
The company does not typically invest in a project unless it has a PAR of at least $300 million and an NPV of at least $100 million. However, its corporate mission does provide for undertaking "public service" projects that might otherwise not meet standard corporate financial goals, as long as such projects present no risk of significant financial loss to the company.
(Note: For the purposes of this scenario, it is not stated how the government has had access to the compound. This may occur, e.g., by the government discovering the compound, by obtaining it from industry or academe, or by working with a compound that is off patent. In this scenario, the patent will expire in 3 years. From the standpoint of Company G, the development work to date has been conducted by another entity at no cost to Company G.)
Base scenario. Under the government's proposed arrangement, the company determines that the PAR of Product G would be $114 million, and that the NPV to the company of investing in Product G would be $142 million, assuming a 12 percent cost of capital.
Base without extended orphan status and guaranteed market. If orphan status remains at the typical duration of 7 years, the guaranteed market runs for 7 (rather than 12) years, and a generic competitor enters the market thereafter, the PAR would remain at $114 million and the NPV would drop to $114 million.
Base without any orphan status and guaranteed market. If no orphan status is accorded, there is no guaranteed market, and generic competition could start as soon as 3 years post-launch and replace Product G in 5 years, the PAR would drop to $91 million and the NPV would drop to $39 million. It is assumed that Product G is still on track to reach peak prescriptions of 125,000 by 4 years post-launch, except that the entry of generic competition 3 years post-launch of Product G precludes reaching that peak, thereby reducing the PAR.
The company notes that the NPV is sensitive to the combination of orphan status and guaranteed market, and that both PAR and NPV are highly sensitive to that combination in the first 7 years.
Pursuant to the provision in its corporate missions for public service, and given assurances of the government provisions for orphan status and guaranteed market, the company decides to take on the project.
Time to patent expiration: 3 yrs.
Time to product launch: 3 yrs.
Premarket R&D expenditures: $100m
Cost of capital: 12%
Orphan drug/similar status: yes
Post-launch to peak prescriptions: 4 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: 13 yrs.
Time for competing drug to replace: 5 yrs.