In Scenario 4, the government has conducted preclinical R&D on a highly promising Product V that is designed to work as a vaccine with an annual booster.
The government approaches a large pharmaceutical firm, Company V, to take on the project beginning in Phase I trials. The government offers to turn over the rights to the Product V in exchange for conducting all clinical trials, securing FDA approval, and an active marketing campaign through at least 8 years post-launch. The patent will expire in 16 years, about 7 years after expected product launch. Contingent on FDA approval and the marketing campaign, the government will: (a) award orphan drug-like status, (b) add another 3 years of orphan status at the end of the original orphan protection period, and (c) guarantee (with federal and state participation) a wholesale price of $1,000 per patient per year (for the initial vaccine and for subsequent annual boosters) that will rise in the first 5 years post-launch to 500,000 users, and remain at that level for 10-years post-launch.
In order to ensure the considerable market penetration of the drug, the government is committed to expanding treatment and financing capabilities at the state level. This commitment involves the following elements: (a) providing more funding to increase treatment capacity, (b) requiring all substance abuse block grant recipients to offer approved anti-addiction medications, and (c) assuring appropriate financing of new medications by state drug agencies and their counterpart Medicaid agencies.
Including R&D expenditures already made by the government, Product V will require about $200 million in uncapitalized expenditures to develop. The figure of 500,000 peak users is about twice the current number of daily enrollees in treatment for cocaine abuse, and about 25 percent of all heavy cocaine users in the country. The average enrollee will have one treatment, by injection or inhaler, once per year. The price of the treatment, $1,000 per person per year, is equivalent to $2.74 per patient per day for each day of the year.
The company understands that, since 7 years of patent protection will remain after launch, the orphan status will provide R&D tax breaks but no additional protection from generic competition. However, the extra 3 years of extended orphan status will provide another 3 years of protection from generic competition in years 8 through 10 post-launch.
The company assumes that a competing drug (generic or non-generic) will be available on the market following year 10 post-launch. Seven years after its launch, the competing drug will completely replace Product Y on the market.
The company typically does not invest in projects unless they have a NPV of at least $100 million and PAR of at least $300 million.
Under the proposed arrangement, the company determines that that the PAR of Product V would be $499 million, and the NPV would be $254 million.
Company V decides to take on the project.
Time to patent expiration: 16 yrs.
Time to product launch: 9 yrs.
Premarket R&D expenditures: $200m
Cost of capital: 12%
Orphan drug/similar status yes
Post-launch to peak prescriptions: 5 yrs.
Peak daily patients: 500,000
Average weeks prescription per year: 52 weeks
Average daily dose wholesale price: $2.74
Time post-launch to competing drug: 11 yrs.
Time for competing drug to replace: 7 yrs.