Company S has a smoking cessation medication, Product S, that was recently introduced to the market. In its first two years, Product S has been highly successful, with projected PAR exceeding $500 million. Company researchers also have found strong early evidence that Product S may be very effective as a medication for cocaine addiction, and are encouraging executives to pursue this as a second indication for Product S.
Given previous research and related experience with Product S, the company estimates that it could conduct Phase II and III trials and secure market approval for about $20 million in uncapitalized expenditures. (This is equivalent in the model of taking on the last 7 years of a typical full 13-year product development cycle with total uncapitalized expenditures of $50 million.)
The patent for Product S will expire in 5 years, prior to the anticipated approval of the new indication for cocaine addiction. Company S assumes that if a cocaine addiction indication is approved, Product S will be accorded 7 years of orphan drug-like protection from generic competition at the time of approval. Company S also assumes that immediately following expiration of orphan status, a competing drug will enter the market, and that after another 10 years, it and/or other competing drugs will overtake Product S for the cocaine addiction indication.
The company assumes that the wholesale price Product S will be $3.00 per daily dose, and that it will take 5 years post-launch to reach its target market of 125,000 patients, or 50 percent market penetration of the 250,000 current daily patients enrolled in treatment.
Company S typically seeks new products with PARs of $300 million or more. However, it may have a lower threshold for products with promising second indications that would require relatively lower development costs. Executives are concerned that any modest financial returns from the cocaine addiction market for Product S might be outweighed by any deleterious effects on the current lucrative Product S market of any stigma or adverse clinical events that may arise in association with the use of the product in treatment of cocaine addicts.
Base scenario. Company analysts determine that, for the second indication of cocaine addiction, and given orphan status, the PAR of Product S would be $137 million and the NPV would be $83 million.
Base + achieve $250 million PAR. The company determines that, in order to achieve a more acceptable PAR of $250 million, and still assuming orphan status and peak market of 125,000, the wholesale price per daily dose would have to be $5.50. The company also determines that, in the absence of orphan status, the wholesale price per daily dose would have to be $6.10 to achieve a PAR of $250 million.
Base + low penetration. Noting the relatively low market penetration to date of other substance abuse medications, the company determines that, assuming orphan status and the wholesale price per daily dose of $3.00, a market penetration of 25,000 (10 percent of the current 250,000 daily enrollees) would yield a PAR of $27 million and NPV of $7 million.
Given their knowledge of the market experience of LAAM and naltrexone, company executives are skeptical about reaching the target market of 125,000 with Product S priced above $3.00. As such, they judge it is unlikely that the product could achieve corporate PAR targets. Executives are not favorable toward the possibility of threatening any significant portion of the strong current smoking cessation market of Product S with any stigma or other adverse experience in connection with a substance abuse indication that could yield as little as a $27 million PAR and barely positive NPV. Analysts point out that the patent on Product S will expire before approval for the cocaine abuse indication would occur, and that the strength of the smoking cessation market of Product S could change.
Company S decides not to pursue the second indication for cocaine addiction.
Time to patent expiration: 5 yrs.
Time to product launch: 7 yrs.
Premarket R&D expenditures: $50m
Cost of capital: 12%
Orphan drug/like status yes
Post-launch to peak prescriptions: 5 yrs.
Peak daily patients: 125,000
Average weeks prescription per year: 13 weeks
Average daily dose wholesale price: $3.00
Time post-launch to competing drug: 8 yrs.
Time for competing drug to replace: 10 yrs.