This report presents several scenarios of pharmaceutical company decision making regarding undertaking projects to develop pharmacotherapies for substance abuse (e.g., cocaine) under various sets of market conditions. Using a quantitative model developed by The Lewin Group, the market conditions are translated into financial and other parameters to generate estimated PAR and NPV for each scenario and for certain variations of these scenarios. Modeling these scenarios helps to illustrate some of the key barriers and other limitations to development of medications for cocaine abuse, as well as the extent to which certain types of financial and policy options might reduce such barriers. Policy options to lower barriers include some that already exist and some that have been posed by the IOM (1995).
The market conditions of each scenario are translated into parameters that are fed into the model to generate estimates of PAR and NPV. Four of the base scenarios have multiple variations, or sub-scenarios, to explore the sensitivity of the output measures to changes in selected parameters. The values assigned to most of the parameters for each base scenario are shown at the end of each scenario.
The five main scenarios are as follows.
Scenario 1: Big Pharm Cold Start. A large pharmaceutical company considers taking on a full product development cycle for a new medication. Sub-scenarios explore how changes in competition, pricing, and market penetration would affect PAR and NPV.
Scenario 2: Biotech Gets Help. A small biotechnology firm takes on the full product development cycle with a promising compound, given the expectation of a set of government incentives to pursue the product. Sub-scenarios explore the sensitivity of PAR and NPV to the various government incentives.
Scenario 3: Guaranteed Handoff. A pharmaceutical company considers accepting a government offer for the rights to a product that the government has taken into phase III clinical trials in the context of additional government incentives.
Scenario 4: Vaccine. A pharmaceutical company considers accepting a government offer for the rights to a product entailing a vaccine and annual booster that the government has taken through preclinical work, in the context of additional incentives provided by the government.
Scenario 5: Second Indication. A pharmaceutical company has a highly successful product that is already approved for an existing CNS indication. The product shows promise for treatment of cocaine addiction as a second indication. The company considers whether to pursue this second indication.
These scenarios are for discussion purposes only. They are illustrative, and not exhaustive, of the possible combinations of market conditions used here. The scenarios are entirely hypothetical works drafted by The Lewin Group. The scenarios do not represent any suggestion or intent by the government to adopt any policies described here. Certain policy options posed here are already in existence, e.g., orphan drug or similar status; others have been discussed in the 1995 IOM report cited in this document.
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Scenario 1: Big Pharm Cold Start
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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.
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Scenario 2: Biotech Gets Help
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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.
Key Parameters: 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.
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Scenario 3: Guaranteed Handoff
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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.
Key Parameters: 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.
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Scenario 4: Vaccine
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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.
Key Parameters: 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.
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Scenario 5: Second Indication
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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.
Key Parameters:
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.
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Discussion
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As illustrated in the "Big Pharm Cold Start" scenario, the prospects of developing a new medication for cocaine abuse and taking it through a full product development cycle do not appear favorable given a moderate wholesale price comparable to LAAM ($2.50 per patient per day) and what amounts to an optimistic target market of 125,000 patients (i.e., 50 percent of the estimated 250,000 people currently enrolled in treatment for cocaine abuse). Although the R&D tax breaks of orphan status can provide modest improvements in NPV, orphan status affords no additional protection for products whose patents have yet to expire. The prospects of delayed competition, in the form of orphan status or delayed entry of a non-generic competitor, can make modest improvements in financial outlook, although its effect on NPV may appear small from the standpoint of a decision maker who is discounting cash flow that will occur 13 or more years in the future.
The Big Pharm scenario does illustrate that, in order to achieve financial indicators that are more in line with traditional targets of large companies, a considerable improvement in price and/or market penetration must be realized. Even assuming the 50 percent penetration of current patients, a wholesale price of $6.60 per patient per day, which is half again as high as naltrexone and two-to-three times the price of LAAM, would be required to achieve a PAR of $300 million. On the other hand, a modest and perhaps more realistic penetration of this market of 12 to 16 percent (i.e., 30,000 to 40,000 patients) could yield a PAR in the neighborhood of $300 million if a cocaine medication were priced at the premium levels that are afforded triple pharmacotherapy for HIV/AIDS, i.e., $10,000 per patient per year (equivalent to $27.40 per patient per day with perfect compliance all year.) More conservative analysis assuming a price equivalent to LAAM ($2.50 per day), a 10 percent penetration of the 250,000 current daily patients, no assurance of orphan status, and the appearance of a competing drug sometime soon after launch would yield a PAR of $20 million and an NPV of a loss of $71 million.
The "Biotech Gets Help" scenario suggests that, even for a company that is confident that it can develop a highly promising molecule with a relatively modest level of R&D expenditures and somewhat lower targets for financial performance, some combination of additional incentives may be needed. In this scenario, three main assumptions are made about government interventions: (a) regulatory reform that would shorten the time to launch by 1 year, (b) provision of market protection similar to orphan drug status, and (c) a significant commitment to expand treatment and financing capabilities at the state level. The expansion of treatment and financing at the state level are assumed to enable the drug to reach a peak market of 250,000 daily enrollees. Given these assumptions and a wholesale price of $2.50 per day, the scenario yields a PAR of $228 million and an NPV of $36 million, both acceptable to the company. Removing each of the government interventions lowers the financial indicators by varying levels. Removing the regulatory reform that shortens time to launch by a year decreases NPV modestly. Removing orphan status also decreases NPV modestly, and does not affect revenue because orphan protection from generic competition would not apply for a drug that will not be off patent. In contrast removal of provisions to expand treatment and financing that could reduce the market size substantially, here down from 250,000 to 125,000 daily enrollees (still an optimistic figure), would reduce PAR by half and push NPV closer to break-even. The drop in these figures would be likely to reduce significantly the number of small companies that would be willing to pursue such a project. Finally, a more pessimistic assumption of market penetration (though realistic in light of the experience of LAAM and naltrexone) of 25,000 (10 percent of current enrollees) would yield unacceptable figures of a PAR of only $23 million with a loss of $18 million for NPV.
In the "Guaranteed Handoff" scenario, the government is offering the rights to a drug that is well along in development (i.e., well into phase III trials) to a company in exchange for the company's finishing the development process and securing market approval. In addition, the government would (a) award orphan drug (or similar) status, (b) provide additional years of market protection from generics, and (c) guarantee purchases for up to 125,000 daily users for the years in which market protection, i.e., (a) and (b), apply. In this scenario, effectively decreasing a company's investment and shortening the time to product launch shifts the risk-reward tradeoff.
Under the government's proposed arrangement, the PAR would be $114 and the NPV would be $142 million. Although the PAR would not be particularly attractive to most large companies under typical circumstances, it may be to smaller companies. In this scenario, where orphan status confers both market protection and R&D tax breaks, removal of the extended orphan status and guaranteed market in the out-years (i.e., after the initial 7 years post-launch) lowers NPV by about 20 percent. Removing the orphan status and guaranteed market in the initial 7 years (in which losses are less cushioned by discounting than in later years) reduced both indicators substantially, i.e., PAR to $91 million and NPV to $39 million. In this instance, PAR is affected directly by the decreased market penetration due to loss of orphan protection from generics, and NPV is afforded less cushioning of revenue decreases by discounting in these early post-launch years. Even so, given the positive NPV, a smaller company might take on the project or, as described in this scenario, a larger company with a corporate mission for public service might still be willing to take on the project.
The "Vaccine" scenario poses more of an outlier set of market conditions involving a promising medication that could be taken just once a year (e.g., vaccine with annual boosters), which may help to obviate compliance problems. As in the "guaranteed handoff" scenario, this involves initial government development of the medication and an offer (earlier in development) to transfer rights to a company to take the product through the balance of development and onto the market. In this scenario, the government provides extended generic protection. Further, the government provides for a substantial, assured market in the form of guaranteed purchases at a premium price ($1,000 per patient per year, equal to $2.74 per day all year) for a number of users rising to 500,000, i.e., twice the current number of daily enrollees in treatment for cocaine abuse, and remaining at that market size through 10 years post-launch. Under these conditions, the PAR would be $500 million and the NPV would be $254 million. This scenario helps to illustrate that extraordinary conditions may be required to bring PAR and NPV over the thresholds sought by the larger pharmaceutical companies.
The "Second Indication" scenario portrays a variation on the risk-reward tradeoff that involves a decision about whether to pursue a market if doing so might jeopardize a currently successful market. In this scenario, a company has a commercially successful product for a CNS indication in a large market that also shows promise for treatment of cocaine addiction. Given previous research and experience with the drug, the company considers that the additional development costs required to secure approval for the second indication would be relatively small. Further, the company expects orphan protection for this indication. Under a base scenario with a moderate price and 50 percent market penetration, the PAR would be $137 million and the NPV would be $83 million. In order to achieve a more palatable PAR of $250 million with the same market penetration, the price would have to be raised to $5.50, which exceeds that of naltrexone. Without orphan status, the price would have to increase to $6.10 to achieve a PAR of $250 million. With more conservative assumptions of a market penetration of 25,000 daily users (10 percent of current daily enrollees) and back to $3.00 per daily dose, the PAR and NPV would drop to $27 million and $7 million, respectively. This scenario illustrates how conservatism regarding expectations for price and market penetration alone can stanch a project. Aversion to the prospects of substance abuse stigma transferring to an already successful product may be secondary, but it could contribute to outweighing any perceived financial returns of a second indication strategy. Under a scenario where the original indication for the product had failed (e.g., if the drug had not reached the market or had been a commercial failure), there may be less down-side risk of pursuing a cocaine abuse indication; however, the challenges to price and market size would remain.
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