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UBC Theses and Dissertations

Value-based real option analysis to support early-stage drug development Shin, Woo Suk


Background: Value-based frameworks link costs with health outcomes and are considered in drug reimbursement, suggesting the increasing need to estimate commercial performance of novel drugs in relation to demonstrating cost-effectiveness. Objective: To develop a value-based drug development framework and evaluate a commercialization strategy for a phase 1 drug candidate for hypoglycemia in type 1 diabetes (T1D). Methods: A value-based real options analysis (VB-ROA) framework was developed to incorporate payer and for-profit investor perspectives by integrating cost-effectiveness analysis (CEA) with real options analysis (ROA). The framework was applied to commercially evaluate a phase 1 drug candidate to prevent hypoglycemia. The VB-ROA framework was constructed in two stages: 1. Value-based price was estimated using headroom analysis based a Markov model assuming a US payers’ willingness to pay (WTP, λ) of $50,000 per quality-adjusted life year (QALY) and payers’ discount rate (rd) of 3%. The drug candidate’s target product profile (TPP) was based on clinician reports on meaningful health improvements. 2. ROA via the binomial lattice option pricing model (BOPM) using revenues based on value-based pricing and a cost of capital (rc) of 13.2%. Data to populate model parameters were gathered from published clinical, regulatory, and market data. Results: The value-based drug price was $5,178 (95% CI $4,437, $5,956) per year per patient. The phase 1 development option value was $0 (V₀,₁). The development strategy could be abandoned or revised, which may involve partnering non-profit institutions. If successful, the development option for phase 2 is $67 Million (V₁,₁) or $0 (V₁,₂). If development leads to regulatory approval, the option value to launch ranges from $8,716 Million (V₇,₁) to $127 Million (V₇,₈). Sensitive parameters to option value include investors’ cost of capital (rc), drug price, development risks (θt), market share, λ, health-related quality of life (HRQoL) weights, and the relative risk of non-severe hypoglycemia (RRNSHday & RRNSHnoc). Conclusions: The VB-ROA framework aligns patient, payer, and investor incentives to assess the impact of clinical and cost-effectiveness parameters on the commercial potential of novel drugs, which further enables the development novel drugs that are affordable for payers and patients, while profitable for investors.

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