That alone will discourage pharma companies from pursuing new drugs. Last month, President Joe Biden signed legislation that will allow the government to negotiate medicine prices itself, potentially costing companies such as Pfizer (PFE.N) and AstraZeneca (AZN.L) about $100 billion in lost sales over a decade and lowering the industry’s return on investment. alone and speeding the economy’s reopening at a modest cost of $18 billion, it’s unlikely to be replicated. Those were hefty carrots, and the result was multiple vaccines and drugs reaching the market within a year.ĭespite the success of the Covid-19 vaccines, saving an estimated 140,000 lives in the U.S. government funded multiple vaccine development efforts, allowed trials to be run concurrently, helped finance manufacturing capacity and guaranteed giant purchases. The pandemic shows how combining these types of interventions can change the outcome. Direct subsidies to labs, quicker approvals, longer patent life and government-assured purchases would be more effective incentives by increasing return on investment. If inspiring the production of more and better drugs is the goal, there are better ways to do it. The program isn’t exactly harmful, though it is unusual to have such horse-trading encouraged by a government-backed subsidy. Against that, the possibility of a $100 million prize barely moves the needle. It can take up to a decade for a drug to make its way to market, and the median cost to reach approval has been estimated to be over $1 billion. The valuation gap probably helps explain why vouchers haven’t been effective in encouraging drug development, says the U.S. Most approved drugs have far more modest sales potential, so a voucher is worth far less. It could be a highly effective obesity treatment, the industry’s white whale. This disparity between the price of the voucher and the potential value for the buyer is in many ways unique to Mounjaro. But Lilly spent just $110 million on a voucher in 2022, roughly the average going price, leaving enough margin for error for it to be worth the effort. If sales disappoint, or if regulators ultimately say no, it could be worth less. At the industry multiple of 5 times revenue, that would pad its $535 billion market value by $30 billion. If the example above is right, that might mean the present value of a faster approval of Mounjaro is $6 billion for Lilly. Lilly’s peak sales for treating obesity might be about 10 times as high, Jefferies analysts estimate. About half derives from money arriving sooner, and the rest from additional sales before patent expiration. The total gain in present value of product sales from shaving several months off approval time might be $600 million, according to these economists. Consider a drug that peaks at $1.5 billion in annual revenue. The program was implemented and expanded to cover rare pediatric diseases and biological warfare threats. If authorities motivated them with a voucher that allowed them to get to market faster, and the vouchers were transferable, it would incentivize more research and development. The success doesn't, however, speak to the effectiveness of the government program used to get there.Īlmost two decades ago, some Duke University economists noticed pharmaceutical companies avoided developing drugs to cure tropical diseases because the market is small, but the cost and uncertainty of producing them is high. Cutting just several months off the approval process could yield $30 billion in additional value. approval for use in a possibly bigger market, obesity. The pharmaceutical giant is maximizing the diabetes treatment’s gain by using a golden ticket to speed its U.S. NEW YORK, May 3 (Reuters Breakingviews) - Eli Lilly’s (LLY.N) Mounjaro might turn out to be the biggest selling drug ever.
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