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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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