Critique of 'Analytical Framework for Examining the Value of Antibacterial Products'

Abstract

In 2014 the Eastern Research Group, under contract with The U.S. Department of Health and Human Services, produced a study entitled “Analytical Framework for Examining the Value of Antibacterial Products.” The study (ERG) concludes that there is a wide gulf between an Antibiotic (AB) development project’s value to the developer and its value to society, and that it is likely therefore that many socially desirable AB development projects are not undertaken. I argue in this paper that ERG’s estimates are seriously flawed and offer no support to the contention that governments should do more to promote the development of ABs. After correcting for some conceptual errors, I find that ERG’s assumptions imply that the private real internal rates of return on the six AB development projects they consider vary between 11.9 percent and 20.6 percent and all exceed ERG’s assumed real cost of capital for the pharmaceutical industry. Moreover, I find that ERG greatly overstates the social value of the AB development projects for several reasons, two of which stand out. First, the social discount rate employed is unjustifiably lower than the assumed private discount rate. And, second, ERG assumes the social value of treatment with a new innovative AB is equal to its gross treatment value less the value of a treatment with “commonly-prescribed ABs” despite the fact that not-commonly-prescribed innovative ABs already exist that treat virtually all pathogens currently in existence.