OP39 The Real-Option Rate Of Return Approach To Inform The Pricing Of Medicines

Abstract

IntroductionPrices of medicines have increasingly come under payer and societal scrutiny in many countries around the world. As the price-setting process is quite untransparent, the concept of cost-based pricing has been brought forward as an alternative method to inform reimbursement decision-making. A Real-Option rate of Return (ROroR) approach, was recently proposed as a method for a multi-stakeholder driven collaborative investment model. This study showed that there are public-private medicine development opportunities that could lead to lower research and development (R&D) costs for products with a challenging business model. The aim of the current study is to assess the practical use of the ROroR approach and highlight its sensitivity regarding input parameters.MethodsThe ROroR approach incorporates medicine-specific parameters: R&D costs, the number of patients treated per year, the time horizon for recouping the investments set by the stakeholders, the production costs and a predefined profit margin. Three hypothetical case-studies were selected for the ROroR analysis comprising of an orphan, oncology, and a more regular medicine. Parameter input data was derived from the available literature. Cost-based prices were calculated based on applying the ROroR equation under a constant profit margin. Ultimately, the corresponding prices of the case-studies were analyzed for their sensitivity using ten changes of the original value.ResultsThe ROroR approach was most sensitive to the length of the time horizon and the number of patients treated per year. The largest sensitivity was found for the oncological drug, with an asymmetric price change ranging from -25 percent to +271 percent if varying the time horizon or number of patients. The profit margin, and total R&D costs have the least effect on the price: +/-4 percent and +/-45 percent, respectively.ConclusionsThis study shows that cost-based pricing is highly beneficial in uncovering pricing-underlying business or economic mechanisms and suggesting a transparent price. Further research is needed on implementing public-private development models and cost-based price determination using the core parameters.