PHP364 - The Evaluation of Innovative Drugs Applying Business Valuation Concepts

Abstract

Many pharmaceutical companies are now commercialising innovative expensive medicinal products, e.g. biologicals, with an incremental cost-effectiveness ratio (ICER), which will probably exceed the accepted threshold values for reimbursement. The goal of this research is to propose an additional methodology to evaluate innovative drugs from a broader perspective by applying concepts from business valuation, when the ICER exceeds the threshold. In a pure free health market, the price of the new innovative drug would be determined by demand and supply mechanisms, and all considerations about the use of cost-effectiveness data would be redundant. On the other hand, the health authorities leave the responsibility for medical innovation to the market. Therefore medical innovation relies on the market mechanisms in the finance market of biotechnology including the incentives of the capital providers, who demand a required return of investment. The justification of the drug price can be based on the Discounted Cash Flow method. The Discounted Cash Flow method is based on the expected free cash flows and the required cost of capital, can be used to validate the price of the new drug from a narrow investor’s perspective. The free cash flow represent the sales from the pharmaceuticals, and cash necessary for capital expenditures represent the costs for research & development (R&D) and marketing. The cost of capital refers to the opportunity cost of making a specific investment, which is the rate of return required to persuade the investor to make a given investment. Conclusion: We propose a policy approach for the evaluation of innovative drugs by bridging concepts from health economics and business economic valuation. This approach may justify a drug price from an investor’s perspective when the ICER exceeds the threshold and may be used in negotiations between governments and companies.