Economic Considerations for the Development of Global Vaccines: a Perspective From the Vaccine Industry

1.1.1

Value

In the context of this usage, value is assessed from the viewpoint of the corporation and must account for all incoming and outgoing cash flows that are expected to occur during the lifetime of the project. For a typical vaccine development program, this would include items such as clinical development costs, registration fees, commercial revenues, and potential postmarketing commitments, among others, as well as the associated manpower and overhead expenses required to support the vaccine throughout its lifetime.

1.1.2

Net

The term “net” refers to the fact that net cash flows are utilized in the valuation calculation. Net cash flow simply refers to the difference between the cash inflows and outflows in a given time period and reflects the amount of cash remaining after all required charges and deductions have been subtracted.

To illustrate this concept, imagine that company A is developing vaccine X. Proof-of-concept clinical studies have shown that vaccine X is safe and immunogenic. Fig. 23.1 illustrates a typical clinical development program for which the net development costs (after-tax) from Phase 2b to approval are estimated to be $650M over 6 years. Cumulative net income (after-tax) from global commercialization of the vaccine is estimated to at $1.5B over an 8 year postlaunch time horizon. At first glance, one might calculate the net value for such a vaccine to be $850M ($1.5B−$650M) making vaccine X a highly attractive investment and supporting continued clinical development of the vaccine. However, this cursory valuation assessment may be misleading. Let us continue to analyze the key components of an objective valuation metric.

1.1.3

Expected

Given the inherent uncertainty associated with any vaccine development program, including vaccine X in our hypothetical example, it is critical that valuation assessments appropriately reflect the probability of success (POS) for each stage of development. The term “expected” is used to connote that the appropriate risk adjustments have been incorporated into the valuation calculation. To accomplish this, POS assumptions are estimated for each stage of development to assess the likelihood of progressing from one development stage to the next. For clinical development stages (eg, Phase 1, Phase 2, Phase 3), a probability of technical success (PTS) can be used to estimate the likelihood of successfully progressing from one phase of clinical development to the next. Success is generally defined as a vaccine having an acceptable safety profile and demonstrated clinical efficacy or immunogenicity against the targeted pathogen. To account for any additional risk associated with the regulatory review process, a probability of regulatory success (PRS) estimate can be used to estimate the likelihood of regulatory approval. The probability of regulatory success value is dependent on the selected regulatory pathway, whether traditional or accelerated, regulatory requirements, as well as regulatory precedent. The more novel the vaccine candidate or regulatory pathway, the lower the PRS value estimate that is assigned. The PRS estimate will evolve as the candidate moves through clinical development and with increased regulatory interactions. The estimates can go up or down, depending on whether the new information is favorable or unfavorable. These individual probability estimates are then combined to produce an overall estimate for the likelihood of product launch, typically referred to as the probability of technical and regulatory success (PTRS). Fig. 23.1 provides a depiction of the overall PTRS calculation process for our hypothetical vaccine X candidate. It is important to note that an individual PTS or PRS estimate should assume success of the prior phases to ensure that program risks are not double counted in the calculation. In our example, the Phase 3 PTS estimate should assume that prior development phases, including the Phase 2b trial, were successful and the PRS estimate should assume regulatory agency agreement with licensure pathway and that the Phase 3 trial will successfully meet the prespecified clinical and safety requirements to support product registration.

Once the PTRS assessment is completed, the cash flows that correspond to each development stage can then be appropriately risk-adjusted to account for the likelihood of occurrence. In our hypothetical example for vaccine X, there is a 100% probability of incurring the Phase 2b development costs and associated cash flows; however, there is only a 50% probability of incurring the Phase 3 development costs and associated cash flows. Therefore, for valuation purposes the cash flows associated with the Phase 3 activities need to be appropriately risk-adjusted to account for the likelihood of occurrence. By similar logic, the calculated PTRS estimate connotes a ∼28% probability of product launch and so all cash flows associated with product launch (eg, sales revenues, cost of goods, sales and marketing expenses, etc.) need to be risk-adjusted in a similar fashion. The appropriate risk adjustment of all project related cash flows is the critical element in the calculation of the expected net present value.

Returning to our earlier example, let’s assume the net development costs are allocated in the following manner across the development phases depicted in Fig. 23.1 ( Table 23.1 ). Given the provided cost distribution from Table 23.1 and probability estimates from Fig. 23.1 , we can calculate the expected net development costs of ∼$366M. Applying similar logic, we can convert the cumulative net income estimate of $1.5B into an expected net income using the overall PTRS estimate for vaccine X. Using the calculated PTRS of 28% from Fig. 23.1 , we arrive at an expected net income of only $420M ($1.5B × 28%). Subtracting the expected net development costs from the expected net income now results in an expected net value for the vaccine of only $54M. In this example, an investment that at first seemed highly attractive has become less valuable once properly risk-adjusted. Admittedly, assigning percentage estimates to the technical and regulatory risk components can be challenging and, while there are some established benchmarks that can be leveraged to inform estimates, a significant degree of subjectivity is inevitable. Later in this chapter, we will provide some real world examples of different PTRS estimates.

1.1.4