Mathematical Modeling and Pharmaceutical Pricing: Analyses Used to Inform In-Licensing and Developmental Go/No-Go Decisions

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Abstract
In the face of significant real healthcare cost inflation, pressured budgets, and ongoing launches of myriad technology of uncertain value, payers have formalized new valuation techniques that represent a barrier to entry for drugs. Cost-effectiveness analysis predominates among these methods, which involves differencing a new technological intervention’s marginal costs and benefits with a comparator’s, and comparing the resulting ratio to a payer’s willingness-to-pay threshold. In this paper we describe how firms are able to model the feasible range of future product prices when making in-licensing and developmental Go/No-Go decisions by considering payers’ use of the cost-effectiveness method. We illustrate this analytic method with a simple deterministic example and then incorporate stochastic assumptions using both analytic and simulation methods. Using this strategic approach, firms may reduce product development and in-licensing risk.