Antibacterial resistance is a growing global problem. According to the most recent statistics from the Centers for Disease Control and Prevention (CDC), at least 2 million people acquire serious infections with bacteria that are resistant to one or more of antibacterial drugs designed to treat those infections in the United States alone. Of these, approximately 23,000 die as a result of drug-resistant infections. Even though estimates vary widely, the economic cost of antibacterial resistance in the United States could be as high as $20 billion and $35 billion a year in excess direct healthcare costs and lost productivity costs, respectively (U.S. Centers for Disease Control and Prevention, 2013). Despite the potential of new antibacterial products to reduce the social burden associated with resistant infections, some of the large companies have been exiting the markets for antibacterial drugs and vaccines in recent years and have also failed to respond to the possible social value of opportunities in production of rapid diagnostic products. These market exits have been driven by the most basic of reasons: insufficient return to capital invested in development of these products. Consequently, governments across the globe are looking to identify ways to stimulate the development of antibacterial products. This study, conducted by Eastern Research Group, Inc. (ERG) under contract to the U.S. Department of Health and Human Services (HHS), Office of the Assistant Secretary for Planning and Evaluation (ASPE) and partly funded by FDA, develops an analytical decision-tree model framework that can be used to assess the impacts of different possible market incentives on the private and social returns to product development of new antibacterial products (in contrast to those already under development). Using the model developed, we evaluate the private and social returns associated with the following types of antibacterial products for a hypothetical developer at the beginning of pre-clinical research phase: - Antibacterial drugs for oral or intravenous (IV) administration designed to treat; - Acute bacterial otitis media (ABOM); - Acute bacterial skin and skin structure infections (ABSSSI); - Community acquired bacterial pneumonia (CABP); - Complicated intra-abdominal infections (CIAI); - Complicated urinary tract infections (CUTI); and - Hospital acquired/ventilator associated bacterial pneumonia (HABP/VABP). - A new vaccine effective in preventing acute bacterial otitis media (ABOM), and - A new rapid point-of-care diagnostic designed to identify methicillin-resistant Staphylococcus aureus (MRSA) that can cause serious infections, such as skin or wound infections, pneumonia, or infections of the blood. The study also considers the level needed to reach a private value of $100 million at the start of pre-clinical research for a hypothetical developer for the following four categories of incentives that encompass the majority of strategies that have been proposed in the policy literature: - Intellectual property (IP) extensions; - Tax incentives; - Modifications to the clinical trial process and approval standards aimed at shortening the drug development process; and - Private grants, awards, and prizes for antibacterial product research and development. For antibacterial drugs, we find that the average value to the developer considering whether to start pre-clinical research ranges from a low of -$4.5 million for HABP/VABP to a high of $37.4 million for CABP, falling short of the $100 million threshold. However, when parameter uncertainty is considered, the lower bound of private returns could potentially range from -$23.5 million (HABP/VABP) to -$15.8 million (ABSSSI), substantially lower than the $100 million threshold, and the upper bound from $126.7 (HABP/VABP) to $330.0 million (CABP), considerably above the $100 million threshold. The primary drivers for the observed wide range of results are attributable to, in order of importance, the total market size, the real opportunity cost of capital, and the total time to market model parameters. Value of the incentives to the developers would be higher at later stages of development, meaning that once a drug successfully reaches certain milestones, incentives to further develop it increase. However, we focus on the value at the point the developer is considering whether to start the pre-clinical stage. Note that this study considers the developer’s private value from the point of the current state of science. Assessing advancements in translational research and basic pathogen biology were outside the scope of this project. However, we note that such advancements have the potential to impact private value of a drug at the start of pre-clinical studies. For example, improved understanding of pathogen biology can cut pre-clinical research time and can yield compounds with higher average efficacy entering human trials. To assess the extent to which these private values fall short of the societal importance of drugs, we estimate the potential social value for these antibacterial drugs. Similar to private returns, we find that there is wide variation in the estimated social values across the different indications. The primary drivers for the observed wide range of social EPV results are attributable to, in order of importance, the model parameters for the percentage in disease duration for patients that do not respond to commonly used antibacterial drugs; phase 1 clinical trial success probability; pre-clinical R&D success probability, and the real annual social rate of discount. Despite the high degree of variability, even the lower bounds of these social values are greater than the estimated private ENPVs by orders of magnitude across all of the indications. Moreover, for CABP, CUTI, and HABP/VABP, the 90 percent lower bounds of social values are greater than the 90 percent upper bounds of private values for the same indications. Using the decision-tree framework developed, we estimate the private and social value for a new ABOM vaccine at $515.1 million (which is greater than the $100 million threshold) and $2.281 billion, respectively. Similarly, the private and social value for new rapid point-of-care diagnostic designed to identify methicillin-resistant Staphylococcus aureus (MRSA) that can cause serious infections is estimated at $329.0 million and $22.1 billion, respectively. The gap between the current private and public values of drug development suggest that incentives are desirable to stimulate the development of drugs to treat the six indications considered, whether through incentives described in this report or public research investment. However, given the degree of uncertainty associated with different model parameters and the limited scope of this project, it is difficult to ascertain the necessary levels of such incentives. The size of the social benefits from developing a new antibacterial drug is also highly uncertain and based on the improvement in outcomes from a hypothetical new drug. It is also important to note that simultaneous institution of conservation mechanisms, such as education campaigns to promote prudent use, and other stewardship programs, along with the types of antibacterial drug production incentives considered are likely to alter the incentive levels identified in this study. Conservation incentives, by their very nature, tend to reduce the potential market size for new antibacterial drugs thereby necessitating higher production incentive levels to boost private returns to the $100 million threshold
