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Incentives for new antibiotics: the Options Market for Antibiotics (OMA) model.

Brogan DM, Mossialos E - Global Health (2013)

Bottom Line: Antimicrobial resistance is a growing threat resulting from the convergence of biological, economic and political pressures.The goal of this new model is to provide an effective mechanism for early investment and risk sharing while maintaining a credible purchase commitment and incentives for companies to ultimately bring new antibiotics to market.Additional work must be done to develop a more robust mathematical model to pave the way for practical implementation.

View Article: PubMed Central - HTML - PubMed

Affiliation: Department of Social Policy, London School of Economics and Political Science, London WC2A 2AE, United Kingdom. E.A.Mossialos@lse.ac.uk.

ABSTRACT

Background: Antimicrobial resistance is a growing threat resulting from the convergence of biological, economic and political pressures. Investment in research and development of new antimicrobials has suffered secondary to these pressures, leading to an emerging crisis in antibiotic resistance.

Methods: Current policies to stimulate antibiotic development have proven inadequate to overcome market failures. Therefore innovative ideas utilizing market forces are necessary to stimulate new investment efforts. Employing the benefits of both the previously described Advanced Market Commitment and a refined Call Options for Vaccines model, we describe herein a novel incentive mechanism, the Options Market for Antibiotics.

Results: This model applies the benefits of a financial call option to the investment in and purchase of new antibiotics. The goal of this new model is to provide an effective mechanism for early investment and risk sharing while maintaining a credible purchase commitment and incentives for companies to ultimately bring new antibiotics to market.

Conclusions: We believe that the Options Market for Antibiotics (OMA) may help to overcome some of the traditional market failures associated with the development of new antibiotics. Additional work must be done to develop a more robust mathematical model to pave the way for practical implementation.

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Example of a project with a cost of $5,000 and two possible outcomes – success or failure, each with differing payouts. Source: [28].
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Figure 2: Example of a project with a cost of $5,000 and two possible outcomes – success or failure, each with differing payouts. Source: [28].

Mentions: A caveat to the task of increasing cash flow is the uncertainty of future returns that is intrinsic to the research and development process. Thus, expected cash flows are often modeled in part based on the likelihood of payout. A simple binomial model can be used to understand the associated costs of success or failure in a single stage of development on ultimate cash payout, and subsequently NPV. Figure 2 gives an example of such a project with a cost of US$5,000 and two possible outcomes – success or failure, each with a pre-determined payout. If the project is successful, the payout is US$5,000, and if it fails the payout is US$0. Each of these states has a pre-determined probability of success, and the total valuation for the project is the sum of the products of each payout and their probabilities. In the example in Figure 2, a payout of US$5,000 would not be sufficient to induce any rational actor to undertake the project. Instead, the project can be made more attractive by increasing the higher payout or lowering the initial cost. This is a fundamental and important principle - NPV can be adjusted by altering future payouts or lowering costs (in this case by initial payments). Potential for savings exists if a payer is willing to shoulder some of the risks. The Call Options for Vaccines (COV) model, explained below, is based on this simple premise.


Incentives for new antibiotics: the Options Market for Antibiotics (OMA) model.

Brogan DM, Mossialos E - Global Health (2013)

Example of a project with a cost of $5,000 and two possible outcomes – success or failure, each with differing payouts. Source: [28].
© Copyright Policy - open-access
Related In: Results  -  Collection

License
Show All Figures
getmorefigures.php?uid=PMC4226193&req=5

Figure 2: Example of a project with a cost of $5,000 and two possible outcomes – success or failure, each with differing payouts. Source: [28].
Mentions: A caveat to the task of increasing cash flow is the uncertainty of future returns that is intrinsic to the research and development process. Thus, expected cash flows are often modeled in part based on the likelihood of payout. A simple binomial model can be used to understand the associated costs of success or failure in a single stage of development on ultimate cash payout, and subsequently NPV. Figure 2 gives an example of such a project with a cost of US$5,000 and two possible outcomes – success or failure, each with a pre-determined payout. If the project is successful, the payout is US$5,000, and if it fails the payout is US$0. Each of these states has a pre-determined probability of success, and the total valuation for the project is the sum of the products of each payout and their probabilities. In the example in Figure 2, a payout of US$5,000 would not be sufficient to induce any rational actor to undertake the project. Instead, the project can be made more attractive by increasing the higher payout or lowering the initial cost. This is a fundamental and important principle - NPV can be adjusted by altering future payouts or lowering costs (in this case by initial payments). Potential for savings exists if a payer is willing to shoulder some of the risks. The Call Options for Vaccines (COV) model, explained below, is based on this simple premise.

Bottom Line: Antimicrobial resistance is a growing threat resulting from the convergence of biological, economic and political pressures.The goal of this new model is to provide an effective mechanism for early investment and risk sharing while maintaining a credible purchase commitment and incentives for companies to ultimately bring new antibiotics to market.Additional work must be done to develop a more robust mathematical model to pave the way for practical implementation.

View Article: PubMed Central - HTML - PubMed

Affiliation: Department of Social Policy, London School of Economics and Political Science, London WC2A 2AE, United Kingdom. E.A.Mossialos@lse.ac.uk.

ABSTRACT

Background: Antimicrobial resistance is a growing threat resulting from the convergence of biological, economic and political pressures. Investment in research and development of new antimicrobials has suffered secondary to these pressures, leading to an emerging crisis in antibiotic resistance.

Methods: Current policies to stimulate antibiotic development have proven inadequate to overcome market failures. Therefore innovative ideas utilizing market forces are necessary to stimulate new investment efforts. Employing the benefits of both the previously described Advanced Market Commitment and a refined Call Options for Vaccines model, we describe herein a novel incentive mechanism, the Options Market for Antibiotics.

Results: This model applies the benefits of a financial call option to the investment in and purchase of new antibiotics. The goal of this new model is to provide an effective mechanism for early investment and risk sharing while maintaining a credible purchase commitment and incentives for companies to ultimately bring new antibiotics to market.

Conclusions: We believe that the Options Market for Antibiotics (OMA) may help to overcome some of the traditional market failures associated with the development of new antibiotics. Additional work must be done to develop a more robust mathematical model to pave the way for practical implementation.

Show MeSH