Pre-approval incentives to promote adoption of personalized medicine: a theoretical approach

Currently, personalised medicine is becoming more frequently used and many drug companies are including this strategy to gain market access for very specialized therapies. In this article, in order to understand the relationships between the health authority and the drug company when deciding upon the implementation of personalized medicines, we take a theoretical perspective to model it when the price and reimbursement policy follows a pay-for-performance scheme. During the development of a new drug, the firm must decide whether to generate additional knowledge by investing in additional resources to stratify the target population based on a biomarker or directly apply for marketing authorization for the new treatment without information on the characteristics of patients who could respond to it. In this context, we assume that the pricing policy is set by the health authority, and then we characterize the pricing and investment decisions contingent on the rate of response to the treatment.

We find that the price when the firm carries out R&D leading to the personalized treatments is not necessarily higher than the price if the firm does not carry out the R&D investment. When the rate of response to the treatment is too low, then the new drug is not marketed. If the rate of response is too high, personalized medicine is not implemented. For intermediate values of the rate of response, the adoption of personalized medicine may occur if the investment costs are sufficiently low; otherwise, the treatment is given to all patients without additional information on their characteristics. The higher the quality of the genetic test (in terms of its sensitivity and specificity), the wider the interval for the values of the proportional responders for which personalized medicine may be implemented.

Our findings show that pre-approval incentives (prices) to promote the personalized treatments depend on the specific characteristics of the disease and the efficacy of the treatment. The model gives an intuitive idea about what to expect in terms of price incentives when the possibility of personalizing treatments becomes a strategic decision for the stakeholders.