OBJECTIVES: Thalidomide is an immonumodulatory drug that has been shown in a phase III clinical trial to be effective when used in combination with melphalan and prednisone (MPT) in patients newly diagnosed with multiple myeloma who are unable to undergo stem cell transplant (SCT) or high-dose chemotherapy (HDC).  As part of an application to the Pharmaceutical Benefits Advisory Committee (PBAC) in Australia we assessed whether such use is cost-effective when compared with MP alone, the current standard of care. METHODS: Data on the comparative efficacy of MPT versus MP alone were sourced from a completed international phase III study. The results from that study showed a statistically significant difference in median survival of 1.53 years (p=0.0006) in favour of MPT. We applied a digitising program to the published Kaplan-Meier survival curves in order to estimate the mean survival (area under the curve) and extrapolate the results to a lifetime horizon.  These data were incorporated into a cost-effectiveness analysis taking the perspective of the Australian health care system.  Outcomes were assessed as quality adjusted life years gained (QALYG), based on applying published utility values to the extrapolated survival data. The costs of the primary drug therapies (MPT or MP), associated medical services, and the treatment of thalidomide related adverse events were all included.  Costs and benefits were discounted at 5% per annum, and costs were stated in A$ at 2008 prices. RESULTS: The modelled analysis estimated an incremental gain in average survival of 1.47 years.  This translated into 1.14 QALYGs once the utility values were applied.  The associated average incremental cost was AUS$23,953.  The resulting cost per QALYG was A$20,998. CONCLUSIONS: This analysis resulted in a positive recommendation from the PBAC to fund thalidomide for the treatment of patients newly diagnosed with multiple myeloma.