Objective: AVOID (Aliskiren in the Evaluation of Proteinuria in Diabetes) was a multicentre, randomised, double-blind, six-month study designed to assess the effect of adding aliskiren, an oral direct renin inhibitor, to losartan and optimal antihypertensive therapy (excluding ACE inhibitors), on the reduction in urinary albumin to creatinine ratio (UACR) in patients with hypertension, type 2 diabetes, and nephropathy. A cost-effectiveness model was developed aiming to estimate the progression to end-stage renal disease (ESRD) and to project the associated costs and clinical outcomes of aliskiren in the UK setting. Methods: A previously published Markov model of diabetic nephropathy and ESRD was adapted to incorporate treatment effects from AVOID, where aliskiren reduced mean UACR versus placebo by 20% (p=0.0009). Transition probabilities from AVOID were used until patients reached UACR >1,900µg/g, with probabilities from the Irbesartan in Diabetic Nephropathy Trial used thereafter. Direct medical costs were based on UK pharmacy costs and published sources. Annual discount rates of 3.5% were applied over the 20-year time horizon. Results: Short-term therapy benefits associated with aliskiren were projected to increase life expectancy by 0.0983 years (7.9175±0.0434 versus 7.8192±0.0369 years), improve quality-adjusted life expectancy by 0.0878 quality-adjusted life years (QALYs) (5.3038±0.0444 versus 5.2160±0.0391 QALYs) and reduce the cumulative incidence of ESRD by 2.51 percent (19.52% versus 22.03%) compared to placebo. An incremental cost-effectiveness ratio of £12,073 per QALY gained was calculated for aliskiren, which is well below the willingness-to-pay threshold of the UK of £30,000 per QALY gained. Sensitivity analysis where the clinical benefit of aliskiren was extended beyond UACR >1,900µg/g, proved to be a cost saving strategy. Conclusion: Aliskiren would be considered cost-effective in the UK setting when added to losartan therapy due to the additional renal protection provided and a reduced incidence of ESRD.