The medicines corporation case Essay
The medicines corporation case
1. What is the value of Angiomax to a hospital?
1.1 Angiomax Vs. Heparin
Angiomax is considered as a potential substitute for heparin. It has 3 major advantages when compared with Heparin. First, the effects of Angiomax are more accurate and more predictable. Second, it works better among patients at risk for bleeding, where heparin often proves problematic.
Third, the product works faster than heparin and patients do not need to wait for 2 – 3 hours to identify the results. The major disadvantage of Angiomax is its high production cost against Heparin. As Heparin has a very long history dated back in 1916, the price is only $2 per unit while the production cost of Angiomax takes nearly $40 per unit. 1.2 Value to a hospital
Both Heparin and Angiomax can be widely used as an anticoagulant in acute coronary heart treatment, such as unstable angina, heart attack, balloon angioplasty and CABS.
Angiomax only get the approval of FDA for angioplasty. Normally speaking, the insurance company will pay $11,500 to a hospital for every angioplasty and the cost will be $9,500. If there is any complication or death, a hospital will incur additional $8,000. As shown in experiment data, Angiomax is effective in reducing the risk of complications and we have summarized the effect as following: Table 1.1 Risk of Complication – Heparin Vs. Angiomax
Very High Risk
Source: Case Material page 8
*estimated by Meanwell, note 7, page 8
So we can estimate the potential cost saving of Angiomax as following: High Risk: 8,000*7%=560 Very High Risk: 8,000*13.6%=1,088 Low Risk: 8,000*3.5%=280
Here, we ignore the cost of Heparin and Angiomax and we discuss the pricing in detail in the next section. 2. What price should the Medicines Company charge for a dose of Angiomax? Why? 2.1 General Principal of Pricing
In pricing of Angiomax, we basically consider two things: first, the value it created for consumer, which has been discussed in Section 1 and second, the cost of production and promotion. We know that the Total Surplus = Total Benefit – Total Cost and the surplus will be shared by sellers and buyers. Our target is to quantify the ceiling (total benefit) and floor (total cost) of Angiomax. 2.2 Price Ceiling
In Section 1, we have roughly quantified the total value of Angiomax created for a hospital. Here we consider the net cost of replacement of Heparin by Angiomax. We noted that for an ordinary treatment, 70% of the treatments will take 1 dose of Angiomax while 30% will take 2 – 3 doses. The average dosage will be: Average Dosage of Angiomax = 70%*1+30%*2.5 = 1.45
We also estimated that there will be 4 doses of Heparin used in an ordinary treatment. Thus we assume the total value (cost saving) will be all taken away by the price of Angiomax. Table 2.1 Cost Saving of Angiomax
Very High Risk
As shown above, if we assume all the benefits have been taken away by the seller, the price of Angiomax should be 391.72, 755.86 and 198.62 for each segment markets. That is our ceiling price for Angiomax. 2.3 Price Floor
When considering the price floor, we mainly use breakeven point analysis to address this problem. The equation will be used here is listed as following: Q * (BEP – VC) – FC = 0
The direct variable cost is $40 per dose after the Medicine Company contracted out production to UCB. As for the fixed cost, we should take into account the amortization period. We noted the patent of Angiomax will be expired in 2010 which means there will be 10 years protected period. The total fixed cost includes the following: Table 2.2 Breakeven Analysis of Angiomax
Clinical trials fee
FC per year
Total Fixed Cost/Year
Source: Case Material
*We use SG&A of 2000 as a proxy of annual marketing expense, see Exhibit 6 As for BEQ, we cannot provide a function between Quantity and Price, such as P=a-b*Q, so we have to estimate the Quantity first and take it as given to solve the breakeven price (BEP). According to Table A, we know that in Balloon Angioplasty treatment, there are 700,000 patients receiving Heparin per year.
Assume that Medicine Company can totally replace Heparin with Angiomax, the max sales volume would be 700,000 * 1.45 = 1,015,000 doses. But actually, replacing a widely accepted $2 drug with any drug costing many times more would take a very long time. As the Medicine Company decided to focus on those 700 centers responsible for 92% of all angioplasty procedures and a random survey conducted to assess the overall satisfaction with Heparin among interventional cardiologists, it is indicated that about 9% cardiologists, who marked 3 or 4 points to Heparin effect, can be convinced to push for the Angiomax.
Take these factors into account, the potential sales volume could be: Quantity = 700,000 * 1.45 * 92% * 9% = 84,042 doses/Year
By solving the equations, we can get the following:
84,042*(BEP – $40) – 20,200,000 = 0 => BEP = $280.36/dose Here we get the
price range for Angiomax as [$280.36 ~ $391.72]. 2.4 Recommended Price Although we have estimated the price range, the exact price should be set according to the bargaining power between seller and buyer, the strategy adopted by the company (penetration or predatory) and the demand elasticity.
As it is the first product launched by the Medicines Company, it has limited bargain power over potential buyers. So we think it should spilt the surplus 50-50 and the recommended price should be set at $339.99, which is nearly 9 times to production cost. 3. How to sell this product?
There’re 3 related parties that influences the purchases of new products: doctors, pharmacists and administrators. Although it’s rarely to have direct access to administrators, they can work through doctors and pharmacists to push for the drug. Pharmacists decide whether to purchase the drug, while doctors decide how much drug to use.
Other important things should be addressed here is as following: 1) Form an elite sales team – the key to sales are relationships within the acute coronary care community. They need to hire Innovex, the marketing services firm which provides experienced salesmen with existing relationships with the doctors and pharmacists they want to reach. In the long run, it should also establish the relationship with hospitals and enhance training of product knowledge to form their own elite sales team.
2) Educate the market – a senior sales method is changing current concept of consumers about products. Publish articles in medical journals to analyze the disadvantages of Heparin and advantages of Angiomax to change the old concept of treating heart disease to new one. Tell doctors and pharmacists that Angiomax is the newest and best product for them to use. 4. How do you think of the Medicines Company’s business model? Is it viable? The Company’s main strategy is to acquire those medicines abandoned by other pharmaceutical companies. Although the Company has adopted 4 rules to screen among the candidates, it still faces the potential risk of failure.
Drug companies abandoned these products for a variety of good reason including safety, efficacy and profit potential. Why does the Medicines Company have the Golden Finger? There is no such guarantee that products which comply with the 4 criteria will turn out to be a blockbuster.
Even if Angiomax became a success, who can ensure IS-159 and CTV-05 will also be successful? Unlike other major players like Biogen, the Medicines Company is much more vulnerable to risk as it has no product portfolio. Not even to mention that the Company appears to lack a clear marketing plan for Angiomax and other future drugs reaching FDA approval. So we should stay prudent about the Company’s strategy and let the Company to prove itself in the future.