Q1. Should Biopure launch Oxyglobin? Why? Support your arguments with quantitative analysis (ie. calc. of market potential). We believe that Biopure should launch Oxyglobin now. First of all, the potential market demand is huge. While current annual demand is 354,750 units (95% primary care practices x 17 units canine blood/primary care practice + 5% specialty care practices x 150 units canine blood/specialty care practice)i accounting for only 2.5% of the cases, potential market demand including unmet need is 4,257,000 units (354,750 units x 30%/2.5%, since 30%i of the cases would have benefited significantly from blood transfusion) or 3,575,880 units (even if accounting for 84% dissatisfaction rate of currently available blood transfusion alternatives)i. And the fact that blood typing is no longer needed is a catalyst to creating such market demand. This is a lucrative demand in which Biopure can enjoy monopoly for at least 2 to 5 years, even if potential entrants, Baxter and Northfield, decide to enter the market right awayii. There’s also a first-move advantage for price-setting, brand-building and distribution channel establishment purposes. Secondly, launching Oxyglobin now is advantageous for risk-diversification. There’s a 30% chanceiii that Hemopure may never pass through Clinical Phase 3 and even if it does, there could be concerns about BSE (Mad Cow Disease) and unknown side-effects if severe can result in fatal lawsuits. In this sense, it is critical that Biopure start generating Cash Flows as soon as possible and disperse its US$200 million R&D cost. On top of product portfolio diversification, launching Oxyglobin now allows for further product improvement (if necessary) before launching Hemopure in the human market. Lastly, there are no overlapping customers between the Veterinary and Human market (different distributors, veterinarians vs doctors, pet owners vs patients). It is also conventional that success in the US and European market extends to success in other markets each of which take extra few years to receive approval. Also, success in dog market could open opportunities for use in other mammals such as cats, livestock, and horses. So it is highly recommended that Biopure launch Oxyglobin in the US and European veterinary market as soon as possible.
Q2. What reference prices will Biopure’s potential customers of Hemopure use in their decision making, and why? Biopures potential customers will have three other choices when deciding which product to use. The company firstly expects insurance companies to decide on whether to use Hemopure in hospital transfusions. Their primary point of reference will therefore be the existing cost of regular blood transfusions. The second and third choices, assuming they gain FDA approval would be the products of Baxter International and Northfield Laboratories. The first point of reference is the cost of real blood which is as low as $125 per unit and up to $225 per unit on the niv. The de-facto decision is also the cheapest. We are not considering the autologous blood transfusion, since at a lower price point (than Hemopure), patients with means, and with prescheduled operations are more likely to choose their own blood to a substitute. Secondly, Baxter Internationals’ product HemAssist, is widely believed to be priced between $600-$800 per unitv. Although we do not have an exact price for this product, Baxter is acknowledged to be the leader in the market for blood related medical products. This price may therefore be taken as a benchmark, should their product reach the market. Northfield Laboratories’ product PolyHeme is also expected to be priced similarly to Hemassist, at between $600-$800 per unitv. However, it is worth nothing that the price of this product may rise due to the fact that Blood Centers of America, it’s supplier of RBC’s, has raised the price from $8 per unit to $26 per unit v. We do not believe that the consumers will use OxyGlobin as a reference price for Hemopure since they are different product categories.
Q3. How much should Biopure charge its Oxyglobin and Hemopure and why? Support your arguments with quantitative analysis. Industry Structure:
The market for blood substitutes is at an early stage with all three players namely Baxter, Northfield and Biopure currently in testing Phase III trials. Given the challenges in cross-matching blood groups and rejection volumes at 1.2m unitsvi for transfusion, the combined production capacity for blood substitutes at 1.45m units, across all companies, is likely to have considerable demand. Since the industry is in the introduction/ growth stage of the lifecycle, the pricing decision for both Hemopure and Oxyglobin will be geared more towards value delivery to consumers rather than pricing for market share growth or stealing share from competitors. Hemopure:
Biopure’s Hemopure product is slated for phase III trials and not due to launch until it obtains FDA approval. Under these circumstances, using an Economic value analysisvii shows that the reference price is the $125 cost to patient of human bloodiv. In addition to the reference value, the differentiation value brought about by Hemopure includes: 1. No need for blood typing or cross-matching = $25 savings 2. Value from Increased shelf life and elimination of waste = 2.7m blood wasted through expiration & rejection/ 14m total RBC cell donations & Transfusions*125 = 19% savings*125 = $24.11 3. Value from 100% efficiency at transporting oxygen = 50% savings on 3.2m units dedicated to Chronic Anemia = 1.6m/14m*125 = $14.29 Other benefits such as lower probability of infections & contaminations and improved treatment of stroke & heart attackviii have not been included into the value /cost equation due to insufficient information.
Hemopure brings the consumer more value than blood donations although it is difficult to compare it to the reference value of blood donations alone, given the information gap in terms of value from infection and heart disease prevention. With R&D costs of $267 (spread over 5 years), combined with fixed costs of $100 and variable costs of $1.5, total costs of Hemopure amount to $368. Adding, the same low & high-end margin of Baxter, we arrive at a price range of about $540 to $720. So, Biopure should continue working on Hemopure but not price/launch with just blood donations as a reference value and without fully valuing the benefits of lower probability of infections and improved treatment of stroke ailments. If Hemopure’s launch is followed by HemAssist’s launch, then the reference value shifts from blood donations to blood substitutes and hence the final pricing can be expected to be closer to the $600 to $800 range (where Biopure will break-even as seen in the cost+margin approach under a 5 year payback horizon). However, Hemopure needs to assess its differentiation value between versus HemAssist before considering final price for launch. Oxyglobin:
As seen in question 1, care is provided only to about 2.5% of the market potential today and there is unmet need for another 27.5%. We assume that Oxyglobin, being the first vertinary blood substitute, will be able to capture a monopoly position in the market for the 3.9m unmet demand. The below table shows that by pricing at a consumer price of $300 ($150 to sell to Veterinarians), Biopure is likely to capture demand that is more than its initial production capacity of 300,000 units and therefore generate revenues of $45m in year 1.
Given that, Hemopure is still awaiting FDA approval, it would be prudent to start generating free cash flows with the Oxyglobin launch, as the other product has a potential risk of not being approved for launch. Incase Hemopure does not launch, Biopure can continue with producing 300,000 units of Oxyglobin, and on the other hand can find an optimal mix of production incase Hemopure is approved. Given that Oxyglobin and Hemopure are serving two completely isolate product categories with non-overlapping consumer interests, the price of Oxyglobin at $150 is unlikely to be seen as a reference value during the launch of Hemopure. Hence Biopure should launch Oxyglobin at the price of $150 immediately. References: