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Biopure Case

By cwbegay Apr 03, 2005 1638 Words
BioPure Corporation, which was founded in 1984 by entrepreneurs Carl Rausch and David Judelson, is a privately owned biopharmaceutical firm specializing in the ultra purification of proteins for human and veterinary use. In 1998 Biopure pioneered the development of oxygen therapeutics using "Hemoglobin", a new class of pharmaceuticals that are intravenously administered to deliver oxygen to the body's tissues. Biopure's two products, Hemopure for human use, and Oxyglobin for animal veterinary use, both represented a new Oxygen based treatment approach for managing patients' oxygen requirements in a broad range of potential medical applications. The factor distinguishing Biopure's two products from other blood substitute products being developed by two possible rivals, Baxter International and Northfeild Laboratories, is that its hemoglobin based source is bovine rather than human and was derived from the blood cells of cattle. Both of Biopure's blood substitute products were in the final stages of the approval process of the Food and Drug Administration (FDA) in 1998. Oxyglobin had just received the FDA's approval for commercial release declaring it safe and effective for medical use. Hemopure was entering final Phase 3 clinical trials and was optimistically expected to see final FDA approval for release in 1999. The FDA approval of Oxyglobin and its possible subsequent release into the veterinary market caused concern over whether the early release of Hemoglobin would impinge BioPure's ability to price Hemopure when the product finally received approval. Given that the two products were almost identical in properties and function, it was thought that the early release of Oxyglobin would create an unrealistic price expectation for Hemopure if released first. Although blood transfusions in the veterinary market are infrequent and the market scope is limited, Oxyglobin has the potential to become a lucrative investment for Biopure. Based on the approximate 355,000 blood transfusions (please see Exhibit 1 for the calculations behind this estimate) performed on animals in 1995, a definite opportunity exists for Oxyglobin within the veterinary blood market. Since the number of blood transfusions conducted in 1995 represented on average only 2.5% of animals suffering from acute blood loss, increased availability of animal blood could possibly stimulate the market.

In order to estimate the possible impacts of introducing Oxyglobin as a major product, it was assumed that Biopure would be able to produce and sell its full capacity of 300,000 units per year. As can be seen in Exhibit 1, the results of such an aggressive marketing strategy would yield a positive gross margin of between 49% and 66%, assuming the product was sold at a price of $100 to $150 per unit. If the company was not able to sell as much of its product as anticipated, it could potentially lose money. Since the average current price charged by veterinary clinics across the country is $100 for a blood transfusion, the clinics would have to raise their prices in order to make a profit on the procedure; this could reduce sales for Biopure. While marketing Oxyglobin has the potential for success, Biopure will have to be extremely careful to create enough selling power to cover the $15 million in fixed costs that the product will cost them. Biopure's HemoPure product on the other hand is in a unique market position. Looking at Exhibit 5 in the case we see that approximately 14 million units of blood were donated in 1995. We must first adjust this number for patients and uses for which Hemopure would not be a good substitute. If Hemopure only stays in the human system for 2 to 7 days than it is not of much use to patients with Anemia. Also, unused units would have no market potential. Autologous uses can be removed because of the obvious benefits of using one's own blood in elective surgery. So what remains are approximately 7 million units used for acute blood loss. It is also important to remember the 100% efficiency of Hemopure, so the total unit market potential is about 3.5 million units per year. Given this potential it can be assumed that Biopure will sell 100% of its current yearly capacity of Hemopure, 150,000 units. Since Biopure has little information on the price sensitivity of the human market, the multiple prices were explored (See exhibit 2). It can be seen from exhibit 2 that Hemopure will be profitable across a range of prices. Even at half capacity and a price of $400 Biopure will make a gross margin of 50%. This scenario also assumes that Biopure can produce Oxyglobin on a second production line that is not yet built. If the market is more price sensitive, Biopure will be able to lower prices given their low cost of production compared to their competitors. Oxyglobin is the only blood substitute approved by the FDA for the small-animal verterinary market, the expectation of competition from similar products in the market is small. It has been estimated that it would take 2 to 5 years for another blood substitute producer to bring a product to the veterinary market. The veterinary market willingness and ability to accept a high price for the product is less than that of the human medical market, and because of this Biopure has a great deal of pressure to price Oxyglobin lower than the human blood substitute product. The challenge for marketing Oxyglobin will be in gaining the mindshare of the veterinarians that act as gatekeepers to the product. The current source of blood for animal transfusions comes from donor animals. This method generally does not include blood typing and cross matching and has been shown to prolong the recovery of the animal because of this lack of preparation. The potential for Oxyglobin lies in teaching the veterinarians the prospective benefits from using it. Competition from Baxter International and Northfeild Laboratories both threaten the profitability of Hemopure. Both of these competitors' products are expected to receive FDA approval at approximately the same time as Hemopure. All three products will be hitting the market concurrently, and Baxter will have an advantage because of its large size. Baxter's size provides them with a large marketing department that may enable them to reach many distributing channels and quickly gain the mindshare of these distribution channels. It will be important for Biopure to educate buyers and present Hemopure as a differentiated product with superior quality as compared to the other competitive products entering the market. Finally, in analyzing the potential impact of Oxyglobin's price on the price of Hemopure, the 4 P's must be analyzed - Product, Price, Place, and Promotion. First, in evaluating the company, the cost of production is determined to be $15 million per year independent of volume. Next, a determination of who the customer is and what their potential is must be made. The competition in the animal blood substitute market is essentially non-existent in that there is no other company in this space. The only other viable option besides Oxyglobin is to use an administratively complex donor animal or a supply strapped animal blood bank. The collaboration or distribution of Oxyglobin is critical to its success and a major factor in its pricing. To distribute Oxyglobin through a regional or national network would most likely require a commission of some sort to the distributor of the selling price. It would be more cost effective for Biopure to sell directly to the veterinary practices. This manufacturer direct model will require Biopure to recruit and maintain a sales force. An advantage of releasing Oxyglobin into the market first may be that Biopure can master its advertising and promotional skills in order to avoid major mistakes with Hemopure when it will be ready for the market. The success of the release will bring some positive clinical record, will establish the company's brand name and gain marketing experience for the company. The positive record of Oxyglobin will make Hemopure more attractive to potential customers for a number of reasons and will eliminate product expected shortcomings and increase product benefits. In this context by starting with Oxyglobin, Biopure will target not only the animal market, but human market potential as well. To do this, one begins by looking at the number of veterinary practices in the US. Exhibit 1 shows the average monthly case load of the 15,000 US veterinary practices. In looking at these averages, the absolute number of practices and doctors for each class of practice can be determined. Taking the average number of animals (dogs, cats, and other) each class of practice treats each month and multiplying that by the absolute number of practices in each class yields the absolute number of animals each practice treats per month, and subsequently the annual potential. Targeting veterinarians in the emergency care segment is the most efficient and effective approach. The potential of this segment is 577,500 animals per year. Of this a greater proportion may be in need of blood, of which comes from blood banks and the remaining can receive blood from a very inefficient and costly "donor animal". This represents the potential market for Oxyglobin and is clearly far above the 300,000 unit annual capacity for Oxyglobin. Of this population, it is known that 60% of Veterinarians and 65% of pet owners are willing to pay the $100-$150 price. Again, being conservative, if only 25% are actually willing to pay those prices, there is still a demand of units, again far exceeding capacity. From this one can derive the estimated total revenue assuming both unlimited production capacity and assuming 300,000 capacity. At 300,000 capacity, our total revenue is maximized at $150, therefore we select $150. At this price point and capacity we would generate $45,000,000 in revenue (300,000 units * $150).

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