This paper is a pricing case for Angiomax. The case questions involve calculating the EVA for the customers, based on different value for different market segments. Then, the price points that the company could charge for the different customer groups is taken into consideration in deriving the optimal target market and the price needed to attract that market.
Product Pricing
The reference price is the $2 per dose cost of heparin. The differential benefit is about $8,000 per patient, among patients for whom there were fewer adverse results (death or complications). For VHR + HR, the differential is 7% of patients that did not experience complications. For every 100 patients, this implies a cost reduction of $56,000 for the hospital. For HR only, the differential is 5.6% of patients, so per patient the savings are $448. For VHR, the differential is 13.6% of patients, so per patient the savings are $1,088. For LR, the differential is 3.5% of patients, so per patient the savings are $280. Of course, the size of these segments differs. The VHR segment is relatively small, only 20% of HR and 10% of total angioplasty patients. The weighted average cost saving per patient, of total angioplasty patients, is therefore: (.5)(280) + (.4)(448) + (.1)(1088) = $140 + 179.2 + 108.8 = $428, plus the $2 reference prices gives an EVA of $430.
Medicines has the production cost down to $40 per unit. There are fixed costs to consider here, but in the beginning the contribution margin can be considered. With this, the contribution margins are as follows. For all patients, $390. For LR, $240. For HR, $408. For VHR, $1,048. The dosage splits will also be needed here. This is again a weighted-average. The average dosage per patient is (.7)(1) + (.15)(2) + (.15)(3) = 1.45. There are a total of 3.5 million annual patients in the overall market.
This gives revenue and gross profit as follows (in millions of dollars):
LR
HR
VHR
Total Patients
3,500,000
1,400,000
350,000
Price
Doses
1.45
1.45
1.45
Revenue
COGS
81.2
20.3
Gross Profit
3. If Angiomax is priced at $180 per dose, this would apply to all segments of the market, since the EVA for low risk is $280 and the EVA for the other types of patients is much higher. Hospitals will take on any drug that has an EVA higher than the cost of the drug. However, $180 means that the markup is much lower than the industry norm.
The computation of the maximum revenue and gross profit for the company, based on a price of $180, would be as follows (in millions of dollars):
All
HR + VHR
VHR
Total Patients
3,500,000
1,750,000
350,000
Price
Doses
1.45
1.45
1.45
Revenue
91.35
COGS
20.3
Gross Profit
71.05
4. The segment of patients that Angiomax is going to be used on first is going to be the very high risk patients, as this is where the hospitals will see the greatest benefit. However, there are fixed costs that are associated with this product. A price point of $180 is unlikely, since the traditional markup is 9x, implying that the price point most likely to be used by Medicines is in the $400 range. At that price point, there is no EVA for hospitals to use this product with low risk patients. The product would be used for high risk and very high risk patients, however, so that is the core market for this product. With a $400 price point, the revenue and gross profit figures as follows:
HR + VHR
Total Patients
1,750,000
Price
Doses
1.45
Revenue
COGS
Gross Profit
Note that this total gross profit (contribution) is higher under this option that for the $180 option, even though that option would deliver a larger potential customer base. These figures of course are for the U.S. only.
A gross profit of $913.5 per year should be sufficient to cover fixed costs and deliver return to the company's investors. The royalty rate is another factor. This is not part of the gross profit, as it would be entered as a sales or marketing expense, or a licensing expense, none of which are part of the gross profit (only COGS is). This assumes that there are a total of 1.75 million total procedures, of which angioplasties make up 20% of the market. If half are in the total target market (HR + VHR), then that implies 350,000 angioplasties per year are going to be covered in the royalty program. The total cost of this program therefore is:
(70,000)(.05)(1.45)(400) + (280,000)(.12)(1.45)(400) = $2.030 million + $19.488 million. The total royalties paid at this level would be $21.518 million. Therefore the gross profit net of royalties would be $891.982 million.
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