Pricing strategy and market segmentation for Angiomax

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

This gross profit is lower than the one that the company would have under the scenario with the $400 price tag and the pursuit of both the high risk and very high risk markets. It is also lower than the profit the company could expect with a very low price point and targeting the entire heparin market. This again supports the conclusion that the most attractive market is the HR + VHR combined market, which represents 50% of the total market but has high EVA for hospitals.