Medicine Company

Case 3 – Q2

The price should cover $30 million upfront cists and continue development, $3 million of marketing fee, variable cost for drug manufacturing and certain profit margin in pharmaceutical industry.

In the case, there are 1300 medical centers, 700 of which were responsible for 92% of all angioplasty procedure. So the calculation is based on the 700 centers.

1. The difference if the cost of complications by using Heparin and Angiomax

Cost of complication for Heparin is $110,252,800.

Cost of complication for Angiomax is $40,185,600.

Average saving for each center = ($110,252,800 - $40,185,600)/700 = $100,096.

2. Calculate the breakeven price of Angiomax for hospitals by using Competition-based pricing method. It is because the cost of Angiomax should be within the budget of hospitals.

Cost of complications by using Heparin + Cost of Heparin per dose * Patient numbers * Dose used per patient

= Cost of complications by using Angiomax + Cost of Angiomax per dose * Patient numbers * Dose used per patient

Cost of Heparin = $2

Dose of Heparin per patient = 1

Patient numbers = 700,000 * 10% *92% = 64,400

Cost of Heparin = X1

Dose of Heparin per patient = 1 * 70% + 2.5 * 30% = 1.45

So, 110,252,800 + 2 * 64,400 * 1 = 40,067,200 + X1 * 64,400 * 1.45

X1 = $835.4

It means X1 is the price ceiling of Angiomax. If Angiomax is priced under X1, hospitals can gain financial benefits.

3. Cost-plus pricing method

Cost per dose of Angiomax * typical “price” to COGS = $40 *10 = $400

Therefore, we could price between $400 and $835.4. Because 80 of the cost are paid by the managed care organization and the government as well as Angiomax is just a small proportion of total angioplasty, the price sensitivity of end users is quite low. In addition, the doctors, who determine which medicine to be used, care more about the medicine performance than the price. So, we could charge a quite higher price.