[Get Solution] The Medicines Company Case Essay
Q1
Value: Angiomax is a blood-thinning drug, or anticoagulant, used in emergency coronary heart care. Angiomax is positioned as an alternative to heparin, the most commonly used anticoagulant in emergency coronary heart care, so to assess Angiomax value to a hospital is required to compare these two drugs.
First of all is necessary to analyze the differences in effectiveness of the products in treatments. The use of heparin has associated some general disadvantages like: Unpredictable effects: it is difficult to use properly since its effectiveness depends on achieving a certain level of anticoagulation of the blood, too much might lead to uncontrolled bleeding and too little might not prevent a blood clot High risk of uncontrolled bleeding: it is necessary a tight monitoring of patients in order to identify and control potential major bleedings after the use of heparin
Risk of adverse reactions: the use of heparin could cause a thrombocytopenia (HIT) in some patients Needs several hours to the observe the effects: cardiologists said that it might be necessary wait three or four hours to see if a dose of heparin has the desired effect In contrast, the effects of Angiomax were very accurate and predictable, since it works faster than Heparin so it is easier to know if the desired effect was obtained. Some studies conducted discover that the use of Angiomax in has associated at the same time a lower risk of major bleedings and risk of adverse reactions in patients.
Angiomax is more effective than Heparin, especially in high-risk and very high-risk patients, that accounts for 50% of all the angioplasty patients (40% high-risk & 10% very high-risk). However, for the other 50%, the low-risk patients, Angiomax was also better, but the differences when compared wit heparin are not so significant as in the other half of patients.
The higher quality and capabilities of Angiomax described create the Functional Value that the hospital could benefit through the use of the new drug. The doctors, who are the potential users, are more concerned with the results and performance of the drug in treatments. It is important to assess what economical/monetary value the Angiomax could offer to a hospital, especially to convinced the administrators to approve the drug for ongoing use within the hospital.
Since the major disadvantage of Angiomax is its production cost of $40 per dose against the $2 per dose of heparin, that leads for sure the selling price of Angiomax to be higher. Hospitals decision will depend on whether the cost savings compensate the higher price of not.
Angiomax reduces the probability of complications during angioplasties that can cost on average $8000 for a patient who experienced complications or eventually die. These extra costs are not reimbursed by insurances, they absorbed by hospital.
Therefore, the use of Angiomax allows the hospital to benefit from some cost savings since the use of Angiomax decrease the risk of complications after the treatment and consequently the extra cost associated, especially in high-risk patients (Heparin=16,5% Angiomax=9,5% ?=7% means a saving of 560$) and in very-high risk patients (Heparin=21,4% Angiomax=7,8% ?=13,6% means a saving of 1088$). At the level of low-risk patients the cost savings are not so significant, it only represent a half of the cost savings of high-risk patients, 280$.
Angiomax has associated lower risks both for patients and to hospital than the other alternative drug heparin, so Hospital could believe that they can trust Angiomax, since with this new drug hospitals can offer to patients a better, safety and reliable treatment, and consequently save more lives. Market:
The Medicines Company initially will try to market the 700 centers across the USA responsible for 92% of all angioplasty procedures. Angiomax, as a prescription drug, appears to be part of a big market that move a huge value of 220 billion dollars in sales worldwide at the manufacturer level, with USA accounting for 50% of all sales. Also the expected market growths at 10% rate per year through 2010 express the high potential of the market.
Other important trends were impacting the USA drug market, and are able to support the concomitant increase of the particular market for drugs used in coronary heart care:
People are becoming older: very important fact since people aged 65 or over correspond only to 15% of the population but represent 33% of prescription drug sales. It is possible to conclude that due to the aging population, the market for prescription drugs is expected to increase
Coronary heart disease was the leading cause of death in the USA: during the late 20 century accounts for 1 in each 5 deaths
Coronary heart disease is transmitted genetically: which means that in the future the number of people with this type of pathology is expected to growth, since the previous American generations had already suffer from some heart problems
The modern societies rhythm of life and bad habits: the constant stressed faced by people in their daily life associated with some risky behaviors like smoke, drink, fast-food and lack of physical activity increased exponentially the risk of an individual to suffer from any heart problem in the near future By the late 90s, 14 million Americans had some form of coronary heart disease, from which 1.5 million experienced unstable angina each year and another 1.1 million suffered from a heart attack.
These patients with unstable angina or heart attacks require emergency care and therefore needed an anticoagulant drug to prevent new blood clots; most emergency care patients need either a balloon angioplasty or a coronary artery bypass surgery and so anticoagulants were also needed to prevent blood clots from forming before, during and after these procedures.
Before Angiomax launch, about 3.5 million coronary care patients received heparin to prevent blood clots. The Market for Angiomax is not as big as the one for heparin right now since FDA approval was only for its use in angioplasty procedures, which means that Angiomax can only reach about 1/5 of the patients receiving anticoagulants per year.
The Medicines Company is however undertaking clinical trials in order to confirm the benefits of Angiomax also for patients with heart attacks, unstable angina or undergoing a Coronary Artery Bypass Surgery, so if they obtained the FDA approval, then the market for Angiomax will be the same as the one for heparin, about 3.5 million patients per year. A number that might increase because there are 14 million people in the USA with coronary heart disease. th
Q2
It is fundamental to set the price window for Angiomax and choose the most appropriate price that captures the value created by the product. In order to create this price window, it is necessary to know the Reference Value (the price of customer best alternative), the Differentiation Value (the value to the customer of any Monetary or Psychological differences between alternatives available) as also the Relevant Total Costs associated with the Angiomax.
1. Reference Value: The price for a dose of heparin is 2$, but on average a treatment requires 4 doses of heparin. So the Reference Value for treatment 8$ (4doses*2$)
2. Differentiation Value: It is fundamental to quantify the benefits provide by Angiomax when compared to heparin. The fact that Angiomax decrease the uncertainty and risk associated in each treatment represent a great psychological value since doctors and patients could feel a sensation of safety that heparin cannot provide.
This psychological value due to its subjective character is very difficult to quantify, so it is better to move look to the monetary value created by Angiomax. The use of Angiomax allows the hospital to benefit from some cost savings since the use of Angiomax decrease the risk of complications after the treatment and consequently the extra cost associated, especially in high-risk patients (Heparin=16,5% Angiomax=9,5% ?=7% means a saving of 560$) and in very-high risk patients (Heparin=21,4% Angiomax=7,8% ?=13,6% means a saving of 1088$).
At the level of low-risk patients the cost savings are not so significant, it only represent a half of the cost savings of high-risk patients, 280$. The average cost savings are 0,5*280$ + 0,1*1088$ + 0,4*560$= 472.8$, since 50% of the angioplasty patients are low-risk, 40% high-risk and 10% very high-risk 3. Relevant Total Costs: These costs are the ones that actually influence the impact of pricing decisions in profit. They are the costs that are incremental (not average) and avoidable (not sunk).
It is known that each dose has variable costs of 40$ and that the Medicines Company need to spent spread by a period of ten years (maximum duration of a patent), an initial 2M dollars in the acquisition, 28M dollars in the continued development of the product, 12M dollars to finish the clinical trials and gain the FDA approval, 10M dollars to reduce the production costs as also a rough amount of 15M dollars per year in expenses with Sales, General & Administrative costs.
It is possible to conclude that the company incurred in an average annual fixed costs of 20.2M dollars per year [(2M+28M+12M+10M)/10years + 15M)] Knowing that for a general treatment it was necessary 1.45 doses of Angiomax (70% ->1 dose & 30% -> 2 or 3 doses), it is possible to know what is the maximum price that makes it indifferent for hospitals to buy Heparin or Angiomax.
Since the average cost saving per treatment with Angiomax is 472.8$, and it was necessary to use 1.45 doses, the maximum price for dose is given by the maximum price of an Angiomax treatment divided by the number of doses needed by treatment, (472.8$+8$)/1.45= 331,5862069$.
Assuming the economic value in this case is in fact the value perceived by hospitals, The Medicines The price floor is the one that makes The Medicines Company have zero profit. To assess this price it is necessary to take into account the relevant costs incurred by the company as also the forecast demand for Angiomax.
Knowing that there are 700 000 angioplasty patients receiving Heparin per year, the maximum volume of sales for Angiomax is 700 000*1.45 doses=1 015 000 doses per year. However, The Medicines Company needs to take into consideration that it is not easy to replace a well satisfactory and cheap drug as heparin
by Angiomax, so in a realistic scenario they would not sell the maximum possible according to the data available. Since the company will focus its action on the 700 centers across USA responsible for 92% of the angioplasty procedures and taking into account that 22% of the cardiologists surveyed by the company said their degree of satisfaction was 5 or less out of 10, which means that these cardiologists might without major difficulties to change from heparin to Angiomax.
The quantity sold per year must be around the total number of angioplasties made by the 700 centers chosen by the Medicines Company, multiplied by the percentage of cardiologists that answer was 5 or less in the survey conducted and by the average doses required in each angioplasty.
The most realistic forecast for volume of sales is 700 000*0.92*1,45*0.22 =205 436 doses of Angiomax per year. The minimum price that The Medicines Company can charge for a dose of Angiomax is given by the following expression 205 436*(P-40$)- 20.23M $=0 ? P=147.0893125$.
Knowing that the price window for Angiomax lies between 147.0893125$ and 331.5862069$, The Medicines Company should know choose the price taking considering at the same time its bargaining power, what pricing strategy to follow, the economical context and the elasticity of demand.
In spite of not having a high bargaining power since the company still lacks of recognition and contacts to reach hospital administrators, it should pursue a skimming strategy obtaining high margins at the expense of volume, since hospitals could not be price very sensitive since the product is directly related with a treatment that involves high risk and human life.
Furthermore, after drawing attention to the shortcomings of Heparin, The Medicines Company is reducing the elasticity of demand, turning hospitals less price sensitive to Angiomax, which should be used to capture a large share of the value created by Angiomax. Also during the period of the ten years of patent the firm faces low threat of imitation, so it has a sustainable differentiated product when compared with other market alternatives.
Taking also into account that in this industry the typical price to cost of goods sold is 1 to 10 (which would mean a price of $400 for a dose), Angiomax is allowed to set a price near to the estimated price ceiling. Additionally, The Medicines Company is offering a premium product with high perceived customer benefits, which supports the perceived customer costs; therefore, the marketing of Angiomax needs to have as key objective the recognition of Angiomax as a premium-priced drug with great benefits for hospitals.
The company cannot neglect the fact that heparins costs are much smaller than the costs of Angiomax and that there has been an increasing pressure to reduce prices in the prescription drugs business, since care organizations and the government pay a percentage of the expenses with prescription drugs.
Q3
The adoption model for Angiomax will be divided in distinct stages. A first stage before the FDA approval, where the objective is convincing hospitals to buy Angiomax through drawing attention to the shortcomings of Heparin in an academic article that appeared in the Journal of Invasive Cardiology; a second stage will be conducted after the FDA approval for the launch, Angiomax needs to be shown as the preferred alternative to Heparin through journal articles, advertisements in medical journals and in trade show presentations.
It is also fundamental to create product advocates within the medical community, so it is necessary to sponsored weekend gateways for thought leaders in the cardiology community with presentations designed to eductate them on the company and the Angiomax. After this, it will be expectable that Angiomax finally start replacing heparin in the case of angioplasty procedures.
The final stage will happen when The Medicines Company finishes clinical trials for other uses of Angiomax and gets FDA approval to other clinical usages like treat heart attacks, HIT, unstable angina and coronary artery bypass surgery. The selling of the product will be tough due to the great discrepancy between the price of a single dose of Angiomax and the price of a single dose of heparin.
It will be difficult to communicate to hospitals the benefits provided by Angiomax and making them believe that the higher price is justified by the potential cost savings obtained with Angiomax. Therefore the marketing of Angiomax could certainly have a crucial impact in the success or failure of the product. Dr. Stephanie Plent, the senior director of medical policy, was in charge of the communication of Angiomaxs benefits, but have a hard task to complete since in a hospital there were typically three major groups involved in the purchase, which had different objectives and concerns:
The doctors are the users of the drug and care only about its results. This group is not difficult to convince since the price is not seemed as an obstacle. Doctors are also analyzers because they seek for alternatives in scientific journals and influencers
Pharmacists, the buyers, care about their budget, since they are rewarded for achieve the goals initially established. Replacing a cheap drug with a premium-priced one would ruin that budget, meaning that this group is very difficult to convince. Pharmacists are also analyzers and influencers
Hospital administrators take into account the whole economic sense of the drug. They are the deciders, the ones who actually make the buying decision
Since drug companies do not have direct access to talk to the hospital administrators, doctors and pharmacists should be the main target of the marketing strategy followed by the company. It is necessary to convince these groups by showing them that the new drug is the better alternative, will lead them to influence the purchase. The company focused especially on convincing doctors, since they care about the results, which is the strength of Angiomax instead of focus on price that represents the major concern of pharmacists.
Tom Quinn, vice president of sales and marketing, tried to educate the market place through advertisement publication of academic journal articles talking about the shortcomings of heparin and advertising of Angiomax as the preferred alternative in medical journals, after its approval; and public relations presentations at trade shows, clinical trials at hospitals to allow doctors to gain hands-on experience and creation of advocates within the cardiology community.
Quinn also formed a sales team with people with experience and existing relationships within the coronary care community that will be spread by the 5 regions where the centers selected by the firm are located in order to influence the doctors and pharmacists.
Another factor that makes it harder selling Angiomax is the fact that The Medicines Company lacks recognition and a product portfolio, so why would hospitals even think about buying a drug that was once abandoned by other firms? Once again, the marketing strategy is of a huge importance, but the company should not only focus on marketing its drugs, it must create brand awareness and recognition for itself, proving its customers that its drugs could make the difference for hospitals. The medicines company case study
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