Hi consultant-to-be,
I would like to share a BCG market entry case, Pharma industry – not like a super difficult one but interestingly tricky, which makes it my fav case. Hope you guys enjoy crack the case as much as I do J
Our client is a pharmaceutical company who has recently developed a drug for apoplexy. The drug has been clinically proven to be safe and effective, and is the only product that is at this stage in our client’s business. Should our client proceed with commercializing the drug?
Some useful info are
From that we figured out the number of patients with automatic trigger that reach hospital in the 3-hour window: 260,000*20%*100% = 52,000 patient
Now, the tricky part is the timing
It takes 8 minutes for an ambulance to dispatch and 10 minutes to load a patient. It takes 12 minutes one-way for an ambulance to go from the city to a hospital and an extra 8 minutes one-way to go from the suburbs to a hospital. Given that, total time it takes for a patient to go from the city to a hospital:
8 + 10 + 12*2 = 42 minutes (it’s very easy not to double the 12 as 2-way)
All patients from the city should be able to receive treatment in the first hour. Time it takes for a patient to go from the suburbs to a hospital:
8 + 10 + (12+8)*2 = 58 minutes (again round way)
Although patients from the suburbs reach hospitals in 58 minutes, 2 minutes isn’t enough time for them to receive treatment. (Fair enough yet given the pressure in real case, we might not notice this)
Therefore, these patients will most likely go for the competitor’s drug (which is cheaper and has the same success rate after the first hour)
Number of patients who call ambulance that get treated in the first hour: 260,000*80%*60%*80% = 99,840 = ~100,000
Total number of patients who will use our client’s drug = 52,000 + 100,000 = 152,000
Revenue = 152,000 patients*$8,000/patient = $1.2 billion per year
One step further, regarding profitability
If fixed costs are $240 million/year and variable costs are $5,000 per unit, how much profit can be made from the drug per year?
Total costs = $240m + $5,000*152,000 = $1 billion; Profit = $200 million/year
Our client is thinking of lowering the price of their drug to $6,000 per use to capture more of the market. Is this a good idea?
In this case, our client will still capture all of the patients who will receive treatment in the first hour, which is 152,000 patients. In addition, our client will get 50% of the patients from the suburbs (since our client’s drug is now identical to the competitor’s after the first hour)
Number of patients from the suburbs = 260,000*20%*60%*50% = 15,600
Total number of patients who will use client’s drug = 152,000 + 15,600 = 167,600
Total revenue = 167,600*$6,000 = ~$1 billion
Total costs = $240m + $5,000*167,600 = ~$1.1 billion
At this price, our client would not make any profit and would make a slight loss instead. Therefore, they should stay with charging $8,000 per use of the drug
Conclusion:
I recommend that the client proceeds with commercializing the drug at $8,000 per use. This pricing strategy allows them to capture a reasonable portion of the market (given the higher effectiveness of their drug within the first hour), generating a profit of $200 million a year. Some major risks are competitive response and the possibility of new market entries, so moving forward, our client should develop a solid marketing plan, and push for the replacement of the competitor drug with our client’s (using the argument that it will simplify the supply management of hospitals)
