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Sidi

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4

Price Request | Dr. Rossman Eyedrops Case (Michigan Case Book)

Hello there,

I was recently given the 'Dr. Rossman Eyedrops case' and I was unsure about the final answer.

Scenario:

  • Dr. Rossman (our client) has invented eyedrops that can correct sight problems. These drops can correct everything: no-one will need glasses anymore.
  • The potential BP for the company that will commercialize the eyedrops shows 392 Billion in cumulative profits for the next 5 years in the US market (patent-protected), but we can also assume future revenues - albeit smaller - when the patent expires.
  • A large pharma company is interested in the patent acquisition

Question: What price should Dr. Rossman ask?

Insights about the answer:

  • The higher threshold is not really easy to find: profits will be higher than 392 B because there will be future profits once the patent expires. (Also: we are not considering other countries, but the case limits the analysis to the US market, other markets should not be considered per prompts)
  • The lower threshold is difficult to define: we can expect the pharma company to make at least 15% of an investment (since pharma has high returns and this investment has a large part of up-front costs), but we don't have a higher threshold.

Apart from that, I am really struggling to advise a price band. What would you suggest?
Feel free to make every kind of assumption, there are no other data :)

Thank you so much

Anonymous

Hello there,

I was recently given the 'Dr. Rossman Eyedrops case' and I was unsure about the final answer.

Scenario:

  • Dr. Rossman (our client) has invented eyedrops that can correct sight problems. These drops can correct everything: no-one will need glasses anymore.
  • The potential BP for the company that will commercialize the eyedrops shows 392 Billion in cumulative profits for the next 5 years in the US market (patent-protected), but we can also assume future revenues - albeit smaller - when the patent expires.
  • A large pharma company is interested in the patent acquisition

Question: What price should Dr. Rossman ask?

Insights about the answer:

  • The higher threshold is not really easy to find: profits will be higher than 392 B because there will be future profits once the patent expires. (Also: we are not considering other countries, but the case limits the analysis to the US market, other markets should not be considered per prompts)
  • The lower threshold is difficult to define: we can expect the pharma company to make at least 15% of an investment (since pharma has high returns and this investment has a large part of up-front costs), but we don't have a higher threshold.

Apart from that, I am really struggling to advise a price band. What would you suggest?
Feel free to make every kind of assumption, there are no other data :)

Thank you so much

Anonymous

4 answers

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Best Answer
Book a coaching with Sidi

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Hi!

The asking price that can be realized also depends on the buyer's best alternative investment. If this second best option generates a return of, say, 10 percent, then the upper price that can be realized needs to warrant at least 10 percent return for the pharma company. So here this means (390 billion - p)/p > 10% needs to be true. By rearranging, this means p can be 355 billion at most.

Additional hint: your point on future profits after patent expiration is incorrect! These future profits are not related to buying the patent (i.e., the pharma company could realize them even without buying the patent today!), so they don't play a role in a rational decision.

Cheers, Sidi

Hi!

The asking price that can be realized also depends on the buyer's best alternative investment. If this second best option generates a return of, say, 10 percent, then the upper price that can be realized needs to warrant at least 10 percent return for the pharma company. So here this means (390 billion - p)/p > 10% needs to be true. By rearranging, this means p can be 355 billion at most.

Additional hint: your point on future profits after patent expiration is incorrect! These future profits are not related to buying the patent (i.e., the pharma company could realize them even without buying the patent today!), so they don't play a role in a rational decision.

Cheers, Sidi

Wow I never thought about this. But makes so much sense! Great insight Sidi! — Anonymous B on Apr 15, 2020

Sidi, could you double check again that future profits do not play a role in the decision. For example, It could give the company a branding advantage or benefit from established relationships with agents or companies that may endorse our brand over the others — RUBEN on Apr 17, 2020 (edited)

Book a coaching with Francesco

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Hi there,

a couple of considerations on your approach:

  1. Assuming you can proxy cash flow as profits, the value of the product for the first 5 years will be lower than 392B, due to the discount rate, unless the interviewer says you can ignore it
  2. Assuming it is profitable for the company to copy the product after 5 years, the value of the patent after 5 years will be given by the investment required to copy the product (assuming the results of copying would be the same as purchasing the patent)
  3. The maximums price could be further increased if acquiring the patent will generate synergies for the pharma company

To calculate the actual value of the patent for the pharma company, assuming they will copy the product after year 5, you can therefore consider the following:

Value of the patent = Present value of the 392B + Present value of the investment to copy the product after year 5 + Present value of synergies

Once you have that value, you can then compare it with other possible alternatives for the pharma company, and check which one will generate the best return given the client objective.

If there is a better alternative for the pharma company and Dr. Rossman wants to sell the product to that company, they should then reduce the price to at least match the best alternative.

Hope this helps,
Francesco

Hi there,

a couple of considerations on your approach:

  1. Assuming you can proxy cash flow as profits, the value of the product for the first 5 years will be lower than 392B, due to the discount rate, unless the interviewer says you can ignore it
  2. Assuming it is profitable for the company to copy the product after 5 years, the value of the patent after 5 years will be given by the investment required to copy the product (assuming the results of copying would be the same as purchasing the patent)
  3. The maximums price could be further increased if acquiring the patent will generate synergies for the pharma company

To calculate the actual value of the patent for the pharma company, assuming they will copy the product after year 5, you can therefore consider the following:

Value of the patent = Present value of the 392B + Present value of the investment to copy the product after year 5 + Present value of synergies

Once you have that value, you can then compare it with other possible alternatives for the pharma company, and check which one will generate the best return given the client objective.

If there is a better alternative for the pharma company and Dr. Rossman wants to sell the product to that company, they should then reduce the price to at least match the best alternative.

Hope this helps,
Francesco

Book a coaching with Clara

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Hello!

This is indeed an interesting case!

In general terms, in a pricing problem you can use three techniques:

  1. Break even to know minimum price and cover cost
  2. Benchmark aginst competitors: this does not apply
  3. Willingness to pay

Those 3 techniques define you some boundary limits, and the answer will lay somewhere in the area defined by them.

Hope it helps!

Cheers,

Clara

Hello!

This is indeed an interesting case!

In general terms, in a pricing problem you can use three techniques:

  1. Break even to know minimum price and cover cost
  2. Benchmark aginst competitors: this does not apply
  3. Willingness to pay

Those 3 techniques define you some boundary limits, and the answer will lay somewhere in the area defined by them.

Hope it helps!

Cheers,

Clara

Book a coaching with Antonello

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Hi, I would conduct the analysis by discussing in a structured table pros and cons of the 3 main pricing strategies: cost based, willingness to pay, competitive benchmark

Best,
Antonello

Hi, I would conduct the analysis by discussing in a structured table pros and cons of the 3 main pricing strategies: cost based, willingness to pay, competitive benchmark

Best,
Antonello

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