Biopure Corporation Write-Up Upload

Biopure Corporation Case Write-up Page 1 BACKGROUND ANALYSIS

Biopure Corporation (“Biopure”) was founded in 1984 with the primary goal of developing a human blood substitute, a product with the oxygen-carrying property of blood but without many of the limitations of donated blood. No blood substitute has received approval for any use anywhere in the world, but Biopure is one of three promising competitors in the field. After many years of research and development, Biopure just received FDA approval for the commercial launch of Oxyglobin, a veterinary blood substitute for use in dogs, which is an ancillary product to Hemopure, Biopure’s human blood substitute. Hemopure, however, is still about 2 years away from from final government approval and commercial launch. As a result, result, Biopure must decide whether to to immediately launch Oxyglobin into the veterinary blood market or delay the release until after the approval and establishment of Hemopure in the human blood market. The debate as to the timing of Oxyglobin’s launch is primarily centered on the concern that the immediate release of Oxyglobin will negatively affect the acceptable market price of Hemopure once it is ready for launch. Since the two products are nearly identical in appearance and composition, a much higher price for Hemopure (as much as 500% more than Oxyglobin) could be difficult to justify in the future if Oxyglobin Oxyglobin were released now. At the same time, Biopure management realizes that launching Oxyglobin immediately has many benefits, including providing an instant revenue stream and enhancing Biopure’s reputation. This decision is one of great importance that may make or break break the company. Biopure needs its first product launch, whichever it chooses, to be successful in order to enhance its reputation, make a profit, take the company public, and grow into a successful and trusted company. The wrong decision could lead to insufficient revenue, negative press, and possibly another high-profile product failure, which could mean the end of Biopure. RECOMMENDATION

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Biopure Corporation Case Write-up Page 2 Oxyglobin solves a serious deficiency in the veterinary blood market: the lack of an adequate blood supply. supply. As such, such, I would would recommend recommend that Biopure Biopure immedi immediately ately launch launch Oxyglobin Oxyglobin to fill fill this void and take advantage of this untapped opportunity, where Biopure will have 100% market share of the veterinary blood substitute market. Target Market / Positioning. Biopure should target emergency care veterinary practices and the

largest primary care veterinary practices with 3 or more doctors. I settled on the target market by focusing on the segmentation criteria of practice demographics and usage behaviors. These two classes of vets have the highest average monthly caseload and the highest gross revenues (see Exhibit 7). Thus, there are more potential patients to benefit from Oxyglobin and these vets are more more likely to be able to to afford the initial initial cost of purchasing purchasing the the product (or if the product product goes unused, unused, they they are better able able to absorb absorb the sunk sunk cost). cost). Additionally, Additionally, these these two groups are are “high incident” incident” practices practices that that tend to handle most canine surgeries and canine trauma cases. Blood transfusions are more common in these practices (for example, emergency practices conduct an average of 150 blood transfusions per year compared to 17 at a primary practice) and thus, they require more blood than than other segments. As such, these segments are most likely to be in need of a veterinary blood supply, which is currently inadequate. Biopure should position Oxyglobin as the only life-saving veterinary blood substitute available, that offers more convenience in storage and administration than the real thing, for practices that handle many canine surgeries and traumas. This positioning statement clearly lays out the target customer, the competitive framework (that there are no alternatives besides real blood), the benefit (advantages over real blood) and the reason to believe (it saves lives).





Biopure Corporation Case Write-up Page 3 should use several veterinary trade shows in different geographic areas to promote Oxyglobin. Again, if it is possible to determine the areas which tend to have more emergency care and the largest primary primary care vets vets (likely (likely to be near larger cities) cities),, those areas areas with with trade shows shows should should be targete targeted. d. Biopure might also consider advertising within the vet offices which ultimately carry Oxyglobin, in order to inform pet owners, since 90% of pet owners want to be made fully aware of the treatments available for their pets and vets may not do so. Distribution Strategy / Place. In order to distribute Oxyglobin, Biopure should use several non-

overlapping regional distributors. Since distributors in general sell far more than ‘manufacturer direct’ distribution, regional distributors make a majority of sales (60%), and it would possible to easily choose regional distributors to cover most of the country without overlap, this is the best option considering the size of the the target market (6750 emergency emergency and large primary care vets). These sales reps will require initial training in order to properly educate them as to the product details and benefits. benefits. Additionally, Additionally, Biopure Biopure already already employs employs 3 sales sales represent representatives atives in the Veterinary Veterinary Products Products Division, so these sales reps should fill in any gaps that might be left as a result of the regional distribution plan. The cost of maintaining a full sales force, force, plus the $10-15 per unit distribution cost of “manufacturer direct” distribution would likely be greater than the 30% distribution fee taken by the regional distributors. of Price. Biopure should price Oxyglobin at $200 per unit. This price is feasible for a number of reasons. First, there is a need for veterinary blood supply: 84% of vets are dissatisfied with the blood transfusion alternatives currently available. This opens the door for an alternative, such as Oxyglobin, which remedies several of the limitations of donated blood (refrigeration, typing and matching,





Biopure Corporation Case Write-up Page 4 in a non-critical situation, a far larger amount of pet owners (30%) would want Oxyglobin used for their pet at a price of $400. This shows that generally, despite the cost, pet owners are willing to spend the money to help their pets. It should also be noted that there is no reason reason to assume that vets will automatically double the price of Oxyglobin for pet owners, so demand by pet owners may be even higher. Also, pet owners are aware that emergency room visits and surgeries cost more on average compared to regular primary care checkups. Additionally, if a rough break-even break-even analysis is estimated, the price of $200 for Oxyglobin could help Biopure break even in less than a year assuming full production capacity (See Appendix Appendix 1). Finally, the higher price of Oxyglobin helps to decrease the potential price difference between it and Hemopure. BASIS FOR RECOMMENDATION

I chose to recommend the immediate launch of Oxyglobin for a number of reasons, including, Biopure can likely break-even with Oxyglobin within a year (See Appendix 1), there is strong market potential potential for Oxyglobi Oxyglobin n even with with the limited limited target target segments segments chosen chosen (See Appendix Appendix 2), and it it is an opportunity for Biopure to generate generate revenue (See Appendix 3). Biopure desperately needs to enhance its reputation and increase awareness among customers since it has not yet launched any products and it is not a public company (in contrast to Baxter, Baxter, for example). This will not only help with future sales of Hemopure, but will also increase investor interest in an IPO, which will generate income and awareness of Biopure. Without revenue from Oxyglobin, Oxyglobin, Biopure only has enough money to support operations for another 2 years, essentially essentially until the expected launch of Hemopure. Hemopure. If something were to go wrong with the approval of Hemopure and the launch was delayed (which occurred with Baxter’s HemAssist), Biopure would in an extremely difficult financial situation. If Biopure tried to to





Biopure Corporation Case Write-up Page 5 the market and generating positive press. If Biopure were to wait to launch Oxyglobin until after Hemopure, that advantage could disappear, as a competitor could potentially enter the market in as little as 2 years. There is also the possibility that Hemopure will not do as well as expected in the human blood substitute market due to the fact that it is bovine-sourced. I feel that this is a substantial concern and for that reason would recommend that once Hemopure is launched, Biopure initially market it only for “borderline transfusion” and trauma situations to see how it fares. It would likely do best in these situations because issues of complications and limited shelf life of real blood (and competitor blood substitutes) are serious problems in these contexts. Since production capacity is currently limited to 150,000 units of Hemopure per year anyway, it would be best to test the market in this way to determine if there is actual demand for a bovine-sourced product for humans before spending the money to build a new facility or increase production. At current production capabilities, Biopure would only have 10% market share of this segment (See Appendix 4). Even if Biopure could have priced Hemopure at the premium price of $800 per unit if it delayed the launch of Oxyglobin, launching Oxyglobin now and pricing Hemopure at the bottom of its range at $600 reaps far more benefits (See Appendix 5), including increased revenue overall (See Appendix 6). I believe that $600 for a human blood substitute can be easily justified even though it is 300% more than the the nearly-identical veterinary blood substitute. Health care for humans always has been and always always will will be valued valued above that that of animals. animals. People pay, pay, and expect expect to pay, pay, thousands thousands and even tens-of-thousands of dollars in health care emergencies. Realistically, this cost for a human blood substitut substitutee will not make waves waves due to to its benefits benefits over over donated donated blood and the fact that the cost cost





Biopure Corporation Case Write-up Page 6

APPENDIX 1 Approximate Break Even Analysis for Oxyglobin

Fixed costs: it is unclear how much was spent on Oxyglobin alone. However we do know that over $200 million was spend on the development of both Oxyglobin and Hemopure and the construction of a production facility. Since Oxyglobin was an ancillary product and created in the course of developing Hemopure, I will assume $25 million in development/facility costs for Oxyglobin. Additionally, bovine blood is purchased at $1.50 per unit and 10,000 cows are needed for full production. Distribution costs will be 30% of sales (assuming sales of full production of 300,000). Variable costs: Production costs are $15 million. Though this does not vary by production volume, I will assume full production of 300,000 units of Oxyglobin for this analysis. Selling price: $200 Break even = fixed cost / (selling price – variable cost) = ($25 million + ($1.50 x 10,000) + (300,000 x $200 x .30) / ($200 – ($15 million/300,000 units)) = $43,015,000 / $150 = 286,766 units Since Biopure can product 300,000 units of Oxyglobin in 1 year, Biopure will break even in less than a year.

APPENDIX 2 Market Potential of Oxyglobin

Target market = emergency care vets + largest primary care vets = 750 + 6000 = 6750 Average vet practice gets 800 dogs with acute blood loss, 30% would benefit from a blood transfusion 6750 x (800 x .30) = 6750 x 240 = 1,620,000 units







Biopure Corporation Case Write-up Page 7 APPENDIX 3 Revenue Estimate from Oxyglobin

Emergency care vets perform 150 blood transfusions per year on average; primary care vets perform perform 17 blood transfusions transfusions per per year on average 750 x 150 = 112,500 units 6000 x 17 = 102,000 units 112,500 + 102,000 = 214,500 units 214,500 units x $200 per unit = $42,900,000

APPENDIX 4

Max. Production Capacity of Human Blood Substitute in 1 Year Market Share (of 1.5 million “borderline transfusion” and trauma cases)*

Biopure

Baxter

Northfield

Donated Blood

150,000 units

1 million units

300,000 units

n/a

10%

66.6%

20%

3.3%

*Market potential for Hemopure for these market segments is approximately 1.5 million units.

APPENDIX 5 Summary of Benefits of Launching Oxyglobin Immediately





Biopure Corporation Case Write-up Page 8 Revenue Differential

If Biopure delays launch of Oxyglobin and sells Hemopure at premium price of $800 (assuming full production capacity since demand far exceeds this): $800 x 150,000 units = $120,000,000 If Biopure launches Oxyglobin immediately, but sells Hemopure at $600 to decrease the price difference between the two products (assuming full production capacity since demand far exceeds this): $600 x 150,000 units = $90,000,000 Biopure loses $30,000,000 by decreasing the price of Hemopure. However, this revenue lost is more than compensated for by the revenue associated with sales of Oxyglobin priced at $200 (See Appendix 3).

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