Biopure Corporation by Tifsihit Ezra 1 Biopure Corporation is a privately­owned biopharmaceutical firm specializing in the ultrapurification of proteins for human and veterinary use. In 1998, Biopure was one of three firms close to launching “blood substitutes,” a class of products designed to replicate the functions of actual blood, while eliminating the drawbacks linked with the use of real blood during transfusions (such as disease transmission, short shelf life, low availability, etc). In 1998, Biopure had just acquired FDA (Food and Drug Administration) approval for Oxyglobin, a blood substitute specifically for the animal market. Hemopure, its product for the human market, was just entering Phase 3 of clinical trials and was expected to be approved by the FDA in 1999. Oxyglobin had become the first blood substitute of any kind to be approved for use. The CEO and president of the company, Carl Rausch, has to decide whether Oxyglobin should be launched as soon as possible, or whether Hemopure should be launched first, two years in the future. Biopure is likely to issue an IPO (Initial Public Offering) soon to become a public company, and a successful launch of the product can have positive influence on the outcome of the IPO. Second, with the approval of Oxyglobin, Biopure is the first company to gain government approval anywhere in the world for this class of products and can capitalize on this. However, Hemopure is the flagship product of Biopure, and launching Oxyglobin first may have negative consequences on the pricing of Hemopure. Additionally, two other firms (Baxter International and Northfield Laboratories) are also working on blood substitutes for humans, and are also in Phase 3 of the FDA approval process, with their products, HemAssist and PolyHeme, estimated to be approved around the same time as Hemopure. Biopure's future depends on the success of Oxyglobin and especially that of Hemopure, therefore making the right decision is crucial. Biopure Corporation should go ahead and launch Oxyglobin immediately instead of waiting to finish Phase 3 of the process for Hemopure, getting the green light from the FDA and launching it. There are 15 000 small animal veterinary practices in the US, with 95% of them being primary care providers and the remaining 5% providing emergency care and specialty care. However, 75% of the primary care providers refer some or all of their surgeries and trauma cases to the emergency and specialty care providers. Additionally, just 15% of practices account for 65% of all canine surgeries and a mere 10% of practices dealt with 55% of trauma cases, most of them being the larger practices. Based on these figures, the target segment for Oxyglobin should be the large primary care veterinary practices and the emergency care practices, since they account for the largest demand for blood transfusions, as well as the owners of animals since they can decide to purchase the product outside of the vets recommendations. Oxyglobin can be relatively easily positioned in the market because there is no competitor 2 either currently on the market or in the process of being created. The sole source of blood for most veterinary practices were donor animals that were kept in the practice for the sole purpose of donating blood; 93% of all blood used by primary care practices and 78% of blood used in emergency practices came from donor animals; only 7% and 22% respectively came from blood banks. Additionally, in 1995, only 2.5% of dogs received transfusions whereas 30% could have benefited from it. This means that Oxyglobin can position itself as an easily available, reliable and safe source of blood, without the constraints of donor blood, such as the administrative and financial costs of keeping animals as donors, the costs of typing the blood of donors and recipients, and the delayed recovery of a patient due to untyped blood. The first two benefits would resonate with veterinarians, while the last one would resonate with animal owners. Biopure can adopt a skim pricing strategy for Oxyglobin because it has a considerable and sustainable differentiation advantage and no competitors outside of animal donors. Oxyglobin should be priced $100 because, according to its survey of veterinarians, that is the price that will allow it to make a profit (refer to Table C in Appendix B). Oxyglobin can be promoted through trade shows and trade publications, specifically through the five journals most read by veterinarians and the six veterinary trade shows held annually. Additionally, Biopure can use independent distributors to educate the veterinarians and to sell the product to them. Biopure can contract with regional distributors, since they account for 60% of total sales in the veterinary market. These regional distributors send sales representatives directly to a veterinary practice once a week so the product can go to the potential customers. Oxyglobin should be launched first because this is the opportunity for Biopure to get first mover advantage in the blood substitute market. The revenue from Oxyglobin can also be used to launch Hemopure and proven success with Oxyglobin can have a great positive impact on the IPO of Biopure than launching the IPO with no evidence to back up the company. Additionally, as mentioned by the VP for Veterinary Products, Andy Wright, if mistakes are going to be made, it's better to make them with Oxyglobin than with Hemopure, since Oxyglobin is just an ancillary product to Hemopure, whereas Hemopure is the flagship product. Additionally, when launching Hemopure, Biopure can differentiate their product from the two other competing products on several significant points. First of all, both PolyHeme and HemAssist are substitutes created out of human blood, whereas Hemopure uses bovine blood. PolyHeme and HemAssist also need to be kept refrigerated or frozen prior to use, whereas Hemopure can be kept at room temperature. By highlighting these advantages of Hemopure, Biopure can show potential customers that its product provides superior value. These significant differences, coupled with a successful product already on the market (Oxyglobin) can give Biopure a significant edge. Biopure can gain significant market share and can price itself independently of competing products, because it has distinct advantages. As it currently stands, if launched now, Hemopure can only get a maximum market share of only 10.3% of the substitute blood market, assuming it sells its entire production. If Biopure is successful with Oxyglobin, it can boost its production capabilities for Hemopure and be able to capture 3 a larger market share due to both production capacity and specially, through positive image already crafted through Oxyglobin. Finally, even if Oxyglobin is the first product of its kind for animal use, and no other company is working on a competing product at this time; it will only take 2 to 5 years for a company to bring a competitor to market. This means that if Biopure waits for Hemopure to be launched and to be successful before launching Oxyglobin, it will be several years before Oxyglobin is launched. This is opening the way for other companies to also create a competitor for Oxyglobin, and the animal market being much smaller and price sensitive, this could have damaging effects for Biopure. Based on the available data, it is inferred that only 8.3% of the market is served by donor animals (refer to Appendix B), Therefore, Oxyglobin has the potential of capturing the remaining 91.7% of the market since there is no competing product, if it produced enough. However, Oxyglobin only has a production capacity of 300,000 units per year, so even with the sale of the full production, only 7.06% of the available market will be captured by Oxyglobin (Appendix B). However, that comes out to 100% of the substitute blood market since there is no competitor there. By pricing at $100 per unit, Biopure can make a profit on Oxyglobin. Pricing it at $150 is a risky move, since the likelihood that veterinarians will recommend the product to their patients' owners is seriously diminished, and based on the survey of veterinarians (Table A – Appendix B), they are unlikely to use the product. Total potential demand for human blood is 18.12 million units per year, and since only 11.3 million units of donor blood is effectively used (the rest being discarded), it creates a shortfall of 6.82 million units. This gap can be filled by Hemopure, HemAssist and PolyHeme. With total production capacity of only 150,000 units, Hemopure can capture only 2.2% of the gap, and only 0.83% of total demand for blood. However, even with this small share of the market, if it manages to sell its entire output for $600, Biopure stands to make almost $75 million in profit (refer to Table 2 – Appendix A); and if it sells it for $800, it can potentially rake in $105 million in profit per annum. However, due to the limited amount of information available for Hemopure, it is difficult to estimate what promotion strategy is available for the company (perhaps the same one as Oxyglobin), nor what kind of pricing would be most effective since the company has not done the necessary studies. 4 APPENDIX A Refer to Appendix B for all calculations
Table 1. Summary of Human blood market Acute blood loss
Anemia
Total
Total Number
2.5 million
1.5 million
4 million
Average units of blood
used in 1995
3.24 units per
patient
2.13 units per patient 2.82 units per
patient on average
Total blood transfused
8.1 million units
3.2 million units
11.4 million units
Total potential demand
14.92 million units
3.2 million units
18.12 million units
Table 2 – Biopure and competitors Baxter
Northfield
Biopure
Cost of RBC per unit
$8
$26
$1.50
Annual production costs
$50 million
$30 million
$15 million
Annual capacity
1 millon units
300 000 units
150 000 units
Price
$600-$800
$600-$800
$600-$800
Expected release date
Late 1999 – early 2000
Late 1999
Late 1999 – early 2000
Potential market share in
total blood market
14.7%
4.4%
2.2%
Potential market share in
blood substitute market
69%
20.7%
10.3%
Potential annual revenues
$600-$800 million
$180 - $240 million
$90-$120 million
Total annual cost
$58 million
$37.8 million
$15.225 million
Potential annual profit
$524 - $742 million
$142.2 – $202.2 million
$74.775 - $104.775 million
Profit margin
87.3% - 92.75%
79% - 84.25%
83.1% - 87.3%
Table A. ​
​
Veterinarians’ Reported Willingness to Trial Oxyglobin % of Veterinarians Who Would Trial Product
Price to Veterinarian
Noncritical Cases
Critical Cases
$50 per unit
95%
100%
$100 per unit
70%
95%
$150 per unit
25%
80%
$200 per unit
5%
60%
5 Table B – Summary of Animal blood market Primary care providers
Emergency care
Total
Total Number
14,250
750
15,000
Average units of blood
used in 1995
17 units per provider
150 units per provider
23.65 units on
average per practice
Total blood transfused
242,250 units
112,500 units
354,750 units
1800 units per provider
283.8 units on
average per practice
Potential demand for blood 204 units per provider
Table C – Potential Sales and Profit of Oxyglobin Price Willing veterinarians Potential production Potential revenue (actual capacity) (actual capacity) Annual Profit Low ­ $50 95.13% 285,390 units $14,269,500 ($1,180,500) Medium ­ $100 70.63% 211,890 units $21,189,000 $5,739,000 High ­ $150 79,140 units $11,871,000 ($3,579,000) 26.38% 6 APPENDIX B Calculations for Oxyglobin – Table B Current market demand for animal blood: ● Blood transfused by primary care providers: ◦ 15,000 x 95% =14,250 x17 units on average = 242,250 units ● Blood transfused by emergency care providers: ◦ 15,000 x 5% = 750 x 150 units on average = 112,500 units ● Total: ◦ 242,250 + 112,500 = 354,750 units transfused This accounts for only 2.5% of animals who needed transfusion. If all 30% of animals that needed transfusions received it: ● 30% / 2.5% x 354,750 units = 4,257,000 units would have been used; ● MDI​
= 354,750/4,257,000 x 100% = 8.3% of cases were given transfusions. If all 30% who need transfusion were to receive it: Emergency care providers would use: ● 30% / 2.5% x 150 units = 1800 units per year; Primary care providers would use: ● 30% / 2.5% x 17 units = 204 units per year; Average use for both would be: ● 1800 x 95% + 204 x 5% = 283.8 units per practice However, production capacity for Oxyglobin is only 300,000 units per year: ● 300,000/4,257,000 x 100% = 7.05% of cases can be treated with Oxyglobin with maximum production Calculations for Oxyglobin ­Table C Production costs: $15 million per year Raw material: $1.50 per unit So to produce 300,000 units per year, the total costs are: ● $15 million + $1.50 x 300,000 = $15,450,000 To break­even, Oxyglobin has to generate $15,450,000: Potential demand, revenue and profit at price of $50: ● 300,000 x 95% = 285,390 units ● 285,390 x $50 = $14,269,500 ● $14,269,500 ­ $15,450,000 = ($1,180,500) The potential demand, revenue and profit for prices at $100 and at $200 were similarly calculated. 7 Calculations for Table 1­ Hemopure Total of 4 million patients required transfusion in 1995 Acute blood loss patients used: ● 8,100,000 units/ 2,500,000 patients = 3.24 units per patients Anemic patients used: ● 3,200,000 units/ 1,500,000 patients = 2.13 units per patients Average unit per patient regardless of cause: ● (3.24 x 2.5 million patients + 2.13 x 1.5 million patients) / 4 million total patients = 2.82 units Current market demand for human blood: Only 10% of 500,000 trauma patients receive blood at the scene of accidents. If 100% were to receive it, demand would be 500,000 x 3.24 units per patient = 1,620,000 units of blood There are 1 million borderline transfusion surgeries annually, which require less than 2 units per patient. So in total, we can assume that total demand for blood is: ● 1,620,000 units + 2,000,000 units = 3, 620,000 units in addition to current usage ● 11.3 million units + 3,620,000 units = 14,920,000 units total for acute blood loss Calculation for Table 2​
– Hemopure Production costs: $15 million per year Raw material: $1.50 per unit So to produce 150,000 units per year, the total costs are: ● $15 million + $1.50 x 150,000 = $15,225,000 To break­even, Hemopure has to generate $15,225,000: Potential revenue and profit at price of $600: ● 150,000 x $600 = $90,000,000 ● $90,000,000 ­ $15,225,000 = $74,775,000 The potential revenue and profit for price at $800 was similarly calculated. 8 APPENDIX C Calculations of Market Potential​
– Oxyglobin Buying ceiling: ● At $100 per unit (see Table C), 70% of vets will use Oxyglobin for non­critical, and 95% for critical cases. Since most of the growth is expected in non­critical care, we can use 70% as the buying ceiling. Since demand for blood is always there, we can assume that the purchase rate could reach 100%. Market potential​
: 15000 vet practices in the US x 70% buying ceiling x 100% rebuy annually x 284 units per user x $100 = ​
$298.2 million annually Calculations for Market Potential​
– Hemopure Total of 4 million patients required transfusion in 1995 Acute blood loss patients used: ● 8,100,000 units/ 2,500,000 patients = 3.24 units per patients Anemic patients used: ● 3,200,000 units/ 1,500,000 patients = 2.13 units per patients Average unit per patient regardless of cause: ● (3.24 x 2.5 million patients + 2.13 x 1.5 million patients) / 4 million total patients = 2.82 units Market potential​
: 4 million people x 40% x 100% x 2.82 units x $600 = ​
$2.71 billion annually