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The veterinary canine blood market is currently valued at approximately $40 million ($34-48 million), but if the potential of the market and the potential for medical benefit were fully realized, the canine blood and blood replacement market is $400 million ($314-$469 million).

This potential market is based on the figure of 12 million dogs suffering blood loss annually, 30% (3.6 million dogs) of which could benefit from blood replacement. Figures given in the case indicate that only 2.5% of those 12 million dogs (the “critical cases”) are actually transfused with four units of blood, each. An additional 3.51 million dogs stand to benefit from blood or blood product transfusion, resulting in a net potential market of at least 3.87 million units of blood or blood replacement product. Naturally, neither every dog, nor every pet owner, nor every veterinarian will achieve 100% of the potential consumption. Biopure, with a production capacity of only 300,000 units of Oxyglobin, cannot satisfy the total potential market, but the potential market instructs not only the marketing plan but also the pricing strategy for Oxyglobin.

Based on market research including willing-to-pay surveys of both veterinarians and pet owners, and based on the full potential of the market, a veterinarian (wholesale) price of $200 per unit is recommended (retail, or billed, price of $400). The market for Oxyglobin based on Biopure market research is 138,353 units. Revenue from this model would be $27.7 million, assuming capture of 39% of the existing, “critical case” market. Revenue maximization would result at $100 per unit cost, with maximal revenue of $127 million. Maximum revenue realization would necessitate not only perfect market adoption among the entire 30% of transfusion-eligible dogs, but also a production capacity of over 1.2 million units of Oxyglobin per year.

The current production capacity and requirement for production of Hemopure to satisfy clinical trial needs makes a low-cost, high-volume market strategy less attractive. Furthermore, introducing Oxyglobin at higher cost will help to substantiate a high product cost for Hemopure.

A major caveat associated with these calculations relates to the nature of “willing-to-pay” market research data. There is often a large difference between the concept of what a consumer is willing to pay and consumer behavior when the actual transaction is demanded. For an extreme and entirely hypothetical example, very few survey subjects would say they are unwilling to pay $10 million to “live twenty years longer.” If that offer were presented to those same respondents, tomorrow, with an invoice, far fewer respondents would actually produce the $10 million.

To accurately analyze the size of the existing human blood replacement market, we must categorize each type of use for blood transfusions and their estimated costs. The total amount of red blood cell donations in the United States in 1995 was 14 million units. However, 2.7 million units were not transferred due to rejection of the blood or due to expiration. Subtracting this number gives us an accurate estimate of 11.3 million units of red blood cells that were actually used in blood transfusions. Of these 11.3 million units, 1.1 million units come from autologous donations and 10.2 million units come from anonymous donations. This difference is important since the costs associated with each type of donation differ greatly. The average cost to the patient of anonymous donations, which are used in emergency surgery, elective surgery, and in trauma cases, is $175 per unit. However, the average cost to the patient in autologous donations, which are used only in elective surgery, is $350 per unit due to the added costs of administration and handling since these donations are stored for a specific individual’s future surgery. If we use the average prices and the amount of red blood cell units used in 1995, we arrive at a total current market for human blood cell transfusions of $2,170 million (1.1 * $350 + 10.2 * $175). The market for blood transfusions is broken down into various uses. A major possible market for Biopure is use in trauma cases, which number roughly 500,000 each year. It is important to note that only 10% of trauma victims received blood transfusions at the site where it was needed and the remaining 90% of these people did not receive transfusions until they arrived at the hospital. This delay was often cited as a major factor to the 30% fatality rate seen in these trauma cases. Another important segment for Biopure is the emergency surgery segment, which numbers roughly 1,000,000 units per year. Many of the trauma patients that do not receive transfusions on site are included in this number.

The market for Biopure within the blood transfusion market is limited because of its relatively small production capacity of 150,000 units per year, which is only 1.32% of the existing current market for blood transfusions. It can be inferred that Biopure would only need to capture a very small part of the existing market to operate at full capacity. It can be inferred that if Biopure captures only 10% of the market for trauma cases and emergency surgeries, the company will be operating at full capacity. This is a realistic expectation, based on the high fatality rate for victims that do not receive transfusions. Executives’ planned pricing strategy of $600-$800 per unit yields a market size for Biopure’s Hemopure product of between $90 million and $120 million. Biopure’s competitors are also planning on pricing similar products in the $600-$800 range. With the enormous size of the existing market, we can assume that there is plenty of room for Biopure’s two major competitors to operate as well.

There are three major caveats that exist in determining the market potential for Hemopure. Unlike its competitors, which derive their blood substitutes from human blood, Biopure derives its blood substitute from bovine sources, or from cattle. This may be a problem for people who will not like the idea of receiving a blood transfusion from an animal source. Another caveat is the product’s short half life which is between 2 and 7 days, compared to up to two months for traditional blood transfusions. This would virtually eliminate the chronic anemia market, which accounts for 3.2 million units transfused annually, since those people would need transfusions on a frequent basis. However, blood substitutes would be valuable as a stopgap during periods of blood shortage. Lastly, the human body can only safely tolerate certain levels of Hemopure before it becomes toxic. Blood substitutes had been demonstrated only up to transfusion levels of 5 to 10 units, which would inhibit the product’s marketability to severe trauma victims who need high amounts of transfused blood.

There are two other pharmaceutical firms in the FDA approval process that are in direct competition with Hemopure. However, there may also be other competitors that are pre-FDA approval process. The first immediate competitor is Baxter International. This firm has a track record of success dating back to 1939 and hopes to offer their patented blood substitute in late 1999, or early 2000. Their substitute is expected to price between $600 and $800 per unit. The second immediate competitor is Northfield Laboratories. Their patented substitute is expected to achieve full FDA approval in late 1999 and to be priced similar to Baxter’s product upon release.

Currently, there is no direct competition with Oxyglobin. Yet it can be assumed that Baxter International and Northfield Laboratories could penetrate this market with only the lag of FDA approval, since the drug manufacturing process may be remarkably similar. It is unlikely that either of the above competitors will enter the animal blood market, since both companies are buying blood at a significantly higher cost. Indirectly, “donor animals” serve as a substitute to Oxyglobin, which can be seen as competition to in-source blood animal blood supplies.

The competition faced by Hemopure and potential competition faced by Oxyglobin may not have an immense impact on their dominance in market share. With respect to Hemopure, Biopure is dealing with a patent race that translates to a race for FDA approval and market entry. Here the advantage of being a “first mover” is substantially more important then the actual patent. The first firm to introduce the innovation will acquire revenue and immediate market share from being first. In this particular race, another advantage is that the first mover will not have to bear greater development costs, since all three firms have already experienced the bulk of R&D expenses. Finally, the first mover will have reduced learning curves that will lower the average total cost curve. We anticipate if Biopure can beat these other two firms to the market, they will enjoy a superior advantage in retaining market shares for their human blood substitute. This analysis also holds true for Oxyglobin if competition does arise. The next step will then be to increase production capacity to realize potential market share.

The potential impact of Oxyglobin’s price on the price of Hemopure seems to be a valid concern. As Ted Jacobs expressed,

“as soon as we come out with Oxyglobin at $150, we jeopardize our ability to price Hemopure at $800. Hospitals and insurance firms will be all over us to justify a 500% price difference for what they see as the same product.”

With this in mind, the potential impact would be to reduce the value of Hemopure to a low-end price of perhaps less than $600 per unit. If Biopure is situated with a maximum annual capacity to produce 150,000 units of Hemopure, the potential impact could be a $30 million reduction of revenues ($800 иC $600 * 150,000 units). Yet this may be just speculation if Biopure can justify its costs. Biopure has an overall production cost of $15 million per year, with an additional cost of bovine blood priced at $1.50 per unit.

Realistically, we believe Oxyglobin’s early release will not have an impact on the pricing of Hemopure. Mr. Jacob may have a personal conflict with the early release of Oxyglobin, since if successful, it may eat into the Hemopure production. Mr. Jacob has a natural self-interest in protecting his product over a competing product, since he is the head of human clinical trials. Furthermore, the pharmaceutical industry has been challenged with veterinary medicine price comparisons in the media, but has not restructured human drug costs.

The speculative nature of pricing Hemopure must be emphasized. Customers have little reference to determine what they are willing to pay. Little systematic testing has been done by Biopure to determine the accuracy of their estimated prices. Also, the price sensitivity of medical personnel and insurance providers must be researched. The actual price sensitivity to the patient is not as important, since they likely either have insurance picking up the tab, or they do not have insurance, in which case they have no inclination to actually pay the bill. Thus, patients may not care what Hemopure costs. Patients also may not care about costs when the product could save their lives. Under this assumption, we believe that Hemopure is relatively price inelastic.

We believe the above analysis is correct in light of Biopure’s current landscape. The most pressing issue for the company is to find a way to increase production capacity, which has recently been the cause of the decline in Biopure’s stock price. Low inventory levels of Oxyglobin due to inadequate production capacity because of a planned 2002 expansion of capacity has been the main reason why revenues have decreased in recent quarters and is a major concern of shareholders, which is confirmed the company’s stock price meltdown from $22 per share in September of 2001 to $4.73 per share as of December 3, 2002.

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