Question

1. The year is 1999 and the Ethical Pharmaceutics Company has just received FDA approval for high risk angioplasties and is bringing AngioMin to the market early January 2000 at the price of $200. The cost of manufacturing a single dose of AngioMin is $40. The key benefit of AngioMin is reduced side effects, complications, and risk of death following angioplasty. These benefits are most pronounced in the very high risk patients. Ethical Pharmaceutics Company’s marketing department decided to focus on the top 100 hospitals in the US where 80% of angioplasties are performed. In 2000 there will be 700,000 angioplasties and this number is expected to grow at 5% each year. 50% of all angioplasties are high risk and 20% of high risk angioplasties fall into the “very high risk” category. Ethical Pharmaceutics Co. is planning an aggressive marketing campaign to get on hospital formularies because (1) AngioMin’s patent protection will expire in late December 2010, after which point sales would immediately go to zero, (2) while there is no chance a better substitute will enter the market in 2000, Ethical Pharmaceutics Co. management estimates a 20% probability for each year 2001-2010, that a new significantly better than AngioMin drug will be brought to market and will replace AngioMin in any hospital that was using AngioMin at the time. Please help the Ethical Pharmaceutics Co. management determine the maximum total marketing budget for an average top hospital for educating, sponsoring travel to continuing-medical-education conferences in Hawaii, wining and dining hospital administrators, doctors, nurses, pharmacists, and their families to get AngioMin on the hospital formulary. (These practices are currently disallowed in the industry based on the voluntary pharmaceutical industry guidelines covering direct-to-physician marketing practices, but were fully acceptable and were widely used in the industry in the 1990s to early 2000s).

Please help the Ethical Pharmaceutics Co. marketing team estimate

a) CLV (customer lifetime value) of an average top hospital acquired in 2000, assuming that all high risk patients will get 1.5 doses of AngioMin during the angioplasty procedure

b) CLV of an average top hospital acquired in 2000, assuming that only very high risk patients will receive AngioMin (on average 1.5 doses will be needed per procedure)

c) To help the marketing team communicate the time value of acquiring hospitals as early as possible, calculate the net present value in 2000 of an average top hospital acquired in 2005. Assume that this hospital would administer AngioMin only to very high risk patients (on average 1.5 doses). Note that this is only possible if the new better substitute is not brought to market by 2005 and make sure that your calculations reflect this fact.

Answer 1

Total of Present value of CLV 1 and 2 are answers for 1 and 2 respectively. for 3, since the market share is not given we can consider the Present value of CLV (2) for 3 also.