BIOPURE INDUSTRIES A Marketing Analysis Based on the data from the case study by Jonn Gourville, Biopure Corporation, HBS, 1998 April 20, 2005 By Veronica Stepanova Executive Summary……………………………………………………………………………… 2 Situation Analysis

I. Human Market………………………………………………………………………..3 II. Animal Market………………………………………………………………………..5

Marketing Plan for Oxyglobin…………………………………………………………………….6 Final decision……………………………………………………………………………………...7 Appendix 1 A (Excel documents, separate attachment) Appendix 1 B

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Executive Summary

• Many opportunities are available in the human blood market due to several disadvantages of the currently available alternatives. Even more opportunities exist in the animal blood market.

• Oxyglobin should be positioned as a high-quality product designed for middle- to upper-class budgets.

• The price for Oxyglobin should be about $200 for the consumer and around $100 for the supplier (animal hospital) to account for distribution markups and other carrying costs.

• Distribution should be oriented in the regional vicinity of the operation and implement larger clinics. In addition, only emergency clinics are to be targeted.

Current opportunities are favorable for Oxyglobin’s launch.

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Situation Analysis I. Human blood market. • Patients with acute blood loss from trauma and surgery – 40% individuals aged 65+. • Chronic anemia patients (any age) – 1.5 million for the year 1995. • Blood loss, resulting from trauma (e.g. car accident) and exceeding 2-3 units (1 unit = 10% of total blood content of human body) needs immediate blood transfusion. • Price is largely cost-based (storage, implementation) – blood donation is free. Existing options. • Red blood cells and their components (hemoglobin, platelets, and plasma) are collected via donations, organized by blood collection centers and then transfused into patients. • Current options allow for storage for 6 weeks in refrigerated conditions, consequently disposed of if unused. Hemoglobin uses oxygen-carrying efficiency by 50% if not used within the first few weeks. • Blood transfusion is subject to blood typing (A, B, AB, O, positive, negative) and reception/rejection by the body. Incorrect matching may be fatal for the patient. • Infection risks slow down the process of testing blood prior to its use and are greater if blood is not separated into components. Infections include the risks of AIDS, hepatitis B, and contamination. • Blood transfusion is available on-site only (hospital or emergency room); as a result, 30% trauma patients die prior to operation. • Blood supply is lower than demand, especially during peak periods (summer months and winter holidays, during which car and other travel increases fewer donors and more patients). Blood substitutes. • 3 companies in final stages awaiting FDA approval (clinical testing). • Entrance into market is difficult (all current processes patented) and time-consuming – may take up to 17 years (See case Exhibit 3).

Potential to replace current blood drawing process by component separation and purification, as well as chemical modification and stabilization of hemoglobin.

Reduced risk of contamination and increased storage capability of 2 years. Added benefits for patients with constricted or restricted blood vessels (smaller size improved

accessibility to organs). Possibility of adapting animal blood cells for use in humans.

• Risk of toxicity and body rejection (sped up excretion). Competitors/industry players. A. Baxter & Northfield Laboratories. • Both rely on human blood supply to derive hemoglobin. • Red blood cells obtained from expired banks. • Require refrigeration. Baxter: • Leader in development and manufacturing of blood-oriented medical equipment. • Large facility – production capacity of 1 million units/year, spent $250 million on R&D. • Product – HemAssist – to be priced between $600-$800. Northfield: • Small facility – 10,000-unit production capability but possible expansion into 300,000 units/year. • Focus on single product (PolyHeme), $70 million spent on development. B. Biopure Corporation. • Specializes in protein purification for pharmaceutical use. • Hemopure 2 years away from final approval. • Derived from the blood of cattle. • Production capacity of 150,000 but possible production limitations due to expected concurrent usage of production equipment for animal version. • Need for removal of hemoglobin clusters from product excess process in production ability. • Cost for Biopure at $1.50 per unit of animal blood, but plan to match Baxter’s price for final consumer product. II. Animal blood market. • Mainly cats (35%) and dogs (50%).

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• 800 dogs were brought to emergency treatment due to acute blood loss in 1995, 2.5% severe. Existing options. • 15,000 veterinary clinics. • 5% of vet clinics perform emergency care, with a 75% referral rate from primary care clinics. • Current blood banks insufficient, demand greatly exceeds supply: 2.5 out of 30 cases treated. • 93% blood drawn from donor animals (78% in emergencies) – an ethically questionable practice. • 150 units of blood transfused per emergency care, 17 per primary care center (Appendix A). • No effective blood typing or cross-matching systems. • Blood collection, storage, and transfusion too costly for proper operation. • Current cost of clinical care to animal owners relatively high, undesirable.

84% doctor dissatisfaction with current alternatives. Blood substitutes. • Biopure’s Oxyglobin currently the only existing FDA-approved substitute ready for launch. • No evident chemical difference in the production process between animal and human supplement. • Animal supplement approved sooner than human equivalent due to less-strict regulations in the animal consumer market. • Production capacity of 300,000 units, $200 million spent on development (combined with Hemopure) Marketing Plan for Oxyglobin Positioning strategy. Most animal owners (enthusiasts) can be assumed to be within the middle to upper income class, based on the extraneous costs of owning an animal (refer to case Exhibit 8 for a summary of average costs of keeping a pet). However, many consumers proved to be price-conscious about spending additional funds on optional services (this will be analyzed further in the pricing strategy); therefore, no premium strategy should be used. The product should be positioned as a high-quality supplement for blood transfusion, available to (affordable by) most animal owners. Pricing strategy. As cited, animal owners expect to spend limited amounts of money on animal care; this is slightly different for emergency situations, where customers are willing to spend more, as demonstrated by the survey results (Exhibit 8; Table B). The typical cost of a blood transfusion to the customer is currently $100 for the traditional method; however, this price was said to have been cost-unjustified. Still, veterinarians were cited as the trusted source for determining a patient’s treatment selection, which puts pressure on the new substitute segment to set a competitive price standard. While profit margins may prove higher on a higher-priced item, the product’s sensitivity to reputation for being a supposedly “better, cheaper alternative” to currently available options, which would satisfy the currently largely-unfulfilled demand for blood transfusion, would pressure Biopure to price its Oxyglobin according to customer expectations (See “Existing options”, page 5 of this report). Those expectations, as we can see from the attached appendix (Appendix 1 A and B), are that the price to the consumer be about $200 ($100 to the veterinarian – keeping the 50% markup), which would give the company the largest marginal gain in revenues (higher prices are actually marginal losses!), while still retaining the major demand (we consider emergency care centers more important here, since they have, proportionally, a much larger demand than primary care centers). In terms of the price difference between Oxyglobin and its competitor in the human segment, Baxter, the latter spent $50 million more on R&D than Biopure, so the price premium on Baxter can be justified by higher costs; in addition, Biopure’s per-unit costs are significantly smaller because it uses cattle blood. In addition, Biopure may price Hemopure slightly higher because of the extra processing that goes into making it, as well as the variation in the segment and target audience (people are willing to spend more on themselves than on animals). Distribution. Biopure should only target emergency care practices. Although those only make up 5% of the overall industry, 75% primary care specialists will refer an acute blood loss case (such as a trauma) to one of these centers. Furthermore, Biopure should target large practices (3+ doctors) through regional distributors, both of which account for the largest sales in the industry. Considering the limited volume of supplies Biopure is going to have, a national distribution may not be desirable right away, until the company at least increases its production capabilities. A regional distributor would be local enough to understand the specific needs of its market (e.g., New England), and a larger vet practice could prove more efficient (and less costly) in terms of the availability of materials and the reduction of transfers, thereby also reducing the consumer’s costs and increasing the rate of success by providing a quicker

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service (in other words, it would have more cases, but more doctors available to help overall, fewer cases per doctor – see Exhibit 7). Of course, the drawback is that a large clinic would not be as personal. The 1 million dollar question: Should Oxyglobin be launched? – Yes. • Launching early allows for an audience test:

Achieve acclaim/recognition for a break-through discovery that is beneficial because it -Fulfills an unsatisfied/dissatisfied need (better quality blood transfusion, availability); -Reduces costs to both suppliers and consumers.

Easier entry into secondary (human) market – “tested on animals” – more trusted than untested competitors.

Potential to utilize production to full potential (instead of splitting up with Hemopure); later on, divide based on larger per-unit profit (and not necessarily the stated 150:300 ratio).

If fails or doesn’t test well: - Would aid in the decision about improving current human version (complete discontinuation not

an option due to the immense initial investment in R&D); - Reduce the shock of having to change both formulas (processes) simultaneously – longer time

span gives better flexibility and more time for testing and improvement – less drastic. • Hemopure and Oxyglobin, although similar in purposes, are meant for two completely different segments; they should not be compared based on price because price expectations are different for humans than they are for animal needs; the demand for Oxyglobin is clear and significant, while the demand for the same product in the human market is questionable. Therefore, stick with Oxyglobin – which already has the approval – and launch it.