The Business of Venture Capital Case 7

Case 7: C. DifÞcile Vaccine! Type of Case Firm Pricing Clearview Prompt Our client, a large pharmaceutical company, has been selling products since the 1980s. They cover every area of pharmaceuticals, but their specialty is vaccine development. They are currently developing a vaccine for overgrowth of the bacteria C. difficile. A major side effect of infection is CDAD or C. difficile associated diarrhea, leading to dehydration and hospitalization. Their vaccine has a 75% efficacy rate in the prevention of C. difficile overgrowth. Our client is looking to define their target market and come up with an appropriate pricing strategy for the vaccine. Additional Information (provided on request) Client Goal - The client is optimistic about this vaccine and wants it to be a blockbuster (brings in $1B in revenue per year) - Our client is mainly concerned about the potential of this vaccine C difficile Infections - Affects children ages 0 to 4, pregnant women, and elderly - Can spread more rapidly from person to person - Current standard of care (current treatment) occurs in a chain of events. 1) Overgrowth of C. Diff, 2) hospitalization for diagnosis, and 3) antibiotic prescription. Case 7: C. DifÞcile Vaccine! What factors should be considered? Sample Issue Tree Pricing Internal External Competition Benchmarks Standard of Care Alternatives Customers/physician preference Effectiveness of the treatment Regulations Time for the treatment Target Costs # of vaccine Prevalence Target Revenue Population Case 7: C. DifÞcile Vaccine! Market Size How do we define the target population? Interviewee should consider the potential at risk populations: Children, pregnant women, elderly and try to estimate which would be the largest. Otherwise prompt Which is the largest? Example calculation assuming equal distribution and stable population Children 0 to 4 = (US pop) (Life Expectancy) (first 5 years) = (320M)(1/80)(5) = 20M Pregnant Women = (US pop) (Births per year) = (320M)(1/80) = 4M Elderly = (US pop)(Life Expectancy)(65 to 80) = (320M)(1/80)(15) = 60M The elderly are the largest at risk group Besides age another risk factor for getting CDAD is person-to-person contact. How would an elderly person be in close contact with others that have C. diff infections? (Brainstorm) The environments: Large family vs small family Living at home vs living in elderly care Social community vs isolated community Urban areas vs country areas High hospitalization rate vs low hospitalization rate A good candidate should come up with a few of the above Case 7: C. DifÞcile Vaccine! Market Size Our team has identified that 10% of elderly live in long term care and are the most affected segment. If we assume a peak penetration rate of 75%, how much in minimum should we charge per vaccination? 6M elderly live in long term care. (Elderly Pop)(Long term care)(Peak penetration) = (60M)(1/10)(3/4) = 4.5M Client goal is a blockbuster drug or 1B in revenue. 1B / 4.5M = $222 per vaccine How do we determine if this a reasonable price? Payers - Insurance companies - Elderly (patients) - Caretakers of elderly Experts - Physicians - Nurses - Industry experts Case 7: C. DifÞcile Vaccine! Pricing Instead of asking the patients directly, letÕs determine the cost to a patient per year if left unvaccinated as a Òbreak even pointÓ for the patient. What is the total cost to patients in long term care if not vaccinated? Can remind the candidate that the chain of events for CDAD treatment is 1) overgrowth of C. Diff, 2) hospitalization for testing, and 3) antibiotic treatment. Candidate should ask for the chances of each event : 50%, 50%, and 66% 6M elderly live in long term care. Long term care elderly with C. Diff overgrowth = (6M) (50%) = 3M Patients who need hospitalization = (3M) (50%) = 1.5M Patients who need antibiotics = (1.2M) (66%) = 0.8M Candidate should ask for cost of hospitalization and antibiotics to calculate the cost per patient Hospitalization = $2k / day, requires 5 days = $10k per treatment Antibiotic Treatment = $2K per treatment Hospitalization total cost = (1.5M)($10k) = $15B Antibiotic total cost = (0.8M)($2k) = $1.6B Total cost = $16.6B Case 7: C. DifÞcile Vaccine! Pricing Calculate the cost of c. difficile treatment per long term care elderly patient Total cost = $16.6B 6M elderly patients in long term care $16.6B in total cost / 6M elderly patients = $2.77K or almost $3K per person in potential cost Ask the candidate to sum up the case Case 7: C. DifÞcile Vaccine! Summary / End of Case Our client wants an appropriate pricing scheme for a C. difficile vaccine in development. Candidate can decide either way if this pricing is reasonable as long as they can defend their answer. Recommendation / Rationale To reach the prompted goal of a blockbuster product, the client should price the vaccine at $222 given our estimation of an elderly market size of 6M individuals. The alternative costs of C. difficile treatment are near $3000 per year, significantly more than the vaccine price. Thus, we expect that our client would find vaccine sales to be positive if they were to target the elderly population. Risks Patient Finances A $222 vaccine may still be expensive for elderly patients who may not be able to afford such a costly preventative measure and renewing vaccination rates were not considered. Insurer Finances Medicare would likely cover the cost of C. difficile treatment because of the need for hospitalization, but this may not extend to a preventative vaccine. Especially considering the vaccine success is actually only 75%, this would mean that there would be additionally associated costs to include on top of the basic vaccine price. Regulatory As this product is still in development, the approval process of the drug should be factored into the decision to continue with this drug. Case 7: C. DifÞcile Vaccine! Next Steps Cost Analysis Although the revenue side of this examination looks favorable, none of the production, sales/manufacturing, or distribution costs were not explored in this case. There may also be additional development costs since the clinical trial stage was not discussed. Incorporate other potential populations The focus of this case was on the long term elderly population, but elderly in general and children are at risk for this disease. Investigating other potential target segments within these two age groups could expand overall sales.