Biopure

Problem Statement - Biopure (BPC), is a small and private developer of human (Hemopure) and animal (Oxyglobin) blood substitutes. Biopure is faced with the decision of whether to immediately launch Oxyglobin (Og) or wait until after the launch of hemapure (Hp), which will be in about two years following FDA approval. If they decide to launch they must determine their pricing strategy. The concern is that launching Oxyblobin would create an obstacle to the pricing of Hemopure, the company's initial product focus.

Market Analysis - The combination of lengthy approval process of the FDA, intellectual property laws, and R&D capital requirements, poses a high entry barrier in the blood substitute markets. The human market is expected to experience moderate future growth affected by an increase in population, and in particular the proportion of older citizens. Also, the human market suffers from uneven seasonal variations in blood supply and demand. There is higher demand in summer and winter holiday seasons and this demand is exacerbated by lower donations. Although the total potential size of the human market in the US is 13.5 million units (Exhibit 1), Hemopure's long shelf life and lack of need for refrigeration makes it particularly suitable for trauma cases estimated at 2 million units.

The existing system for supplying animal blood is poor at matching animal blood types and it is relatively costly, leading to an underserved market. Veterinarians use approximately 350,000 units of blood per year in canine transfusions, all of which could be captured by Og. The potential market size is estimated at only 2.3 million (Exhibit 2). Even with the smaller demand figure, however, BPC's capacity of 300,000 would still leave some excess demand. This, along with minimal threat of entry (due to R&D and FDA approval processes) results in the potential for maintaining high prices for Og.

Company Analysis - BPC is a manufacturer of blood substitutes, specifically Hemopure (Hp) for humans and Oxyglobin (Og) for the veterinary (mainly canine) market. Although Hp is expected (without guarantee) to receive FDA approval by the end of 1999, Og received approval for general use in 1997. BPC has already invested $200 million on product development and manufacturing facilities for the two products, and recently received $50 million in Venture Capital funding; thus, it has little if any short-term financial constraints. The company's plant capacity is 300,000 units of Og, or 150,000 units of Hp. There is considerable flexibility in switching from the manufacturing of one product to another, and BPC can manufacture both at the same time (given the resulting linear function from the capacity figures above). These capacity numbers, however, are limited in comparison to the larger potential market. Given its competitors in the human blood market, BPC would be place third among three competitors, whereas in the canine market, it would have a monopoly for a minimum of two years. As such, BPC would likely be a price taker in the human blood supply market, whereas it would be a price setter in the canine market, allowing it to maximize profits by charging the highest possible price given its current capacity. An undersupplied marketplace for both humans and canines will allow for sufficiently elevated prices (Exhibit 3).

In performing a VRIO analysis of BPC (Exhibit 4), one sees the unique use of bovine precursors and product differentiation of Og as sustainable competitive advantages. The unique raw material provides a variable cost advantage. As well, the seasonal variation in human blood supply would not affect BPC's supply of raw materials as it would for its competitors. Hp, while a valuable resource for BPC, cannot be considered a sustainable competitive advantage due to its two competitors. Its lower-cost production process allows BPC to position itself as a lower-cost producer. However, this would be difficult to take advantage of as it will have to take the price set by the market leader. While this would still provide for higher margins, the percentage gain would be minimal compared to the otherwise high margins.

The company is seriously interested in pursuing an IPO, which could be greatly enhanced with a product in the marketplace generating revenue, an established customer base and experience in producing large amounts of blood substitute in its facilities. As well, the revenues from an Og launch could generate additional funds for the future launch of Hp.

Competitor Analysis - Competition to Og is solely indirect: a few blood banks and donor animals at veterinary clinics, for which there is a high degree of dissatisfaction (difficulty in blood typing, ethical issues). As well, there is no foreseen direct competition; BPC would have a monopoly on this market. In the human market, direct competitors Baxter and Northfield are expected to launch their products towards the end of 1999, at the earliest, following completion of Phase 3 clinical trials. Expected pricing for both is between $600-800. Unlike bovine blood-based Hp, both competitive offerings are derived from outdated human RBCs, indicating a higher cost of raw material and a potential cap on production capacity due to limited blood supply. The breakeven volume analysis (Exhibit 5) demonstrates BPC's anticipated cost advantage over its competitors due to lower variable costs. However, Baxter and Northfield may have an advantage if bovine-source blood is perceived negatively by the marketplace. Moreover, the need for refrigeration until use reduces the suitability of these competing products for field use (e.g. trauma cases). Substitutes to Hp include the blood supplies of the American Red Cross and other agencies which supply blood at competitive patient costs of $125-$225/unit, as well as autologous donations ($275-425/unit). It is possible the availability of human blood substitutes would lead to a decrease in blood donations. Baxter, with its reputation, experience, and 1 million unit capacity is expected to be the market leader, and as such will set the price for human blood substitutes. If Northfield builds a new production facility for 300,000 units as planned, it will occupy the number two spot. As all three companies have made considerable investments in developing the product, there are considerable exit barriers, and they will price the product as high as possible to recoup the sunk costs. If the product is commoditized by the three competitors, reductions in price would likely result in a price