Marketing – Pricing/Economic Value

Marketing – Pricing/Economic Value

Economic Value: Medi-Cult’s IVM

Company Background
In late 1998, Medi-Cult, which is a small Danish firm that competes against much larger firms, was reviewing a revolutionary development-stage product used in a new procedure called “in vitro maturation” (IVM). So far, 5 births had occurred using IVM. Medi-Cult currently sold human egg medium products for use in vitro fertilization procedures.

In Vitro Fertilization Cycle
Step 1 – Hormone stimulation requires up to 50 self-administered injections over 30 days. Nausea (50%), over-stimulation problems (10%) and other rarer, but life-threatening side-effects resulted in 2% of patients being hospitalized for up to 5 days.

Step 2 – The mature eggs were extracted (aspirated) and matured further in a medium supplied by Medi-Cult (or its competitors).

Step 3 – After four hours in an incubator, the eggs are fertilized with sperm.

Step 4 – Forty-eight hours later, the embryos are transferred to the uterus. This transfer takes just a few minutes.

Of 345,000 cycles started worldwide in 1997, 25% did not complete all the steps above for various reasons. Of these completed cycles, 25% resulted in a live birth. About 20% of patients do not repeat uncompleted cycles because of the side effects of the hormone injections required for each cycle. The US market accounted for approximately 50% of global cycles, with Europe and the rest of the world at 25% each. Medi-Cult sold its current egg medium at $50 per cycle dose to fertility clinics. In Table A, this cost is included in the “Cost of Treatment” column. Medi-Cult’s variable costs are about 30% of selling price.

Table A: Cost for IVF Cycle
Cost of
Treatment (a) Cost of Injected
Hormones¹ (b) Lab Work (c ) Misc Cost² (d) Total
(a+b+c+d)
US $4K-$6K $3000 $500 $500 $8K-$10K
Non-US $2K-$3K $1500 $300 $200 $4K-$5K

1. In IVF, the patient usually buys hormones directly from a pharmacy while the rest of the items (IVF treatment, lab work, etc.) are billed by the clinic to the patient or third party payer.
2. Miscellaneous costs include additional doctor visits, ultrasound monitoring, and hospitalization.
In Vitro Maturation
Medi-Cult’s new medium eliminated the need for the hormone injections. In the IVM procedure, immature eggs were aspirated and matured for two days in a medium consisting of a mixture of the traditional hormone medium and Medi-Cult’s newly patented medium. The eggs were then fertilized and transferred into the patient, as with the existing IVF procedure. Medi-cult anticipated that IVM would equal IVF’s cycle loss rate and live birth rate per competed cycle. Since IVM eliminates the hormonal stimulation step from the IVF procedure, the cost of hormones for the patients falls to zero. Furthermore, lab work and miscellaneous costs fall by about 50%.

Table B: Cost for IVM Cycle
Cost of
Treatment¹ (a) Cost of Injected
Hormones (b) Lab Work (c ) Misc. Costs (d) Total
(a+b+c+d)
US $4K-$6K 0 $250 $250 $4.5K-6.5K
Non-US $2K-$3K 0 $150 $100 $2.25K-$3.25K
1. These costs include reflect the various steps of IVF that would still have to be performed, such as doctor visits and tests. They do not include the price of the IVM medium.

 
a) Calculate the Economic Value of a single cycle dose of the new medium. What price would you recommend?

 

 
To calculate the Economic Value of a pair of chicken lenses, you first consider the
reference product, then list all the differentiating attributes of the lens, quantify
the differentiating attributes, then add this number to the price of the reference product. The reference product here is debeaking, which costs 1.13 cents, since 220 birds get debeaked in an hour at a labour cost of $2.5/hour.

For the differentiating attributes, we have four that can be easily quantified.

Reduced Mortality
From 9% to 4.5%. At 21 cents a bird, that is a savings of 10.5 cents per bird.

Reduced Feed Costs
You can assume various numbers for how much this reduction is. For ease of
calculation, I am take 0.5 inches as the reduction; you could take 5/8”, or even 1”,
as long as you realize what direction it moves the EV in.

The savings are then (156/2)*(1/20,000) per chicken.
Since feed is $158/tonne, that is 158/2000 lbs.
Converting this to an annual number, we finally get

Savings = (156/2)*(1/20,000)*(158/2000)*(365) =11.25 cents

Reduced Trauma
We save 1 egg over a lifetime. Since a dozen eggs sell for 53 cents, this is 4.42
cents. Or, you could say that the farmer only makes 3 cents for a dozen eggs, so
he makes only 0.25 cents.

Labour Savings
This is essentially zero.

Adding the numbers above, you get something like 26 cents. You can get anything from 20 to 33 cents, depending on your specific assumption. To this
you add the 1.13 cents that was the reference product price, to get a final EV that
varies from 21 to 34 cents, approximately.

Note:
1.I kept the numbers above approximations for a reason. It’s silly to get hung up on decimal points and miss the bigger picture, which is: at marginal costs of around 3.45 cents, there is a huge scope for you to make margins. Whether the exact EV is 21.13 or 23.67 is really not crucial.
2. To the EV above, you have to add many positive and negative factors. Most of them may not be quantifiable, but listing them gives you an idea of which way they are likely to shift the EV. This step is really crucial.

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