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Biopure Corporation
It was February 5, 1998, as Carl Rausch, president and CEO of Biopure Corporation, opened
his Boston Globe and read about the U.S. government’s final approval of Oxyglobin (see Exhibit 1).
Oxyglobin was the first of two new “blood substitutes” on which Biopure’s future depended—
Oxyglobin for the veterinary market and Hemopure for the human market. While Oxyglobin was
ready for launch, Hemopure was still two years away from final government approval. This timing
was the source of an ongoing debate within Biopure.
Ted Jacobs, vice president for Human Clinical Trials at Biopure, argued that the release of
Oxyglobin should be delayed until after Hemopure was approved and had established itself in the
marketplace (see Exhibit 2 for an organizational chart of Biopure). Given that the two products were
almost identical in physical properties and appearance, he felt that Oxyglobin would create an
unrealistic price expectation for Hemopure if released first. As he made clear in a recent management
meeting,
... [T]he veterinary market is small and price sensitive. We’ll be lucky to get
$150 per unit. The human market, on the other hand, is many times larger and we
can realistically achieve price points of $600 to $800 per unit. But as soon as we come
out with Oxyglobin at $150, we jeopardize our ability to price Hemopure at $800.
Hospitals and insurance firms will be all over us to justify a 500% price difference for
what they see as the same product. That’s a headache we just don’t need. We’ve
spent $200 million developing Hemopure—to risk it at this point is crazy. We should
just shelve Oxyglobin for now.
At the same time, Andy Wright, vice president for Veterinary Products, had his sales
organization in place and was eager to begin selling Oxyglobin. He argued that the benefits of
immediately releasing Oxyglobin outweighed the risks,
Oxyglobin would generate our first revenues ever—revenues we could use to
launch Hemopure. And while the animal market is smaller than the human market,
it is still attractive. Finally, I can’t stress enough the value of Oxyglobin in learning
how to “go to market.” Would you rather make the mistakes now, with Oxyglobin,
or in two years, with Hemopure?
Professor John Gourville prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. Some nonpublic data have been disguised and some business details
have been simplified to aid in classroom discussion.
Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No
part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the
permission of Harvard Business School.
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While Carl Rausch listened to this debate, he also considered his colleagues’ growing desire
to take Biopure public in the near future. He wondered whether a proven success with Oxyglobin
might not have a greater impact on an IPO than the promise of success with Hemopure.
An Overview of Biopure
Biopure Corporation was founded in 1984 by entrepreneurs Carl Rausch and David Judelson
as a privately owned biopharmaceutical firm specializing in the ultrapurification of proteins for
human and veterinary use. By 1998, this mission had taken Biopure to the point where it was one of
three legitimate contenders in the emerging field of “blood substitutes.”1 Blood substitutes were
designed to replicate the oxygen-carrying function of actual blood, while eliminating the
shortcomings associated with the transfusion of donated blood. Through the end of 1997, no blood
substitute had received approval for use anywhere in the world.
Biopure’s entries into this field were Hemopure, for the human market, and Oxyglobin, for
the animal market. Both products consisted of the oxygen-carrying protein “hemoglobin” which had
been removed from red blood cells, purified to eliminate infectious agents, and chemically modified
to increase its safety and effectiveness. What distinguished Hemopure and Oxyglobin from other
“hemoglobin-based” blood substitutes under development was the fact that they were “bovinesourced” as opposed to “human-sourced”—they were derived from the blood of cattle. To date,
Biopure had spent over $200 million in the development of Oxyglobin and Hemopure and in the
construction of a state-of-the-art manufacturing facility.
Both of Biopure’s products fell under the approval process of the United States government’s
Food and Drug Administration (FDA), which required that each product be proven safe and effective
for medical use (see Exhibit 3 for an overview of the FDA approval process). In this regard,
Oxyglobin had just received final FDA approval for commercial release as a veterinary blood
substitute, while Hemopure would soon enter Phase 3 clinical trials and was optimistically expected
to see final FDA approval for release as a human blood substitute sometime in 1999.
This recent FDA approval of Oxyglobin brought to a peak a long-simmering debate within
Biopure. With its primary goal being the development of a human blood substitute, Biopure’s entry
into the animal market had been somewhat opportunistic. During Pre-Clinical trials for Hemopure,
the benefits of a blood substitute for small animals became apparent. In response, Biopure began a
parallel product development process which resulted in Oxyglobin. However, there was little
question within Biopure that Oxyglobin was an ancillary product to Hemopure.
As it became apparent that Oxyglobin would gain FDA approval prior to Hemopure, Carl
Rausch and his management team discussed how best to manage Oxyglobin. As the first “blood
substitute” of any type to receive full government approval, Rausch was eager to get the news out.
With this in mind, Andy Wright and a small marketing team had been assembled to bring Oxyglobin
to market. However, Ted Jacobs and others questioned whether the immediate release of Oxyglobin
might not impinge on Biopure’s ability to optimally price Hemopure. After months of debate, it was
time to decide on the fate of Oxyglobin.
1 While the term blood substitute has historically been used to describe this class of product, Biopure and the
medical community increasingly have used the term oxygen therapeutic to describe the latest generation of
product. For simplicity, however, we will continue to use the term blood substitute in this case.
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The Human Blood Market
Blood is essential for life. It performs many functions, the most acutely critical of which is the
transportation of oxygen to the organs and tissues of the human body. Without oxygen, these organs
and tissues will die within minutes.
That portion of blood responsible for oxygen transportation are the red blood cells (RBCs).
RBCs capture inhaled oxygen from the lungs, carry that oxygen to the cells of the body, release it for
use where needed, capture expended carbon dioxide from those cells, and carry that carbon dioxide
back to the lungs, where it is released. The key to this process is “hemoglobin,” the iron-containing
protein found within each RBC to which oxygen and carbon dioxide molecules bind.
The adult human body contains 5,000 milliliters (ml) or about 10 pints of blood. An
individual can naturally compensate for the loss of up to 30% of this volume through some
combination of increased oxygen intake (i.e., faster breathing), increased flow of the remaining blood
(i.e., faster heart rate) and the prioritization of blood delivery to vital organs. In cases of blood loss of
greater than 30%, however, outside intervention is typically required—generally in the form of a
“blood transfusion.”
Human Blood Transfusions
A blood transfusion entails the direct injection of blood into a patient’s bloodstream. As of
1998, the most common form of blood transfusion was the intravenous transfusion of donated RBCs.2
Typically, a healthy individual would donate 1 unit or 500 ml of “whole” blood, which would be
tested for various infectious diseases, sorted by blood type, and separated into its usable components
(e.g., plasma, platelets, and RBCs). This process would yield 1 unit or 250 ml of RBCs, which then
would be stored until needed by a patient. 3
While potentially lifesaving, the transfusion of donated RBCs has limitations. These include
•
The need for exact blood typing and cross-matching between donor and recipient. The RBCs
of each human may contain specific blood sugars, or antigens. The existence or absence of
these antigens creates a complex set of allowable transfusions between donor and recipient,
as shown in Exhibit 4. Transfusions outside of those outlined can be fatal to the recipient.
•
The reduced oxygen-carrying efficiency of stored RBCs. RBCs stored for 10 days or more are
only about 50% efficient at transporting oxygen in the first 8 to 12 hours after transfusion.
•
The limited shelf-life for stored RBCs. RBCs can be safely stored for only about 6 weeks, after
which time they are typically discarded.
•
The need for refrigeration. For optimal shelf-life, RBCs must be stored at 4° Celsius (~40° F).
2 Historically, whole blood transfusions were the norm. Since the 1970s, however, whole blood increasingly had
been separated into RBCs, platelets and plasma, allowing for (1) several patients to benefit from a single unit of
donated blood and (2) a reduced likelihood of negative reaction for any given patient.
3 In blood medicine, 1 unit is defined in terms of its therapeutic value. Therefore, “1 unit” or 250 ml of RBCs
provides the oxygen-carrying capacity of “1 unit” or 500 ml of whole blood. Similarly, “1 unit” of a blood
substitute (i.e., typically 125 ml) provides the same oxygen-carrying capacity of “1 unit” of RBCs or whole blood.
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•
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The risk of disease transmission. While donated blood is tested for infectious agents, there
still exists the risk of disease transmission. For example, the risk of AIDS is 1:500,000, the risk
of Hepatitis B is 1:200,000, and the risk of Hepatitis C is 1:100,000.
Autologous transfusions
In an attempt to overcome some of these limitations, the use of
“autologous” or self-donated RBCs has become increasingly common. In an autologous RBC
transfusion, a medically stable patient who anticipates the need for RBCs would have his or her own
blood drawn weeks in advance, separated into its components, and saved until needed. Research
has shown this process to significantly reduce a patient’s rate of complication and post-operative
infection, thereby hastening recovery and shortening his or her stay in the hospital.
Human Blood Supply and Demand
Human blood supply Fourteen million units of RBCs were donated by 8 million people in 1995 in
the United States. Approximately 12.9 million of these units came from individuals who voluntarily
donated to one of over 1,000 nonprofit blood collection organizations. By far, the largest of these
organizations was the American Red Cross, which collected half of all the blood donated in the
United States in 1995 through a network of 44 regional blood collection centers. Typically, the Red
Cross and the other blood collection organizations supported “blood mobiles,” which traveled to high
schools, colleges, and places of employment to reach potential donors. The remaining 1.1 million
units of RBCs were autologous donations made directly to a hospital blood center.
Increasingly, blood collection was a struggle. While 75% of all adults qualified as a donor,
fewer than 5% actually donated in a given year. Historically, reasons for donating included altruism
and peer pressure, while reasons for not donating included fear of needles and lack of time. Since
the mid-1980s, an additional reason for not donating involved the misconception that donating put
one at risk for contracting AIDS. Public education had failed to counteract this misconception.
Given the low rate of donation and the relatively short shelf-life of RBCs, it was not
uncommon for medical facilities and blood banks to experience periodic shortages of RBCs. This was
especially true during the winter holidays and the summer months, periods which routinely
displayed both increased demand and decreased rates of donation.
Human blood demand
Of the 14 million units of RBCs donated in 1995, 2.7 million were
discarded due to contamination or expiration (i.e., units older than 6 weeks). Another 3.2 million
units were transfused into 1.5 million patients who suffered from chronic anemia, an ongoing
deficiency in the oxygen-carrying ability of the blood. The remaining 8.1 million units were
transfused into 2.5 million patients who suffered from acute blood loss brought on by elective
surgeries, emergency surgeries, or trauma. Exhibit 5 offers a breakdown of RBC transfusions in 1995.
In elective and emergency surgeries, RBCs were routinely transfused in situations where
blood loss was greater than two units, as was typical in heart bypass and organ transplant surgeries.
In surgeries with blood loss of one to two units, however, RBCs typically were not transfused in spite
of their potential benefit. In these “borderline” transfusion surgeries, doctors typically avoided
transfusions for fear of disease transmission or negative reaction caused by the transfused RBCs.
There were approximately 1 million “borderline transfusion” surgeries in the United States each year.
RBC transfusions were also required in the approximate 500,000 trauma cases which occurred
every year in the United States. These cases were characterized by the massive loss of blood due to
automobile accidents, gunshot wounds, etc. However, due to the resources required to store, type,
and administer RBCs, only 10% of trauma victims received RBCs “in the field” or at the site of the
accident. Blood transfusions for the remaining 90% of victims were delayed until the victim arrived
at a hospital emergency room. This delay was often cited as a contributing factor to the 30% fatality
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rate seen in these trauma cases, as evidenced by the 20,000 trauma victims who bled to death each
year prior to reaching the hospital. As one doctor put it,
... [T]hose first few minutes after a trauma are known as the “Golden Hour.”
Life and death often depends on how fast the lost blood is replaced in this period.
Looking forward, while the demand for RBCs to treat chronic anemia was expected to remain
stable, the demand for RBCs to treat acute blood loss was expected to rise with the aging U.S.
population. Individuals over 65 years of age comprised 15% of the adult population in 1995 and
received over 40% of all “acute blood loss” transfusions. By the year 2030, this over-65 segment was
expected to double in absolute numbers and to grow to 25% of the adult population.
Human blood pricing
Since the AIDS crisis, it has been illegal for an individual to sell his or her
blood in the United States. As such, all blood donations are unpaid. In turn, to cover their expense
of collection and administration, blood collection organizations sell this donated blood to hospitals
and medical centers. Once obtained, hospitals incur additional costs to store, handle, transport,
screen, type, cross-match and document the blood. Estimates for these costs are outlined in Exhibit 6.
Typically, these costs are passed on to the patient or to the patient’s insurance provider.
The Veterinary Blood Market
The role of RBCs for animals is biologically identical to its role for humans: RBCs transport
oxygen to an animal’s tissues and organs. In practice, however, the availability and transfusion of
blood was considerably more constrained in the veterinary market than it was in the human market.
Veterinary market structure
There were approximately 15,000 small-animal veterinary practices
in the United States in 1995. Of these, about 95% were “primary care” practices which provided
preventative care (e.g., shots, checkups), routine treatment of illness (e.g., infections, chronic anemia),
and limited emergency care (e.g., simple surgery and trauma). The remaining 5% of practices were
“emergency care” or “specialty care” practices. Approximately 75% of primary care practices
referred some or all of their major surgery and severe trauma cases to these emergency care practices.
Across both the primary care and emergency care practices, patient volume was concentrated in dogs
(~50% of patient volume) and cats (~35% of volume). Exhibit 7 provides a staffing and patient profile
of small-animal veterinary clinics in the United States.
Veterinary blood demand
In practice, blood transfusions in the veterinary market were
infrequent. In 1995, for example, the average veterinary practice was presented with 800 dogs
suffering from acute blood loss. About 30% of these dogs would have benefited significantly from a
transfusion of blood, but only about 2.5% were deemed “critical cases” and received a transfusion.
The incidence of these acute blood loss cases was relatively concentrated, with 15% of
veterinary practices handling 65% of all canine surgeries and 10% of practices handling 55% of all
canine trauma cases. Not surprisingly, these “high incident” practices tended to be the larger
primary care practices and the emergency care practices. This concentration was also evident in
blood transfusions. In 1995, an average of 17 units of canine blood were transfused by each primary
care practice, while an average of 150 units were transfused by each emergency care practice.
Veterinary blood supply4xxx Historically, the biggest constraint to veterinary transfusions was the
lack of an adequate blood supply. In contrast to the human market, there existed few animal blood
4 Unlike the human market, transfusions in the animal market still tended to be “whole blood” transfusions.
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banks. As a result, the sole source of blood for most veterinary practices were donor animals which
were housed at the practice for the expressed purpose of donating blood. When a dog or cat was in
need of blood, blood was drawn from a donor dog or cat and then transfused into the animal in need.
For primary care practices, donor animals provided 93% of all transfused blood, while blood banks
provided the remaining 7%. In emergency practices, these proportions were 78% and 22%.
About 15% of veterinary practices found the “donor animal” system to be administratively or
financially prohibitive and did not offer it as a service. Of the 85% of practices that did use a donor
system, few had a good sense of its cost. In particular, few practices explicitly tracked the cost of
housing the donor animal or the time required to draw the blood. As a proxy for these costs,
practices typically looked to the price of a unit of blood from an animal blood bank. In 1995, that cost
was $50 to $100. In turn, a typical primary care practice charged a pet owner $80 to $120 per unit and
a typical emergency care practice charged a pet owner $130 to $170 per unit.
Finally, most practices that conducted transfusions lacked the time and resources to properly
type both the donor and recipient blood. According to one estimate, only one-tenth of practices
reported always typing the blood of both the donor and recipient animal. While complications due to
incompatible blood types were not nearly as severe for dogs as they are for humans, this lack of blood
typing and cross-matching was shown to prolong the recovery of a patient animal.
These factors resulted in many veterinarians viewing the transfusion of animal blood as the
treatment of last resort, with 84% of veterinary doctors reporting overall dissatisfaction with the
blood transfusion alternatives currently available in the marketplace.
Human Blood Substitutes
Originally conceived as a vehicle to treat wounded soldiers in battlefield settings, the
potential for a human blood substitute for nonmilitary use became increasingly apparent since the
1950s. This period saw a significant rise in auto accidents, the advent of open heart and organ
transplant surgeries, and the AIDS crisis, which called into question the safety of the blood supply.
By 1998, several companies appeared to be on the verge of a viable blood substitute with a
class of product called “hemoglobin-based blood substitutes.” These products attempted to exploit
the natural oxygen-carrying capabilities of hemoglobin while eliminating the limitations associated
with donated RBCs. Each of these companies was attempting to (1) extract the hemoglobin found
within human or animal RBCs, (2) purify that hemoglobin to eliminate infectious agents, and (3)
modify the otherwise unstable free hemoglobin molecule to prevent it from breaking down. These
purification and modification processes were nontrivial and represented the bulk of blood substitute
research conducted over the past 20 years.
Product benefits
In theory, these hemoglobin-based blood substitutes eliminated many of the
limitations associated with donated RBCs. In particular, they were
•
“Universal” blood substitutes, eliminating the need for blood typing and cross-matching.
•
Free of infectious agents and contamination.
•
Increased shelf life. These blood substitutes could be safely stored for up to 2 years.
•
Immediately 100% efficient at transporting oxygen. Unlike whole RBCs, modified
hemoglobin did not require a period of time to achieve peak oxygen-carrying efficiency.
6
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In addition to these “anticipated” benefits, hemoglobin-based blood substitutes were
displaying several “unanticipated” benefits which companies were only just beginning to investigate.
In particular, given that hemoglobin molecules were significantly smaller than RBCs, they were able
to flow to regions of the body that RBCs might not be able to reach. It was believed that this could
lead to improved treatments in cases of stroke and heart attack—cases where RBCs often were slowed
or restricted from reaching vital organs either due to artery blockages or decreased blood pressure.
Product shortcomings
At the same time, these “hemoglobin-based” blood substitutes did have
some shortcomings, including:
•
A short half-life.
While donated RBCs remained in the body for up to two months after
transfusion, these blood substitutes were excreted from the body within 2 to 7 days.
•
The potential for higher toxicity.
While the human body could tolerate the limitless and
continuous replacement of one’s blood with donated blood, the safety of these blood
substitutes had been demonstrated only up to transfusion levels of 5 to 10 units.
In spite of these shortcomings, Dr. C. Everett Koop, the former Surgeon General of the United
States, proclaimed,
When the history of 20th-century medicine is written, the development of
blood substitutes will be listed among the top ten advances in medicine. … [B]ecause
of its purity, efficacy and convenience, this product class has the potential to
revolutionize the practice of medicine, especially in critical-care situations. … [T]he
next generation will not know how tough it was for those of us in medical practice
before this technology became available. 5
Others were less optimistic. One industry analyst presented a less attractive scenario
for hemoglobin-based blood substitutes:
... [W]e feel that there is no urgent need for blood substitutes since donated
human blood is, for the most part, safe and effective. The expectation that blood
substitutes will command vast markets and high price premiums is based on the
assumptions that blood substitutes will prove safer and more effective than donated
blood. While only time will tell if this is true, it will be an uphill battle given the
widespread acceptance of donated blood.
The FDA Approval Process
Human blood substitutes fell under the strict regulation of the U.S. government’s Food and
Drug Administration (FDA), which required that a product be proven safe and effective for medical
use before being approved for commercial release (refer back to Exhibit 3). By early 1998, three
companies had products that were in the final stages of this process. These products differed in their
source of raw hemoglobin and in the process by which that hemoglobin was purified and modified.
The FDA approval process was sensitive to these differences. Short of beginning the FDA approval
process anew, each company was limited in its ability to substantially alter either the source of their
hemoglobin or the process by which that hemoglobin was purified and modified. In addition, given
that most of the companies had patented their purification and modification processes, there was little
opportunity for a new entrant to quickly gain FDA approval.
5 Biopure company website.
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Competitors for a Human Blood Substitute
As of 1998, Baxter International and Northfield Laboratories were the only other companies
in late-stage development of a hemoglobin-based blood substitute. All other competitors were either
several years behind in their development of a hemoglobin-based product or were pursuing a less
promising technology.
In contrast to Biopure’s use of cattle as its source of hemoglobin, both Baxter and Northfield
relied on human blood as their source of hemoglobin. In particular, both companies had developed a
technology to extract raw hemoglobin from “outdated” human RBCs (i.e., RBCs intended for
transfusion, but which had been stored for more than 6 weeks). While their production processes and
their pending FDA approval did not preclude them from using fresh RBCs, it was the stated intention
of both companies to initially rely on outdated human RBCs. Through 1998, Baxter had an agreement
with the American Red Cross to obtain outdated RBCs at a cost of $8 per unit. Until recently,
Northfield had a similar $8 per unit agreement with Blood Centers of America, another national
blood collection agency. However, in early 1997, Blood Centers of America raised their price to
Northfield to $26 per unit for outdated RBCs.
In addition to their reliance on human blood, the products of Baxter and Northfield also
differed from Biopure’s in that they needed to be frozen or refrigerated until used. Biopure’s
Hemopure was shelf-stable at room temperature.
Baxter International
With over $5.4 billion in sales and $670 million in net income in 1996, Baxter
was an acknowledged leader in the development, manufacture and sale of blood-related medical
products, ranging from artificial heart valves to blood-collection equipment. In addition, Baxter had a
long history of product breakthrough, having developed the first sterile blood collection device in
1939, the first commercially available artificial kidney machine in 1956, and the first Factor VIII bloodclotting factor for the treatment of hemophilia in 1966.
“HemAssist,” Baxter’s patented blood substitute, was expected to add to this string of
breakthroughs. Representing 30 years and $250 million in effort, HemAssist was the first human
blood substitute to proceed to Phase 3 clinical trials in June 1996. Initially, these trials were expected
to lead to full FDA approval by late 1998. However, in October 1997, Baxter revised its estimate to
late 1999 or early 2000—an announcement that was followed by a 10% dip in Baxter’s stock price.
Despite this delay, Baxter recently constructed a $100 million facility with a production
capacity of 1 million units of HemAssist per year. Aside from its variable cost of source material,
Baxter was expected to incur production costs of approximately $50 million per year, independent of
production volume. While still just industry speculation, it was anticipated that Baxter would price
HemAssist between $600 and $800 per unit.
Northfield Laboratories Northfield Laboratories of Illinois also had recently entered Phase 3 trials
with a hemoglobin-based blood substitute. Northfield’s product, “PolyHeme,” was very similar to
Baxter’s HemAssist in its production and usage profile. Based on early positive results from its Phase
3 trials, Northfield anticipated full FDA approval in late 1999.
In contrast to Baxter, Northfield was a small, 45-person firm that was founded in 1985 for the
sole purpose of developing a human blood substitute. As such, PolyHeme represented its only
product. Analysts expected PolyHeme to be priced comparably to HemAssist upon release.
By early 1998, Northfield had spent $70 million in its development of PolyHeme and in the
construction of a pilot production facility with an output capacity of 10,000 units per year. While this
facility was sufficient to satisfy demand during clinical trials, Northfield management recognized the
need for a full-scale production facility. With this in mind, they hoped to construct a $45 million
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facility with a capacity of 300,000 units per year. With this factory in place, aside from the cost of raw
material, production costs were expected to be about $30 million per year, independent of production
volume. By early 1998, selection of a factory site and plant construction had not yet begun.
Animal Blood Substitutes
Through early 1998, Biopure was the only company that was actively engaged in the
development of a blood substitute for the small-animal veterinary market. And while there was little
to prevent Baxter or Northfield (or anyone else) from attempting to enter the veterinary market, any
company wishing to do so would have to initiate an FDA-approval process specific to the veterinary
market. By one estimate, assuming a company immediately began such a process, it would take 2 to
5 years to bring a product to market.
Biopure and Its Blood Substitutes
Hemopure and Oxyglobin were nearly identical in terms of physical characteristics and
production processes. The only difference between the two products was in the size of the
hemoglobin “clusters” that were contained in the final products. In the production of Oxyglobin,
both large and small clusters of hemoglobin molecules were naturally formed. However, the small
clusters tended to cause minor gastrointestinal problems and discoloration of urine. While
considered acceptable in the animal market, these side effects were undesirable in the human market.
As a result, Hemopure followed the same production process as used to make Oxyglobin, with a final
step added to remove the small hemoglobin clusters.
Biopure had a single manufacturing facility, with an output capacity varying by the
production mix of Oxyglobin and Hemopure. The same equipment was used to produce either
product, but only one product could be produced at a time. This resulted in an annual capacity of
300,000 units of Oxyglobin or 150,000 units of Hemopure or some linear combination inbetween. The
lower output for Hemopure reflected the facts that (1) the added step to remove the small
hemoglobin clusters decreased the rate of production, and (2) the removal of the small hemoglobin
clusters decreased yield.
To support these levels of output, aside from the cost of raw material, Biopure anticipated
overall production costs of $15 million per year, independent of volume. For raw material, it
anticipated a ready supply of bovine blood priced at $1.50 per unit. Biopure paid this money to cattle
slaughterhouses to collect and transport the blood of cattle that were being processed for their meat—
blood that otherwise would have been discarded. It was estimated that 10,000 cattle could supply
enough raw material to support full production in Biopure’s existing manufacturing facility.
Status of Hemopure
As of early 1998, Hemopure was in Phase 3 clinical trials in Europe, with FDA approval for
Phase 3 trials in the United States appearing imminent. In anticipation of this approval, Biopure had
established sites for Phase 3 trials and was ready to proceed immediately upon approval. While
acknowledging the potential pitfalls of any clinical trials, Biopure was confident that the Phase 3 trials
would be successful and that the FDA would grant full approval sometime in 1999.
Biopure
expected to commercially release Hemopure sometime in late 1999 or early 2000.
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In line with the anticipated price of Baxter’s HemAssist, Biopure planned to price Hemopure
at $600 to $800 per unit. However, little systematic testing had been done by Biopure to determine
the acceptability of these prices. In particular, little was known of the price sensitivity of medical
personnel, insurance providers, or of patients when it came to human blood substitutes.
Status of Oxyglobin
In 1997, Biopure established the Veterinary Products Division and hired Andy Wright to
oversee the marketing and sale of Oxyglobin. Working under the assumption that Biopure would
begin selling Oxyglobin immediately upon approval, Wright faced a host of decisions, including how
to price and how to distribute Oxyglobin. Supporting him in these decisions was a team of seven
employees—one director of marketing, one technical service representative (to answer technical
questions and complaints), two customer service representatives (to support ordering and billing),
and three sales representatives (to make sales calls and generate orders).
The pricing of Oxyglobin
Some members of Wright’s sales team argued for Oxyglobin to be
priced at $80 to $100 per unit. These team members pointed to the price sensitivity of the vet market,
arguing that few pet owners carried health insurance on their animals. They also noted that the
average cost of a visit to the vet was only about $60, with few procedures costing more than $100 (see
Exhibit 8). Finally, they noted that vets tended to use a simple “doubling rule” when pricing a
medical product to the pet owners, bringing the end-user price of Oxyglobin to $160 to $200 per unit.
Other members of Andy Wright’s sales team felt that Oxyglobin should carry a premium
price of up to $200 per unit, reflecting the many advantages of Oxyglobin relative to donated animal
blood. These team members pointed out that while the average cost of a visit to a primary care
practice might be only $60, the cost of a visit to an emergency care practice could easily run from $200
to over $1,000. They also questioned whether veterinary doctors would just blindly double the price
of Oxyglobin without regard for its high dollar contribution. Finally, they noted that at a low price,
Biopure could never hope to recoup the massive cost of product development.
To better understand the channel’s willingness to pay for an animal blood substitute, Biopure
conducted two surveys in 1997—one survey of 285 veterinarians and another of 200 dog owners.
Table A offers results of the veterinarian survey and Table B offers results of the owner survey.
In reviewing these surveys, Wright reminded himself that veterinarians often played the role
of gatekeeper when it came to potential treatments, recommending less-expensive over moreexpensive treatments in an effort to save their clients’ money. At the same time, 90% of pet owners
reported that they wanted to be made fully aware of all the alternatives available to treat their pets.
Table A xxx Veterinarians’ Reported Willingness to Trial Oxyglobin
Price to Veterinarian
$50 per unit
$100 per unit
$150 per unit
$200 per unit
% of Veterinarians Who Would Trial Product
Noncritical Cases
Critical Cases
95%
70%
25%
5%
100%
95%
80%
60%
Source: Biopure company records
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Biopure Corporation
598-150
Table Bxxx Pet Owners’ Willingness to Trial Oxyglobin
Price to Pet Owner
% of Pet Owners Who Would Trial Product
Noncritical Cases
Critical Cases
60%
40%
35%
30%
90%
85%
75%
65%
$100 per unit
$200 per unit
$300 per unit
$400 per unit
Source: Biopure company records
The distribution of Oxyglobin
Andy Wright also had to decide how best to sell and distribute
Oxyglobin and how to educate veterinarians on its use. In approaching this question, he looked to
the current distribution practices for medical products in the veterinary market.
In 1997, $1.2 billion worth of product was sold to veterinary practices through a network of
200 independent distributors—each of whom sold and distributed the products of many
manufacturers. Two of these independent distributors were national in scope, 18 were regional (e.g.,
New England), and 180 were local (e.g., metropolitan Boston). Table C provides a sales and staffing
profile for these distributors. A manufacturer might contract with one national distributor, several
nonoverlapping regional distributors, and many nonoverlapping local distributors. In return for their
selling and distribution efforts, a distributor would receive 20% of the manufacturer selling price on a
more-established product and 30% of the selling price on a less-established or new product.
Table C xxx Profile of Independent Distributors of Veterinary Medicines
Type of Distributor
Number
% of Total Sales
Avg. Number of
Sales Reps
National
2
25%
100
Regional
18
60%
40
Local
180
15%
1.5
Source: Biopure company records
A veterinary practice could expect one 15-minute visit per week from the sales
representatives of its primary distributor. These 15-minute visits would entail a focused discussion of
current promotions on existing products and a more limited discussion of products new to the
market. Typically, a sales rep might introduce 100 new products in a given year. To educate a
particular distributor’s sales reps on a new product, a manufacturer might set up a series of training
sessions. These training sessions would be conducted for groups of about 10 sales representatives
each and last anywhere from 1 to 4 hours, depending on the complexity of the new product.
Another $300 million worth of products were sold directly to veterinary practices through
manufacturer salesforces. Termed “manufacturer direct,” this type of distribution often was used by
manufacturers with either high-volume, well-established products or products which required a very
sophisticated sales pitch. If Biopure chose this route, in addition to the cost of maintaining a
salesforce, Andy estimated the cost to physically distribute Oxyglobin to be $10 to $15 per unit.
Andy Wright also considered trade publications and trade shows as another means by which
to educate veterinarians about the existence and benefits of Oxyglobin. A quick investigation revealed
that five journals had almost universal coverage across veterinarians and tended to be well-read. In
addition, six large veterinary trade shows held in the United States each year attracted 2,000 to 10,000
veterinarians each. Typically, these trade shows were taken seriously by attendees and were a valued
source of information. Andy wondered if either of these avenues made sense for Biopure.
11
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2019.
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598-150
Biopure Corporation
Biopure’s Decisions
While Andy dealt with the question of how best to market Oxyglobin, Carl Rausch wrestled
with the larger question of whether and when to launch Oxyglobin. Should he listen to Ted Jacobs
and postpone the launch of Oxyglobin until after Hemopure had established itself in the marketplace?
Or should he listen to Andy and immediately launch Oxyglobin and reap the near-term benefits?
Not lost on Carl was the potential impact of Oxyglobin on a possible initial public offering of
Biopure stock. To this point, Biopure had remained a privately held firm with very little debt. And
while they currently had no revenues, a recent round of capital venture financing had provided them
with $50 million—enough money to support operations for another two years. Nevertheless, many
stakeholders in Biopure were anxious to take the company public. In this regard, Carl wondered
whether a veterinary product with small but steady sales might not prove more attractive to investors
than a human product still under development. He was especially sensitive to this issue in light of
some recent, high-profile product failures in the Massachusetts biotechnology community (see
Exhibit 9).
With all of this in mind, as president and CEO of Biopure, Carl Rausch pondered how best to
leverage the opportunity offered by Oxyglobin without jeopardizing the potential of Hemopure.
12
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2019.
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Biopure Corporation
Exhibit 1
598-150
Excerpts from The Boston Globe Article, February 5, 1998
Biopure’s Blood Substitute for Dogs OK’d
Veterinarians scrambling to find blood for badly injured dogs now have a
blood substitute. Biopure Corp. of Cambridge said yesterday it received
federal regulatory approval to market oxygen-carrying blood derived from the
blood of cows.
Tested in over 250 dogs, the company’s blood substitute, called Oxyglobin, is
initially aimed at the [canine blood transfusion market], according to Andrew
W. Wright, vice president of Biopure’s veterinary products.
The US Food and Drug Administration approval makes Oxyglobin the first
blood substitutes for dogs, designed for dogs needing blood transfusions
because of blood loss from accidents, surgeries, parasite infections, or rare
anemia cases.
“This is breakthrough development because it quickly gets oxygen into tissue
and organs and buys time for the dog’s own regenerative red blood cells to
come back,” said Dr. Robert Murtaugh, professor of veterinary medicine and
section head for emergency and critical care services at the Tufts University
School of Veterinary Medicine.
The canine version is designed to largely replace drawing blood from donor
dogs some veterinarians use in emergency situations.
Unlike blood that contains red blood cells, Biopure’s technology uses a highly
purified bovine hemoglobin that does not require blood typing or crossmatching. [Oxyglobin] can be stored in a veterinarian’s storage area at room
temperature for up to two years. A single bag—equivalent to a pint of whole
blood—is sufficient for small to medium-sized dogs; two bags might be
needed for larger dogs.
Reprinted with courtesy of The Boston Globe.
13
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598-150
Biopure Corporation
Exhibit 2
The Organizational Structure at Biopure Corporation
Carl Rausch
President/CEO
(140)a
VP
Manuf. &
Engineering
(38)
Dr. Ted Jacobs
VP - Human
Clinical Trials
(10)
VP
Regulatory
(15)
Marketing
Director
(1)
VP
Research &
Development
(50)
VP
Finance
(15)
Andrew Wright
VP - Veterinary
Products
(7)
Technical
Services
(1)
VP
Human
Resources
(5)
Customer
Services
(2)
Sales
Reps
(3)
Source: Biopure company records
a
Numbers in parenthesis represents the total number of employees that fall under a particular position’s span of
control. Thus, 140 employees either directly or indirectly report to Carl Rausch.
14
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2019.
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Biopure Corporation
Exhibit 3
598-150
The United States FDA Approval Process
Phase
Goals
Characteristics
Pre-Clinical Trials
Safety in animals
–
–
–
–
Typical length = 5 - 10 years
Need to show safety
Hope to show efficacy
Testing animals include mice, rats, dogs, sheep, etc.
Phase 1
Clinical Trials
Safety in healthy human
subjects
–
–
–
Typical length = 2 - 3 years
20 - 100 individuals
Single-site testing location
Phase 2A & 2B
Clinical Trials
2A - Safety in human
patients
2B - Safety & efficacy in
human patients
–
–
–
Typical length = 1 - 2 years
100 - 200 individuals
Single-site or multi-site testing locations
Phase 3
Clinical Trials
Large-scale safety &
efficacy In use
–
–
–
–
Typical length = 1 - 2 years
100 - 500 individuals
Multi-site testing locations
Double-blind testing (i.e., neither patient nor doctor
aware of specific product or brand)
Source: Biopure company records
Exhibit 4
Human Blood Typing and Allowable Transfusions
Donor Blood
Type
% of
Population
AB
4%
AB
A
40%
A, AB
B
11%
B, AB
45%
O, A, B, AB
c
O
a
Acceptable
Recipients
b
Source: The American Red Cross
a
In addition to ABO blood typing, RBCs are either Rh+ or Rh-,
further complicating allowable transfusions.
b
AB is often referred to as the “universal recipient.”
c
O is often referred to as the “universal donor.”
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2019.
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598-150
Biopure Corporation
Exhibit 5 Red Blood Cell Donations and Transfusions in
the United States in 1995
Use of Red Blood Cells
Units
(in 000s)
Acute Blood Loss:
Elective Surgery:
Anonymous Donations
Autologous Donations
5,800
a,b
1,100
Emergency Surgery (in hospital)
Trauma (in field administration)
Acute Blood Loss Subtotal
Chronic Anemia
1,000
200
8,100
3,200
Not Transfused
Due to Rejection
1,200
Due to Expiration
1,500
Not Transfused Subtotal
Total:
2,700
14,000
Source: Stover & Associates LLC
a
Autologous donations are in elective surgery only. All other uses
of RBCs represent anonymous donations.
b
Autologous donations include both those units transfused and
those unused units discarded.
Exhibit 6
Cost to Patient of Donated Human Blood
Low Estimate
(per Unit)
High Estimate
(per Unit)
$ 75
$150
Screening/Typing/Crossmatching
25
40
Transportation/Administration
25
35
$125
$225
+ 150
+ 200
$275
$425
Anonymous Donations:
Hospital Acquisition Cost
Final Price of Anonymous
Autologous Donations:
Added Administration and Handling
Final Price of Autologous
Source: Stover & Associates, LLC
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2019.
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Biopure Corporation
Exhibit 7
598-150
Profile of the 15,000 Veterinary Practices in the United States (1995)
Class of
Practice
Average Monthly Case Load
Average No.
of Doctors
Relative
Frequency
Dogs
Cats
Other
Average Gross
Revenues
1 Doctor Practices
1
25%
200
125
80
$265,000
2 Doctor Practices
2
30%
300
200
120
$460,000
3+ Doctor Practices
4.6
40%
450
300
160
$800,000
2.7
95%
412
265
140
$570,000
4.0
5%
400
240
130
$770,000
Primary Care:
Average Primary Care
Emergency Care:
Avg. Emergency Care
Source: Biopure Company Records
Exhibit 8
Small-Animal Veterinary Fees for Typical
Procedures in Primary Care Practices in 1995
Procedure
Average Fee
Average Charge per Visit
$58
Office Call—Average Minimum Charge
$25
Boarding
$10
Hospitalization
$19
Anesthesia
$45
X-rays
$40
Blood Transfusion
Hysterectomy
$100
$80
Heartworm treatment
$250
Annual Vaccinations
$27
Rabies Vaccination
$12
Lab Tests—Average
$23
Dental Cleaning
$75
Deworming
$15
Source: Veterinary Economics, October, 1996, p. 45
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2019.
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598-150
Biopure Corporation
Exhibit 9 xxx Massachusetts Biopharmaceutical Companies’ Proposed Drugs Sidelined in the 2nd
Quarter, 1997
Firm/location
Date
Problem
Status of company
ImmunoGen
Norwood, MA
March 18
Oncolysin B cancer drug halted after
Phase 3 trial failure
Significantly downsized operations,
extensive layoffs, major restructuring, sold
biomanufacturing plant, and relocated
corporate offices
OraVax
Cambridge, MA
March 19
HNK20, a nosedrop designed to
reduce hospitalization for lower
respiratory infections caused by
respiratory virus in infants, failed in a
pivotal overseas clinical trial
Layoff of 20 people in April as part of a
corporate reorganization
AutoImmune
Lexington, MA
April 21
Myloral, an oral multiple sclerosis
drug, did no better than placebo in
Phase 3 trial
Major restructuring, now employs 20,
down from 90 employees
Genzyme
Cambridge, MA
May 5
Sepracoat, a surgical antiadhesion
coating, was rejected by FDA
advisory committee for lack of
sufficient evidence of clinical
effectiveness
Company selling Sepracoat in Europe; has
FDA approval on related Seprafilm product
Cambridge
Neuroscience
June 24
Cerestat clinical trial is halted over
safety concerns by corporate partner,
Boehringer Ingelheim
Six-month investigation begins to find
reasons for concern
Cambridge, MA
Source: The Boston Globe
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Running Head: Cumberland and Metal Industries CASE ANALYSIS
Southwest Airlines Case Analysis
Student Name: Felix Wei
Date: 7/2/19
Cumberland and Metal Industries CASE ANALYSIS
Pertinent Issues and Recommendations
Several pertinent issues are revealing themselves from the case study. The first and most
crucial one is the fear of getting into the market and fail. The marketing department of
Cumberland and Metal Industries does not have confidence that their new product will do well in
the market due to the existence of alternatives. Yes, it is not wrong to worry about the market,
but it is also good to consider who you are competing against. Is there any potential competitor
in the industry? The case reveals that there is no single identified brand since multiple small
vendors in the country produce the cushion pads. This is something which CMI has to consider
and from it, create the first recommendation. Thus, my first recommendation is one of brand
creation. The organization should implement effective strategies to build their brand image.
Some of the best strategies will include regular advertising through the use of salespeople (which
the firm is partially doing), the use of posters, and the media. These are lines which will foster
fast communication to the potential consumers. Advertising reminds and informs people about
the existence of a product. Though it will seem expensive for the firm, it will only be for the first
few months. With time, the organization will have a strong identified brand in the market. The
brand influences the consumer purchasing decision. For example, most people will go for an
iPhone despite its higher prices than most Android phones (Gountas & Mavondo, 2008). It is not
that Apple Inc has excellent products, but it is about the brand image it has created.
Another vital issue is on pricing. CMI marketing department is not sure of how the
pricing should be made. Price is an essential element which consumers focus on when deciding
what to buy. Considering the processes involved in the production of the new metallic curved
pads, the costs are likely to be higher than what the existing providers give their customers. For
this part, I recommend that the organization should employ a specialized team to hold seminars
and demonstrate to the public, which can consist of potential consumers about the efficiency of
their products. For instance, in the case where one will need twenty (20) sets of Asbestos, only
one set of CMI will be required. Take this principle to a firm that invests in continuous projects,
which one will be cheaper? In the long-run projects, these pads will be useful. Thus, price
should not be a concept of worry if the firm will explain well in its marketing the benefits of
using their products. Nevertheless, in some cases, high prices are taken by the consumers to
mean quality products, which is the case for this organization.
The effects which CMI new product has on the production process is another issue. For
instance, it is difficult to replace it instantly due to a large amount of heat the metals retain. This
leads to a waste of time. For this, I recommend that the firm should come up with handling tools
which will make it easy for the technical crew to minimize injuries during the changing of the
sets. This will reduce the waiting hours for the systems to cool. However, I can also recommend
the firm to look for faster cooling systems. Time is an important production factor and cannot be
created.
The firm is also in a dilemma on the type of pads to produce. The production of one size
will limit some users. I recommend that the marketing department should do more research and
find all the sizes required. During the production, the pads should be produced based on the
market survey. The ones dominating the market should be produced in large numbers. Simply
because there are few consumers of a product in the market does not mean that they should be
neglected. Taking care of the entire population in the provision of goods and services is one way
of building a brand’s image, and CMI will be operating in greater heights in a while.
Cumberland and Metal Industries CASE ANALYSIS
References
Gountas, J., & Mavondo, F. T. (2008). Marketing strategy: A decision-focused approach. North
Ryde, N.S.W: McGraw-Hill.
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