Reference no: EM131782220

Customer-oriented pricing case

Medi-Cult, a biotech company based in Denmark, has developed a new alternative to In Vitro Fertilization (IVF) called In Vitro Maturation (IVM). IVM significantly reduces the time needed to mature an egg from 30 days to just 2 days. Importantly, it is a hormone-free treatment thus sparing women a number of psychological and physical side effects.

IVF has 4 steps:

1. Hormonal stimulation: This increases the number of eggs that are matured, lasts for 30
2. days, and can require up to 50 self-administered injections. The injections of hormones is often accompanied by side effects such as nausea, mood swings, general discomfort, and reduced sexual desire resulting in loss of work days in some cases. In 2% of the cases, 5 days of hospitalization is required.
3. Egg aspiration: The more mature eggs are removed, examined, and placed in a nutrition fluid.
4. Fertilization: After four hours in an incubator, the eggs are fertilized with the male sperm.
5. Embryo transfer: 48 hours later, the embryos are transferred to the uterus.

IVF has about a 20% success rate. The total cost of an IVF cycle (one procedure) is about $9,000 broken out in the following way: Cost of IVF treatment: $5,000 (including the cost of a single dose of the IVF medium, sufficient for one cycle); cost of hormones: $3,000; lab work: $500; miscellaneous costs: $500. Medi-Cult's IVF medium is priced at $50 per dose with variable costs of production being $15.

1 This exercise is based on "Medi-Cult: Pricing a Radical Innovation," IMD case #IMD044, by Nirmalya Kumar. 1

Normally, it takes 3-5 attempts before a child is born. Because the extensive hormone treatments are so unpleasant and can be dangerous, women dislike it and often give up after the first attempt.

IVM uses steps 2-4 of IVF. Thus, the hormonal stimulation part of the IVF procedure is avoided. As a result, a number of the costs of the IVF procedure are significantly reduced: Cost of IVM treatment (does not include the price of the IVM medium): $5,000; cost of hormones: $300; lab work: $250; miscellaneous costs: $250. The variable costs of production of a cycle of the IVM medium is the same as for IVF. The success rate of IVM in clinical trials is about the same as that of IVF, 20%.

Medi-Cult faces two types of competition. One form of competition is the large pharmaceutical companies like Merck, Schering-Plough, and Wyeth who supply the hormones used in IVF. This market is worth over $1 billion worldwide. The second type of competition comes from companies like Medi-Cult who develop and manufacture cell culture media like IVM. The company expects to have a 2-3 year first-mover advantage.

Medi-Cult intends to market the IVM medium in the form of a single dose sufficient for one cycle. In addition, no extra production investment is required as sufficient capacity is available and the company already produces similar products.

Questions

1. What are the sources of economic value for IVM vs. IVF?
2. What method(s) mentioned during the lecture seem most appropriate for determining what a person/couple would be willing to pay for a cycle of IVM?
3. Assuming away issues like insurance coverage, channels (clinics), regulations, etc., approximately what price would you charge for a cycle of IVM?