Case Type: new product; pricing & valuation; industry analysis.
Consulting Firm: IMS Health Consulting Group second round job interview.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences; insurance: life & health.
Case Interview Question #00193: The client Genentech, Inc. (Genetic Engineering Technology, Inc.) is a biotechnology and pharmaceutical corporation headquartered in San Francisco, California, USA. Genentech has hired your consulting team because its research department has just invented a preventative medicine for heart attacks that took two years to develop and that will be ready to market in six months. The drug is a tablet with no side effects and it significantly reduces the chances of a heart attack.
The marketing department of Genentech has decided to price the new drug at $300 per year. What is likely to happen to the healthcare industry if the new drug is sold at this price?
Additional Information:
Product
- The tablet must be taken every day.
- The drug has already been approved by FDA.
- Assume that Genentech has unlimited manufacturing capacity for this product.
- The drug will be prescribed through cardiologists.
Customers
- Potential customers are Americans aged 50+ that are high risk for heart attacks.
- Of Americans aged 50+, 40 percent are considered high-risk.
- Of high-risk Americans, 25 percent will have a heart attack by age 70.
- 40 million Americans are over 50. (Ask candidate to estimate this figure)
- It costs a health insurance company $50,000 to cover every heart attack.
- There are no viable substitutes for this new drug product.
Possible Answer:
My comments are the following:
1) I agree that the effectiveness wont be probably 100%, it would be more feasible to use a 80% or a similar percentage.
2) I am not english native, but reading the text I understand that in the high risk population the hearth attack can happen any time between 50 and 70, which is an assumption that makes more sense than assuming that all patients will have an hearth attack when they turn 70.
If this is correct than the NPV calculation must be corrected including the possibility that hearth attack will happen earlier (in the simplest scenario assuming an average of 60).
3) As the risk of the two scenario are quite different I believe we should use two different discount factors (lower for the case of preventive treatment).
We need to calculate two populations:
1) Over 50 that are at risk
2) Up to age of 70 that are at risk and get a heart attack
The question is, what about over age of 70? how many get heart attack after that?
1) 300 M in US, in 8 age segments 0-10-20…-70-80 so between 50-80 we have 3/8 of populations, and 40% of them are at risk, so the total = 3/8 x 300M x 40% = 45 M
2) We are looking at people at risk that by the age of 70 get a hear attack, so now the age segment is between 50-70, 40% of them are at risk and 25% of this risk group get a heart attack, so the total is 2/8 x 300M x 40/100 x 25/100 = 7.5M
The health insurance pays $50K for each of these 7.5 M, but note, in one of the comments someone said every year a new generation is added to this segment, but we are calculating in a period of 20 years isolated.
so heart attack expenses for a period of 20 years: $50K x 7.5 M people = $375 B
Supplying Preventive drug in a 20 years: 45 M x 300 x 20 = $ 270 B
It makes sense to use the preventive drug
I am not sure about the calculations and final answers, while 4M people x 50.000 $ results 200 B$, this amount is equal every year, because every year there will be 4 M people raising up tp 70 years. On the other hand, 300 $ per year X 16 M people for the drug it will be 4,8 B $ every year too, so as far as I understand, the solution will be directly and simply comparing 4,8 B$ per year VS 200 B$ every year, so the answer it will definitelye be YES, the healthcare companies should cover the drug, I don’t understand where the NPV takes place in this case…
Do we know the effectiveness of reducing the heart attack and is it relevant in the calculation?
The case states “The drug is a tablet with no side effects and it significantly reduces the chances of a heart attack”, I would assume if taken every day, the new drug is highly effective in preventing heart attacks for people aged 50+.
So if it’s 50% effective… still 50% people can still get a heart attack after taking this pill every day. Does that affect the calculation? Possible answer 1 seems to suggest 100% effectiveness.
I think it’s assumed to be 100% effectiveness for people aged 50+. This information is not so relevant to the case.
That’s a good assumption Jenny perhaps for the sake of the interview. In reality if I were BCBS I would want more info on the cure effectiveness – a 50% effectiveness is going to make a huge difference vs. a 100% effectiveness. Maybe something for the case writer to include in the next version…
Hi, I was going through the possible answer for the above mentioend case and I observe that if we discount $96 billion @10% then PV will be $14 billion and in other scenario if we discount $200 billion @10% then PV becomes $30 billion.
It shows scenario one is better for the insurance company. Please correct me if I am wrong.
Hi Deepak, the $96 billion costs in scenario one is actually realized every year @ (16 million x $300/year = 4.8 billion) for 20 years. At 10%, the NPV is about 41 billion. The $200 billion in scenario two is a one time costs incurred at year 21.
Hi David, It is correct. I did some wrong calcualtion. Acutal NPV in scenario 1 is $ 40.86 billion. Thx.