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Burroughs Wellcome Company

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Amber Laub

on 3 April 2014

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Transcript of Burroughs Wellcome Company

Questions?
Case Description
Anti-HIV drug treatment
development began in June 1984
interferes with the ability of HIV-infected cells to produce new viruses and slows the progression of HIV infection
does not eliminate the disease
administered for first time on July 3, 1985
Management Alternatives
Price decreases
drop price 10% ($108)
drop price 20% ($96)
drop price 30% ($84)
ROR pricing
The management team evaluated the price necessary for a 30% return on investment
Keeping the same price at $120
10% Analysis
As mentioned by the management team,
a 10% decrease in price ($108) would require a 20.7% increase in production to break even, which would be about 310,638 units. This is well below the expected 53% increase in volume for the next fiscal year. The management team would end up choosing this.
Rate of Return Analysis
The management team decided to calculate the price that would be required for a 30% return on investments. Investments for Retrovir totaled $115 million which they multiplied by the 30%. They also multiplied the price of the medicine, $120, by the expected units to be sold in the next fiscal year, 2,296,021. They added both of these values and this resulted in a price of $134.58, which is not feasible because it is higher than the price of Retrovir now.
Consultant Team:
Francine Gabriel
Shateera Israel
Amber Laub
Franchesca Saraison
Minjee Sull
Burroughs Wellcome Company
The Problem
drug is very expensive relative to cancer drugs
can be 2-3 times more expensive compared to leading cancer-fighting drugs
even with two 20% decreases, first from $188 to $150, then $150 to $120, users, activists and politicians are still not satisfied
20% Analysis
A 20% decrease in price ($96), would require a 52.2% increase in production to break even. This is a bit risky since it is right at the expected 53% increase in volume for the next year. This is perhaps why the management team did not pick this option.
30% Analysis
A 30% decrease in price, ($84) would require a 106% increase in production to break even, which is completely beyond the 53% expected increase in volume for the 1990 fiscal year. This, therefore is unfeasible.
Keep Price at $120
They figured out that with the price at $120, they can achieve forecasted sales of $275,522,461 and it will be an opportunity to increase sales further with high supply and higher ROI.
But disadvantage would be those who need AZT do not have high income and as a result, they will not be able to afford this product without assistance.
Profit & Revenue
Rate of Return Pricing
We used the rate of return (ROR) formula to determine what the ROI (return on investment) would be for each price deduction.
ROR= ((ROI)* I + CQ)/Q
((x * 115,000,000) + (120*2,296,021))/2,296,021=$$
i= investment
c= cost
q= units sold

Thus, using the formula:
10% Price Decrease ($108) = -24%
5% Price Decrease (114)= -12%
0% Price Decrease ($120)= +1%
Consultant Analysis
In addition to analyzing the management team’s strategies, we looked at:
Price Deduction of 5%
Profits & Revenues
Keeping the Price $120 with a different perspective
Rate of Return (ROR)
Return on Investment (ROI)
Profit & Revenue
Revenues
10% Price Decrease ($108)= $214,421,256
5% Price Decrease (114)= $245,699,351.20
0% Price Decrease ($120)= $275,522,400

Between all 3 of these price deductions, there is a huge difference in the projected revenues for the 1990 fiscal year. Between a 0% and 5% price deduction, there is about a $30,000,000 difference and between a 0 and 10% price deduction, there is about a $60,000,000 difference in total revenues. Our aim is to make as much as possible before other companies enter the market and begin to compete with us.
Final Recommendation
Keep the price of Retrovir at $120
Smallest price point with positive rate of return
Company has already made one price cut of 20% for the 1990 fiscal year
This is the second price cut in two years
More companies are expected to enter the market within the next year, when we subsequently expect to lose some market share
We will instead consider more price cuts for the 1991 fiscal year
Full transcript