1) Is Gardasil a good product? What should the price be to?

 The development of Gardasil was the result of more than 25 years of research by scientists
of various science institutes.
 Merck tested Gardasil rigorously on 20,541 women ranging in age from 16 to 26.
 Results of the study were impressive, as Gardasil prevented 100% of cancers related to HPV
types 16 and 18 in women not previously exposed to the HPV virus.
 Gardasil also prevented 99% of genital warts caused by HPV types 6 and 11.
 There were very few side effects from the vaccine

Overall Gardasil was an innovative product which could prevent cervical cancer and reduce the
chance of people being infected with HPV. Thus it’s a good product to launch in the market.

o Pricing of Gardasil:
o The recommendation of outside consulting firm is justified, which is $120 per dose
or $360 per person because:

 Gardasil was the result of years of research by various scientists.

 Merck spent $1.2 billion developing Gardasil vefore seeking approval from FDA
 Gardasil was the first HPV vaccine to be approved by FDA
 Vaccine developed by GSK was 1 year behind as compared to Gardasil, giving Merck a
competitive advantage – because of quality product
 The revenue and net income of Merck have been falling since 2005, to it is a great
opportunity for Merck to command premium.

Thus the price of the product must be higher than the recommended price of $120. The
recommended price should be $140-150 to gain the maximum returns in the first year to
capitalize on the first mover advantage. Later on the price can be reduced and a price skimming
model can be used for the product instead of a cost based pricing strategy.

2) What factors should Merck consider when setting the price?

Factors to be considered while setting the price:

 The approximate demand for the product and the impact of price on it.
 The overall cost of production and R&D.
 The competition to be faced in the near future.
 The advantages and dis-advantages for Merck will influence the pricing pattern

The demand for a generic product eventually reduces once the price is increased. But in this case as
it is one of a kind medicine which is launched for the first time to prevent against the deadly disease
cervical cancer caused by HPV. For expensive products the demands are mostly inelastic and as it is a
medicine to cure something which has never been done before it can be priced higher than expected
or recommended price. As it will be a necessity for women to protect against cervical cancer the
demand will persist among most people. Reimbursement will be an issue but eventually if the
demand is there the pattern will change.

The company already invested 15 years in R&D and spend $1.2 billion already for manufacturing the
product and various approvals. They are also on the verge of spending millions to launch this new
product which can change the fate of the Company. With the competition coming up real soon,
Merck need to recoup maximum amount possible with this product. Though the cost of production
is less the product must be priced high to earn returns from their investment.

The competition coming up will put pressure to price the product high as later on there might be a
price war to get the maximum share of the revenue. Merck needs to capitalize on the first mover
advantage and stay ahead of its competition.

Advantages for Merck in setting the price:

 First ever drug to prevent cervical cancer with very less side effects.
 First mover advantage in the sector
 Impressive results from tests showing 100% prevention against HPV types 16 and 18 and
99% prevention against genital warts caused by HPV type 6 and 11.
 First Patent on Gardasil would not expire until at least 2017
 Huge potential to expand the product in international markets as its one of a kind innovative
product offering.

Disadvantages for Merck in setting the price:

 Does not eliminate completely the need for PAP Tests and hence the cost benefit for the
customers will be limited.
 Does not protect against all types of cervical cancer and hence a risk factor remains.
 Potential strong competition to come up in a year’s time from Cervarix from GSK which also
prevents HPV types 16 and 18 only.
 Huge R&D Costs incurred to make the product, created a huge pressure to accumulate
maximum returns from its sales. Thus will make the vaccine one of the costliest.

3) At a price of $120/ dose, what is the cost per QALY? So what should the price be?

The average age for cervical cancer is 54, ie. mostly mid-life.

Cervical Cancer had a 5 year survival rate of about 60 percent.

Difference in life expectancy with and without cervical cancer = (31.6-20) = 11.6 additional years

Total cost of cancer treatments = $ 100,000

QALY for cervical Cancer and Gardasil treatment = 11.6 * 0.9 = 10.4

QALY for affected with no treatment and life expectancy of 5 years = 5 * 0.6 = 3

Incremental Cost / Incremental Outcome = $ 360 / 7.4 QALYs = $ 48.6 per QALY gained

Hence the cost per QALY is $ 48.6.

Ideally the price should be $140-150 so as to maximise the profits for the first year before the
competition arrives in the market from GSK. Later on to make the price competitive price skimming
can be done to keep the revenues and profit share.

Thus the incremental cost/ outcome would increase to be $450 / 7.4 QALY = 60.8