4 Columbia Business School Interviewee: Okay, so let’s assume every segment will use this drug. 30 million * 5% = 1.5 million people. However, I would expect that there would be some barriers to switching and not all potential users will switch from inhalers. Interviewer: Okay, so now how do you set the price? Interviewee: I want to determine the price to break-even. For a pharma, I think 5 years is acceptable To break even in 5 years: 1.5 million * Revenue = 5 billion (R&D) Revenue = $3,300 Use 350 days/year for simplicity, one pill every day over 5 years = 350*5= 1,750 pills, $3,300/1,750 pills = approximately $2/pill Interviewer: So do you think this price should be the minimum or the maximum? Interviewee: This is the minimum because it is the break-even price. Interviewer: Okay, let’s consider the second half of the question. As I mentioned, the Canadian government subsidized medical costs, let’s for the sake of this case say that it pays back its citizens for medical treatments. How do you determine how to set the price so that the government will agree to pay it? Interviewee: Assuming that the government is paying for the current treatment, I would ‘want to know their current spend and determine what the difference is between that and the new drug. Do you know how much the government is currently paying patients for their inhalers? Interviewer: The cost of inhalers is $10 each, Also, acute patients that result in hospitalization spend | night/year in the hospital at $1,000 and the rate of death is 1%, Interviewee: So I want to determine how much the government is currently spending on inhalers. Basic: $120/year (1 inhaler a month), 600,000 people, $72 mill Serious: $520/ycar (1 inhaler a week), 600,000 people, $312 mi Acute: $520/year (1 inhaler a week), 300,000 people, $156 million total Total government is spending on inhalers: $540 million/year. Now I want to determine how much government is spending on hospitalizations, Management Consulting Association Case Book 2007 =