BioPure Marketing Report

Group Members:

Araya Taychachaiwong D540003

EXECUTIVE SUMMARY



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MARKET ANALYSIS

According to the use of animal donated blood in 1995, it is estimated that the market potential demand of animal blood
substitutes will be approximately 7,909,500 units (Exhibit 1 for details). With patient dogs making up 51% of the market, the
rest are patient cats and other animals.

Based on the use of human RBCs in 1995 from the case, it is estimated that the market potential demand of human blood
substitutes will be approximately 10.3 million units (Exhibit for details). The target demand, which accounts for 4.5 million
units, will come from borderline transfusion, emergency surgery, and trauma. t is also expected that the rest of the potential
available demand will largely depend on the availability of donated bloods. n this regard, Porter's five force model is used in
order to determine the competitive intensity and the industry attractiveness of animal and human blood substitute markets.

PORTER'S FIVE FORCES FOR ANIMAL BLOOD SUBSTITUTE INDUSTRY

Intensity of RivaIry among EstabIished Firms (Low): The veterinary blood substitute market is a newly established market.
Currently, Biopure is the only biopharmaceutical company that supplies FDA-approved Oxyglobin, the world's first veterinary
blood substitute. As such, the intensity of rivalry is very low. However, once the patents for Biopure expired, other
biopharmaceutical companies would likely develop the similar veterinary blood substitutes to supply the market, increasing
competition in the market.

Bargaining Power of SuppIiers (Low): The main supply of the blood substitutes is the qualified bovine blood from controlled
and monitored herds raised for certified and pathogen-free beef. The qualified and monitored bovine blood suppliers do not
have high bargaining power because the bovine blood has a relatively smaller demand for an alternative use in food
processing than demand for medical uses. n addition, because of the high number of the bovine blood suppliers, there is a
high competition among the suppliers themselves to supply the bovine blood to the customers.

Bargaining Power of Buyers (Low): The main demand for blood substitutes from the chronically ill animals, such as canines
suffering from anemia, and animals in need of blood transfusions is quiet high. Due to the market structure of one single
supplier of the veterinary blood substitute, the biological veterinary blood is the only alternative for buyers to switch to and the
switching cost is relatively high because the biological veterinary blood is financially prohibitive and often has incompatible
blood typing issue.
.
Threats of Substitutes (Medium): The main substitute is biological veterinary blood, which comes from the non-human
animal blood banks and in-house animal donors in clinical institutions. Usually an in-house animal donor is forced to donate 3
units over a 10-day period
1
while a voluntary donor in a non-human animal blood bank is monitored to donate every 3-4
months

. Currently, the prices of biological veterinary blood are $80 to $10 for typical primary care practice and $130 to $170
for emergency care practice. The high cost of biological vet blood comes from screening method, which could cost up to $0
to $500 per donation
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. Therefore, with limited supply of and access to biological veterinary blood and a cost, the threat from
the substitute remains relatively low.

Threats of New Entrants (Low): The FDA process of new drugs approval could take up to 9 to 17 years till it is finished.
Thus, it will take a long while for new entrants to get in with new technologies for blood substitutes. With patents registered,
the startup firms could not produce similar products that are in demand in the market. Moreover, the capital requirements and
financial resources are quiet high in developing new products for the market. This could prove to be a challenge for a new
startup firm. The distribution channel with contracted distributors could also be a challenge, as these contracted distributors
would prefer well-established biopharmaceutical companies to those start-up ones. Because of high barriers to entry for new
entrants, the threats from them are low.

1
R. Sitarz, January 7, 006

Canine Blood Donors, http://thepetwiki.com

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Description and Evaluation of a Canine Volunteer Blood Donor Program, Lawrence A. DeLuca, Sharon G. Glass, Richard E. Johnson and
Melissa Burger

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PORTER'S FIVE FORCES FOR HUMAN BLOOD SUBSTITUTE INDUSTRY

Intensity of RivaIry among EstabIished Firms (Medium): Competition from Baxter nternational and Northfeild Laboratories
both threaten the profitability of Hemopure. Both of these competitors' products are expected to receive FDA approval at
approximately the same time as Hemopure. All three products will be hitting the market concurrently, and Baxter will have an
advantage because of its large size. Baxter's size provides them with a large marketing department that may enable them to
reach many distributing channels and quickly gain the mindshare of these distribution channels. t will be important for Biopure
to educate buyers and present Hemopure as a differentiated product with superior quality as compared to the other
competitive products entering the market.

Bargaining Power of SuppIiers (Low): The main supply of the blood substitutes is the qualified bovine blood from controlled
and monitored herds raised for certified/ pathogen-free beef. The qualified and monitored bovine blood suppliers do not have
high bargaining power because the bovine blood has a relatively smaller demand for an alternative use in food processing
than demand for medical uses. n addition, because of the high number of the bovine blood suppliers, there is a high
competition among the suppliers themselves to supply the bovine blood to Biopure.

Bargaining Power of Buyers (Low to Medium): The customers of human blood substitutes are healthcare practitioners and
hospitals. These people have high involvement in purchasing human blood substitutes. Detailed information about the product
is necessary for these buyers. However, if these people are satisfied with the product, they will become long-term customers.
The target demand is for borderline transfusion surgery, emergency surgery and trauma (Exhibit for details). The total
demand from these usages is 4.5 million units. Since donated blood supply is limited, has relatively short shelf life, and
requires exact blood typing and cross matching between donor and recipient, it is common for medical facilities and blood
banks to experience periodic shortages of RBCs. The need of blood substitutes is quiet high for this target market. Thus, the
bargain power of buyers is low to medium.

Threats of Substitutes (High): The donated blood is the imminent threat to Hemopure and other human blood substitute
products. Threat of substitutes from donated blood is considered very high. Despite the low rate of donation and the relatively
short shelf-life of donated RBCs, donated blood would be a preferable choice to blood substitutes.

Threats of New Entrants (Low): The FDA process of new drugs approval could take up to 9 to 17 years till it is finished.
Thus, it will take a long while for new entrants to get in with new technologies for blood substitutes. With patents registered,
the startup firms could not produce similar products that are in demand in the market. Moreover, the capital requirements and
financial resources are quiet high in developing new products for the market. This could prove to be a challenge for a new
startup firm. The distribution channel with contracted distributors could also be a challenge, as these contracted distributors
would prefer well-established biopharmaceutical companies to those start-up ones. Because of high barriers to entry for new
entrants, the threats from them are low.

COMPANY ANALYSIS

n order to access success factors and barriers to success in the animal and human substitute markets, SWOT anaIysis is
used to determine these factors.

Strengths
O Ability to market its blood substitute technology for both animal and human use
O Time and development advantage on the animal blood substitute market.
O Biopure has the intellectual property right, allowing the company to protect the product for -5 years before other
competitors can enter the market using similar technology. Thus, during the years before the introduction of
Hemopure, Biopure will have an opportunity to build brand loyalty and capture the heart of customers (i.e. vet
practitioners) to ensure that after the expiry of the patents and the market is very competitive, the main customers
still stay with Biopure.
O Both Oxyglobin and Hemopure are almost identical products in terms of production process. This results in lower
fixed costs for the human blood substitute, compared to the competitors. Moreover, a large supply of production
materials also keeps the production costs low, especially for Hemopure.


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O Biopure has a sufficient fund for years before the expected release of Hemopure in late 1999 or early 000; and
O Since both competitors use outdated human RBCs in developing their products, Biopure differentiates itself by
using RBCs from cattle. (i.e. larger supply of production materials and shelf-stable at room temperature, resulting in
lower production and procurement costs)

Weaknesses
O Hemopure has not yet received FDA approval. t is possible that of the competitors could beat Biopure to the
market with their human-based blood substitute;
O Biopure does not have any distribution network and experience in going into the blood-related medical market while
Bexter nternational is an acknowledged leader in blood-related medical product market;
O Biopure has not done any extensive market research on the probability of a human blood substitute being accepted
by the current market;
O After the PO, Biopure will face with a high expectation from stockholders to generate a high profitability. Bad news
from the products (i.e. Oxyglobin does not work or Hemopure does not get approved) will be followed by a dramatic
dip in stock prices;
O Limited production capacity (i.e. only one product can be produced at a time). Enlargement of production plant is
needed for expansion; and
O Dissension within Biopure's top management could slow down the process of launching any new products.
O f Oxyglobin fails to capture the market, the introduction of Hemopure (after FDA-approved) would be exposed to a
high level of financial risk for Biopure.

Opportunities
O The introduction of Hemopure is still at least years away from FDA approval. The release Oxyglobin will allow
Biopure to generate positive brand equity about the new technology that will in turn promote the future release of
Hemopure after the FDA approval. This buzz will allow healthcare practitioners to learn more about the lifesaving
benefits as well as cost savings that Hemopure has;
O Blood substitute competitors have a more established brand and more money; success of Oxyglobin would help
Biopure compete against these factors; and
O Supplies of blood substitutes during time of periodic shortages of donated RBCs
O There is a high demand in the military for human blood substitutes, especially for battlefield trauma where blood
products are not available

Threats
O The introduction of Hemopure depends entirely on the FDA approval;
O Perception of Oxyglobin and Hemopure as being essentially the same product, resulting in a negative public
perception of injecting "animal blood into human bodies and the price of Hemopure should not too different from
that of Oxyglobin;
O Hemopure is bovine-based. This results in a negative public perception of injecting "cow blood. Trade publications,
written by well-known veterinarians, will be used to convey the right message to customers;
O Animal substitute market is very price sensitive. Pricing Oxyglobin too high will adversely affect sales of Oxyglobin,
resulting in lower stock prices; and
O Baxter has a 3X larger production capacity with strong established distribution networks, and other products in the
blood-related medical market. f Biopure is to compete with Baxter in the human blood substitute market, Biopure
needs to differentiate itself from the rest of the competitors, marketing Hemopure as a better substitute than those
from competitors.

MARKETING PLAN FOR OXYGLOBIN
t is true that the market size for an animal blood substitute is far less when compared to the needs for human blood
substitute, but there is still a sizable demand in which our brand can penetrate into and create a strong position in supplying
for this unique demand of animal blood substitute. As the product itself is not going to be used directly by the consumers; who
are the pet owners, the marketing strategy needed to build the product's demand needs to communicate mainly more towards
veterinarian who makes the decision on whether a certain type of treatment is preformed and if a blood substitute is needed or
not in case of an emergency. As a tangible product that is needed in a very specific field, we need to clearly point out the
advantages of having our product on hand when the needs arise. Below we explore the 4 Ps of marketing Oxyglobin.

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P'S FOR MARKETING OXYGLOBIN

Product
Oxyglobin Animal Blood Substitute. Segment
ssues with the product being produced from cattle's blood, mad cow

Price

Promotion We need to promote the product as an emergency solution or as a

Place


KEY ISSUES AND RECOMMENDATIONS

Issue 1: Whether Biopure should launch Oxyglobin before the introduction of Hemopure (February 1998)

Currently, Biopure's name is relatively new in the blood substitute market as they have yet to release a product. f Oxyglobin
were released immediately, Biopure would be the only company holding a substitute product for blood transfusion in the
market. This gives the company the benefit of being the innovator in blood substitution market, and also a competitive
advantage. t would profit the company to market and release Oxyglobin early for medical use. With well-planned marketing
strategy, Oxyglobin will not only be generating immediate revenues, but also the pave the way for Hemopure.

t should also be noted that there is very little and insufficient amount of research conducted on public's acceptability of
Hemopure. The field of blood substitution for human is fairly new and therefore, launching Biopure is a great opportunity to
test the blood substitute market before the introduction of Hemopure. t will also create a positive impact on PO, which would
benefit the future product release. By launching the product immediately, they are taking advantage of a situation that they
can currently control, as opposed to wait and see if they will have a similar opportunity again in the future, after the FDA
approval. Since Biopure has two to five years before competitors can compete with its product due to intellectual property
rights, Biopure will have an opportunity to establish a customer base in the veterinary blood substitute market and even
monopolize the market for alternative animal blood transfusion. Moreover, if the company waits too long for human blood
version of blood substitute to be ready, the company might face with new technology and competition that would jeopardize
the demand for Oxyglobin. For all these reasons, it is recommended that Biopure release Oxyglobin immediately.

Launching Oxyglobin after Hemopure is possible since the company has sufficient fund to support its operation for years
(before the expected release of Hemopure). However, since there is no promise of success (i.e. future profit) with Biopure, it
will be difficult for Biopure to sell its PO shares.

Moreover, if FDA does not approve Hemopure, the company's book value will be adjusted down and there will be another
great dip in Biopure's stock prices. The company will need to come up with a new R&D in order to reformulate the product or
invent another breakthrough in order to bring the company back on track. And if the competitors get FDA approval before
Biopure, it will be even more difficult for Biopure to compete with them. The only way out for Biopure is to aggressively push
Oxyglobin into the market and to ensure that Biopure has a strong customer base for Oxyglobin within the first 5 years of
patent protection
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. n addition, Biopure should perform another R&D for the animal substitute market so that after the 5 years
of patent protection the company will have another breakthrough to excite the market and maintain its market leader position.

f FDA defers approval on Hemopure, there will be an adverse effect towards the stock price of Biopure because the
deferment usually appears to be negative towards the eyes of investors, who are afraid that the product will eventually be
turned down. The only optimistic insight for the deferment will be the military since the military has a great need for this
product, especially for battlefield trauma where blood products are not available. As for this reason, the deferment could mean
another reformulation of the product, which will eventually be approved by FDA.

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Patent normally lasts two to five year. n this case, it is assumed that the patent for the Oxyglobin production technology will last 5 years.

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Since the disadvantages for not launching, as mentioned above, outweigh the advantages for Biopure at this stage it is
recommended that Biopure launch Oxyglobin immediately.

Issue 2: Whether the price of Oxyglobin should be lower, higher, or the same as the animal donated blood

[P'Champ please make a conclusion about pricing here n aka :D]





Issue 3: Whether Biopure should outsource sale and distribution functions for Oxyglobin

Option 1: Outsource Sale and Distribution Functions

Outsourcing sale and distribution functions to independent distributors make sense for Biopure in the initial stage because of
its lack of sale and distribution experience in the blood-related market. Moreover, the company does not have enough sales
representatives to perform this function on a regional and national basis. Outsourcing these functions, the company will not
have to recruit new sales representatives. Moreover, the training time and cost will be reduced since these sales
representatives are already in the field and have a strong relationship with the veterinary practitioners.

Although the pricing policy for outsourcing is resale minus 30%, we recommend the company outsource sale and distribution
functions to independent distributors during the first years and learn from them since the company does not have any
experience in the sale and distribution of blood-related products.

Option 2: "Manufacture direct" or Self-Perform Sale and Distribution Functions

Biopure is responsible for sale and distribution functions. This option will save up a lot of distribution cost for Biopure since it
only takes $10-$15 per unit. The advantages are (i) the company has a full control over this function and (ii) the break-even
price is lower (exhibit 3 for details) than the outsourcing option and thus, the company can either charge low price for
Oxyglobin but still get good margins or charge high markups in the first 5 years (before the expiration of the patent) and lower
the price down to maintain its competitive position.

f Biopure takes this option, the company needs to recruit more sales representatives since there are only 3 sales
representatives in the company at the moment. Moreover, Biopure will need to train them from zero. However, this will be
difficult for Biopure because the company itself does not have experience in the field at all. f Biopure is to take this option, it is
recommended that Biopure do this after gaining some experience though outsourcing independent distributors.

Issue 4: How the marketing of Oxyglobin and Hemopure will affect each other

The marketing plan is to make clear market segmentations between Oxyglobin and Hemoglobin _ince all subsequent
marketing decisions (e.g. timing, pricing, distribution, etc.) will be directed toward satisfying the needs of these customers.
Although the products are very similar to each other in terms of production process, the segmentation will distinguish
Oxyglobin and Hemopure as independent products. Price expectations are different for humans than they are for animal
needs. As mentioned, the price of Hemopure should be significantly higher than that of Oxyglobin because the company is
exposed to a high level of production liability risk - an enormous amount of money claimed if the product fails the body.

However, the marketing failure of one product does have an impact on the other. For example, if FDA-approved Oxyglobin
fails to introduce itself to the market after launching, the marketing of Hemopure after FDA approval will face a hard time from
the failure of the other product from Biopure (i.e. lower credibility in producing blood substitute products). The negative
perception of using "cow blood is also another concern. Customers of both products will have concern due to "mad cow
disease. This concern could be solved by conveying the right message to customers using trade publications and direct
contact through tradeshows.




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APPENDIXES

Exhibit 1: Market PotentiaI for AnimaI BIood Substitute Market

Total Number of Small-Animal Veterinary Practices 15,000 100%
Number of Primary-Care Practices 14,50 95%
Number of Emergency Care or Specialty Care Practices 750 5%
Total Number of Acute Blood Loss Cases for Dogs in 1995 (1) 1,000,000 Cases
Demand Shortage for Dogs () 3,600,000 Units
Total Blood Units required by the Primary-Care Practices for Dogs in 1995 (3) 4,50 68%
Total Blood Units required by the Primary-Care Practices for Dogs in 1995 (4) 11,500 3%
TotaI BIood Units required for Dogs in 1995 354,750 100%
TotaI PotentiaI Demand for Dogs in 1995 3,954,750 Units
1) 800 dogs, on average * Total Number of Small-Animal Vet Practices

2) 30% * 12,000,000 dogs = proportion of dogs that would benefit from blood transfusion
3) Number of Primary-Care Practices * 17 units


) Number of Emergency-Care Practices * 250 units


5) 3,600,000 units + 35,750 units


Average MonthIy Case Load
TotaI Number of Dogs 812 51%
- Primary Case 41

- Emergency Case 400

TotaI Number of Cats 505 32%
- Primary Case 65

- Emergency Case 40

TotaI Number of Other AnimaIs 270 17%
- Primary Case 140

- Emergency Case 130

TotaI Number of Patient AnimaIs' 1587 100%
Based on above proportion of patient animaIs,

Total Potential Demand for Dogs in 1995 3,954,750 Units
Total Potential Demand for Cats in 1995 ,516,886 Units
Total Potential Demand for the rest in 1995 1,345,66 Units
TotaI Market PotentiaI for the AnimaI Substitute Market 7,909,500 Units

Exhibit 2: Market PotentiaI for Human BIood Substitute Market

BorderIine Transfusion Surgery


1,000,000 Cases with 1.5 units, on average, needed for borderline transfusion

1,500,000 Units of potentiaI demand
Emergency Surgery (in hospitaI)


1,000,000 Units of potentiaI demand
Trauma


500,000 Cases
10% of Trauma cases (i.e. 50,000 cases) is "in the filed" administration, which equals to 00,000 units. Thus,
each accident needs on average of 4 units / case

2,000,000 Units of potentiaI demand (500,000 cases * 4 units/ case)
EIective Surgery 5,800,000 Units of potentiaI demand
TotaI Market PotentiaI for the Human BIood Substitute Market is 10,300,000 Units
Note: 1) Borderline Transfusion Surgery/ Emergency Surgery/ Trauma are specific target markets that Biopure can expect a high conversion
rate
2) Factor out those RBCs from Autologous donations - these consumers are not our target market since they prefer to use their own blood for
surgery
3) If Hemopure only stays in the human system for 2 to 7 days than it is not of much use to patients with Anemia.

Exhibit 3: Break-Even AnaIysis for OxygIobin


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Scenario 1 Scenario 2
Production Capacity per year (units) 300,000 300,000
Unit SaIes Price to Break Even 143.94 113.26
Total Sales Revenue (1) 43,18,17 33,977,55
Total Variable Cost ()
- Raw material cost 450,000 450,000
- Selling and Distribution expense 1,954,665 3,750,000
Contribution Margin 29,777,552 29,777,552
TotaI Fixed Cost 29,777,552 29,777,552
R&D and Manufacturing Facility Cost per Year 14,777,55 14,777,55
Fixed Production Cost/ Year 15,000,000 15,000,000

Notes
- Scenario 1: Outsource sale and distribution functions and use resale minus 30%
- Scenario : "Manufacturer Direct" approach - Self-performed sale and distribution functions and the average expenses for sales and
distribution is $1.5 per unit
- Assume a full-scale production and the Company is able to sell all 300,000 units

Exhibit 4: Break-Even AnaIysis for Hemopure


Scenario 1 Scenario 2
Production Capacity per year (units) 150,000 150,000
Unit SaIes Price to Break Even 385.21 282.15
Total Sales Revenue (1) 57,78,069 4,3,448
Total Variable Cost ()
- Raw material cost 5,000 5,000
- Selling and Distribution expense 17,334,61 1,875,000
Contribution Margin 40,222,448 40,222,448
TotaI Fixed Cost 40,222,448 40,222,448
R&D and Manufacturing Facility Cost per Year 5,,448 5,,448
Fixed Production Cost/ Year 15,000,000 15,000,000

Notes
- Scenario 1: Outsource sale and distribution functions and use resale minus 30%
- Scenario : "Manufacturer Direct" approach - Self-performed sale and distribution functions and the average expenses for sales and
distribution is $1.5 per unit ($10-$15 per unit from the case)
- Assume a full-scale production and the Company is able to sell all 150,000 units

Exhibit 5: Research and DeveIopment and Manufacturing FaciIity Expenses for OxygIobin and Hemopure

Market PotentiaI for BIood Substitute Market
Total Market Potential for the Animal Market 7,909,500 Units 37%
Total Market Potential for the Human Market 13,500,000 Units 63%
TotaI Market PotentiaI 21,409,500 Units 100%
InitiaI Investment (Fixed Costs) for OxygIobin and Hemopure
R&D and Manufacturing Facility portion to OXYGLOBN 73,887,760 Dollars 37%
R&D and Manufacturing Facility portion to HEMOPURE 16,11,40 Dollars 63%
R&D and Manufacturing FaciIity Cost, TotaI 200,000,000 DoIIars 100%
Amortization expense - Oxyglobin 14,777,55 Dollars
Amortization expense - Hemopure 5,,448 Dollars

Note: Assume that the amortization period for research and development as well as manufacturing facility is 5 years, which comes from the
patent protection period. The patent protection period usually last 2-5 years. In this case, we assume that Biopure's patent lasts 5 years.