# VIRGIN MOBILE Pricing Decision by mikeholy

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```									AEM 4160: STRATEGIC PRICING
PROF.: JURA LIAUKONYTE

LECTURE 10
PRICING GARDASIL
QALY
   The quality-adjusted life year (QALY) is a measure
of disease burden, including both the quality and
the quantity of life lived.
   It is used in assessing the value for money of a
medical treatment.
   The QALY is based on the number of years of life
that would be added by the treatment.
   Each year in perfect health is assigned the value of
1.0 down to a value of 0.0 for death.
QALY
   Used in cost-utility analysis to calculate the ratio of
cost to QALYs saved for a particular health care
treatment.
   Helpful in allocating healthcare resources,
 Treatment  with a lower cost to QALY saved ratio being
preferred over an intervention with a higher ratio.
 Controversial: some people will not receive treatment
because it is too costly
 Cost per QALY under \$50,000 is acceptable
Value of Statistical Life
   An economic value assigned to life in general,
   Marginal cost of death prevention in a certain class
of circumstances.
   As such, it is a statistical term, the cost of reducing
the (average) number of deaths by one.
Value of a Statistical Life and Compensating
Differences
   Qa , Qb =probability of fatal injury on job a, b respectively in
a given year.

   Wa, Wb = earnings on job a, b in a given year.

   Assume Qa<Qb so that Wa<Wb.

   Compensating difference=Wb-Wa

   Value of a “statistical” life = (Wb-Wa)/(Qb-Qa)

   Example: If a person is faced with .001 higher risk of death
per year and is paid \$5000 per year extra for that risk, the
value of a statistical life is 5000/.001 - \$5,000,000.
Viscusi. “The Value of a Statistical Life: A Critical Review of Market Estimates
Throughout the World.” Journal of Risk and Uncertainty, v. 27 issue 1, 2003, p. 5.
Value of Life and Compensating Differences

   Biases in estimates of statistical value of life
 Valuation is correct only for “marginal” worker. Estimate is
too high for infra-marginal worker, and too low for workers
that didn’t accept job with risk.
 ex post versus ex ante rewards for risk (compensating
difference vs. law suits, insurance, etc.)
 Failure to control for other risks correlated with fatality risk
 Fatality risk measured with error
Question

   Is Gardasil a Good Product?
Pricing in the Biomedical Industry
   What factors should Merck consider when setting
the price?
Factors:
   Important or not important?
 Product cost
 R&D Investment?

 Other Vaccines?

 Public Relations?

 Value to the Customer/Benefit?

 Economic Modeling?

 Competition?
Calculating cost per QALY
   Cost Per QALY = Cost of a quality life year

   STEP 1: Consider the costs per person:
 Cost per dose: ___________________
 Number of doses: _____________________
 Total cost per patient: __________________
Step 2

At age 50, further life expectancy without cervical cancer: ____________
QALY per year: __________________________________________
Total QALYs: ____________________________________________

At age 50, further life expectancy with cervical cancer: ______________
QALY per year: ___________________________________________
Total QALYs: _____________________________________
STEP 2
   Reduction in QALYs with cervical cancer:_________________
   Gardasil prevents:______________________________
   Gardasil incremental QALYs: ________________

   Chance of Getting cervical cancer without Gardasil: _______________
   Incremental QALYs per person: ________________________________

   Cost per QALY:
   Vaccination: _____________________________________
   QALY: ____________________________________
   Cost per QALY:___________________________
Step 2a
   This was a rough calculation because it left out an
important piece of a puzzle:
 COST   SAVINGS
 Fewer Pap tests
 Fewer LLETZ procedures
 Fewer cervical cancers to treat
Step 2a
   Calculate COST savings
   Chance that a woman will have CIN 1: ______________
   Chance that a woman will have CIN 2/3:______________
   Chance that a woman will have cervical cancer: ___________

   Cost to treat CIN 1: ________\$55______________
   Cost to treat CIN2/3: _____________________
   Cost to treat cervical cancer: ________________
Saved Costs per person
   CIN 1: __________________________________
   CIN 2/3: ________________________________
   Cervical cancer: ___________________________

   Gardasil will prevent (estimates):
 CIN 1: 50%
 CIN 2: 70%
 Cervical Cancer: 70%
Calculate total savings:
   CIN 1: ____________________
   CIN 2/3: ____________________
   Cervical cancer: _________________
 TOTAL   SAVINGS: ______________________
Savings now or later?
   Vaccine given (average or target): __________
   Cancer prevents: _______________
   Difference: ___________________

   Discount the cost savings at say, 8% = \$16.50
 In   excel the command would be: =PV(0.08, 43, ,-450.2)
Savings later
   So the total is”
 Cost per person: _______________
 Savings per person: ___________
 QALY per person: 0.038

 COST   per QALY:__________________

 Do the risks of a PR backlash and the need to grow quickly
outweigh the benefits of a higher price
 Potential entrant is coming
 Patent is not forever
\$360 Too low or too high?
   Suppose prices are set so that cost of QALY is
\$30,000

   What is the maximum price that could be set?
   x = cost per person
   (x-16.50)/0.038 = 30,000
   x =\$1156.5
   Or \$1156.5/3 = \$385 per dose
Calculating cost per QALY
   Cost Per QALY = Cost of a quality life year

   STEP 1: Consider the costs per person:
 Cost per dose: ____________\$120_______
 Number of doses: _________3____________
 Total cost per patient: ________\$420_______
Step 2

At age 50, further life expectancy without cervical cancer: ____31.6 years___
QALY per year: ______________________________0.8______________
Total QALYs: _________________0.8*31.6=25.2____________________

At age 50, further life expectancy with cervical cancer: ______20 years_____
QALY per year: ______________________________0.8______________
Total QALYs: _________________0.8*20=16____________________
STEP 2
   Reduction in QALYs with cervical cancer:___25.2-16=9.2___
   Gardasil prevents:__________________70%____________
   Gardasil incremental QALYs: _______.7*9.2=6.4_________

   Chance of Getting cervical cancer without Gardasil: ___0.6%_
   Incremental QALYs per person: ___________0.006*6.4=0.038_______

   Cost per QALY:
   Vaccination: ___________________\$420__________
   QALY: ________________________0.038____________
   Cost per QALY:_________________420/0.038=\$11,053__________
Step 2a
   This was a rough calculation because it left out an
important piece of a puzzle:
 COST   SAVINGS
 Fewer Pap tests
 Fewer LLETZ procedures
 Fewer cervical cancers to treat
Step 2a
   Calculate COST savings
   Chance that a woman will have CIN 1: _______10%__
   Chance that a woman will have CIN 2/3:___2.8%___
   Chance that a woman will have cervical cancer: __0.6%_____

   Cost to treat CIN 1: ________\$55______________
   Cost to treat CIN2/3: _________\$1400____________
   Cost to treat cervical cancer: _______\$100,000_________
Saved Costs per person
   CIN 1: ________10%*\$55=\$5.50____________
   CIN 2/3: ______2.8% * \$1400=\$39.20_______
   Cervical cancer: __0.6%*\$100,000=\$600_____

   Gardasil will prevent (estimates):
 CIN 1: 50%
 CIN 2: 70%
 Cervical Cancer: 70%
Calculate total savings:
   CIN 1: ________5.50*50%=\$2.75____________
   CIN 2/3: ______39.20*70%=\$27.44__________
   Cervical cancer: __600*70%=\$420___________
 TOTAL   SAVINGS: _____\$450.20______
Savings now or later?
   Vaccine given (average or target): ___Age 11____
   Cancer prevents: _____Age 54_____
   Difference: _____________43 years______

   Discount the cost savings at say, 8% = \$16.50
 In   excel the command would be: =PV(0.08, 43, ,-450.2)
Savings later
   So the total is”
 Cost per person: ________\$420_______
 Savings per person: ______\$16.50_____
 QALY per person: 0.038

 COST   per QALY: \$10,618.00

 Do the risks of a PR backlash and the need to grow quickly
outweigh the benefits of a higher price
 Potential entrant is coming
 Patent is not forever
\$360 Too low or too high?
   Suppose prices are set so that cost of QALY is
\$30,000

   What is the maximum price that could be set?
   x = cost per person
   (x-16.50)/0.038 = 30,000
   x =\$1156.5
   Or \$1156.5/3 = \$385 per dose
   Volume of advertising expenditures is large. For the
US, advertising consumes over 2% of GDP

   Underneath this national total is a wide variety in firm

   Car makers (e.g., GM) and household product firms
(e.g., Proctor & Gamble) spend the most on advertising

   Basic patterns that emerge are:
 Correlation between advertising & market power
 Consistency of advertising behavior within industries—big
advertisers remain big over time and across countries

   Assume a firm faces a downward-sloping demand
inverse curve but one that shifts depending on the
amount of advertising A that the firm does

P=P(Q, A)
•Recall, the Lerner Index, LI
L = (p - MC)/p = 1/|EP|
Where |EP| is the price elasticity of demand
   The elasticity of output demand with respect
to advertising A is defined as
Q / Q   A Q
EA         
A / A   Q A
• We can derive the following relationship:
A      EA