Tengion is a company at the forefront of regenerative medicine. The firm has two lead products, both of which use stem cell technology to treat diseases associated with the bladder. One product, called Neo-Bladder Augment, is targeted at patients with a birth defects and spinal cord injuries whose bladders do not function properly. The second product, called Conduit, is aimed at patients with bladder cancers. While Tengion has invested some $175 million on its products, as of 2008 the firm was running out of money and can, for the foreseeable future, only invest in one of its two lead products. The purpose of this memo is to propose which product should become Tengions lead product.

Memo question: Which product should Tengion prioritize, Augment or Conduit? Your answer should draw on both qualitative factors and a quantitative analysis. For the quantitative analysis it is required that you calculate the estimate of economic value of each of Tengions lead products, Augment and Conduit and use this as part of your pricing estimate for use in market sizing.

Here are some important hints:

1. Use economic value analysis to propose prices. To do this, use exhibits 6a and 6b in the case study to calculate economic value from reduced complications and enhanced quality of life.
2. For these calculations, you must factor in life expectancy - there is data on this in the case study.
3. Some of the economic value from reduced calculations and enhanced quality of life will only appear years in the future. As a result, it is important that you use a discounted cash flow calculation to calculate these values. Please use an 8% discount rate for these calculations (which are relatively easy to calculate using Excel). If you are unfamiliar with discounted cash flow, there are numerous tutorials available on the internet. While important in generating a plausible answer, I will not mark down submissions that do not include a discounted cash flow analysis (this is optional).
4. There are two indications for Augment (spina bifida and spinal cord injury) and just one for Conduit (bladder cancer).
5. The case also contains estimates on potential unit demand for the two procedures. Using this data and your price estimates, calculate the market potential for each procedure. You can then use these market size estimates as part of your overall recommendation.
6. When working on the objective value price for Augment, please be advised that you CANNOT take the average of the economic value for the two indications and use this as your price estimate. You can only propose one price, of course, but averaging doesn't make sense as the people with the disease with the lower original economic value will then never have an incentive to adopt. Put another way, if you propose a price higher than the lower of the two economic values, you need to justify why it makes sense regardless to exclude that patient group.
7. Please be sure to factor in life expectancy for people with each indication - you need this for your calculations to make sense. Also, it is really important to try to include discounted cash flows (for value generated in distant years due to multiple-year life expectancy). The idea here is that because the company is asking insurance companies to pay now for future savings, the insurance company will say that those future savings need to be discounted. Use an 8% discount rate.

This is Exhibit 6a and 6b

Exhibit 6a Post-Operative Complications Arising from Existing Bowel Tissue Harvestinga Complication/Opportunity Description Incidence Frequency per Year Average Cost per Incident or per Year Urinary Tract Infections Patients require medical evaluation and antibiotics 18% 1.5 $600 Bowel Obstruction Bowel obstruction as a result of adhesions forming along the bowel tract 8% 1 per lifetime $5,500 Renal Insufficiency Bowel tissue creates blockages (usually due to stone formation) in bladder that cause urine to back up into the kidneys 8% Ongoing chronic condition after initial damage occurs $5,000 Deep Vein Thrombosis Deep vein thrombosis (DVT) is a blood clot in a major vein, usually in the legs and/or pelvis 7% 0.3 $11,000 Bladder and Kidney Stones Bladder stones are crystalline masses that form from the minerals and proteins, which naturally occur in urine 6% 0.75 $6,355 Peritoneal Infection Patients require medical evaluation and antibiotics 3% 1.5 $600 Malignancies (primarily bladder and colon) Bowel tissue in the bladder increases risk of cancer; shortened bowel increases risk of developing colon cancer years after the surgery 1.25% 1 per lifetime; after at least 68 years post-op $65,000 Reduce Hospitalization Eliminating bowel harvesting would reduce length of stay in hospital by four (4) days. Average cost per day for this procedure is $750/day 100% 1 per lifetime $3,000 Shorten Operating Room Time Harvesting bowel tissue extends the procedure by 40 minutes. Variable cost for surgical team by the hour is roughly $1,000 in the U.S. 100% 1 per lifetime $667 a The type of complications, their incidence and frequency are roughly equal for bowel resectioning for purposes of augmenting the bladder or creating a conduit diversion. Life expectancy in the U.S. is estimated at 78 years; although it was typically lower for Spina Bifida patients (by some estimates about 50-55 years for those who were able to reach adolescence).

Exhibit 6b Components of Quality of Life Valuation The U.S. healthcare system is beginning to evaluate development projects in terms of quality of life improvements. The methodology for converting life improvement into economics has been most fully developed by the National Institute for Clinical Excellence (NICE) in the UK where new product pricing is assessed using cost savings calculations plus quality of life improvements (QoL). The basic equation used for adding QoL value to new product assessments is the value of a year of healthy lifea times the percentage improvement a panel of clinical experts estimates the patient will experience after having the procedure or using the drug. Estimates of improvement values per year for Tengion products: Augment = 6.2% Conduit = 5% Value of a year of fully healthy life = $60,000 a The maximum value of a year of healthy life may be set at a lower threshold for patients with other chronic conditions, such as partial paralysis in the case of SCI patients who are confined to wheelchairs even after bladder augmentation. In the case of SB patients, for example, many experts would assess their value to be only half of that of a fully healthy individual if only bladder issues are resolved.