Role of Kim Johnson
Sales Representative for PEM (pharmaceutical company)
You are a sales representative for a young, fast growing pharmaceutical company that was created as a joint venture between a Japanese and a European firm. Pharmaceuticals for the European Market (PEM) was created four years ago to introduce a number of the Japanese firm’s pharmaceutical products to theEuropean market trough the marketing and sales skills of the European firm. The joint venture, PEM, was recently spun off as a separate corporation.
Currently, the company sells three products, with total sales just under €1 billion. Seventy-five percent of the sales come from the lead product Tummy Fix which is the best product available for the treatment of a variety of gastrointestinal problems.This product has been shown to reduce the need for surgery for approximately 80% of patients suffering from a set of severe gastrointestinal problems. Up until two years ago, Tummy Fix was the only product in this category of drugs that truly freed patients from the need for surgery.
Two years ago, TOBA Pharmaceuticals introduced a competitive product – Tummy-Repair. TOBA’s product ischeaper to purchase than yours. You believe your product is more effective that TOBA but there haven´t been comparative studies to demonstrate that this is indeed the case. There has been strong pressure on pharmaceutical directors to reduce costs and, as a result, TOBA’s inferior product has been able to grab 22% of your market in the past two years.
The current negotiation concerns an unfortunatedevelopment with a critical customer. PEM contracts for the utilization of its products with strategically important managed care organizations. University Medical Plan (UMP) is an HMO* providing managed care services to university communities troughout Europe. A well-known leader in preventive medical care, the currently run 26 hospitals servicing 640,000 patients. They have also been leaders incutting costs and premiums to their customers, Finally, their positive reputation in the industry grants image benefits to you, being their leading provider of products in the Tummy Fix category.
Last year, UMP purchased 100,000 units of Tummy Fix from PEM under the first year of a three-year contract. More than 1,000 UMP patients used Tummy Fix during this last year. Under the contract, UMPagreed to purchase a minimum of 50,000 units of Tummy Fix each year for the next three years. In addition, PEM agreed to provide a rebate of 10% if UMP’s purchases exceeded 80,000 units in any year of the contract and 15% if UMP’s purchases exceeded 120,000 units in any year of the contract. The price of Tummy Fix is €2.50 per tablet. Thus UMP purchased €250,000 worth of Tummy Fix in the last year,and PEM was about to send UMP €25,000 in rebates. Patients generally take one tablet per day, often for six to eight months. Although expensive, this is a very cost-effective alternative to surgery, which would typically cost €10,000.
You are now in the first week of Year 2 of the contract, Sam Sawyer, the pharmaceutical director from UMP, just called you and said that they need to meet withyou immediately. Apparently TOBA just lowered the list price of their competitive product from €2.40 to €2.00. In addition, they agreed to provide a 25% discount on all purchases if UMP purchased over 80,000 units. Your best guess is that TOBA sold UMP 20,000 units last year. Thus UMP uses a total of about 120,000 units of drugs in this category per year.
Sawyer informed you that they areunder intense pressure to reduce costs at UMP, and that unless you can significantly alter the contract for its remaining two years they will shift their primary order to TOBA and only order Tummy Fix for specific doctor requests at the list price. You pointed out that this would violate the contract but Sawyer’s response was the contract was simply a general understanding and not an enforceable...