Case 10: Heartcorp

BACKGROUND
Firm: McKinsey & Company
Round: 2005 Summer, First
Content: Qualitative and quantitative

CASE TOPIC

Heartcorp is a medical devices company. They produce cardiovascular stents.

They have developed a revolutionary product that is positioned to replace the current products in
the market. The product, called Device X, is the first of its kind

Heartcorp wants to launch Device X in Europe in the near future and then bring it to the U.S. in 6
months. They are 1 year ahead of its competition (with regard to R&D of the product).

INTERVIEWER BRIEFING

Recommended approach:
This case is representative of many of the prepared, McKinsey round 1 cases, in which the
interviewer actively walks the interviewee through a set of qualitative and quantitative questions.
The interviewer should “stick to the script” of questions. To the effect that the interviewee
struggles, the interviewer can assist the interviewee to get back on track.

The interviewee should be structured in answering qualitative questions and crunch through any
numbers thrown his or her way, always keeping in mind how they tie back to the larger issues.

CASE QUESTIONS

Q: How do you determine what price to charge for Device X? What are the issues that
need to be considered?

A: Three areas should be explored to determine the price:

1. Current price and rationale for current price (value-based or cost-based)
2. Benefits of new drug vs. old drug in terms of decreased side effects or repeat procedures
3. Buyer’s willingness to pay

Additional items that could be considered:

• Cost of Device X
• Total R&D cost (if not considered sunk)
• Any customer acquisition cost
• Cost of overhead and sales force

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Q: What is the “Cost Neutral Point”- the point at which the cost of the new product equals
that of the old product- given the following data:
• Hospital Cost of an operation = $2500 per patient
• Old product cost = $500/unit
• Number of units needed per operation = 2
• Frequency of repeat procedure (using existing product) = 50%
• Frequency of severe complication resulting in open heart surgery = 30%

Is there any more information that you would need to calculate this?

A: Need more information:

• What is the cost of open heart surgery operation? $15,000
• What is the frequency of repeat procedure using Device X? 0%
• What is the frequency of severe complication using Device X? 5%
• How many units of Device X will be necessary per operation? 2

To determine how much is the new device is worth:

Item Old New

Hospital cost $2500 $2500
Product cost per operation $500*2=$1000 2*X
Subtotal $3500 $2500+2X
Repeat procedures 50%*$3500=$1750 $0
Severe complication 30%*$15K=$4500 5%*$15K=$750
Total $9750 $3250 + 2X

Value of Device X = ($9750 - $3250) / 2 = $3250 (cost neutral point)

Q: What might factors might allow Heartcorp to price the new product above cost neutral
point)? What needs to be considered?

A:
• Risk / Malpractice Insurance costs,
• Value of reduction in pain (to patients),
• Higher success ratio (without repeat procedure and/or severe complication),
• Cost savings of keeping fewer Device X’s in inventory, etc.

These and other factors might allow us to price Device X above the Cost Neutral Point.

Q: The company has decided that it wants to sell Device X at a premium above the cost
neutral point, but a survey of potential customers (Hospital Purchasing Departments)
showed that they are only willing to pay $2000/unit. Now what would you recommend?

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A: Is the $2000/unit figure a single data point or an average? Average across many customers
surveyed
One of two things:
1. Manage Heartcorp’s expectations that they should really expect something close to
$2000/unit
2. Increase potential customers’ “willingness to pay”

Q: How can we increase “willingness to pay”?

A: Two thoughts:
• Communicate the benefits (both “soft” (e.g., decreased pain or frequency of re-operation)
and “hard” (financial)) to the additional stakeholders (i.e., patient advocate groups and
insurance payers) in the decision. Work with them to “pressure” the potential buyers of
Device X to spend the additional money to realize the added benefits of the new
hardware.
• Publish articles about the efficacy of the new device in reputable journals (e.g., JAMA,
New England Journal of Medicine, etc.) and use those to convince doctors to pressure
hospital administration to increase “willingness to pay” for Device X.

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