The Business of Venture Capital Case 1

Case 1: CS Med (Medical Device)! Type of Case Firm Commercialization Health Advances Prompt Our client is CS Med, a medical device start-up company. CS Med built a new biopsy needle attachment, AccuBiop, which is integrated directly into needles. This device exploits differences within breast cancer masses for greater accuracy to decrease the need for a second biospy. AccuBiop is approaching FDA approval so the CEO has brought our firm on board to explore routes to commercialization. Additional Information (provided on request) Client Goals - CEO wants to achieve $1M in profit as soon as possible to recoup R/D costs, but does not want to sell the patent for AccuBiop or the company CS MedÕs Capabilities - CS Med mainly invested in R/D for the AccuBiops. - AccuBiop would be the first revenue stream for the company - The company does not yet have the manufacturing infrastructure make needles, or the experience to sell/market/distribute a product Biopsy Needles - Currently sold around $200 per needle and are disposed after one use - Estimated market size is 200k biopsies/year. Case 1: CS Med (Medical Device)! What factors should be considered? Sample Issue Tree How to Commercialize AccuBiop? Routes to Commercialization Market Potential of AccuBiop Size Major Players Speed Customer Preference Accuracy In House Profitability Price Revenue Manufacturing Needle Partnership Feasibility Costs Sales / Marketing AccuBiop Time Experties Distribution Profitability Capital Costs Revenue # of devices Per device payments Feasibility Upfront Operational Case 1: CS Med (Medical Device)! Market Analysis When asked about the market size, provide 200k biopsies/year. If candidate request information about market trend and the potential market share for client (related to current competition) Present Exhibit 1 What can be interpreted from this table? Interpretations of Exhibit 1 1) Total sales = market size (as given above). Market is saturated 2) Costs are not particularly different between the companies on the market 3) C1 and C2 are offering a lower price. Could have larger market share by competing on price How could CS Med enter this saturated market? Product differentiation -Price -Features -Quality A good candidate should recognize AccuBiop adds new features and would proactively ask if the features fulfill unmet customer preferences How would you analyze if the features AccuBiop adds are relevant? - Physician surveys for features - Interview experts in the field Case 1: CS Med (Medical Device)! Product Differentiation Provide Exhibit 2 Interpretations of Exhibit 2 1) Accuracy is the most important feature for the surveyed physicians so the AccuBiop adds relevant value 2) Physicians specifically value this at $100 extra per needle Now that candidate realizes that AccuBiop can add relevant value, move to commercialization. Commercialization Candidate should have already thought of a few examples of commercialization styles, but if not utilize this time to brainstorm potential ways to market. - In house " Produce AccuBiop + needles alone - Partnership " Work with another company to produce needles with AccuBiop - Licensing " A subtype of partnership where the intellectual property of making needles with Accubiop are rented to another company to produce the needles with AccuBiop - Selling IP/Company (not an option from prompt) Interviewer should ask the candidate to evaluate in house commercialization first Case 1: CS Med (Medical Device)! In House Assessment To in house manufacture needles with AccuBiop, CS Med can make a maximum $10M investment in manufacturing, storage/inventory, sales/marketing, and distribution. By year 2 this allows for the production and estimated sales of 10k needles with AccuBiops per year. What other information is needed to calculate profitability for this approach? Revenue Side -Expected units sold Ð 10k needles -Expected price - $300 per needle (max doctors will pay via Exhibit 2) Cost Side -Expected fixed cost - $10M investment -Expected variable cost - $30 for needle and $20 for AccuBiop (candidate should ask for) Profit Revenue: (10k needles) ($300/needle) = $3M per year Cost: Investment: $10M Variable Cost: (10K needles) ($30/needle + $20/AccuBiop) = $500K per year Year 1 Profit = ($10M), Accumulated Y2 Profit = ($7.5M) Gain $2.5M/year. Will breakeven year 5 and reach the goal of $1M profit by year 6 Case 1: CS Med (Medical Device)! Partnership Assessment During this analysis, Company 3 has approached CS Med for a partnership. As the 3rd largest player in the market, Company 3 is looking for ways to improve market share by diversifying its product. For producing the needle with AccuBiop, CS Med would receive a royalty per needle, but will have to pay for and manufacture each AccuBiop How much can CS Med charge per AccuBiop to reach its $1M goal in profit in Year 1? Assumptions: All other costs (represented by cost/needle in the in house approach) will be covered by Company 3 Calculation Example Company 3 Partnership - assume all needles are converted to needles with AccuBiop (Goal) < (C3 partnership revenue for AccuBiop) Ð (C3 partnership costs) (Goal) < (C3 needles sold) (price per AccuBiop) Ð (C3 needles sold) (cost per AccuBiop) $1M < (40k needles) ($x per AccuBiop) Ð (40k needles) ($20 per AccuBiop) $1M< 40k ($x-$20) ~$25/needle with AccuBiop < $x Ð $20 ~$45/needle with AccuBiop = $x In this case, $45 per AccuBiop will lead to the profit goal within one year. Given the survey from Exhibit 2, physicians are willing to pay as much as $120 more for better quality, $45 should be easily acceptable. Case 1: CS Med (Medical Device)! Summary / End of Case The CEO of CS Med would now like to hear a summation of your findings and a recommendation of which way to commercialize the AccuBiop Recommendation / Rationale CS Med should form a partnership with Company 3 to bring the AccuBiop to market. Within the first year, CS Med can reach the $1M profit goal by working with the 3rd player in the market and charging $45 per AccuBiop. In house manufacturing would be the slower approach, also requires a substantial financial burden on the company ($10M) that a start-up like CS Med may not want to incur. Risks Regulatory Approval AccuBiop still needs to complete regulatory assessment before commercialization and should be aware of this risk Competitive response of other players If the other companies could produce a similar needle improvement, this would lower the value of our product and could hurt the market share of our partner. Adoption Rate If AccuBiop needles are not adopted quickly enough, competitors would have more time to develop a similar product and to enter the market. Case 1: CS Med (Medical Device)! Next Steps Negotiate Deal Terms A good candidate would note that the terms of the partnership were dictated by Company 3. The high value of the device to physicians should allow CS Med the leverage to negotiate better terms or partner with other companies. Terms could include a higher price per AccuBiop or an upfront payment. Increase manufacturing of AccuBiop needles By fulfilling the physiciansÕ need for accuracy, CS MedÕs partner has the potential to increase market share. CS Med should prepare to increase production of AccuBiops to meet the demand beyond a given partnerÕs market share. Evaluate Other Partnerships An insightful candidate might suggest partnering with two or all three companies because this would maximize the Ò#needles sold by partnerÓ. However, the firm would have to perform an analysis to see if working with multiple partners would be more profitable than an exclusive partnership. Case 1: CS Med (Medical Device)! Exhibit 1: Biopsy Needle Market Rank the following features: 1 to 3 ranking (1 highest) Higher Accuracy? 1 70k Faster Speed? 3 35% 70k Price? 2 $35 20% 40k How much are you willing to pay more for Extra $ / needle $30 10% 20k Higher Accuracy? $100 Faster Speed $20 Willing to switch over to a new needle with % yes response Higher Accuracy? 80% Faster Speed? 10% Lower Price? 30% Price / needle Cost / needle Market Share (by units) Units Sold Company 1 $180 $30 35% Company 2 $180 $30 Company 3 $200 Others $190 Company Exhibit 2: Physician Survey