UCSF Life Sciences Week 5 Devices: Revenue streams

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  • 1. UCSF Lean Launchpad For Life Science and Healthcare Startups Medical Device Track Class 5 Revenue Models October 29, 2013 Allan May Chairman, Life Science Angels amay@lifescienceangels.com UCSF Lean Launchpad - Allan May ©
  • 2. CLASSIC MEDICAL DEVICE REVENUE CONSIDERATIONS  What value are customers willing to pay for?  Remember Minimal Viable Product  How do they pay today?  Revenue model  How much do they pay today?  Pricing  What is their capacity to pay?  What role does reimbursement play? UCSF Lean Launchpad - Allan May ©
  • 3. CLASSIC MEDICAL DEVICE REVENUE MODELS  Sale of Product – Dominant model  Per Procedure fees – occasionally, in connection with Capital Equipment revenue models  Service fees – not relevant  Rental – occasionally in connection with Capital Equipment revenue models  Licensing – only for software based products  Aggregator – some distributors use this model  Intermediary – not relevant  Advertising – only for consumer oriented, self-pay devices UCSF Lean Launchpad - Allan May ©
  • 4. RAZOR/RAZOR BLADE MEDICAL DEVICE REVENUE MODELS  Recurring revenue is usually valued more highly by acquirers than one-time revenue  Most medical devices either are a consumable or disposable or include one as part of the procedure kit  Eg, Nanostim – Leadless cardiac pacemaker requires an insertion catheter, sheath, and removal catheter  If your solution doesn’t have a disposable, try to reengineer it so it does  Eg, Cyberheart – Use of a stereotactic CyberKnife for structural heart did not have any disposables originally  Determined that the procedure benefited by the insertion of fidicuals to provide real-time visualization per procedure; then the fiducials are discarded UCSF Lean Launchpad - Allan May ©
  • 5. MOST FAVORED CUSTOMER PRICING CLAUSES  Most Favored Customer pricing generally provides substantial discounts based on volume  Be aware of the issue with Most Favored Nation pricing clauses:  Medicare and Medicaid mandate that whatever is the lowest price you provide to ANY customer, you MUST provide the same price to Medicare and Medicaid  Failure to comply is a criminal offense UCSF Lean Launchpad - Allan May ©
  • 6. CLASSIC PRICING MODELS  FIXED – Most common in medical devices  Value Pricing  Cost + Markup  ASP based on percent discount from list prices  Volume pricing  DYNAMIC - Rare UCSF Lean Launchpad - Allan May ©
  • 7. PRICING BASED ON COST VERSUS VALUE  Cost Pricing is one of the most common mistakes startups make    Often driven by high initial costs of R&D and prototyping Cost reduction efforts always lag the need to demonstrate safety and efficacy Margins are usually under pressure  Use Value Pricing whenever possible  What Pains are avoided; what Gains are delivered  Prices rarely go up, so setting the right price initially is critical  This is a key area where interviews with Customers and others can be critical UCSF Lean Launchpad - Allan May ©
  • 8. FACTORS THAT AFFECT PRICING  Market Type impacts pricing strategy (more later)   Do you enable a patient cohort to receive therapy who are otherwise not receiving therapy (New Market) Do you offer a therapy with better clinical outcomes than existing therapies (Existing Market)  Competition is a major impact on pricing strategy  Reimbursement often dictates pricing strategy  So falling under an existing code is great if it pays well; otherwise you will need to obtain a separate code  Often the existing code can be used as a bridge strategy until the special code is obtained  Relying on “self pay” until a reimbursement code is obtained requires a lot of cash and time to survive UCSF Lean Launchpad - Allan May ©
  • 9. MARKET TYPE AFFECTS PRICING  New Markets   Classic hockey stick revenue stream – slow start First Gen; Second Gen can follow different revenue models as you move from an Existing Market to a New Market  Existing Markets  Taking share is much faster way to drive revenue, but generally is burdened by greater price constraints  Re-segmented Markets  Hybrid of both; can have aspects of each  Revenue Model Strategy and Pricing Tactics control Cash Flow UCSF Lean Launchpad - Allan May ©
  • 10. MARKET SIZE AFFECTS PRICING TACTICS  Need to understand market size and the potential share your product can achieve  Costs of sales and customer acquisition costs hugely influence cash and gross margin but are almost always underestimated  Medical Device projections are the opposite of internet/software projections:   Revenue models should be built “bottoms up”, e.g., by salesperson, by customer, by clinical case, by numbers of devices per case Projections based obtaining an estimated percent of total market (“Tops down”) are ignored by investors and strategics UCSF Lean Launchpad - Allan May ©
  • 11. THE MOST IMPORTANT NUMBERS ON YOUR FINANCIAL STATEMENTS Cash to proof (demonstration) of safety and efficacy in humans Cash to Cash Breakeven Cash to Exit Gross Margin UCSF Lean Launchpad - Allan May ©
  • 13. UCSF Lean Launchpad For Life Science and Healthcare Startups Medical Device Track Class 5 Revenue Models October 29, 2013 Allan May Chairman, Life Science Angels amay@lifescienceangels.com UCSF Lean Launchpad - Allan May ©