1. KBT Devices: Pull the Plug
Cindy Hur, Maya Poncelet, Jonah Ragsdale, Eric Ren
ZS Associates Case Competition Presentation 11/20/15
2. The Agenda for Today
About Us
SurgiNet and beyond
Options
Acquisitions and solutions
Goals and Assumptions
The parameters
The Market
Right for KBT?
The Problem
Solvable?
The SurgiNet Plan
3. Unreasonable Assumptions
Accurate forecast?
Sales & Reps
The issue of time
The Solution
Surgi’n forward
The Numbers
The final projections
Does the acquisition of KBT Devices and ClearPATH solve the needs of SurgiNet Medical? Can we reasonably
assume our goals will be met? If not what are our alternatives? We will seek to answer these questions through
careful examination of both companies and the industry.
4. What We Do
SurgiNet is one of the leading
providers of product services, and
education for the surgical – both open
and laparoscopic – treatment of
urological diseases and conditions.
• Provides 32% of Ford Medical Systems revenue
• Average annual revenue growth of 9%
• Global revenue of $356 million in 2014 (6% growth from previous year)
• 85 established sales representatives
SurgiNet
A division of Ford Medical Systems
5. 03 Low Morale
04 Quality Issues
01 Slugish Growth
• 6% growth lower than
9% average
• Strong pressure from
competitors
02 Dry R&D Pipeline
• Executive leaving for
competitor
• New Management from
parent company
• No new product
developement
• Funding issues?
• New product faced
quality issues
• Recalled few batches,
negative publicity
The Problems
An explanation
6. Acquire the fast growing
ClearPATH device, revamp
sales, increase revenue
Develope new product, utilize
existing networks for additional
sales, increase revenue
Acquire KBT Devices Internal Solutions
What are the Options?
Solving SurgiNet Issues
7. Ultimate Goal
While a number of strategic and fiscal factors are considered by corporate when
making funding decisions, it seeks a 15% return on investment within the first
three years on most investments
Key Assumptions
• If current funding allows for acquisition, the same funds can be applied to R&D
• Acquisition of KBT Devices would require a separate and individual team of sales reps
• KBT Devices is not limited in its growth in sales of the ClearPATH product
What We Must Provide
The solution we provide will increase the current revenue of SurgiNet, increasing
currently slow revenue growth back to an annual 9% growth or greater
Goals and Assumptions
The parameters of our solution
9. Market Share: SurgiNet
Changes
Increasing competition, revenue growth
slowing, margins declining
Current Products
Offer a versatile and diverse product
portfolio
Product Challenges
Released recent product, quality issues
ensued, received bad publicity
Growth
Average revenue growth of 9% in past
years
Market Share
Currently control 60% + of ureteral
catheter & stent markets
Relationships
Sales reps have positive relationship with
surgeons using current products
Understanding the environment we are in will guide our decision whether or not to buy
KBT Devices, or find our own solution
Potential for growth
10. Market Share: KBT Devices
Sustainability
25% growth; Converts 40-60% but loses
20% of accounts annually
Market Potential
Can achieve a 10% market share in US
and greater
Dominant Buyer
Cleveland Clinic (trocar market leader)
adopted ClearPATH
Growth
Launched ClearPATH 13 months after
beginning R&D: Already strong results
Market Share
On contract with over 70% of surgical
facilities in the the US
Relationships
Generated good relationships and
publicity in laparoscopic industry
Is ClearPATH a sustainable product in a reliable market?
A solid start
11. Size
The US trocar market
is estimated to be $280
million and $330 million
worldwide. The US
constitutes 85%
making it the focus for
sales and development
Growth
The market for
laparoscopic continues
to grow. Less pain,
shorter recovery, and
reduced costs are
results of innovation
and competition
Competition
Endoscopix holds 66%
of the US market
share. Their size (225
reps) makes it hard to
compete with. Access
Labs holds another
25% of US market
share
Clinical
Trocars are minimally
invasive but are fickle
in nature. Their use is
rarely the same from
patient to patient which
makes them difficult to
master and control
ClearPATH
ClearPATH utilizes
recyclable & reusable
design making it more
cost effective for
hospitals. However its
materials make it
harder for doctors to
use
Trocar Market: Overall
Who has the advantage?
The market is relatively small and crowded, but the right product has
potential to steal valuable market share
12. Will acquiring KBT devices tap into a large enough market of $280 million? How much more traction will ClearPATH
generate if SurgiNet acquires KBT? How difficult will it be to convince surgeons to adopt a new, more complex device?
Market Share Breakdown
Who’s in control
KBT Devices – 1%
Endoscopix – 66%
Access Labs – 25%
AB Medical – 4%
Other – 4%
14. 01 Clinical Selling
Selling clinical value of the product
(effectiveness, safety, ease of use,
compatibility)
02 Economic Selling
Selling the economic value of the product
(lower upfront cost, reducing other costs
for the overall treatment)
03 Contracting
Contract writing with the hospital
regarding sale of product (pricing,
condition for service, training, liability, etc.)
04 Case Coverage
Keep in touch with hospital and physicians
(resolve issues, train and educate, inform
of new products, observe procedures)
05 Administrative Support
Ensuring the hospital has sufficient
inventory, fixing insurance reimbursement
issues, etc.
06 Technical Support
Address technical problems and bringing
appropriate resources
Six Activities of Selling
100% time consumption
15. 01 Clinical Selling
Physicians are cautious for products new
to the market or that command a small
share of the market
02 Economic Selling
ClearPATH provides high value at a low
cost and is recyclable, further reducing
costs
03 Contracting
If a hospital is affiliated with a GPO or IDN
and is under contract, new negotiations are
unnecessary. However, there are openings
04 Case Coverage
Trocars are low risk in general, but due to
the complex materials and recyclability,
ClearPATH requires higher case coverage
05 Administrative Support
ClearPATH has no additional impact on
administrative support
06 Technical Support
ClearPATH is more complex in nature
which could lead to increased technical
support over the average trocar
ClearPATH Compatibility
A Cost-Benefit Analysis
16. Selling Non-Customer Admin.
SALES
Customer AdministrationTravel
Driving, flying etc.
Face to face interactions
that are performed to
maintain or increase sales
Expense reports, call reports,
special projects, internal
coordination
Preparing proposals, contracts,
coordinating customer meetings,
handling defective products, etc.
SurgiNet Rep Time Allocation
A Full Schedule
SurgiNet has 85 sales
representatives on staff
Assumption: SurgiNet
reps are utilizing 100%
of time selling SurgiNet
products
15-25%
40-55%
15-25%
4-8%
17. Market
New Hospitals
New Reps
Time Consuming
Conversion Time
Small Hospitals
New Product
New Place
ClearPATH’s focus on small hospitals isn’t conducive to saving time as new larger
customers will require longer conversion time
ClearPATH and Time
Moving in the Opposite Direction
18. Medium-LargeMega Hospitals
12% 49% 23% 4%
ASCCommunity
Total Conversion Efforts
48 Days 18 Days 6 Days 4.5 Days
Ongoing Account Maintenance (Monthly Average)
16 Hours 4 Hours 2 Hours 2 Hours
Hospital Breakdown
Time and Effort in the Market
19. Current Reps:
• Will current SurgiNet sales representatives be able to handle ClearPATH?
• No, sales representatives are too busy selling current SurgiNet products
Staff:
• Do we need to hire a separate team to handle sales? If so, how many additional sales
reps do we need?
• Yes, projections claim an additional team of 28 sales representatives selling ClearPATH only
Costs:
• Are the high costs of a sales representative worth the returns in sales?
• Annual costs of $225,000 - $250,000
Important Answers
Consequences of Acquisition
22. 2014 SurgiNet US
Revenue
Revenue per sales
rep (159.5/85)
Anticipated reps in
2016
Lost opportunity
(1.88*28)
159.5m* 1.88m 28 52.64m
Unreasonable Assumption 1: 100% of Time on ClearPATH
Using Current Sales Representatives
Using existing SurgiNet sales reps for ClearPATH causes huge loss
in opportunity
*Assuming no other revenue outside of representatives
23. April 2016 May 2016 June 2016 July 2016
Sales Reps 13 18 24 26
Costs
257,291.67
(13*237,500/12)
356,250
(18*237,500/12)
475,000
(24*237,500/12)
514,583.33
(26*237,500/12)
Expected Revenue 353,483 412,425 527,430 620,635
Gross Profit (96,191.33) (56,175) (52,430) (106,051.67)
Unreasonable Assumption 1: 100% of Time on ClearPATH
Hiring New Sales Representatives
Cost of a fully-loaded sales rep: $225,000 - $250,000 (Avg. $237,500)
24. Strengths
Contracts
Weakness
Customers
Weakness
Unsteady Sales
SALES
ClearPATH sales have increased
25% over the past twelve months
Growth has not been consistent.
ClearPATH tends to lose about 20%
of sales annually
On contract with over 70% of
surgical facilities in the US
KBT focuses on smaller customers.
Needs to target medium and large
hospitals to be effective
Assumption 2: Expectation of 2% Sales Growth
A risky assumption?
Strengths
Past Sales
CUSTOMERS
25. Cleveland Clinic
Conversion of one of the premier U.S. teaching
hospitals
Westside Hospital System
A nationally-renowned OB/GYN hospital
Surgery Center of San Antonio
Conversion of one of the leading bariatric
centers in the US
Doctors’ Surgery Center
Another leading bariatric center
Cleveland, OH
Portland, OR
San Antonio, TX
Philadelphia, PA
Major Adopters
But is it enough?
With 70% still on contract but only a 1% market share, do these facilities suffice?
27. 20%
15%
10%
2016 2017 2018
Acquisition Forecast
Proper Formulation
• The original forecasting model does not include the
loss of 20% of accounts
• Creating the new acquisition model builds in the loss
of accounts in decreasing scale (assuming
acquisition makes sales more efficient)
• Assumes 50% of accounts are converted annually
(Average of 40-60% conversion)
• Gross margin is 74%
• Assumption: Each sales rep costs $225,000
annually (low end)
• Assumption: Each account assumes 6 surgeons
using 35 trocars a month
Percentage Loss of Accounts in New Model
29. Three Year Profit
Acquisition Valuation
Three Year
Profit
$21,049,643.83
Max Acquisition
Price
$18,304,038.11
Corporate (Ford Medical) requires a 15% return on investment within 3 year when making
funding decisions. Based on the three year profits after acquiring KBT Devices, SurgiNet
can pay no more than $18.3 million for ClearPATH in order to achieve a 15% return.
30. 2
4
5
2016 2017 2018
KBT Devices Valuation
Underestimating Worth
• Due to the dominance of ClearPATH with smaller
market customers, we estimate revenue based on
lower but increasing numbers of surgeons per
account (as larger hospitals are contracted)
• Assumption: KBT convert 40% of accounts (low end)
• Gross margin is 74%
• Assumption: Each sales rep costs $250,000
annually (high end)
• Assumption: KBT has 28 sales reps on staff through
3 year period (matching acquisition model)
• KBT Devices has contracts with over 70% of
surgical facilities in the US
Number of Surgeons Per Account
31. KBT Devices 3 Year Valuation
Forecast accuracy is integral
32. Three Year Profit
KBT Valuation
Three Year
Profit
$27,246,105.60
The Market Value for KBT Devices based on profits over 3 years is higher
than SurgiNet can afford to produce a 15% return on its investment
33. Comparison Report Sample
Write here your great subtitle
The differences in profits are due to the issues we have previously discussed: Unreasonable
acquisition assumptions, difference in target hospitals, and time efficiencies of sales reps. An
acquisition of KBT Devices would require at minimum their market value of $27.2 million
(excluding the premium most acquisitions demand). Thus we will not acquire KBT Devices as
it would not achieve our goal and cause a loss of revenue.
Max Acquisition
Price
$18,304,038.11
KBT Devices
Market Value
$27,246,105.60
35. Money Assumption
If SurgiNet has the funds to
acquire a company, then SurgiNet
has the funds to invest in R&D
Current Success
SurgiNet holds 60% of its current
market and has established
relationships at target market
hospitals
ClearPATH
Just because ClearPATH isn’t right
for our market, doesn’t mean that a
trocar isn’t right for our market
Internal Solutions?
Things to Keep in Mind
36. SurgiNet Trocars
• Invest up to $18.3 million into R&D of effective
but price sensitive trocar
• Higher a few additional sales reps, but not
near as many, and without 100% time
allocation to the new product
• Why?
• Simple trocars are a low risk
product which requires very little
case coverage, the biggest time
consumer of a sales rep
• Current reps will utilize current successful
accounts to market new product with
physicians trust already established
• Market research shows hospitals are price
sensitive, meaning a lost cost product could
steal away significant market share
The Solution
Entering the Market
37. The trocar market has potential, but ClearPATH isn’t the solution
SurgiNet needs
Current time usage doesn’t allow for the attention ClearPATH would
require. Profitable projections are unreasonable due to time constraint
Acquiring KBT Devices would lead to an inability to produce a 15%
return (or a positive return) due to KBT’s high market value
Development of a price sensitive trocar internally provides greater
return than acquisition
In Summary
Conclusion
