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 ©

12. NEED TO DIAGRAM REVENUE
STREAM AND PRICING TACTICS
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 ©