Strategy & Implementation Summary
Appendix
Appendix A: Competitive Technology
The current industry for Premium Therapy's EMIT system is rapidly evolving. Analysis of the current state of the industry surrounding these products must first consider the sum in terms of its parts. The several industry segments for the EMIT system Models MX and SX are outlined below.
Emit Mx Industry Segments
Prevention and Treatment of Muscular Atrophy: The industry for atrophy prevention and treatment currently involves primarily electrical stimulating technologies. Other technologies have made small inroads in the industry, but the bulk of therapeutic intervention consists of traditional exercise and physical therapy-based activities.
- Electrical Stimulating Devices (ES): Commonly referred to as functional electrical stimulators, these devices utilize the direct application of electric potentials in order to excite nerves. There are hundreds of different devices available for ES of muscle. The use of these devices has encountered several significant obstacles in the treatment of atrophy, though. While effective in stimulating superficial muscles, ES technology is limited by the fact that it is not able to penetrate tissues to reach deep muscles without causing skin burns and irritation. As a result, this form of stimulation has found very limited success in the treatment of atrophy for large muscle groups, such as those found in the legs, shoulder, back, and other areas.
- Existing Pulsed Electromagnetic Stimulating Devices (PES): PES has been shown to overcome a number of the limitations of electrical stimulating technology. Significantly, PES has been shown to penetrate much more deeply and to do so much less painfully. What is more, PES has potential indications that do not overlap those of ES. Due to its painless nature, PES can be used more frequently and over a larger area of the body without significant discomfort. Despite these scientifically proven advantages, no competitor, to date, has developed a user-friendly, consistently-effective therapeutic device employing PES technology.
Neurogenic Bladder and Bowel Treatments: The present industry for the treatment of neurogenic bladder and bowel involves principally invasive therapies that are associated with high risks of complications. The treatment options for persons with this condition have, to date, included the following therapies:
- Intermittent Catheterization: Catheters, or hollow tubes, can be inserted into the bladder in order to provide evacuation at regular intervals. While simple and effective, long-term use of catheterization is associated with a number of significant complications, including: bladder and kidney infections, chronic kidney inflammation, kidney stones, and bladder stones.
- Surgery: The alternative to intermittent catheterization for treating these conditions for many patients has been surgical intervention. Surgical procedures can involve the placement of an artificial sphincter around the neck of the bladder or manipulation of the outflow tracts to assist with bladder emptying. Surgical intervention is invasive, and thus associated with long-term complications including infection and continued need for catheterization or similar procedures. In addition, surgical management has failed to demonstrate significant improvements in the quality of life of persons affected with these conditions.
- Electrical Stimulation (ES): This technology has been used on a limited basis for the facilitation of voiding with neurogenic bladder. Application of ES technology in this field has remained largely experimental to date, and has failed to translate into a viable treatment option for patients.
Emit Sx Market Segments
Treatment of Musculoskeletal Pain: The market for the treatment of musculoskeletal pain is staggering in size, with estimates of greater than 100 million pain sufferers in the U.S. alone. Treatment options include:
- Pharmacologic Therapy: Medications are used widely in the treatment of musculoskeletal-related pain. The mechanisms by which the numerous medications function in the treatment of musculoskeletal pain include: the modulation of pain signals received in the brain, alteration of the transmission of pain signals along nerves, and the production of pain-reducing chemicals in the body. While pharmacologic treatments of musculoskeletal pain can be effective, they can also have highly significant side effects. These side effects can be of great consequence, especially in the elderly who account for the bulk of musculoskeletal pain sufferers.
- Electrical Stimulating Devices (ES): ES technologies, primarily in the form of transcutaneous electrical nerve stimulation (TENS units), have been used in the treatment of musculoskeletal pain for decades. ES technology is now a widely used modality for the treatment of general acute and chronic pain syndromes. The primary disadvantages of ES technologies relate to the fact that this form of stimulation is associated with risk of tissue damage at the interface between the electrodes and the skin. In addition, ES is associated with frequent reports of "uncomfortable sensations or pain" and requires an invasive approach to target regions that are deeper than the surface of the skin.
- Existing Pulsed Electromagnetic Stimulating Technology (PES): PES devices have made only limited inroads in the industry of musculoskeletal pain treatment. PES technologies, though, have demonstrated efficacy in treating musculoskeletal pain in a number of different studies. Despite this fact, to date, existing PES industry forces have failed to create a user-friendly application for the treatment of musculoskeletal pain.
Treatment of Arthritis: The market for the treatment of arthritis is also quite large, approximately 90 percent of which is osteoarthritis. This form of arthritis involves degenerative changes in the cartilage lining the joint surfaces. To date, there are no therapies that have demonstrated the ability to reverse the wear-and-tear degenerative changes that cause such significant pain for osteoarthritis sufferers.
- Nutritional Supplements: Glucosamine and chondroitin are the principle players in the $330 million joint health supplement market. These supplements are used widely in Europe and are becoming increasingly popular in the U.S. There has, however, been very little in the way of scientific evidence to support any claims of efficacy. Dr. Daniel Clegg, the director of a National Institutes of Health supplement study, reports that research to date "has not proven that the supplements work... The lure of glucosamine and chondroitin is that there isn't really any good treatment for degenerative arthritis."
- Hyaluronic Acid Injections: Intra-articular hyaluronic acid injections have also been used to treat degenerative arthritis. The use of these injections is based on the premise that the replenishment of hyaluronan, an important substance for cartilage growth, can alleviate pain in the knee joint and possibly even repair cartilage damage in early osteoarthritis. Several studies, though, have failed to show a statistical difference in symptomatic improvement between intra-articular hyaluronic acid injections and the placebo, intra-articularly introduced saline. In addition, the injection of any foreign substance into the body is associated with increased risks of infection and other adverse side effects.
- Pharmacologic Therapy: Pharmacologic therapies are used widely in the treatment of arthritis pain. Drug-based therapies used for this type of pain are similar to those used for the treatment of musculoskeletal pain (as outlined above) and involve primarily narcotics and nonsteroidal anti-inflammatory drugs (NSAIDS). Pharmacologic treatments of arthritis pain can be effective, but as noted earlier, can also have significant side effects. These side effects are of greatest consequence to the elderly who are the most likely to suffer from arthritis.
- Existing Pulsed Electromagnetic Stimulation Devices (PES): PES devices have not yet gained a significant foothold in the market for arthritis treatment. The power of PES to reduce pain, improve function, and enhance the growth of cartilage producing cells, though, offers a promising opportunity for future growth in this field.
Appendix B: Main Competitors
| Technology | Company | Application | Model Price |
| ES | Electrologic of America | Atrophy | $15,000 |
| ElectroStim Medical Devices | Atrophy | $3,000-$5,000 | |
| Rehabilicare | Pain | $500-$1,000 | |
| PES | Leetonus | Atrophy | $20,000 |
| Magstim | Diagnostic Testing | $12,500-$30,000 |
Appendix C: Sales Forecasts
In compiling sales forecasts, Premium Therapy used another innovative technology, vacuum-assisted closure (VAC), as an analogy in estimating diffusion of the EMIT system. Much like Premium Therapy's EMIT technology, VAC entered the medical device market as an innovative extension of existing technology. Also much like EMIT, VAC offered a novel solution to an otherwise poorly-managed disease. VAC was quickly proven to be highly effective in the treatment of chronic wounds and sales increased exponentially over the first five years of company operation.
Premium Therapy extrapolated the diffusion of EMIT SX and MX using the historical diffusion of the VAC device. Using this information, Premium Therapy was able to compile sales forecasts for the five-year horizon of the business plan. These forecasts do not take into account the fact that the diffusion rate will likely be accelerated due to increased acceptance of precedent pulsed electromagnetic technologies.
| Dollar Sales | 2002 | 2003 | 2004 | 2005 | 2006 |
| EMIT SX - Logic Controller | - | 428,568 | 1,249,459 | 4,249,828 | 18,430,229 |
| EMIT SX - Array of Coils | - | 107,142 | 312,365 | 1,062,457 | 4,607,557 |
| EMIT MX - Logic Controller | - | 358,160 | 947,507 | 4,019,275 | 8,343,473 |
| EMIT MX - Array of Coils | - | 68,877 | 182,213 | 772,937 | 1,604,514 |
| Total Dollar Sales | - | 962,747 | 2,691,544 | 10,104,497 | 32,985,773 |
| Direct Cost of Sales | |||||
| EMIT SX - Logic Controller | - | 188,592 | 523,141 | 1,693,012 | 6,985,729 |
| EMIT SX - Array of Coils | - | 38,738 | 107,456 | 347,754 | 1,434,907 |
| EMIT MX - Logic Controller | - | 131,068 | 329,909 | 1,331,531 | 2,629,922 |
| EMIT MX - Array of Coils | - | 24,903 | 62,983 | 252,991 | 499,685 |
| Total Unit Costs | - | 383,301 | 1,023,188 | 3,625,288 | 11,550,243 |
| Unit Sales | 2002 | 2003 | 2004 | 2005 | 2006 |
| EMIT SX - Logic Controller | - | 210 | 600 | 2,000 | 8,500 |
| EMIT SX - Array of Coils | - | 420 | 1,200 | 4,000 | 17,000 |
| EMIT MX - Logic Controller | - | 27 | 70 | 291 | 592 |
| EMIT MX - Array of Coils | - | 270 | 700 | 2,910 | 5,920 |
| Total Unit Sales | - | 927 | 2,570 | 9,201 | 32,012 |
| Unit Sale Prices | |||||
| EMIT SX - Logic Controller | $2,000.00 | $2,040.80 | $2,082.43 | $2,124.91 | $2,168.26 |
| EMIT SX - Array of Coils | $250.00 | $255.10 | $260.30 | $265.61 | $271.03 |
| EMIT MX - Logic Controller | $13,000.00 | $13,265.20 | $13,535.81 | $13,811.94 | $14,093.70 |
| EMIT MX - Array of Coils | $250.00 | $255.10 | $260.30 | $265.61 | $271.03 |
| Unit Costs | |||||
| EMIT SX - Logic Controller | $925.00 | $898.06 | $871.90 | $846.51 | $821.85 |
| EMIT SX - Array of Coils | $95.00 | $92.23 | $89.55 | $86.94 | $84.41 |
| EMIT MX - Logic Controller | $5,000.00 | $4,854.37 | $4,712.98 | $4,575.71 | $4,442.44 |
| EMIT MX - Array of Coils | $95.00 | $92.23 | $89.55 | $86.94 | $84.41 |
| 2002 | 2003 | 2004 | 2005 | 2006 | |
| Total Revenues | - | 962,747 | 2,691,544 | 10,104,497 | 32,985,773 |
| Direct Cost of Sales | - | 383,301 | 1,023,188 | 3,625,288 | 11,550,243 |
| Gross Margin | - | 579,446 | 1,668,356 | 6,479,209 | 21,435,530 |
| Gross Margin % | - | 60% | 62% | 64% | 65% |
| Operating Expenses: | |||||
| Advertising and Promotion | - | 48,137 | 134,577 | 505,225 | 1,649,289 |
| Travel | 4,500 | 30,000 | 100,000 | 200,000 | 300,000 |
| Research and Development | 150,000 | 250,000 | 1,100,000 | 1,350,000 | 2,750,000 |
| Regulatory Expenses | 10,000 | 25,000 | 80,000 | 120,000 | 135,000 |
| Payroll | 222,000 | 696,000 | 119,200 | 1,615,280 | 2,396,446 |
| Payroll Burden | 46,620 | 146,160 | 235,032 | 339,209 | 503,254 |
| Depreciation and Amortization | 500 | 1,000 | 3,000 | 6,000 | 11,000 |
| 2002 | 2003 | 2004 | 2005 | 2006 | |
| Utilities | - | 24,069 | 67,289 | 252,612 | 824,644 |
| Insurance | 25,000 | 35,000 | 45,000 | 65,000 | 105,000 |
| Rent | 24,000 | 26,000 | 28,000 | 48,000 | 88,000 |
| Contract Workforce/Consultants | - | 15,000 | 35,000 | 75,000 | 135,000 |
| Total Operating Expenses | 482,620 | 1,296,366 | 2,947,098 | 4,576,326 | 8,897,633 |
| Earnings Before Interest and Taxes | (482,620) | (716,920) | (1,278,742) | 1,902,883 | 12,537,897 |
| Net Interest Expense (Income) | (15,024) | (8,622) | (5,607) | (10,409) | (32,803) |
| Provision for Taxes | (144,786) | (215,076) | (383,623) | 570,865 | 3,761,369 |
| Net Profit | (322,810) | (493,222) | (889,512) | 1,342,427 | 8,809,331 |
| Net Profit Margin % | - | 51.20% | 33.00% | 13.30% | 26.70% |
| Dividends Paid | - | - | - | - | 3,000,000 |
| 2002 | 2003 | 2004 | 2005 | 2006 | |
| Net Profit: | (322,810) | (493,222) | (889,512) | 1,342,427 | 8,809,331 |
| Plus: | |||||
| Depreciation and Amortization | 500 | 1,000 | 3,000 | 6,000 | 11,000 |
| Working Capital Changes: | |||||
| Accounts Receivable | - | (118,695) | (213,139) | (913,926) | (2,820,979) |
| Inventory | - | (92,318) | (165,775) | (710,831) | (2,194,095) |
| Other Short-Term Assets | - | (5,000) | (1,000) | (20,000) | (40,000) |
| Accounts Payable | - | 63,008 | 105,187 | 427,742 | 1,302,732 |
| Long-Term Debt | - | - | - | - | - |
| Long-Term Liabilities | - | 10,000 | 20,000 | 40,000 | 80,000 |
| Capital Expenditures | (5,000) | (5,000) | (20,000) | (30,000) | (50,000) |
| Financing Activities: | |||||
| Capital Infusion | 1,078,500 | - | 1,500,000 | - | - |
| Dividends Paid | - | - | - | - | (3,000,000) |
| Net Cash Flow | 751,191 | (640,227) | 338,760 | 141,412 | 2,097,989 |
| Beginning Cash Balance | - | 751,190 | 110,963 | 449,723 | 591,135 |
| Ending Cash Balance | 751,190 | 110,963 | 449,723 | 591,135 | 2,689,124 |
| ASSETS | 2002 | 2003 | 2004 | 2005 | 2006 |
| Current Assets | |||||
| Cash | 751,190 | 110,963 | 449,723 | 591,135 | 2,689,124 |
| Accounts Receivable | - | 118,695 | 331,834 | 1,245,760 | 4,066,739 |
| Inventory | - | 92,318 | 258,093 | 968,924 | 3,163,019 |
| Other Short-Term Assets | - | 5,000 | 6,000 | 26,000 | 66,000 |
| Total Current Assets | 751,190 | 326,976 | 1,045,650 | 2,831,820 | 9,984,883 |
| Long-Term Assets | |||||
| Net Property, Plant and Equipment | 4,500 | 8,500 | 25,500 | 49,500 | 88,500 |
| Total Long-Term Assets | 4,500 | 8,500 | 25,500 | 49,500 | 88,500 |
| TOTAL ASSETS | 755,690 | 335,476 | 1,071,150 | 2,881,320 | 10,073,383 |
| LIABILITIES AND CAPITAL | |||||
| Accounts Payable | - | 63,008 | 168,195 | 595,938 | 1,898,670 |
| Bank Revolving Facility | - | - | - | - | - |
| Current Liabilities | - | 63,008 | 168,195 | 595,938 | 1,898,670 |
| Long-Term Debt | - | - | - | - | - |
| Long-Term Liabilities | - | 10,000 | 30,000 | 70,000 | 150,000 |
| Total Liabilities | - | 73,008 | 198,195 | 665,938 | 2,048,670 |
| Paid-in Capital | 1,100,000 | 1,100,000 | 2,600,000 | 2,600,000 | 2,600,000 |
| Retained Earnings | (21,500) | (344,310) | (837,532) | (1,727,045) | (3,384,618) |
| Proft/(Loss) for the year | (322,810) | (493,222) | (889,512) | 1,342,427 | 8,809,331 |
| Total Shareholders' Equity | 755,690 | 262,468 | 872,955 | 2,215,382 | 8,024,712 |
| TOTAL LIABILITIES AND EQUITY | 755,690 | 335,476 | 1,071,150 | 2,881,320 | 10,073,383 |
| Profitability Ratios: | 2002 | 2003 | 2004 | 2005 | 2006 |
| Gross Margin (%) | - | 60.0% | 62.0% | 64.0% | 65.0% |
| Net Profit Margin (%) | - | -51.0% | -33.0% | 13.0% | 27.0% |
| Return on Average Assets | -85.4% | -90.4% | 126.5% | 67.9% | 136.0% |
| Return on Average Equity | -85.4% | 96.9% | -156.7% | 86.9% | 172.1% |
| Activity Ratios: | |||||
| AR Turnover | - | 8.1 x | 8.1 x | 8.1 x | 8.1 x |
| Collection Days | - | 45.0 | 45.0 | 45.0 | 45.0 |
| Inventory Payable Turnover Days | - | 35.0 | 35.0 | 35.0 | 35.0 |
| Accounts Payable Turnover Days | - | 60.0 | 60.0 | 60.0 | 60.0 |
| Total Asset Turnover | - | 0.3 x | 0.4 x | 0.3 x | 0.3 x |
| Debt Ratios: | |||||
| Debt to Equity | 0.0 x | 0.0 x | 0.0 x | 0.0 x | 0.0 x |
| Short-Term Liabilities to Total Liabilities | - | 0.9 x | 0.8 x | 0.9 x | 0.9 x |
| Liquidity Ratios: | |||||
| Current Ratio | - | 5.2 x | 6.2 x | 4.8 x | 5.3 x |
| Quick Ratio | - | 3.6 x | 4.6 x | 3.1 x | 3.6 x |
| Net Working Capital | $751,190 | $263,968 | $877,455 | $2,235,882 | $8,086,212 |
| Interest | - | - | - | - | - |
| 2002 | 2003 | 2004 | 2005 | 2006 | |
| CEO | 48,000 | 115,000 | 126,500 | 139,150 | 153,065 |
| CFO | 32,000 | 115,000 | 126,500 | 139,150 | 153,065 |
| COO | 16,000 | 100,000 | 110,000 | 121,000 | 133,100 |
| Director of R&D | 36,000 | 100,000 | 110,000 | 121,000 | 133,100 |
| Research Engineers | 40,000 | 50,000 | 165,000 | 302,500 | 532,400 |
| Sales and Marketing | 42,000 | 120,000 | 330,000 | 580,800 | 958,320 |
| Administrative | 8,000 | 96,000 | 151,200 | 211,680 | 333,396 |
| Total Payroll | 222,000 | 696,000 | 1,119,200 | 1,615,280 | 2,396,446 |
| Total Headcount | 7 | 9 | 15 | 21 | 30 |
| Payroll Burden | 46,620 | 146,160 | 235,032 | 339,209 | 503,254 |
| Total Payroll Expense | 268,620 | 842,160 | 1,354,232 | 1,954,489 | 2,899,700 |
Appendix I: Important Assumptions
Market
- Vacuum-assisted closure (VAC) was used as an analogy in estimating diffusion of the EMIT system. For further explanation, see Appendix C.
Sales/Revenues
- The Low Power (SX) model will be leased less frequently than the High Power (MX) model and thus the total potential market for logic controllers (LC) will be one for every two potential customers for the SX model. The MX model will frequently be owned by hospitals and leased more routinely, so the total potential market for LCs will be one for every ten potential customers.
- The potential market for the arrays of overlapping coils (AOC) will be: one AOC per potential customer for the SX and MX systems as the AOCs will not be designed to withstand sterilization.
- Insurance company reimbursement will be approved by year 3.
Cost/Pricing Factors
- Assume 5 percent annual decrease in costs/unit and a 3 percent annual increase in price.
- Specialty Distributor Markup will be approximately 50 percent of wholesale price.
- Average Cost to treat arthritis, atrophy, and pain per patient per year is approximately $2,400.
- Use of the EMIT system will result in a 20 percent reduction in consumption of current therapies.
| 2002 | 2003 | 2004 | 2005 | 2006 | |
| Interest Earned on Cash Balances | 2.0% | 2.0% | 2.0% | 2.0% | 2.0% |
| Interest Rates on Bank Revolver | 12.0% | 12.0% | 12.0% | 12.0% | 12.0% |
| Long-term Debt Interest Rate | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% |
| Accounts Payable Days | 60 | 60 | 60 | 60 | 60 |
| Accounts Receivable Days | 45 | 45 | 45 | 45 | 45 |
| Inventory Turnover Days | 35 | 35 | 35 | 35 | 35 |
| Short-term Assets ($) | - | 5,000 | 1,000 | 20,000 | 40,000 |
| Capital Expenditures (CapEx) | 5,000 | 5,000 | 20,000 | 30,000 | 50,000 |
| Long-term Liabilities | - | 10,000 | 20,000 | 40,000 | 80,000 |
| Tax Rate Estimated | 30.0% | 30.0% | 30.0% | 30.0% | 30.0% |
| Personnel/Payroll Burden | 21.0% | 21.0% | 21.0% | 21.0% | 21.0% |
