AgaMatrix, Inc.

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Medical Software Business Plan

Strategy and Implementation Summary

AgaMatrix's strategy will be built upon sustainable advantages from superior software technology, in-house expertise, monopolization of a scientific team, and development lead time over competitors. In addition, the company will deploy a strong intellectual property strategy of defensive and offensive patents to create an IP minefield to make litigation for competitors as costly as possible. Coupled with an aggressive marketing and sales strategy, AgaMatrix is positioned to be the leading provider of technology that enables biosensor devices used in medical and other life science applications.

5.1 Competitive Edge

Advantage #1: Superior and Complementary Software Paradigm
Potential indirect competition could lie within R&D departments of medical device OEMs who are striving to create both incrementally higher-performing biosensors for existing products. The R&D teams are also striving to make revolutionary advances which enable implantable biosensors such as blood glucose monitors. However, based on secondary market research and on first-hand conversations with potential customers/partners, the observed historical trend in this industry has been to approach chemical problems with chemical experts. We believe that our multi-disciplinary software approach fills a missing piece in the development of these devices.

From a technological standpoint, our software-based solutions achieve the same goals of interference suppression as rival chemical solutions; however, because we obviate the need for these chemicals, most of which are toxic, products deployed with AgaMatrix technology will be suited for in vivo applications, such as some minimally invasive and implantable glucose monitors. Furthermore, our technology can simultaneously monitor multiple chemicals, both the target analyte and any interfering chemicals, engendering low-cost multi-analyte sensors which are not readily viable with current chemical-based sensor enhancements.

From a marketing standpoint, our products have the advantage of being software-based, engendering many of the potential benefits that other software-based products traditionally enjoy. One of the principle advantages that end users would have is the ability to upgrade the software as new, better algorithms are developed, a benefit that cannot be as easily realized with other physical and chemical technological advances. From a cost-saving standpoint, many of the permselective membranes that are currently designed to be used in biosensor devices are too expensive to be used in all applications. As such, our software solutions would provide a cost benefit advantage to our customers.

Regardless of other traditional technology advances in sensor design, our DSP technologies will ultimately prove to be complementary. Our noise-filtering algorithms will increase the signal-to-noise ratio enabling greater sensitivity and lowering detection limits. In many applications, membrane filters are not fully effective; as such, our interference suppression algorithms can compensate for the limitations of such membranes. Additionally, rival empirical improvements cannot address other limitations of these devices, such as sensor deterioration, where our technology may be applied to auto-correct for such sources of error.

Advantage #2: In-House Expertise
As is the case with chemical and life science research, one of the most resource-intensive aspects of the development time lies in optimizing empirical protocols and avoiding unforeseen pitfalls; most of the knowledge comes from "hands-on" experience, not only theoretical background. Furthermore, expertise in multi-disciplinary areas as ours requires specialized knowledge. AgaMatrix's scientific team has been involved in biosensor research for an aggregate of over 40 years. The foundational research for our current technology was initiated seven years ago, and our scientists have developed and optimized many of the techniques that are vital to the continuing development and validation of AgaMatrix's products. To date, we have developed the groundbreaking technology approach, the experimental protocols, the validation mechanisms, and the core algorithms. Our extensive in-house expertise in working on bridging biosensor systems and DSP technologies represents a significant barrier to any potential competitor.

Advantage #3: Monopolization of Scientific Team
The technology that AgaMatrix is built upon has been inspired by research performed throughout the past decade at the University of Cambridge. The original scientific team that achieved these breakthroughs boasts inimitable credentials and has remained intact to form the current AgaMatrix R&D team. In the ensuing years, AgaMatrix has developed new technologies and is moving towards its commercialization. We believe that our virtual monopoly on the intellectual resources that have been responsible for the technological advances that AgaMatrix owns represents a significant competitive advantage over potential competitors. As is the case with any empirical endeavor, much of the in-house expertise comes in the form of a close working knowledge of the practical aspects of technology development. With the current R&D team already experienced in the relevant technologies, and having worked together in the past, much of this knowledge has already been acquired.

Advantage #4: Development Lead Time Over Potential Competition
In sharp contrast to the typical chemistry-based approach, AgaMatrix's technology is based upon a multi-disciplinary core competency. Our competitive capabilities are derived from a unique confluence of electrical engineering and life science disciplines, a roadblock for potential competitors entrenched in traditional "wet chemistry" research paradigms.

5.2 Marketing Strategy

Presenting compelling value through superior technology
Because of AgaMatrix's revolutionary, proprietary technology, we are positioned to be the market leader in biosensor enhancing solutions. AgaMatrix offers a novel approach that clearly provides significant value to our customer and ultimately the end user. The AgaMatrix solution delivers value in two ways: by improving the performance of their product against competing products and by increasing customers' market share and revenue. Communicating this value to the device manufacturers, as well as branding our technology to defend market share, is the fundamental philosophy behind our marketing strategy.

Becoming a competitive standard
The core AgaMatrix technology is a unique approach to improving biosensors systems in a way that substantially increases performance and adds value to the end user. In a competitive marketplace, we will present our technology to medical device makers as an industry standard that they must adopt to be able to compete. Examples of this kind of standard-setting technology include the adoption of Windows platforms on PCs and auto-focus and red-eye reduction capabilities on cameras. Specific selling points include elimination of cross-interference, improvement in accuracy, improvement in signal to noise ratio, improvement in device robustness, reduction in sample requirements, and increase in market acceptance of product. The value proposition will differ depending on the needs of each customer.

Marketing to end users by marketing the end product
AgaMatrix will market to end users through partnership with the device makers; to add value, our technology must increase their bottom line profit. AgaMatrix can do this if end users appreciate the advantages AgaMatrix enhancements bring and if they require our products for a healthcare "standard of care." The desire for end users, such as doctors and patients, to use the best and most effective technology for diagnosis and treatment of health problems will drive demand for AgaMatrix-enabled devices. Therefore, AgaMatrix will develop a marketing plan with our partners to increase the awareness of the clinical advantages of our devices. The AgaMatrix-enabled label will become a moral imperative to clinicians in the same way that advanced digital imaging technology is used by radiologists and cardiovascular specialists.

In summary, AgaMatrix will market both to the device makers we sell to and end customers, who will drive demand.  Because device makers are concerned about increasing their bottom line through value-add to their products as well as through production cost reductions, AgaMatrix will sell to them on the basis of value rather than on any other consumer-based premise. End users, such as healthcare professionals and customers, demand standard of care. Therefore, AgaMatrix will co-market its brand as a necessary technology for healthcare diagnostics.

5.3 Sales Strategy

Phase 1: Sales to medical device manufacturer partners
In the first stage of bringing AgaMatrix technology to market, the company will approach and partner with medical device manufacturers. Such partnerships have the added advantages of product development that is supported by the partner's engineering, finance, marketing, and management.

Phase 2: Becoming the "competitive standard"
With a base of customers who can vouch for the product value, AgaMatrix aims to become the competitive standard that all players must adopt. Specific marketing tactics in this stage include: increasing market awareness through trade shows (e.g., Medical Device Expo, SensorExpo) and technical conferences, advertising in trade journals and publications (e.g., Sensor Magazine, Medical Device and Diagnostics Magazine), and retaining "Thought Leaders" from industry and academia who will corroborate our claims.

Phase 3: Branding for mind share and market domination
AgaMatrix will brand its proprietary DSP technology to associate enhanced solutions with our identity. A consistent, strong, and clearly defined brand will add yet another barrier to entry and market penetration. Increased awareness of the advantages we deliver will give rise to increased demand for the end product.

5.3.1 Sales Forecast

The sales forecast is based on a royalties pricing model.  However, a revenue model based on licensing fees is also described and provided for comparison purposes, below.

Charging on a royalty-based per-use fee, AgaMatrix will initially sell OEM technology solutions to manufacturers of biosensor-based medical devices that will enhance their products' performance.  Because AgaMatrix technology is software-based and is optimized for minimal hardware requirements, it can be easily integrated into existing sensor devices, boosting functionality on a cost-effective basis.  By embedding our technology within their devices, OEMs will realize substantial gains (20% to over 100%) in performance dimensions such as accuracy, sensitivity, and robustness.  Technology OEM royalty-based business models are not new in this business.  Our ability to quickly provide performance upgrades in the form of easy-to-integrate software/firmware updates provides a number of technical and sales advantages over the existing development paradigm, which relies on "wet" chemistry approaches. 

Sales Forecast
Year 1 Year 2 Year 3
Sales
Test Strip Royalties (000) $256,000 $9,954,000 $44,816,000
Other $0 $0 $0
Total Sales $256,000 $9,954,000 $44,816,000
Direct Cost of Sales Year 1 Year 2 Year 3
Test Strip Royalties (000) $37,500 $1,500,000 $6,270,000
Other $0 $0 $0
Subtotal Direct Cost of Sales $37,500 $1,500,000 $6,270,000

5.3.2 Pricing Model and Revenues

The primary value proposition that AgaMatrix presents to medical device manufacturers is increased revenues through increased market share from product advantages over other competing devices and from premium pricing for increased functionality and performance of their products.  Because the new product offering from the manufacturer contains "best of" technology and is in the healthcare space, they can charge a premium for their product, which will translate into revenues to AgaMatrix.  Another value proposition which a potential customer (i-STAT) actually brought to our attention is that our technology could very likely reduce production costs for them by allowing them to eliminate the need to use costly membranes in their products.

The pricing for our product can be either "value-added" pricing on the price of the medical device or based on device usage, depending on the revenue model used by our customers.  In the case of the blood glucose market, revenues are driven not by the device, but rather by recurring revenues from consumable test strips.  For example, the test strips that LifeScan sells retail for approximately $0.70 each.  These test strips are supposed to be used three to four times a day, although the pain associated with testing has reduced compliance to about 1.5 tests per day per patient.  AgaMatrix will share in the revenues this model generates.  For example, every time a test strip is analyzed by the device that LifeScan sells, AgaMatrix technology will be utilized to provide a more accurate reading.  Therefore, AgaMatrix will enter into a royalty-based fee agreement with device manufacturers, such as those in glucose monitoring, where consumables generate revenue.  Preliminary conversations with Hypoguard indicate a general willingness to this type of pricing model.

Another example of how our royalty will work could be through the partnership with Company X.  Company X manufactures and sells a point-of-care device for approximately $5,000.  Test cartridges are priced at around $3.40 each and can perform 5-6 different tests once.  For Company X, our product would solve an existing problem with the performance and reliability of their cartridges.  Cartridges would be priced approximately $4.00 - $5.00.  Company X manufactures these cartridges for $0.12-$0.16 each and should be amenable to sharing the increased margins.  For cases in which consumables are not used, premium pricing of about +20% will be used depending on the added value that can be delivered to the end user.  The following table summarizes a conservative revenue forecast based on royalties.

Revenue

2003

2004

2005

2006

Blood Glucose

$256,432

$9,954,009

$44,816,452

$94,571,316

Implantable

-

$1,317,544

$2,879,816

$6,283,236

Hospital POC

-

$1,013,627

$7,066,014

$11,367,777

Total Royalty Revenue

$256,432

$12,285,180

$54,762,282

$112,222,328

An alternative pricing model would be to charge an annual licensing fee for each device enabling AgaMatrix technology.  The value proposition to customers is the same: devices enabled with AgaMatrix technology will be more accurate and therefore require smaller blood samples and result in less pain, which will increase device and test strip sales. Pricing structures and terms of the company's software modules and services will ultimately be determined by negotiations with customers. The most likely scenario will be a hybrid pricing model of flat licensing fees on devices and royalties on test strip sales. The following table summarizes a conservative revenue forecast based on a licensing structure.

Revenue

2003

2004

2005

2006

Blood Glucose

$100,879

$3,894,857

$18,693,271

$41,016,225

Implantable

-

$1,317,544

$2,879,816

$6,283,236

Hospital POC

-

$278,540

$3,035,925

$6,223,663

Total Royalty Revenue

$100,879

$5,490,941

$24,609,011

$53,523,124

5.4 Intellectual Property Strategy

With a fully developed IP strategy consisting of core utility patents (currently filed as provisional applications) and defensive utility patents to be filed imminently, and based on our technological leadership, we believe that it would be far more beneficial for potential customers to purchase our technology than to develop it in-house.

5.5 Milestones

The following tables summarize the company's developmental goals (month-to-month for Y1). Product Milestones are listed separately, below.

Phase 1

Months

Business Milestones

Operational Milestones

1-3Secure 1st beta letter of intent with one small blood glucose monitor company
Set up HR and Finances Systems; set up lab
4Secure final beta agreement and terms 
5Determine short term partner targets 

Phase 2

Months

Business Milestones

Operational Milestones

6Marketing face overhauledMove to larger office
7Determine future product requirements2nd Research Scientist hired
8 Utility patent #1 filed; 2 more Engineers hired
9Soft launch; secure 2nd beta agreement 

Phase 3

Months

Business Milestones

Operational Milestones

10 CEO and VP hired
11Secure institutional funding commitment for Year 2 and 3 
12Secure 2nd beta termsUtility patent #2 filed
13Secure first (small) paying glucose customer terms 

5.5.1 Year 2 and 3 Milestones

Year 2

  • Business Milestones
    • Secure two major paying POC customers
    • Secure another small paying glucose customer
    • Secure one major glucose beta customer

  • Operational Milestones
    • Move to larger office 
    • Hire 6 scientists, 8 engineers
    • Hire product management and operations staff

Year 3 Milestones

  • Secure one major paying glucose customer
  • Secure one major implantable beta
  • Expand to other POC players

5.5.2 Product Milestones

The following table summarizes the product development vision. Future products will all contain updated core DSP algorithm software, associated tools, and documentation of performance results, ensuring that we maximally leverage our existing technology base as productization evolves.

Quarter

Milestone

Y2; Q1

Customize AccuMatrix v1.0 for continued deployment onto other glucose biosensor devices

Customize PosiMatrix v1.0 for continued deployment onto other point-of-care devices

Begin development of VivoMatrix v1.0 for implantable glucose biosensor makers

Improve algorithm functionality to address robustness & fouling issues

Y2; Q2

Begin development of AccuMatrix v2.0

Improve algorithms to increase signal-to-noise ratio for higher sensitivity

Begin development of PosiMatrix v2.0

Incorporate adaptive interference cancellation algorithms to auto-correct for unknown interferences

Y2; Q4

Deliver AccuMatrix v2.0, PosiMatrix v2.0

Y3; Q1

Begin development of PosiMatrix v3.0, AccuMatrix v3.0

Y3; Q4

Deliver VivoMatrix v1.0, PosiMatrix v3.0, AccuMatrix v3.0

Y4; Q4

Deliver AccuMatrix v2.0, PosiMatrix v2.0, VivoMatrix v2.0

5.5.3 Summary of Current Accounts

Potential Customer or OEM Partner

 Current Product Desired

Conversation Status

Company A

AccuMatrix interference suppression

  • Had conversations with Managing Director and a Director of Research.
  • We have identified what Company A wants and they have started to ask about prices.
  • They have requested the blood data.
  • They have suggested a schedule for closing the terms of a partnership.

Company B

Implantable biosensor anti-fouling

  • Had conversations with two relevant Director-level people.
  • They have requested the blood data.

Company C

Alerting of bad readings

  • Had conversations with their VP of Sales and Business Development.
  • We have identified at least one product that they would want.
  • They have requested the blood data.
  • They mentioned the possibility of doing a short-term consulting project for them for $20K.

Company D

Not yet determined

They have requested the blood data.

Company E

Monitoring of multiple analytes

  • Had conversations with a senior scientist.
  • He said that we would "definitely" affect their bottom line.
  • He asked about the price of the technology.