Medical Equipment Business Plan

The market for our two-component device currently consists of two key market sectors:

1. The healthcare field for the prevention and treatment of muscular atrophy; and
2. The alternative medicine field for the application of potentially therapeutic, non-stimulatory magnetic fields.

The potential healthcare market sector consists of patients with diseases that result in immobilization of musculature for any length of time. The alternative health market consists of those patients who believe in the therapeutic effects of non-contractile magnetic fields.

The two key factors influencing discussion of MedNexis, Inc.’s markets are as follows:

• The prevalence of conditions in which the MedStim system would be indicated.
• The size and growth of the alternative medicine magnetic stimulation market in which TheraMag will compete.

4.1 Market Segmentation

Currently there are two main markets for our two-component device: healthcare applications for the prevention/treatment of muscular atrophy (MedStim) and alternative medicine applications in which the device will be used for the potentially therapeutic benefits of non-contractile magnetic field stimulation (TheraMag).

In estimating the sale of logic controllers, obsolescence and machine failure are the only reasons for the replacement of the devices. Due to wear and tear, we have assumed a useful life of 2 years for each logic controller and in our projections, we have also assumed that the logic controllers are replaced after their useful life has expired.  Due to the multiple configurations of AOCs, the sale of AOCs is expected to be approximately five AOC’s per LC.

U.S. Market

The U.S. market will be the initial target market. This market can be broken down into the two main applications: (1) Prevention and Treatment of Muscular Atrophy and (2) Alternative Medicine Applications.

Prevention and Treatment of Muscular Atrophy Market 

Prevalence of medical indications for use of the MedStim system in the U.S. are as follows:

Source: National Center for Health Statistics- 1997

The estimated percentages of these patients that are treatable with the MedStim system are as follows:

Using this data, and assuming both that hospitals will require one unit of the programmable logic controller and five arrays of coils per ten patients treated, the potential annual U.S. market for the MedStim components in 2001 is projected to be: 421,825 LCs and 2,109,125 AOCs.

Although there has been little activity to date in this sector, Neotonus has developed a magnetic device for urological uses that has gained FDA approval and has been received by allopathic practitioners.  In the fourth quarter of 1999, the company sold 73 systems vs. just one during the same period in the previous year. The number of patient treatments performed on this installed base increased over 70% from third quarter 1999 to fourth quarter 1999. More than 20,000 treatments have been administered through January 2000. In October 1999, Neotonus received $7.3 million in a second round of venture capital funding, bringing its total funding to $12.2 million.

Alternative Medicine Market

The current U.S. market for alternative medicine applications is growing rapidly. Total visits to alternative medicine providers increased 47.3% from 427 million in 1990 to 629 million in 1997. Expenditures during this period increased 45.5% and is estimated at $21.2 billion in 1997, with at least $12.2 billion paid out of pocket, exceeding out-of-pocket expenditures for all U.S. hospitals.  Further growth is anticipated as U.S. insurers offer more and more alternative medicine programs and benefits. Moreover, in 1994, there were 59,000 licensed alternative medicine practitioners in chiropractic, oriental medicine (acupuncture and herbal medicine), and naturopathy (Health Affairs 15(3), Fall 1996, pp. 226-238.).

Additionally, 15 million adults took prescriptions concurrently with alternative medicine remedies. The potential market for energy therapy devices, of which magnetism is the most popular, is 40 million (source: JAMA Vol 280, No 18, pp 1571-1573). Conservatively, assuming only 20% of these consumers would employ magnetism as their source of energy therapy, the size of the market for magnetism in alternative medicine is approximately 8 million consumers. Assuming less leasing in the alternative medicine industry and more out-of-pocket purchases, we expect to sell 1 LC for every 5 patients and conservatively estimate one AOC per patient. The potential size of the U.S. market under these assumptions is 1.6 million LCs and 8 million AOCs per year.

Insurance Concerns

While some health plans and self-insured employers, as well as Medicare, voluntarily cover, or are considering covering alternative medicine, some states have issued mandates. For example, a law in New York that went into effect on January 1, 1998, requires insurers to cover up to 15 chiropractic visits per year. Altogether, in early 1995, 41 states reportedly required private insurers to offer chiropractic, either as a rider or mandated as a benefit services (National Journal Group, Inc., “Access/Quality/Cost – Alternative Treatments: Acceptance is Increasing,” American Health Line, January 30, 1995). Additionally, according to Oxford Health Plans, 8 states currently mandate that insurers offer acupuncture treatments.

Of all 50 states, Washington state has had the most extensive mandate. A law that took effect on January 1, 1996, requires health plans to provide access to licensed providers of alternative health care. It states that all categories of providers will be given equal treatment by insurance companies. The law initially mandates that, in every health plan, insurers must cover visits to chiropractors, acupuncturists, naturopaths, and other alternative care providers. However, after 12 of the state’s largest insurers challenged the mandate, a federal judge ruled that the mandate was preempted by the Employee Retiree Income Security Act of 1974 (ERISA). In turn, the ruling was changed so that the mandate applied only to state-regulated health plans. As of April 1998, an appeal by the state was pending (National Journal Group, Inc., “Statelines – Washington: Insurance to Cover Alternative Medicine,” American Health Line, December 18, 1995, National Journal Group, Inc., “Statelines – Washington: Insurers Challenge Alternative Care Mandate,” American Health Line, January 10, 1996, National Journal Group, Inc., “Statelines – Washington: Insurers Freed from Alternative Care Mandate,” American Health Line, May 8, 1997).

4.2 Target Market Segment Strategy

Our Market Segment Strategies will be tailored to the targeted markets as follows:

Muscular Atrophy Prevention Market

Our primary markets in this segment are large medical institutions (i.e. universities, regional hospitals, and HMOs) that are more likely to purchase our products in large volumes due to the frequency of new patients. The key in this market is to gain acceptance of the MedStim system as a cost-effective therapeutic device among healthcare providers. Our strategy involves “push” tactics at the outset, in which we hope to establish our MedStim System as the standard instrumentation used in key/renowned medical institutions for the treatment of muscular atrophy. As our products gain acceptance among medical institutions, a “pull strategy” will result, leading to demand of our products by other medical institutions. Initial sales of our products will primarily be through demonstrations and introductions made by our marketing personnel to medical institutions. Upon gaining market acceptance, the products may be sold on proprietary websites, leading to penetration of a larger market segment.

Alternative Medicine Market

The primary market for this segment will be individuals who subscribe to the effectiveness of non-contractile magnetic field stimulation. This is a highly fragmented market that is naturally segmented both by ailment type and preferred alternative remedy. More recent research investigated the characteristics of persons who have used alternative medicine. First, individuals with college or graduate degrees were found to be more likely to use alternative medicine than those with high school education or less. Second, individuals reporting serious health problems were more likely to use alternative medicine than healthier individuals. Furthermore, the majority of individuals who used alternative medicine did so largely because they viewed these practices as being compatible with their own values, beliefs, and philosophy toward life and health, not because they were dissatisfied with conventional medicine (JAMA 279 (19), May 20, 1998). Subscribers source related information and products largely at the local level, but with the proliferation of the internet have been able to effectively access pertinent information.  We plan to use existing channels to access the 40 million alternative medicine users. Direct consumer sales will be encouraged by targeting alternative healthcare forums and the consumers themselves. Catalog and website sales will be the main channels of distribution for the TheraMag system.

4.2.1 Market Needs

There is a large unfulfilled need for devices that prevent atrophy of the musculature in today’s large health care facilities. While outpatient care is the fastest growing segment of  the healthcare industry, there is still a large percentage of patients each year who require extended hospitalization time. Atrophy of the musculature of such patients can seriously impede recovery time for such patients, and raise the costs of overall health care.

In addition, there are a significant number of individuals who suffer from paralysis of one form or another. With the current research in genome and DNA promising the possibility of curing such conditions, many patients with such conditions need to prevent serious muscle decay from occuring if they wish to eventually lead normal lives.

Finally, there are those individuals who desire alternative methods of seeking good health and solving existing medical problems. The use of magnetism in alternative medicine has been around for decades, and more and more people are using non-traditional methods as the popularity of such practices becomes more mainstream.

4.3 Industry Analysis

Our Industry Analysis is based on each individual market segments and breaks down as follows:

Muscular Atrophy Prevention Market

The reason the market for atrophy treatment/prevention devices is untapped is due to the lack of any user-friendly devices. The existing devices in the market, both Neotonus’ and MagStim’s products, are difficult and awkward to use, requiring intensive training and skilled operation for an effective therapy. While the trend in healthcare is expected to be towards magnetic stimulation for treatment/prevention of muscular atrophy, these devices are not expected to capture significant market share for the following reasons:

• Difficult and expensive to use with cost-intensive, skilled medical personnel required to operate effectively.
• Awkward to use and inconsistent stimulation due to the single focused coil requiring constant manipulation.
• Further inefficiency in the treatment of multiple muscle groups due to the single focus of magnetic stimulation.

Atrophy is currently treated using electrical stimulation. Electrical devices, though, cannot penetrate deeply enough to affect important musculature. Magnetism has been shown to penetrate much more deeply than the current electrical stimulation, and much less painfully.

Magnetic stimulation also has potential indications that do not overlap those of electrical stimulation. Due to its painless nature, magnetic stimulation can be used more frequently and over a larger area of the body a disease, such as Guillain-Barre, would require virtually full-body stimulation of key muscle groups. This would not be treatable with painful electrical stimulation but can be treated using magnetism. Many of the potential indications for muscular atrophy prevention, therefore, are not currently encompassed in the available electrical stimulation industry data.

In summary, the healthcare industry can be expected to experience a trend towards magnetic stimulation for the following reasons:

• Much less painful than electrical stimulation at submaximal thresholds and no risk of burn at contact sites.
• Penetrates much more deeply than electrical stimulation.
• More frequent indication than electrical stimulation.

Alternative Medicine Market

The alternative medicine industry is experiencing phenomenal growth in many arenas. Magnetic stimulation is no exception. Industry estimates for potential markets incorporate current magnetic field applications and projected growth of these fields. This market will likely provide less resistance to entry than the data-intensive muscular atrophy prevention market.

The alternative healthcare market has experienced a trend towards use of magnetic stimulation because of the proposed beneficial effects on circulation, immune system function, and wound healing.

4.3.1 Industry Participants

To date, the company is not aware of any products that provide therapeutic care that is as cost effective as the MedStim or TheraMag systems.

Prevention and Treatment of Muscular Atrophy

The only significant competitors in the therapeutic functional magnetic stimulation field are Neotonus and MagStim. As detailed earlier, each of these companies produces a device with a single stimulatory coil which requires intensive, skilled operator involvement. Even with a skilled operator, treatments are lengthy (greater than 15 minutes per muscle group) and inconsistent because constant manipulation is required to effect the desired result. These devices are more suited to the diagnostic field, in which MagStim has captured the majority of market share due to this fact. These devices, though, are not tailored to therapeutic application of magnetic fields. 

Medtronic Dantec, Digitimer, and Schwarzer GmbH are also involved in the magnetic stimulation business, but have only produced devices for diagnostic purposes to date.  Nihon Kohden produces diagnostic stimulators, which are sold only in Japan. 

Alternative Medicine Applications

Major companies competing in the alternative medicine magnetic therapy field include: BioFlex, Tectonics, Nikken, MagnetRelief, Homedics, BMI, and Sota Instruments. Only Sota Instruments has a dynamic magnetic therapy device, the Magnetic Pulser, which functions through induction of a magnetic field through a conducting coil. This device, though, consists of only a single coil and, therefore, will not cover a large region without constant manipulation. Also, this device is significantly weaker than the TheraMag system.

All other products are either static magnets or not similar enough to the TheraMag device to compete directly.

4.3.2 Distribution Patterns

Distribution patterns in the healthcare industry are such that the large buying groups dictate what products are used for certain conditions throughout their sphere of influence. Thus, our products could be mandated or forced out for thousands of patients due to endorsements by their health plan or hospital group. Others recommend several alternatives which require physician education and intervention, similar to pharmaceuticals.

In the alternative medicine industry, patients frequently choose their own therapy and method of treatment. Due to this fact, this industry will require a much more intensive advertising campaign than would be recommended for the healthcare industry. In addition, the company expects to penetrate this market through direct marketing of our products on our proprietary websites.

4.3.3 Competition and Buying Patterns

In the medical industry, product cost in and of itself is not paramount. However, the effectiveness of the device is a major consideration for medical practitioners. The product must deliver performance as promised in order to effectively treat the patient with the desired results. It will be imperative to have data showing the cost-effectiveness of the MedStim system. More rapid recovery, and thus less missed work, and reduced physical therapy costs are the key economic parameters.

In the alternative medicine arena, more emphasis is placed on anecdotal accounts, and advertising will be crucial for the TheraMag system. Beneficial trial results, though, could also prove highly favorable for TheraMag sales.

MedNexis will succeed based upon the capability of its product in the healthcare industry and the positioning of its product in the alternative medicine industry. After initial market resistance to any new product, MedNexis’ product can grow to dominate two market segments: the market for prevention and treatment of muscular atrophy and the market for magnetic therapy in alternative medicine. Both are large and growing markets.