Five Forces & Value Chain
NxStage is a medical equipment manufacturer specializing in hemodialysis products for use in the home. Their main flagship, NxStage SystemOne, constitute two-thirds of the company's revenues. The product has been on the market for several years, but NxStage has never been able to turn a profit, nor has it been able to develop a viable second major product. This has created a strategic dilemma for the company as to how best to enhance shareholder value going forward.
The external environment is generally challenging, especially in light of regulatory changes that aim to drive down the cost of medical care, not necessarily good for a company like NxStage that has a differentiated product. There is some demand for the product, but also substitution from dialysis clinics, which can be offered at a lower total cost, making them attractive for payers. In light of the ongoing difficulties generating a profit, NxStage has several strategic alternatives.
It can seek international markets, several of which are promising, in an attempt to build revenues, but this is a risky option for a company still unable to make a profit domestically. However despite its struggled, NxStage can still afford to pursue this opportunity. Another alternative is to explore merger and acquisition activity. In particular, allowing the company to be bought out -- Baxter is a good candidate -- is a good way to extract value for shareholders, while building synergies that will allow NxStage to thrive in the long-term, leveraging Baxter's distribution network and innovation infrastructure. This is the recommendation for NxStage management, to seek a buyer like Baxter, if they cannot improve their market share in dialysis in the next year or so.
NxStage is an innovative company that is competing in the medical equipment industry. The primary focus for NxStage is home hemodialysis equipment, which leads to the company's motto of "Leading the renal revolution" (NxStage, 2014). The company developed with this technology and was incorporated in 1998. The main product is called NxStage System One, and right now this is the major product for the company. The company also does some in-center business, but feels that its competitive advantage lies with System One, a portable hemodialysis system (Reuters, 2014). As of the 2011 fiscal year, System One represented 66% of the company's sales. An image of System One can be found in Appendix A. The following is a brief description of the production, from Reuters (2014):
"…is a portable electromechanical device containing pumps, control mechanisms, safety sensors and remote data capture functionality; the NxStage Cartridge, which is an integrated treatment cartridge that loads easily into the cycler. The cartridge incorporates a volumetric fluid management system and includes a pre-attached dialyzer, and Premixed Dialysate that is used for hemodialysis applications. The Company supplies its premixed dialysate in sterile five liter bags or through the use of its PureFlow SL accessory."
The company has experienced growing sales in recent years, but has not experienced growing profits. NxStage continues to lose money each year, as increased investments in marketing have not resulted in a marginal increase in sales (MSN Moneycentral, 2014). The company's mission to be a renal revolutionary affects its strategy, because it feels that it needs to focus on renal, but is hesitant to expend too much energy on in-center solutions, perhaps out of fear of cannibalizing sales of SystemOne.
There are a number of elements to an environmental scan. The first is an examination of the remote, operating and competitive environments. This is followed by an examination of the internal factors (strengths & weaknesses) and external factors (threats & opportunities). The final stage of the environmental analysis is the five forces analysis, which helps management understand the attractiveness of its industry. There is also the value chain to help understand how the company derives its value.
There are several critical factors in the external environment that affect NxStage. Government regulation has already been mentioned in the context of the ACA, but it is worth mentioning as well that the FDA must approve medical devices, including dialysis equipment. In order to have access to the home dialysis market, a company must have equipment that has received approval for home use. At present, NxStage has a monopoly on this, and as a result the company has a captive audience for a growing segment of the dialysis market. However, there is risk that the other major manufacturers of dialysis...
This poses a threat to both the market share and profits of NxStage, which has built its business around the concept of market exclusivity. Most of this occurs in the remote environment.
As we know from Porter (2008), the more competition there is in a market, the less attractive it is.
Market demand is another factor that contributes to the remote environment. Right now, NxStage benefits primarily from the service area of the value chain. While it is competent in the other areas of the value chain (Mantkelow, 2014), the company has little control over demand. The health of the nation is largely responsible for the total demand conditions that the company faces. This is because it treats renal disease. While there are some people afflicted by renal diseases, most people suffer renal damage through diabetes and other controllable factors. The result is that if the population gets healthier, and especially if it gets to a point where it has lower instances of hypertension, then NxStage will face reduced demand inherently. It depends on people getting sick for its business, and in this case that illness is largely preventable.
In the industry environment, competition is the biggest factor. There are two major manufacturers of dialysis equipment in Baxter and Fresenius. Both sell mainly to the institutional market and have left the home market alone. They still compete with NxStage, however, especially Fresenius because it operates dialysis clinics that directly compete with home machines.
A further industry factor that comes into play with NxStage is that of the payers -- often these are insurance companies or government. While the end user is a consumer, the payer is usually not. Thus, if NxStage can gain more acceptance for its machines with the payers, then it will be able to sell much more of them to the public. This will require some effort in terms of salesmanship because these stakeholders are notorious tight-fisted, but success will be worth millions of dollars in revenue, especially where the government (Medicare, Medicaid) is concerned.
Internal Strengths and Weaknesses
NxStage has some good internal strengths that will help it. The first of these is a tight-knit management team (NxStage, 2014). The company benefits from being small in that its management team can work closely together, allowing the company to be more innovative. This is important because NxStage is competing against much larger companies and innovation is going to be one of the key bases on which is competes.
Another internal strength that the company has is that it has a monopoly in the home dialysis market. While this market is not particularly large compared with the total dialysis market, having a monopoly is never a bad thing. Combined with the ability to innovate, it is reasonable that this company can continue to build on its competencies to ensure that no other company can enter this market.
There are some weaknesses as well that will cause trouble for NxStage. The first of these is that the company is not all that big. This is clearly a blessing and a curse, but the company lacks the sort of size that will give it bargaining power with the large insurance companies and government agencies that run this business. Further, there are issues with respect to exposure, and the company may not have the financial resources to buy the exposure it needs to attract more doctors to its product.
Another weakness that the company has is that it lacks representation in the institutional market. This is the largest market for dialysis machines. While the company wishes to forge an identity based on product uniqueness, the reality is that market share = cash flow, and right now the company is lacking in these things. Having products that allow it to access the lion's share of the market is critical to long-term success.
At this point, the weaknesses appear to outweigh the company's strengths. The company has an operating loss, despite gradual income growth, and it is much smaller than its competitors. The ongoing losses -- which were bigger in FY2013 compared with FY2012 -- are a source of problems for the company (MSN Moneycentral, 2014). The company can take heart that its equity value is rising despite these losses, but that is only because paid-in capital continues to increase. The company has at this point a stable but small, niche business,…
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