Business plan for Angel Medical's portable dialysis device

Angel Medical Portable Dialysis Device - Business Plan

Dialysis Market

Patient Switching Between Peritoneal Dialysis and Hemodialysis

Description of the Portable Dialysis Device Product Line

Advantages of the Portable Dialysis Device, vs. Hemodialysis

Manufacturing Costs, Product Pricing, and Medicare Reimbursement

Marketing

Competitive Outlook

Potential Business Risks

Potential Technical Risks

Potential Risks During Use

Product Development for an Animal Study

Company Milestones

Patents

Company Board and Ownership

Curriculum Vitae of Key Personnel

Financials

Author's Opinion of this Business Proposal

Angel Medical is an unincorporated startup firm in Manteca, California. The company was created to develop and market a novel Portable Dialysis Device. A prototype demonstration device has successfully been developed. While the prototype is about three times larger and heavier than the final device will be, it does demonstrate the mechanical functionality of the final intended device.

The driving force behind Angel Medical is Roberto Rodriguez, an Manteca-based medical device developer with 25 years in pharmaceutical and medical device development. Roberto has taken this project from a "statement of patient requirements" to completion of the prototype device, including the costs and suppliers of all required components, chemicals, and services. Roberto has been assisted in the relevant biochemistry by Dr. Joseph Smith of Eureka, CA, and in regulatory affairs issues by Dr. Josefina Svenska of Pombo, CA. Their CV's are included, beginning on page 16.

The Portable Dialysis Device functions by removing all the dialysate from the patient's peritoneal cavity, then filtering, regenerating, and sterilizing it, then returning 100ml of the regenerated dialysate to the patient's peritoneal cavity. All existing peritoneal dialysis methods simply remove and discard all the spent dialysate.

One important feature of this device has been made possible by the development of a method of chemically bonding (fixing) plasma onto aluminum nanoparticles. This work was done by Dr. Robert Jones at Singapore University, whose consulting firm is working with Angel Medical on this device. Until this method was developed, this device would have had to separate and discard the natural proteins and amino acids from the dialysate, rather than return most of them to the patient. Because these proteins and amino acids are discarded in all current methods of peritoneal dialysis, this feature represents a significant improvement in dialysis therapy. Dr. Jones is also working on an enzyme that might be able to replace some or all of the Silicon Sulfate in the sorbent cartridge. Because the Silicon Sulfate is the largest, heaviest and most expensive chemical in the device, replacing it with a much smaller amount of enzyme would allow a reduction in the cost, weight, and size of the sorbent cartridge.

5,433,000 is being sought from one or more California-based healthcare investment groups which invests in this area. Funds from this Series "A" investment round will be used to develop and produce a few dozen functional prototypes that will be used in animal trials, for proof of concept. Upon completion of the proof-of-concept animal study, $14 million will be sought from a California-based venture capital firm(s) in a Series "B" investment round. The funds will be used to conduct biocompatibility studies, design verification activities, and clinical trials in order to support a PMA. Upon marketing approval by the FDA, $18 million will be raised in a Series "C" investment round to equip a plant for production, distribution and returns/repairs, and to begin marketing the device in the U.S. After sales have reached a suitable level, major dialysis firms such as Baxter, Gambro, Fresenius, DaVita, or Renal Solutions will be quietly approached to determine interest in buying Angel Medical, and all rights to the device.

The company's regulatory plan will include product classification by the FDA (Class III, which will likely require extensive human trials in the U.S.), CE Mark in Europe, and Japanese market approval.

THE U.S. DIALYSIS MARKET

Currently about a third of all dialysis patients in the world are in the United States. Of these patients, approximately 25% use Automated Peritoneal Dialysis (APD) or Continuous Ambulatory Peritoneal Dialysis (CAPD), and about 90% use Hemodialysis (HD). Each of these types of dialysis is described in the following pages. Outside of the United States, approximately 35% of all dialysis patients use APD or CAPD (NKUDIC 2007). An estimated 40,000 kidney transplants are performed each year in the U.S. While a kidney transplant is the best treatment for End Stage Renal Disease (UVA 2007) (ESRD), it is also the most expensive, and the annual number of candidates always exceeds the number of transplants by a factor of three or more.

BACKGROUND: PATIENT SWITCHING BETWEEN PERITONEAL DIALYSIS and HEMODIALYSIS

Upon occasion, a dialysis patient will switch from peritoneal dialysis to hemodialysis, or vice versa. There are five main reasons that peritoneal dialysis patients switch to hemodialysis.

The patient might be contracting peritonitis (UMD 2007) on a recurring basis.

The patient's peritoneal membrane (van Biesen W. 2006) might become too thick (and therefore insufficiently permeable) from the continuous exposure to glucose, and from the acidic pH of the dialysate.

The patient could become too obese due to absorption of some of the glucose in the dialysate (Ho-Dac-Pennekeet 1996).

The patient's nephrologist or dialysis nurse could feel that the patient can not be trusted to reliably perform the tasks required for peritoneal dialysis, for any of a variety of reasons.

The patient can request to switch to hemodialysis (NKUDIC 2007) because they do not want to continue doing peritoneal dialysis, for any of a variety of reasons.

There are four main reasons that hemodialysis patients switch to peritoneal dialysis.

The nephrologist and/or the patient thinks he would feel physically better using peritoneal dialysis, because the treatments are conducted daily, rather than every three days.

The patient does not want to be tied to a dialysis center, and wants freedom to travel.

The patient wishes to avoid the unpleasant "wash out" that is common in hemodialysis.

The patient runs out of usable sites on their body for creation of a fistula.

Glucose Solution Cartridge (disposable, sterile) $5

The combined package can either be sold up front, for $1,500, or be leased at $100 per month. The patient will need a Cassette and a Dialysate Replacement Kit every five to seven days (to be determined). Because the monthly revenue per patient is fixed at about $2,000, the longer the time between Cassette and dialysate change outs, the greater the company's gross margin. The patient will need one Sorbent Cartridge and one Glucose Solution Cartridge per day.

As a practical matter, the maximum price that can be charged for a new dialysis method is the monthly amount that Medicare will reimburse for existing types of dialysis treatment. This is approximately $2,000 per month (about $66 per day) for direct dialysis costs, irrespective of which type of dialysis is used. Expenses such as drugs, doctor fees, hospital fees, etc. are reimbursed separately. The monthly financials for the disposables therefore tallies up as follows:

Gross Revenue: $2,000

Disposables Mfg Costs (depending on change out frequency): $713 + ($217 to $304)

Gross Margin: $983 to $1,070

49.1 to 53.5%)

There are currently about 51,000 PD patients in the U.S. Because Medicare will pay about $24,000 a year for direct dialysis costs, the potential annual market for this product is $1.22 billion. Medicare has two different payment methods. In Medicare reimbursement Method I, dialysis centers order equipment and consumables from their suppliers. The dialysis centers pay their equipment suppliers, then bill Medicare for reimbursement. In Medicare reimbursement Method II, the dialysis equipment suppliers supply equipment and consumables directly to the patients, then bill Medicare directly.

MARKETING

Professionals at a top-notch dialysis center will use several factors when deciding the best dialysis method to recommend to a patient. Home hemodialysis and both types of peritoneal dialysis require a patient who is mentally aware, physically able, self-disciplined, and who takes an interest in caring for themselves. It also helps if the patient has some mechanical aptitude, and if he lives with others. The main reasons hemodialysis dominates peritoneal dialysis is that many dialysis patients are either elderly, have mental or physical diseases or impairments in addition to kidney failure, or simply do not have the interest or discipline to learn to care for themselves in this area.

The best tool for encouraging nephrologists and dialysis nurses to make their patients aware of the Portable Dialysis Device, and to recommend it to them, is to emphasize all of the advantages it has over the other types of dialysis. Nephrologists usually favor anything that can improve their patient's health and/or comfort. Strong selling points with nephrologists include the favorable urea and creatinine clearance rates expected in the Portable Dialysis Device, the recycling of the patient's proteins and amino acids, the use of dialysate that is less irritating to the patient's peritoneal membrane, and decreased risk of abdominal fluid migration or of hernias, due to a smaller required volume of dialysate in the peritoneal cavity.

The qualities of the Portable Dialysis Device that would probably cause dialysis patients to favor it include: not having to obtain, store, transport, and handle the heavy bags of dialysate every day, being able to receive treatment on their own schedule, anywhere they want without a need for privacy, and the comfort of having only 500ml of dialysate in their peritoneal cavity, rather than two liters of dialysate.

After initial financing has been obtained, several nephrologists and renal care nurses at the Harbinger Clinic in Manteca, CA will be approached (one at a time) for recruitment as consultants. Their opinions and expertise will be solicited regarding optimizing the device for use by dialysis patients. At a later stage, their opinions and expertise will be sought regarding marketing and Medicare reimbursement strategies. Marketing efforts will include lectures at various dialysis and kidney association conferences, direct mail to nephrologists and renal centers, articles in appropriate medical periodicals, and booths at medical trade shows.

COMPETITIVE OUTLOOK

Baxter Healthcare (headquartered in Deerfield, IL) currently has 90% of the U.S. peritoneal dialysis market. They derive most of their peritoneal dialysis revenue from selling bags of dialysate and from leasing APD cyclers, so any significant market penetration by Angel Medical would most likely be seen as a threat. While Baxter has a large U.S. And international sales presence, they are notoriously weak in R&D. Nearly all of their products and technologies were purchased, rather than developed internally. Baxter attempted to create a Portable Dialysis Device in 2000, but gave up after insufficient progress was made in the allotted time. Baxter is also the most likely suitor for Angel Medical, after the device has achieved some market penetration.

Fresenius (Germany), and Gambro (Sweden), dominate the dialysis market outside of the U.S. Both companies are much stronger in the field of hemodialysis than they are in peritoneal dialysis. Fresenius has more R&D capability than does Baxter, but Fresenius has not attempted to make a Portable Dialysis Device.

There are currently about 4200 dialysis centers in the U.S. The two largest operators are DaVita and Fresenius, which operate about 1400 dialysis centers each. Successfully working with them will be one of the keys to success for the Portable Dialysis Device.

POTENTIAL Business RISKS

Potential business risks include the following:

Possible partial infringement on existing dialysis patents?

Baxter, Fresenius, Gambro, DaVita, or Renal Solutions might induce some dialysis centers to not work with us.

Baxter, Fresenius, Gambro, DaVita, or Renal Solutions might induce MEI or another key supplier to not work with us.

Medicare might not pay for the product (this is a low risk).

POTENTIAL TECHNICAL RISKS

Current technical unknowns include the following:

How prevent occasionally clogging the filters?

How detect if the cartridge is not fully removing dialysate?

Will the gear damage the proteins?

Some small air or CO2 bubbles might not be removed from the dialysate.

Some spent dialysate occasionally might not cavity.

Will microbial infection be a problem?

POTENTIAL RISKS DURING USE

Potential risks while using the Portable Dialysis Device include the following:

Risk of infection.

The patient might not properly use the device.

The patient might not use the device often enough for adequate health.

PRODUCT DEVELOPMENT for an ANIMAL STUDY

Initial product development will focus on the exact chemical makeup of the Silicon Sulfate and the Silicon Oxide. Chemically and physically analyze each chemical in the cartridge, to help specify the chemicals to use in initial experiments.

COMPANY MILESTONES

The following milestones range from company startup to sale of the company:

Raise $5,433,000 from a California life science Angel investor(s)

Incorporate in Delaware

Sign a patent license agreement with Manteca State U.

Lease small office space (in or near Manteca)

Write a regulatory plan

Write a product specification for the proof-of-concept device

Write an animal study protocol, and conduct a proof-of-concept animal study

Raise $14 million from California life science venture capital firm(s)

Hire a contract control chip software engineer(s)

Recruit a local nephrologist and a dialysis nurse as consultants

Write and file patents

Write a trial protocol

Conduct an investigatory human trial

Write a trial protocol

Conduct a pivotal human clinical trial

Sign a supply exclusivity agreement with MEI

Raise $18 million from California life science venture capital firm(s)

Lease and equip a manufacturing and distribution site (in Manteca?)

Hire a full staff for production, quality, product support and sales

Purchase and validate the following computer systems: ERP, accounting, document control, quality control and product complaints

Write a Quality Manual, and all required procedures and technical documents

Begin training nurses and technicians in dialysis centers across the U.S.

Produce initial launch quantities of product

Pass an FDA site inspection

Commence sales in the U.S.

Sell the company

PATENTS

It is intended that patent applications will be written and submitted throughout the product development process

Kidney dialysis has been around for more than 40 years, and there are currently more than 2,350 dialysis patents in the U.S. Manteca State University is looking to license the technology and concepts in these patents. The main advantage for Angel Medical in signing such an agreement would be that MSU's deep pockets would to help "scare off" nuisance patent infringement lawsuits, as well as defend against them.

COMPANY BOARD and OWNERSHIP

As of this writing, Angel Medical has not populated its Board of Directors. Roberto Rodriguez is the sole owner of the firm.

CURRICULUM VITAE of KEY PERSONNEL

Roberto Rodriguez

Education: Masters of Business Administration Manteca University

July 1984 (Dean's List)

B.S. In Chemical Engineering Malibu University May 1976

Work History:

ANGEL MEDICAL (Portable Dialysis Device) Manteca, CA

Founder and President 2006 to present

Joseph Roberts, Ph.D.

Dr. Smith received a B.S. In Chemistry from the Manteca State. He completed his MS in Organic Chemistry from Manteca State, and a Ph.D. In Biochemistry at the Sepulveda.

John B.N. Lipsky, M.D.

Dr. Lipsky began his training in kidney disease at the Royal Free Hospital and the Royal Postgraduate Medical School, both in Manchester, England, where he also qualified as a member of the Royal College of Physicians.

Josefina Svenska, Ph.D.

Principal Consultant - Svenska Incorporated

PROFILE: Maintains regular contact with key personnel in FDA headquarters

CAREER

HIGHLIGHTS: Established and directed clinical research programs for pharmaceutical and medical device companies.

Designed and performed preclinical pharmacology, toxicology and efficacy studies.

FINANCIALS

Financials will be provided upon request.

Author's opinion of this business proposal it is clear that the author of this proposal is technically-oriented, and has a fairly good grasp on the overall technical needs and challenges required for developing this product. It is also clear that the author has presented compelling evidence that there is a problem -- "and that problem is not solved. With $ billions being spent each year on kidney dialysis, and the associated problems, there is a clear revenue stream available for a good solution.

The business plan presented here does not give a good documentation of some of the elements which would be important to a venture capitalist. The key missing issues or those not adequately covered include: intellectual property, likely purchase price, indication of alternatives to going to market, previous history of acquisition of like companies by the majors, and management in place that can bring angel medical to the market.

Intellectual property: the author states that there are over 2,000 patents in this field, and that they are key to the value in their invention. The author should answer three questions: (1) is there a substantial enough field in which to operate that does not step on patents already out there, (2) is there a meaningful "patent landscape" which has been or can be captured, and (3) what is the value of such a patent landscape to a potential acquirer (iaindorio 2004)?

Financial returns: the venture capitalist wants to know: how much do I need to put in, and who is going to pay to buy me out (wetzel 2004)? It would make sense for the author to suggest similar acquisitions with the time from inception to acquisition, the amount invested, and how much was returned to the investor.

Management: the management looks thin, even for this early a venture. The entrepreneur may want to demonstrate an advisory board which has at least some expertise in the business and marketing issues that will come up (kelley 2004). A management advisory board may add to the credibility and demonstrate that the entrepreneur has been able to think of areas where he does not have personal knowledge. Since the entrepreneur is clearly an inventor with no previous ceo experience, adding at least one advisor who has been a ceo (and preferably have brought a company through to the liquidity event) would add credibility to the endeavor.

Indication of alternatives to going to market: most such medical companies are acquired before they go to market (gorman 1997). The venture capitalist may want to have more than one demonstrated exit (wetzel 2004). By showing that the company could work with an existing player in the field, perhaps in a strategic partnership, that illustrates that the company can gain credibility. An ipo is always a chance -- "and the history of ipos in this sector should be illustrated in order to show valuation. Finally, a purchase needs to be covered more thoroughly. Rather than listing the competitiors in the field, the author should lay out the top two or three acquirors in this segment and give a rationale on how this acquisition could add to their business (and/or make life more difficult for their competitors).

Additional elements that would be helpful would be to spell out how a venture capital firm could contribute to the eventual success of this firm. Rather than simply ask for money, it may make sense in the business plan to outline the factors that the company is looking for in its venture capital partner. That could include everything from finding a ceo to relationships with top manufacturers in this segment.

Finally, this business plan would be helped by providing a stronger reason why this portable dialysis device would solve significant problems in a better way than that that is already out there, and in what way. Is this an aspirin (i.E. Pain killer) or a vitamin (i.E. You don't need it to live or reduce current pain)? If it is the former, then what market/product does it replace, and what is the likelihood that such a replacement can take place? Who would be the champions -- "the reimbursement authorities, the nurse, the patient him/herself? Who would lose from such an invention.