BU491 Lecture Notes - Lecture 7: Laparoscopy, Minimally Invasive Procedures, Group Purchasing Organization
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GENICON: A SURGICAL STRIKE INTO EMERGING MARKETS
Allen H. Kupetz, Adam Tindall and Gary Haberland wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of
this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to
reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of
Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail case[email protected].
Copyright © 2010, Ivey Management Services Version: 2012-08-01
In January 2010, Gary Haberland, president and founder of GENICON, a U.S.-based firm that manufactured
and distributed medical devices used in laparoscopic surgery, sat at his desk poring through rather
encouraging fourth quarter financial statements. Impressed with GENICON’s recent performance, he
reflected on how he had arrived at this point and what the future might hold for the young company. It was
not long ago that GENICON was near bankruptcy, as had been the case with many small companies in this
industry. GENICON, unlike most of the startup companies that had succumbed to the pressures of the
medical device industry, was not only able to remain open but actually thrived: it did this by focusing on its
international distribution strategy since the early stages of its launch. This strategy not only saved
GENICON from the vast and often fickle barriers of the U.S. market, but came to define the company.
Haberland knew that in order for GENICON to grow and diversify, new markets would have to be identified,
evaluated and developed. Although the minimally invasive surgery (MIS) device market in the United
States had long been the largest in the world, international markets were expected to grow at a much faster
rate than the five per cent growth forecasted for the U.S. market for the foreseeable future. According to the
2009 GENICON business plan, growth for the Pacific Rim was estimated to be 14 per cent, with 11 per
cent for the Middle East, nine per cent for Europe and six per cent for Latin America; additionally, it was
extremely difficult to gain market share in the United States. Since the early 1990s, distribution of MIS
devices had been controlled by companies receiving contracts through group purchasing organizations
(GPOs). The GPOs’ financial structure had long favoured purchasing products from only the largest
companies, some of which included Ethicon and Covidien, subsidiaries of Johnson & Johnson and Tyco
respectively: this factor presented nearly insurmountable barriers to many startup MIS device companies.
Survival for GENICON depended on its ability to sell products abroad.
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Early international success did not change the fact that GENICON needed to constantly identify what
market it should enter next. The capital investment and risk associated with entering a new market was high
for a firm the size of GENICON. Although the cost varied depending on the market and the local regulatory
process, it would cost approximately $50,000
1
per market up front, with another $20,000 in costs for
distributor assessment, market sampling and channel contracting. There was also an opportunity cost, as
Haberland did virtually all the new business development and thus he was often out of the office attending
tradeshows and meeting potential new distributors; furthermore, the time between initial investment and the
point at which the first revenues were realized had been as much as three years. As was the case with many
startup companies, capital resources were difficult to come by and entering various markets simultaneously
was simply not feasible.
A LOOK INSIDE THE LAPAROSCOPIC INDUSTRY
Laparoscopic surgery, a subset of MIS, allows physicians to examine, diagnose and treat problems within
the abdomen. These surgical interventions can be performed through either traditional open or
minimallyinvasive techniques. During laparoscopic surgery, the abdomen remains closed while specialized
surgical instruments are inserted through a number of small incisions. Compared to open surgery,
laparoscopy reduces trauma to the skin and muscles and reduces post-operative pain: this leads to shorter
hospital stays and recovery times, providing clear advantages for both patients and hospitals.
The global market for MIS devices and instruments was worth an estimated $12 billion in 2005, and was
expected to reach $18.5 billion by 2011, an average annual growth rate (AAGR) of 7.5 per cent between
2006 and 2011. The United States accounted for approximately 60 per cent of the world market, or $7.2
billion in 2005, and was growing at an AAGR of 7.2 per cent. The U.S. market for all MIS procedures was
approximately $7.7 billion in 2006, and was expected to reach $11 billion by 2011;
2
thus, there was a market
outside the United States of more than $7 billion for GENICON to pursue.
While strong future sales growth was expected, this growth rate was forecasted to decline year-over-year
(YOY). This declining growth rate was indicative of several market forces. The laparoscopic device market
was limited by hospitals aiming to contain laparoscopic surgery costs by purchasing less expensive reusable
and/or reprocessed devices instead of premium-priced disposables. With the market becoming very
competitive and reaching a period of slower growth, coupled with the recent downturn in the worldwide
financial condition, hospitals did not want to invest large sums of money in instrumentation. Many hospitals
argued over the value of owning the assets they used and whether disposable or reusable instruments were
appropriate in their business models; additionally, in some developing international markets, issues
involving the re-use of disposable instruments put downward pressure on sales in those markets. GENICON
was certain, however, that the ease-of-use and innovation of the disposable device markets would continue
to guarantee their use and market share. When taking all factors into account, the outlook for the entire
laparoscopic device industry was deemed very promising by Haberland and many industry observers.
THE GENESIS OF GENICON
In 1996, while working for a large medical device company, Haberland and a small development team were
tasked to perform an analysis as to whether the company should mature its soft goods line to include
laparoscopic medical devices. The firm was hesitant, considering it was primarily involved in orthopaedics
1
All prices are in U.S. dollars.
2
Millennium Research Group, U.S. Markets — Medical Technology Laparoscopic Devices 2008.
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and this would represent a significant deviation from their current operations; additionally, maturing their
line to include laparoscopic devices would require a large investment of capital resources. After several
months of research and negotiations with the development team, upper management decided to forgo entry
into this field, citing high barriers to entry and compatibility with the company’s current operational
structure as factors in their decision. Haberland, baffled by management’s assessment, resigned and created
GENICON.
Being part of a large corporation lent Haberland little knowledge or experience concerning how to create a
company of his own. Although it was clear to Haberland that there was an enormous unmet need in the
endoscopic industry, he was unaware of how to go about meeting this need; for example, he knew nothing
of the process to gain approval from the Food and Drug Administration (FDA) to manufacture and market
medical products. Haberland learned that in order to file with the FDA he needed a company, and in order
to have a company he needed his first product. After vetting the various devices used in laparoscopic
surgery, he decided to start with a trocar, a device used in every laparoscopic procedure to provide the initial
means of access into the abdominal cavity (see Exhibit 1).
Considering his limited resources for development, the trocar was the most logical option. Being a oneman
company meant that Haberland had to outsource any research and development requiring specific technical
skills. The knowledge base for these instruments was well-established and readily available, reducing the
capital investment needed to produce a prototype; more importantly, several of the patents on these devices
had expired since many had been on the market for more than a decade. Taking this approach was much
less costly than developing a completely new product, which was extremely important considering
Haberland’s limited financial resources.
In 1998, GENICON achieved its first sale to an Atlanta-based distributor for $20,000. This was a
monumental achievement for the company at the time, but further sales had to be obtained quickly as
expenses rapidly began to pile up. Haberland initially targeted U.S. customers. Considering that
approximately half of the world’s laparoscopic procedures were performed in the United States, and given
GENICON’s location, this market seemed to be the logical choice. Expecting brisk sales within the first
year, GENICON would then use that capital to sustain operations and grow the company.
Though there was a large and increasing demand for laparoscopic surgical devices, unforeseen barriers to
obtaining these sales loomed large. The U.S. health care market heavily favored purchasing through GPOs,
which then sold to hospitals and other primary care facilities. While larger medical device firms had few
problems selling their products under this arrangement, smaller companies faced a daunting challenge to
obtain contracts from GPOs. This industry structure led to GENICON’s inability to sell any significant
amount of product during its initial year of operation. To further compound the young company’s problems,
it was quickly running out of capital. If these issues persisted, the company would almost certainly fail
within a year.
GENICON GOES INTERNATIONAL
In 1998, Haberland learned that the American College of Surgeons would be holding their annual meeting
at the Orlando Convention Center, just minutes from his home. Although it was not a trade show, Haberland
figured it would be a good place to network and gain input from surgeons.
It was not inside the convention, however, where Haberland received advice that would drastically change
GENICON’s market focus. While walking to the convention center, he ran into an employee of British
Document Summary
Allen h. kupetz, adam tindall and gary haberland wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey management services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact ivey publishing, ivey management services, c/o richard ivey school of business, the university of. Western ontario, london, ontario, canada, n6a 3k7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey. uwo. ca. In january 2010, gary haberland, president and founder of genicon, a u. s. -based firm that manufactured and distributed medical devices used in laparoscopic surgery, sat at his desk poring through rather encouraging fourth quarter financial statements.
