Help me to design a new machinery for u!

xj220c wrote:

GumbyCT wrote:Out of curiosity what are the barriers to entry?

Well, at the risk of teaching people how to compete against us . . . .

I could write a 200-page white paper on why somebody would be nuts to try and get into this market. I'll attempt to sum it up in a few paragraphs here. Any one of these factors would keep me from entering this market. Bear in mind that all of these factors are intertwined to some extent so you have to consider them as a whole as well.

1. The customer is not the end-user.

CPAP manufacturers don't sell to the end-users, they sell to the middle-man DME vendors and clinical suppliers. You can't market your product to the people who actually use it. In fact, you can't even identify those people. They buy the machine within days of getting the script for it so you never have a chance to influence that buying decision. It makes no difference if you've got the best machine on the market or if there are features on your box that distinguish it from all the others. People are just going to buy what the DME supplier hands them or what their insurance company is going to pay for. If you can't effectively market your machine to the end-user then you have very few options for gaining share in the market.

2. The market is dominated by existing big players.

The CPAP market is already dominated by existing manufacturers with substantial resources. Respironics is a $1B company with 5,000 employees. ResMed is almost as big. If DeVilbiss or one of the other players wanted to they could drop a few hundred million more into the market as well. In order to penetrate that space you have to go in and displace existing relationships between these huge companies and the DME suppliers just to get your foot in the pool. That's a daunting proposition. The existing makers have lots of ways to incentivize their DME's to keep you out. You don't have a lot of options for breaking up those existing relationships.

3. Price is king.

Because of this large supplier/middle-man market structure the dominate factor driving sales is price. DME suppliers are bound by insurance reimbursement policies so they can't be flexible on pricing. They could therefore care less about the size of your LCD display, whether your software is user friendly, or if the plastic hinges on your humidifier give out in six months. What matters to the end-user accounts for a very small part of the DME buying decision. What they really care about is price. The big established manufacturers are therefore at a HUGE advantages over new entrants because the big boys already have economies of scale that let them keep their prices low. A new machine maker would probably have to sell at a loss for the first few years just to establish enough market share to get their costs down to competitive levels. Price driven markets are not where you want to be starting new companies.

4. Blocking patents are in place.

There are already a couple of hundred issued patents covering CPAP technology and, as a general rule, there are usually 2 or 3 unissued patent applications for every issued patent. Any one of those patents is enough to block you from introducing your product. You're going to have to spend at least $500k and a couple of months just to find out if your proposed design is already covered by somebody else's patent. Then you're going to have to try and negotiate licenses with those patent holders who - even if they are willing to let you have the license - are going to be rather hesitant to let a new competitor into their market without a hefty royalty being paid. Unless you've got some big new break-through technology that you can patent and cross-license to the existing players the chance of you getting into the market without either paying significant royalties or being sued for patent infringement is pretty low.

5. There are significant regulatory costs.

So lets say that you decide there is a market opening and that you can get around the patent problem. Now all you have to do is get it all past the FDA and various other regulatory bodies all around the world. In order to do this be prepared to write a check for an amount that will make your head spin.

Just to give an idea of what regulatory expenses can be like: We recently decided to move a switch on one of our machines about an inch to one side in response to some complaints we had about users accidentally bumping the switch and triggering it during use. This cost us about $800 in engineering, about $2,000 in tooling, and about $1,000 to reprint existing manuals to reflect the change. It then cost us over $100,000 to re-certify the design to various safety standards all around the world - just because we moved the switch a little.

To get something through initial safety and efficacy testing will cost you many, many, many times that amount - and that's assuming everything goes well. If you have to go back through redesign and retesting you can easily triple those numbers and there's no guarantee that the design will even be approved at the end of the whole process. You then have to go back through re-certification every time you bring out something new, and you have to keep bringing out new stuff in order to keep up with the big boys.

I haven't sat down and done a formal study of it, but I would assume the following cost if you really wanted to get a new CPAP machine to market (assuming that you didn't have any patents blocking your way):

Startup and initial design: $2-4M

Clinical approval, initial marketing efforts: $20-30M

Full scale manufacturing ramp-up, full marketing effort, continued R&D, regulatory surveillance: $100M over first five years after approval

So to successfully get your product to market I'd say you need to invest around $125M over seven to ten years. All that to build a company that's going to make $5M in earnings on $100-200M in revenue in a cut-throat, price-driven market that could disappear overnight if somebody develops better technology.

Any businessman that thinks this is a good idea needs to have their medication adjusted.

Admittedly I'm not a CPAP market insider and maybe there are forces at work inside that particular market that I'm not privy to. It could be that I'm way off base and that there is an opportunity if you play it right. I really, really doubt it though. Unless CPAP is significantly different than any other medical device market you just can't get into it unless you're there on day one before anybody else has a chance to establish themselves. The only way to break through is to develop something so radically different and desirable that it changes the market dynamics and breaks the existing manufacturer's stranglehold.

The only real chance of a new manufacturer entering the scene is if one of the existing mega-corps gets the hots for pulmonary equipment and decides to jump in. Somebody like GE or Thermo could enter this market in a heartbeat. Those companies have $125M fall out of their nose every time they sneeze and they have existing distribution networks so they wouldn't have to fight their way in. It's also entirely possible that somebody like that could buy one of the existing small manufacturers and then go after the market based on improved product design. I don't think that's very likely either, but you never know.

One place where there may be a larger opportunity is in masks. Masks have a whole different economic than machines and that's why you're seeing much greater evolution in mask design. Even so I doubt you'll see entry of independent mask producers happening. It's still a big up-hill battle to get into that market as well.

Cheers,
XJ.

xj220c wrote: 1. The customer is not the end-user.

CPAP manufacturers don't sell to the end-users, they sell to the middle-man DME vendors and clinical suppliers. You can't market your product to the people who actually use it. In fact, you can't even identify those people. They buy the machine within days of getting the script for it so you never have a chance to influence that buying decision. It makes no difference if you've got the best machine on the market or if there are features on your box that distinguish it from all the others. People are just going to buy what the DME supplier hands them or what their insurance company is going to pay for. If you can't effectively market your machine to the end-user then you have very few options for gaining share in the market.

2. The market is dominated by existing big players.

The CPAP market is already dominated by existing manufacturers with substantial resources. Respironics is a $1B company with 5,000 employees. ResMed is almost as big. If DeVilbiss or one of the other players wanted to they could drop a few hundred million more into the market as well. In order to penetrate that space you have to go in and displace existing relationships between these huge companies and the DME suppliers just to get your foot in the pool. That's a daunting proposition. The existing makers have lots of ways to incentivize their DME's to keep you out. You don't have a lot of options for breaking up those existing relationships.

3. Price is king.

Because of this large supplier/middle-man market structure the dominate factor driving sales is price. DME suppliers are bound by insurance reimbursement policies so they can't be flexible on pricing. They could therefore care less about the size of your LCD display, whether your software is user friendly, or if the plastic hinges on your humidifier give out in six months. What matters to the end-user accounts for a very small part of the DME buying decision. What they really care about is price. The big established manufacturers are therefore at a HUGE advantages over new entrants because the big boys already have economies of scale that let them keep their prices low. A new machine maker would probably have to sell at a loss for the first few years just to establish enough market share to get their costs down to competitive levels. Price driven markets are not where you want to be starting new companies.

5. There are significant regulatory costs.
<many specific details omitted>
To get something through initial safety and efficacy testing will cost you many, many, many times that amount - and that's assuming everything goes well. If you have to go back through redesign and retesting you can easily triple those numbers and there's no guarantee that the design will even be approved at the end of the whole process. You then have to go back through re-certification every time you bring out something new, and you have to keep bringing out new stuff in order to keep up with the big boys.<more details omitted>

GumbyCT wrote:

snoozysue wrote:I worry that when I am asleep I might accidently knock the unit off the bedside table (I did this on the only night that I have slept away from home since I have begun using it and it was full of water!).
I would like an easy, secure way to "anchor" it to the bedside table.

Don't fight gravity put it on the floor. Mine has never fallen off the floor. It should be lower than your head anyway.