## Assignment 1: The Glucometer Case

Case/Situation:

A new medical device has been developed to measure the blood sugar level. This is expected to be used widely by diabetics for ‘self-monitoring.’ The product is non-invasive yet is accurate and is expected to substitute existing products in the market, particularly the diabetic strips that cost \$1 per use, and involve a prick using a lancet. The current popular technology used by most consumers is the diabetic strip meter, where the strips cost just a dollar each, and the reusable meter has a low cost of \$20 only; further the user needs to ‘prick’ himself –not very pleasant!

The new firm ABC has a patent for a new technological medical device referred to as a Glucometer, that expires after 4 years.

The New Device: The new Glucometer is iris response based (uses the iris in the eye); its manufactured cost is \$3000 (for the machine), and annual maintenance costs for the machine average \$500 per year. The machine does not require an attendant or any material inputs. All the patients must do is look into a viewer and the device measures blood sugar levels using iris examination- the machine’s instrumentation, gives the results on a digital display panel. The simple looking machine looks like a small computer with a two-eye viewer into which the user looks.

1. Suppose the Glucometer company is to sell the machine only to hospitals, and the company will maintain the Glucometer machine for the hospital for the first four years. A hospital, on an average, will use the machine 80 times a day, 300 days in a year. If this is the case, then suggest a price that the company should charge hospitals and justify your answer. What is the basis of your recommendation? (20 points)

Answer: The total cost of the Glucometer over a four-year period is \$5000. This cost includes \$3000 manufacturing cost and \$2000 maintenance cost, the \$500 cost per year over 4 years. To cover the total cost, the hospital must be charged at least \$5000. The hospital stands to make money off the use of the Glucometer also. If the hospital uses the Glucometer 80 times per day and 300 days out of each year, over 4 years (80 x 300 x 4 = 96000), the hospital can make \$96000 because of the use of the Glucometer. The company can charge quite a lot for the Glucometer based on this information, anywhere from \$5000 to \$96000, however I suggest that the company charge \$15000 per Glucometer. This price will most assuredly cover any overhead while allowing a 100% mark-up on the Glucometer. This price is also six times less than the amount that the hospital stands to make off its use, thus they will be willing to spend the money on the Glucometer.

• Suppose the company realizes that it is more appropriate to sell the service of the machine rather than the machine itself. So, it decides to install the machine like a health or blood pressure monitor in Walmart, Walgreens etc. and operate it like a vending machine, charging \$1.00 per use. Assume that there are an average of 30 users per day, for 360 days in a year. Now calculate (making any appropriate assumptions):

(a) The break-even level of demand for the machine. That is, calculate the minimum number of customers you require per day to break even.

Answer: The break-even level of demand is 9.72 or 10 people per day. The total cost of the Glucometer per year is \$3500 (\$3000 manufacturing cost + \$500 maintenance cost. Because break-even level is when cost equals revenue, break-even revenue is \$3500. \$3500 must then be divided by the number of days the Glucometer is used per year which is 360 days. \$3500/360 =9.72 making the break-even level of demand equal to ten customers.

(b) If Walmart were to retain 70% of the revenues and the Glucometer firm receives 30% of the revenues then calculate the Net Return on Investment to the company for a typical installation charging \$ 1.00 per use and an average of 30 users per day, for 360 days in a year.

Answer: \$1 x 30 x 360 = \$10800. The total profit from the use of the Glucometer is \$10800. The Glucometer company gets 30% of the proceeds from its use which is \$3240 (\$10800 x .30). The return on investment from these proceeds is the 30% of the proceeds, or \$3240 divided by the cost of the Glucometer to the company. \$3240/\$3000 = 1.08 or 108%.

(c) Calculate the pay-back period for an installation for the Glucometer company on the assumption that it receives 30% of the revenues. The pay-back period for the company is the period (number of days) in which the company should recover its initial investment (which is \$3000 manufacturing cost).

Answer: 30 users per day at \$1 per user equals \$30 in revenue per day. The company will receive \$9 per day of the \$30 in revenue (\$30 x 30% = \$9). To find the number of days the company will need to recover the initial investment of the manufacturing cost of \$3000, the cost should be divided by the dollars per day received from the revenues (\$3000/\$9 = \$333.33). The pay-back period for the company is 334 days.

• Suggest a business strategy for the firm after four years –when the patent expires. In your answer discuss at least three alternative strategies and explain your choice of your ‘ideal strategy.’ (Question 3 carries 20 points)

Answer: The three strategies into which the company should look. The first alternative for the company is to try to keep Glucometers in the stores and hospitals where they have been, but at a discounted price. The company already has connections and contracts with the company, so these businesses are less likely to stray to another because of loyalty. The discounted price is even more incentive to the stores and hospitals. The cost for the company is minimal because they do not have to extend promotions except to new business and they are less likely to have to remove the machines.

The second alternative for the company is to use their research and development teams to make a Glucometer that can be marketed to individuals. The R&D team would need to produce a Glucometer that is affordable for the individual user. The promotion of the Glucometer to individuals, if the Glucometer is affordable to them, should be easy. The individual would want to have a device with which they could easily check their blood-glucose level and would be excited about the long-term savings because they would not be purchasing blood testers or test strips. The stores in which the Glucometers were housed will make up for the loss of the device in store because the Glucometers will be sold there.

The third option is to continue to market Glucometers to stores and hospitals, but to extend the marketing to doctor’s offices as well. This would allow for continued income from stores and hospitals while increasing profits and access to the device. The pharmaceutical sales representatives would increase their commissions as well by extending their reach.

The strategy that I find most ideal is alternative two, developing a Glucometer for individuals. Although there would be an initial cost to produce the Glucometer for individuals, there is an incredible amount of profit that can be gained from individual sales. Stores that already have a Glucometer can continue to charge people who are unable afford their own Glucometer per use while also selling the Glucometers for individuals as well. Promotion of the Glucometer for individuals should discuss the savings available to the individual user because they will no longer have to pay for blood testers or strips.

Description of Skill

Blood glucose monitoring uses a Glucometer that takes a small sample of blood to determine the concentration of free glucose in the blood.

People with diabetes require regular monitoring of their blood glucose to help them achieve as close to normal blood glucose levels as possible for as much of the time as possible. The benefits of maintaining a blood glucose level that is consistently within the range of 4-7 mmol/L will reduce the short-term, potentially life-threatening complications of hypoglycemia as well as the occurrence rate and severity of the long-term complications of hyperglycemia.

Patients in the hospital setting are likely to have inconsistent blood glucose levels as they are affected by changes in diet and lifestyle, surgical procedures, and the stress of being in a hospital. The physician will prescribe how regularly the blood glucose should be monitored. In acute situations, a sliding-scale treatment for insulin will be individually prescribed per patient. The medication administration record (MAR) or sliding scale will provide directions for the amount of medication to be given based on the blood glucose reading.