A. MARKET SIZING AND GROWTH
The candidate should present a structure that breaks down the market into price and volume. The candidate can use the average market price. Volume should break down into new wheelchairs (driven by incident rate and penetration) and replacement wheelchairs (driven by prevalence, wheelchair lifecycle, penetration, and death rate). The market growth can be identified by taking incidence minus death rate and setting this into relation to the base of wheelchairs or patients. For a growth rate in dollar terms, an assumption on price inflation also needs to be applied.
B. MARKET ENTRY
A complete answer should consider the following aspects: Market (size, growth, profitability), Competitive landscape (market shares and relative trajectory of other players), Customers (customer preferences in the US vs. Europe, insurance companies, doctors), Distribution (Sales channels, the supply chain in the US, geographic penetration), Economics (Cost of entering and payback time in relation to PE fund investment horizon), Regulatory aspects (FDA approval and timeline).
C. SUMMARY
Comfort chairs should enter the US market due to its large size, attractive growth rate, and relatively fragmented competitive landscape. Entering will significantly increase the profit growth of the company and make for a more attractive exit in ~5 years time for the PE fund.
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- Powered wheelchairs are wheelchairs with an electric motor that can move the wheelchair both indoors and outdoors as well as change the configuration of the chair (lean backrest, make chair stand, etc.)
- Powered wheelchairs are typically used by patients with severe handicaps who are typically paralyzed in the whole body
- Each wheelchair is customized to the needs and size of the patient and given higher complexity, commands a much higher price point than a standard wheelchair
1. Market sizing and growth
- The average price for a complex powered wheelchair in the United States is $12,000
- The average lifetime for a powered wheelchair is 7 years
- There is no second-hand market for powered wheelchairs because they are highly customized to each individual patient
- Assume US Population of 300 Million
- On average each patient owns 1 powered wheelchair
Share the exhibit when the candidate asks for data about handicaps/paralysis in the United States
A. IDEAL STRUCTURE
A good initial structure breaks down the market sizing into the drivers of price and volume and outlines each in detail. The candidate should realize that the key underlying driver in this market is the number of people with severe disabilities.
Price
Here the candidate can just select to use the average price in the market or break it down into different segments or products.
For simplicity's sake, guide the candidate to use the average price.
A very strong candidate can consider the willingness to pay / ability to pay (access to health insurance) when discussing the price in the market.
Volume
A strong candidate breaks down the drivers of volume.
- US Population
- Number of patients with diseases/handicaps
- Growth in patients with diseases and handicaps
- Frequency of replacing wheelchairs
- Number of wheelchairs used by each patient
- Penetration of powered wheelchairs amongst the handicapped population (e.g. do some use standard wheelchairs instead?)
B. IDEAL SOLUTION
Market Size
The candidate should present a structure that breaks down market size to be driven by price x volume. The structure should then further break down the volume to be driven by the rate of paralysis/handicap in the US, powered wheelchair penetration, and wheelchair lifecycle.
Price
Use average market price per complex powered wheelchair in the US ($12,000)
Volume
The underlying driver of demand in this market is the number of patients that have an underlying condition that requires the use of a complex powered wheelchair. This information should be inferred from the exhibit provided to the candidate.
Volume = New wheelchairs + Replacement wheelchairs
New wheelchairs:
The new wheelchair volume comes from new patients that recently contracted one of the underlying conditions and that would be buying their first wheelchair. This should be inferred from the Incidence Rate data in the exhibit.
New wheelchairs = Incidence rate x Extrapolation factor (3,000 assuming 300M US population) x Penetration rate (%)
Neurologic disease =15 x 3,000 x 70% = 31,500 new wheelchairs
Strokes = 17 x 3,000 x 40% = 20,400 new wheelchairs
Accidents = 4.5 x 3,000 x 25% = 3,375 new wheelchairs
Total = 55,275
Replacement wheelchairs:
The replacement wheelchair volume can be identified from the prevalence data in the exhibit. The prevalence represents the population of patients that already have the disease and would already own a powered wheelchair if their condition requires it. They would be replacing their wheelchair every 7 years throughout their life.
Replacement wheelchairs = Prevalence x penetration rate (%) / average wheelchair lifetime
Neurologic disease = 700,000 x 70% / 7 years = 70,000
Strokes = 800,000 x 40% / 7 years = ~45,700
Accidents = 260,000 x 25% / 7 years = ~9,300
Total = 125,000
Total Volume = 55,275 + 125,000 = 180,275
Total market size = 180,000 x $12,000 = $2.16B
Growth
The growth in this market is driven by:
- Incidence rate (number of new patients)
- Death rate (impacting size of the base of population that needs wheelchairs)
- Wheelchair lifetime (a longer lifetime would reduce market size)
- Changes in penetration of powered wheelchairs
As such, growth can be calculated considering these variables:
Growth = Volume growth + Price Growth
Volume growth = Incidence patients - wheelchair patient deaths / wheelchair patient population base x changes in wheelchair lifetime / penetration
Wheelchair patient deaths = 490,000 (700K x 70%) + 320,000 (800K x 40%) + 65,000 (260K x 25%) x 3% = 26,000
Volume growth = 55,275 - 26,000 / 875,000 = 3.3%
Price growth = Let's assume an expected 2% p.a. going forward
Growth rate = 3.3% + 2% = 5-5.5% p.a.
2. Market Entry
- Comfort Chair is offering a more technologically advanced product with more power functions than the other players in the U.S. market
- Comfort Chair's positioning is more premium and commands a 25% price premium over the other players
- Three players hold 60% of the US market. The rest of the market is fragmented with no player holding more than 5% market share.
- The Swedish manufacturing plant is running at 90% capacity
- Building a new plant in the United States is a $100M CAPEX
- The company has gross margins of 60% and operating costs in the US (SG&A, sales, marketing) are expected to be $10M per annum
- The company estimates that a 5% market share should be achievable already in the first year based on the market research conducted
A. IDEAL STRUCTURE
A strong candidate is able to identify the key drivers of market attractiveness and the most important considerations regarding a US market entry. These should include:
- Market - Is the market attractive for Comfort Chairs to Enter?
- Market size
- Market growth
- Profitability
- Competitive Landscape - Is the competitive landscape advantageous?
- Market fragmentation
- Market share trajectories
- Competitive positioning
- Customers - Are US customers interested in our product?
- Is there a demand for our product in the United States?
- Who is the decisionmaker (doctor vs. patient vs. insurance company)?
- Any sub-segments that are more or less interesting for Comfort Chairs?
- Distribution - How will the products be sold?
- What distribution channels will be used to sell and service?
- How costly will distribution be?
- Can we get access to attractive distribution?
- Economics - Is it economically attractive to enter the market?
- Investment required to enter
- Expected returns
- Regulation - Any regulatory hurdles that need to be cleared to enter?
- Is the product regulated?
- How long does it take to get regulatory approval?
B. IDEAL SOLUTION
Market
- From the market sizing we know that the market size is large (~$2.16B) and is growing relatively quickly at over 5% per annum
- A good candidate will ascertain that the other players in the market are profitable although no further analysis is expected
Competitive Landscape
- The market is comprised of three large players that together hold ~60% of the market. The remainder is held by small players with less than 5% market share each -> The market is relatively fragmented beyond the top three players
- Comfort Chairs offers a more technologically advanced and premium product compared to its US competitors that offer a more basic product -> Comfort Chairs is uniquely differentiated in the market. A good candidate should try to understand if there is demand for a more premium product
Customers
- The customer preferences in the US are similar to Europe and initial customer research indicates that there is demand for a more premium and technologically advanced product. Initial research indicates that this segment is about 25% of the total market
- The wheelchairs are paid for by the insurance company depending on the type of medical insurance that the patient has. Around 25% of insurance companies would cover up to the full cost of Comfort Chair's pricing
Distribution
- Comfort Chairs plans to distribute its wheelchairs via the two leading medical device dealers in the US that offer nationwide coverage. They are interested in working with Comfort Chairs given its higher price and differentiated proposition
- Wheelchairs will be served by the distributors
- Comfort Chairs plans to set up a new manufacturing plant in the United States and will be sourcing components globally
Economics
- A full analysis should be conducted to figure out how long it will take to breakeven on the investment required to under the US market
- The main drivers of the economics will be the market share achieved and the gross margin contribution
- If we assume that Comfort Chairs achieves a 5% market share the economics are as follows:
- Revenue: 5% x 2.16 = 108M p.a. growing at 5% with the market
- Gross profit: 60% x 108M = ~$65M
- Operating profit = $65M - $10M = $55M
- Breakeven = $100M / $55M = ~1.8 years time
Regulation
- Powered wheelchairs are a regulated medical device that requires approval from the Federal Drug Administration (FDA)
- Given Comfort Chairs' strong standing in Europe and existing regulatory approval, it is expected that the process with the FDA will be smooth and take around 6 months
Summary
