Expert Case by Axel

Powered Wheelchairs

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Powered Wheelchairs We have been hired by the CEO of Comfort Chairs, a company that manufactures complex powered wheelchairs. Comfort Chairs has headquarters in Sweden with manufacturing in Sweden and sales all over Europe. The company enjoys a strong market position and is known for being a pioneer in its industry. It was recently acquired by a leading global private equity firm that is interested in driving the international growth of Comfort Chairs. Especially, the US market looks very interesting. The CEO has hired you to help him with two things: 1. Determine the size and the growth of the US market for complex powered wheelchairs. 2. Analyze whether entering the US market is attractive.
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Problem Definition

We have been hired by the CEO of Comfort Chairs, a company that manufactures complex powered wheelchairs. Comfort Chairs has headquarters in Sweden with manufacturing in Sweden and sales all over Europe. The company enjoys a strong market position and is known for being a pioneer in its industry. It was recently acquired by a leading global private equity firm that is interested in driving the international growth of Comfort Chairs. Especially, the US market looks very interesting.

The CEO has hired you to help him with two things:

1. Determine the size and the growth of the US market for complex powered wheelchairs.

2. Analyze whether entering the US market is attractive.


Comments

Difficult Bain first-round case that tests the candidate's ability to break down a problem and be creative. The case has two main components:

1. Market sizing and growth - Tests the candidate's ability to understand an abstract market and break down the growth drivers of this market.

2. Market Entry - Assesses if the candidate is able to identify the most important drivers of market attractiveness and what would be the key constraints to market entry for Comfort Chairs.

The case is candidate-led and will require strong case leadership, quantitative skills, and time management to be achievable in a 35-40 minute timeframe.


Short Solution (Expand)


Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that shall be shared in the “Case exhibits” section.

Paragraphs highlighted in blue shall be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

  • 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

  • The client should enter the US market for powered wheelchairs

    • The market is large at 2.16 billion dollars and is growing at over 5% per year

    • The competitive landscape is relatively fragmented and Comfort Chairs has a differentiated premium positioning that resonates with a large subsegment of the market
    • The economics of market entry are attractive and the entry would likely add significant value to the company over a 5-year horizon to serve the interests of the Private Equity owner.
  • Next steps
    • Firm up economics calculations
    • Get a better view of the market share that is achievable for Comfort Chairs
  • Risks
    • Regulatory approval is denied or takes longer than anticipated
    • Changes in the regulatory landscape or reimbursements (insurance companies, national health insurance scheme)

Difficult Questions

How can you figure out how much market share is achievable for Comfort Chairs in year one?

A good way to answer this would be to break down the problem into the new patients and the replacement patients and estimate how much they can gain from each segment.

New patients:

  • Because these are new patients and they do not have an existing relationship with any brand
  • We can assume that Comfort Chair can take a higher market share amongst this segment, especially if our product is more advanced and better than the competition

Existing patients:

  • These patients are very likely to want to use the type of wheelchair that they already have given how important it is to their quality of life
  • Assume that Comfort chair is able to take a smaller share in this segment but still able to win over customers given better product
Questions on this case
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1) 875,000 is the installed base of wheelchairs. 490,000 + 320,000 + 65,000 2) No price x volume would be incorrect. The mathematically correct calculation would be 1+ volume growth rate % * 1 + pr... (read entire answer)

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