KBT Devices: Pull the PlugCindy Hur, Maya Poncelet, Jonah Ragsdale, Eric Ren

ZS Associates Case Competition Presentation 11/20/15

The Agenda for Today

About UsSurgiNet and beyond

OptionsAcquisitions and solutions

Goals and AssumptionsThe parameters

The MarketRight for KBT?

The ProblemSolvable?

The SurgiNet Plan

Unreasonable AssumptionsAccurate forecast?

Sales & RepsThe issue of time

The SolutionSurgi’n forward

The NumbersThe final projections

Does the acquisition of KBT Devices and ClearPATH solve the needs of SurgiNet Medical? Can we reasonably assume our goals will be met? If not what are our alternatives? We will seek to answer these questions through

careful examination of both companies and the industry.

What We DoSurgiNet is one of the leading

providers of product services, and education for the surgical – both open

and laparoscopic – treatment of urological diseases and conditions.

• Provides 32% of Ford Medical Systems revenue• Average annual revenue growth of 9%• Global revenue of $356 million in 2014 (6% growth from previous year)• 85 established sales representatives

SurgiNetA division of Ford Medical Systems

03 Low Morale

04 Quality Issues

01 Slugish Growth• 6% growth lower than 9% average• Strong pressure from competitors

02 Dry R&D Pipeline

• Executive leaving for competitor• New Management from parent company

• No new product developement• Funding issues?

• New product faced quality issues• Recalled few batches, negative publicity

The ProblemsAn explanation

Acquire the fast growing ClearPATH device, revamp

sales, increase revenue

Develope new product, utilize existing networks for additional

sales, increase revenue

Acquire KBT Devices Internal Solutions

What are the Options?Solving SurgiNet Issues

Ultimate GoalWhile a number of strategic and fiscal factors are considered by corporate when making funding decisions, it seeks a 15% return on investment within the first three years on most investments

Key Assumptions• If current funding allows for acquisition, the same funds can be applied to R&D• Acquisition of KBT Devices would require a separate and individual team of sales reps• KBT Devices is not limited in its growth in sales of the ClearPATH product

What We Must ProvideThe solution we provide will increase the current revenue of SurgiNet, increasing currently slow revenue growth back to an annual 9% growth or greater

Goals and AssumptionsThe parameters of our solution

The MarketA look at opportunity

Market Share: SurgiNet

ChangesIncreasing competition, revenue growthslowing, margins declining

Current ProductsOffer a versatile and diverse product portfolio

Product ChallengesReleased recent product, quality issuesensued, received bad publicity

GrowthAverage revenue growth of 9% in past

years

Market ShareCurrently control 60% + of ureteral

catheter & stent markets

RelationshipsSales reps have positive relationship with

surgeons using current products

Understanding the environment we are in will guide our decision whether or not to buy KBT Devices, or find our own solution

Potential for growth

Market Share: KBT Devices

Sustainability25% growth; Converts 40-60% but loses20% of accounts annually

Market PotentialCan achieve a 10% market share in US and greater

Dominant BuyerCleveland Clinic (trocar market leader)adopted ClearPATH

GrowthLaunched ClearPATH 13 months after beginning R&D: Already strong results

Market ShareOn contract with over 70% of surgical

facilities in the the US

RelationshipsGenerated good relationships and

publicity in laparoscopic industry

Is ClearPATH a sustainable product in a reliable market?

A solid start

Size

The US trocar market is estimated to be $280 million and $330 million

worldwide. The US constitutes 85%

making it the focus for sales and development

Growth

The market for laparoscopic continues

to grow. Less pain, shorter recovery, and

reduced costs are results of innovation

and competition

Competition

Endoscopix holds 66% of the US market

share. Their size (225 reps) makes it hard to compete with. Access Labs holds another 25% of US market

share

Clinical

Trocars are minimally invasive but are fickle in nature. Their use is rarely the same from

patient to patient which makes them difficult to

master and control

ClearPATH

ClearPATH utilizes recyclable & reusable design making it more

cost effective for hospitals. However its

materials make it harder for doctors to

use

Trocar Market: OverallWho has the advantage?

The market is relatively small and crowded, but the right product has potential to steal valuable market share

Will acquiring KBT devices tap into a large enough market of $280 million? How much more traction will ClearPATHgenerate if SurgiNet acquires KBT? How difficult will it be to convince surgeons to adopt a new, more complex device?

Market Share BreakdownWho’s in control

KBT Devices – 1%

Endoscopix – 66%

Access Labs – 25%

AB Medical – 4%

Other – 4%

Sales & RepsA critical look at time

01 Clinical SellingSelling clinical value of the product (effectiveness, safety, ease of use, compatibility)

02 Economic SellingSelling the economic value of the product (lower upfront cost, reducing other costs for the overall treatment)

03 ContractingContract writing with the hospital regarding sale of product (pricing, condition for service, training, liability, etc.)

04 Case CoverageKeep in touch with hospital and physicians (resolve issues, train and educate, inform of new products, observe procedures)

05 Administrative SupportEnsuring the hospital has sufficient inventory, fixing insurance reimbursement issues, etc.

06 Technical SupportAddress technical problems and bringing appropriate resources

Six Activities of Selling100% time consumption

01 Clinical SellingPhysicians are cautious for products new to the market or that command a small share of the market

02 Economic SellingClearPATH provides high value at a low cost and is recyclable, further reducing costs

03 ContractingIf a hospital is affiliated with a GPO or IDN and is under contract, new negotiations are unnecessary. However, there are openings

04 Case CoverageTrocars are low risk in general, but due to the complex materials and recyclability, ClearPATH requires higher case coverage

05 Administrative SupportClearPATH has no additional impact on administrative support

06 Technical SupportClearPATH is more complex in nature which could lead to increased technical support over the average trocar

ClearPATH CompatibilityA Cost-Benefit Analysis

Selling Non-Customer Admin.

SALES

Customer AdministrationTravelDriving, flying etc.

Face to face interactions that are performed to

maintain or increase sales

Expense reports, call reports, special projects, internal coordination

Preparing proposals, contracts, coordinating customer meetings, handling defective products, etc.

SurgiNet Rep Time AllocationA Full Schedule

SurgiNet has 85 sales representatives on staff

Assumption: SurgiNet reps are utilizing 100% of time selling SurgiNet

products

15-25%

40-55%

15-25%

4-8%

Market

New Hospitals

New Reps

Time Consuming

Conversion Time

Small Hospitals

New Product

New Place

ClearPATH’s focus on small hospitals isn’t conducive to saving time as new larger

customers will require longer conversion time

ClearPATH and TimeMoving in the Opposite Direction

Medium-LargeMega Hospitals

12% 49% 23% 4%

ASCCommunity

Total Conversion Efforts

48 Days 18 Days 6 Days 4.5 Days

Ongoing Account Maintenance (Monthly Average)

16 Hours 4 Hours 2 Hours 2 Hours

Hospital BreakdownTime and Effort in the Market

Current Reps:• Will current SurgiNet sales representatives be able to handle ClearPATH?

• No, sales representatives are too busy selling current SurgiNet products

Staff:• Do we need to hire a separate team to handle sales? If so, how many additional sales

reps do we need?• Yes, projections claim an additional team of 28 sales representatives selling ClearPATH only

Costs:• Are the high costs of a sales representative worth the returns in sales?

• Annual costs of $225,000 - $250,000

Important AnswersConsequences of Acquisition

Unreasonable AssumptionsFaults in projections

Risky AssumptionsForecast accuracy is integral

2014 SurgiNet US Revenue

Revenue per sales rep (159.5/85)

Anticipated reps in 2016

Lost opportunity(1.88*28)

159.5m* 1.88m 28 52.64m

Unreasonable Assumption 1: 100% of Time on ClearPATHUsing Current Sales Representatives

Using existing SurgiNet sales reps for ClearPATH causes huge loss in opportunity

*Assuming no other revenue outside of representatives

April 2016 May 2016 June 2016 July 2016

Sales Reps 13 18 24 26

Costs 257,291.67(13*237,500/12)

356,250(18*237,500/12)

475,000(24*237,500/12)

514,583.33(26*237,500/12)

Expected Revenue 353,483 412,425 527,430 620,635

Gross Profit (96,191.33) (56,175) (52,430) (106,051.67)

Unreasonable Assumption 1: 100% of Time on ClearPATHHiring New Sales Representatives

Cost of a fully-loaded sales rep: $225,000 - $250,000 (Avg. $237,500)

StrengthsContracts

WeaknessCustomers

WeaknessUnsteady Sales

SALES

ClearPATH sales have increased 25% over the past twelve months

Growth has not been consistent. ClearPATH tends to lose about 20% of sales annually

On contract with over 70% of surgical facilities in the US

KBT focuses on smaller customers. Needs to target medium and large

hospitals to be effective

Assumption 2: Expectation of 2% Sales GrowthA risky assumption?

StrengthsPast Sales

CUSTOMERS

Cleveland ClinicConversion of one of the premier U.S. teaching hospitals

Westside Hospital SystemA nationally-renowned OB/GYN hospital

Surgery Center of San AntonioConversion of one of the leading bariatric centers in the US

Doctors’ Surgery CenterAnother leading bariatric center

Cleveland, OH

Portland, OR

San Antonio, TX

Philadelphia, PA

Major AdoptersBut is it enough?

With 70% still on contract but only a 1% market share, do these facilities suffice?

The NumbersProjections and KBT Value

20%15%

10%

2016 2017 2018

Acquisition ForecastProper Formulation

• The original forecasting model does not include the

loss of 20% of accounts

• Creating the new acquisition model builds in the loss

of accounts in decreasing scale (assuming

acquisition makes sales more efficient)

• Assumes 50% of accounts are converted annually

(Average of 40-60% conversion)

• Gross margin is 74%

• Assumption: Each sales rep costs $225,000

annually (low end)

• Assumption: Each account assumes 6 surgeons

using 35 trocars a month

Percentage Loss of Accounts in New Model

The New Acquisition ModelForecast accuracy is integral

2016 2017 2018

Three Year ProfitAcquisition Valuation

Three Year Profit

$21,049,643.83

Max Acquisition Price

$18,304,038.11

Corporate (Ford Medical) requires a 15% return on investment within 3 year when making funding decisions. Based on the three year profits after acquiring KBT Devices, SurgiNet

can pay no more than $18.3 million for ClearPATH in order to achieve a 15% return.

24

5

2016 2017 2018

KBT Devices ValuationUnderestimating Worth

• Due to the dominance of ClearPATH with smaller

market customers, we estimate revenue based on

lower but increasing numbers of surgeons per

account (as larger hospitals are contracted)

• Assumption: KBT convert 40% of accounts (low end)

• Gross margin is 74%

• Assumption: Each sales rep costs $250,000

annually (high end)

• Assumption: KBT has 28 sales reps on staff through

3 year period (matching acquisition model)

• KBT Devices has contracts with over 70% ofsurgical facilities in the US

Number of Surgeons Per Account

KBT Devices 3 Year ValuationForecast accuracy is integral

Three Year ProfitKBT Valuation

Three Year Profit

$27,246,105.60

The Market Value for KBT Devices based on profits over 3 years is higher than SurgiNet can afford to produce a 15% return on its investment

Comparison Report SampleWrite here your great subtitle

The differences in profits are due to the issues we have previously discussed: Unreasonable acquisition assumptions, difference in target hospitals, and time efficiencies of sales reps. An

acquisition of KBT Devices would require at minimum their market value of $27.2 million (excluding the premium most acquisitions demand). Thus we will not acquire KBT Devices as

it would not achieve our goal and cause a loss of revenue.

Max Acquisition Price

$18,304,038.11

KBT Devices Market Value

$27,246,105.60

So What is the Solution?

Money Assumption

If SurgiNet has the funds to acquire a company, then SurgiNet

has the funds to invest in R&D

Current Success

SurgiNet holds 60% of its current market and has established

relationships at target market hospitals

ClearPATH

Just because ClearPATH isn’t right for our market, doesn’t mean that a

trocar isn’t right for our market

Internal Solutions?Things to Keep in Mind

SurgiNet Trocars

• Invest up to $18.3 million into R&D of effective but price sensitive trocar

• Higher a few additional sales reps, but not near as many, and without 100% time allocation to the new product

• Why?• Simple trocars are a low risk

product which requires very little case coverage, the biggest time consumer of a sales rep

• Current reps will utilize current successful accounts to market new product with physicians trust already established

• Market research shows hospitals are price sensitive, meaning a lost cost product could steal away significant market share

The SolutionEntering the Market

The trocar market has potential, but ClearPATH isn’t the solution SurgiNet needs

Current time usage doesn’t allow for the attention ClearPATH would require. Profitable projections are unreasonable due to time constraint

Acquiring KBT Devices would lead to an inability to produce a 15% return (or a positive return) due to KBT’s high market value

Development of a price sensitive trocar internally provides greater return than acquisition

In SummaryConclusion