Team:KU Leuven/Future/Economic potential analysis

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Economic potential analysis

An economic rationale analysis for investing in the use of micro-organisms for the production of artificial bone implants.

Because our research contributes to the base of fundamental knowledge, it could be used as preliminary research for many applications. A brief look into the future potential, from an economic perspective, could possibly offer the rationale for a deeper research into the applications. As we will see, there are many opportunities and challenges that pop up and need to be addressed, even in this early stage. The main goal of this potential analysis is to construct a bridge between the pure scientific research and the commercial environment, resulting in a marketable product. In this analysis, we mainly focus on the use of Spot E.Shape principles for producing novel ways of producing artificial bone replacements. Although a similar analysis can be made for each of the other applications of the project. For more details on this, please go to the application section.

A deeper understanding of the market and industry dynamics in the bone-implant industry

Nowadays, elderly people are more active than ever before. They cycle, play tennis, go swimming, travel, etc. Besides, they do not want to give up on those activities because of their age. Nevertheless, the risk of accidents with possibly serious health consequences and broken limbs grows with age. Approximately 1% of all falls of elderly people result in a hip fracture with an acute mortality of 3%-5%. (23)

The ageing population and active life-style trends are two major driving forces for the demand of orthopaedic devices. Apart from that, the medical world is confronted with an increasing number of obesity and osteoporosis patients. These factors result in an enhanced growth of the orthopaedic industry. Medical device companies respond by continuously looking for new ways of treating fractured bones in order to reduce the curing time and to obtain a more performant device.

A closer look into the industry dynamics reveals that the industry is highly regulated and very dynamic where most of the industry players are well-established small and medium-size enterprises (SME’s). A start-up company often needs a significant better product to gain some market share in the medical device industry. Many of them choose to first enter a niche market to establish some early market share. Once they obtained a solid position in the industry, they can broaden their horizon by reaching out to new, unexplored markets.

Relevance of using traditional materials for bone implants

Traditionally orthopaedic devices have titanium alloys as the dominant material used in most artificial bone implants. However alternatives with new and better functions having lower failure rates are finding their way to the industry. One of the most promising applications is tissue engineering where the cells from a patient or a donor are isolated. Thereafter, they are combined with biomaterials, grown in laboratories and then implanted into the patient. This futuristic approach is in fact becoming a reality and is facing some major concerns and drawbacks. The limited viable window from the point of extraction of cells to the reintroduction makes this technology less flexible. (4) The transportation of these cells to and from the laboratory is also a huge challenge. Besides, the storage of tissue engineered products (TEP) at a constant temperature of -37°C puts pressure on the cost-efficiency. (4) On top of that, tissue engineered products didn’t make a breakthrough in Europe due to the lack of regulation. TEP’s are beyond the medical device regulation and the pharmaceutical regulation. (4) This ambiguity concerning the regulation in Europe leads to a strong delay in market introduction. At the moment there is no dominant supply model based on mass production due to the capacity limits. This prevents TEP’s from really breaking through and becoming the industrially standard technology. (4)

In the last decade, composite materials, polymers and ceramics steadily found their way to the medical device industry. This is mainly due to the lower failures rates, recalls and their lower weight. With our Spot E.Shape project, we would like to take this to the next level by imitating the natural bone structure as much as possible through the use of micro-organisms.

The positive consequences of using micro-organisms for bone engineering

Spot E.Shape can be used for a wide range of bone prosthesis. Here we focus on hip prosthesis. Hip fractures impose an increased risk for complications which could seriously shorten the life expectancy.

Recently, surgeons are using a 3D printed implant made of titanium, polymers or ceramics for hip transplantations. Here the patient’s CT scan is used to design an exact replica of the femoral head. Our project could optimise this design by using bacteria that form and precipitate calcium carbonates in a controlled way. From there a porous, spongy structure similar to a bone can be formed. Thereafter, this can be used as a surface coating for the titanium alloy.

In order to identify and deal with the competitive implications of the so called salient attributes, we used the ACE Matrix (Attribute Categorization and Evaluation) by Ian C. MacMillan and Rita Gunther McGrath (21) applied to our orthopaedic device. The columns refer to the level of energy the attribute generates for the customer while the rows refer to the sentiment it provokes. (21) This analytic tool serves to identify the right mix and dynamic fit between the customer needs and the attributes of the product. (21) Particularly interesting are the powerful energizers that often become the determining factor for the purchase decision. The layer of calcium deposited by the bacteria can be seen as a coating for the titanium structure which reduces substantially the amount of constraint and wear of the prosthesis. Wear is something that more traditional metallic and polyethylene prosthesis have to deal with. Therefor it can have a great impact on the health.

matrix

An important issue is that dissatisfiers can encourage the customers (mostly the surgeons) to opt for a competitor that reduces customer loyalty. (21) In the case of our medical device, it is crucial to conduct long-term experiments to test possible health effects. Additionally already in the prototyping phase, we need to start thinking about possible ways to automate and fasten the production process. An improved cost-effectiveness of the product could turn the tolerable into a differentiator. On the other hand, a competitor’s action can turn a tolerable into a dissatisfier, e.g. the competitor eliminates a negative characteristic. To be one step ahead of competition, we first need to look for ways to keep the price of our product under control.

We have to remark that the validation phase concerning the customer perceptions of attributes still needs to be performed. Keep also in mind that this analysis is a foresight for a medical device application, which implies that at this stage, not every attribute can be proved scientifically.

Barriers for the market introduction of orthopaedic materials based on micro-organisms

Introducing a brand new technology often comes with some major challenges to overcome. In this section, we are focusing on the different potential issues that need to be addressed in further stages of the project. We identify three of them, namely the financial gap, regulation gap and human capital gap.

Financial gap

Orthopaedic research is often time-consuming and requires a substantial investment during the development, production and distribution phase before it can be translated into a final product for patient care. (7) At the current proof-of-concept phase of the project, we already experience a clear need for financials. Radical innovations typically need large investments in further technological development before a first working prototype can be constructed and tested. (14) From the perspective of potential investors, there is a lot of uncertainty about the outcome which will probably lead to a long payback time and thus few economic incentives to invest in this early stage of the project. (13) The phenomenon of investor reluctance is often described as ‘the financial barrier’ which plays a role on the level of private financiers, such as banks and venture capital firms. (16) The need for government stimulants through specialised funding programs is clearly present. (12) This is underlined by the fact that publicly funded venture capital firms are more willing to consider investing in early-stage university spin-outs than private ones (15).

Beside the proof-of-concept phase, the pre-seed funding phase further explores managerial and organisational aspects of the project in order to make it more attractive for potential investors. (12) In the proof-of-concept phase, government funding mainly serves the role of reducing the technological uncertainty while the reduction of the organisational uncertainty is mainly the purpose of pre-seed funding. For this phase we are currently fully relying on sponsorship from the industry and university organisations. For further research, the option of applying for a governmental grant remains possible.

The third major phase or seed phase takes place when the company is established, but basically it does not generate enough cash flow to survive on its own. For their early investments, investors are often given an equity stake in return. Attracting venture capital investors remains difficult because they prefer to invest in university spin-outs after the seed phase, when the research and following application proved to be robust. (17) Possible investors should be found in the industry, angel investors, crowd funding, government, etc.

When a company grows, at some point in time there will be an immediate financial need that is too high to bear for traditional investors. Often regional and national venture capital firms are then the only option to turn at. (11) However venture capital firms should be a well-considered decision. They bring along a new working culture, make demands (e.g. hiring professional managers and administrators) and put pressure on the firm to get the necessary in-house competences. All of this is done with respect to the return-on-investment they need so desperately regarding their 10-year horizon. (11) Venture capital firms could lead to tremendous progress for the company or they can break up with the company in the long term because growing organically with the company is not their primary strategic concern. (11)

Regulation gap

A lack of regulation can be considered as double-edged, where it shortens the product innovation cycle but at the same time makes marketing your product more complicated. (s) Orthopaedic devices are normally classified as a medical device and fall within the European medical device regulation. To be issued with a CE mark, medical devices must achieve high quality, safety and performance standards. (18) However the specificity of our device, which is based on the precipitation by bacteria, could possibly be subject to the regulation of genetically modified organisms. The narrow legal framework concerning GMO’s in Europe could affect and delay the innovation process of our orthopaedic device. The ambiguity and lack of clarity to which regulation our application can be applied, shows the need for the realignment of regulation with practice and current state-of-technology. (19)

Human capital gap

Knockaert et al. suggested that “One of the principal challenges facing university spin-outs is academic entrepreneurs tending to possess little commercial human capital.” (15) The fact that they are experts in their domain does not make them the perfect marketers for their product. As showed above, the orthopaedic industry is characterised by a certain set of aspects. Appropriate managers will more likely find more adapted ways of dealing with these differences. Besides there are possible conflicts of interest with the traditional roles of research and teaching that might pop up when academic entrepreneurs need to run a business. (20) Raising venture capital should also be done by an entrepreneur who possesses lots of commercial human capital. This shows clearly that the different challenges are interrelated. (15)

Desired approach for the market introduction

The orthopaedic device industry is currently confronted with a rising demand for new orthopaedic prosthesis devices. To deal with this, we came up with a brand new device based on the use of bacteria. However we described three major barriers that can potentially disturb the realisation of its economic potential. The purpose of this section is not to provide an exhaustive description of a go-to-market-strategy or business plan, but rather briefly offering some guidelines that need to be kept in mind to secure a bright future perspective.

Parallel to tissue engineered products, where they also work with cells (4), the end product is highly customized and falls under the ‘Make to Order’ approach. In view of the high demand of orthopaedic products, this will not be sufficient to establish a competitive supply model that is capable of gathering a significant part of the market. The way to deal with this obstacle should be to identify all the parts that can be automated and scaled-up already in an early stage of the development process in order to satisfy a possibly mass market. (4) In order to commercialize the device, there should also be thought off patenting the invention. The Bayh–Dole-inspired legislation made this possible for universities and was adopted by many countries in their national regulation. (12)

There comes a time when you can not do everything on your own anymore, especially in an industry where multiple disciplines overlap and different competences are needed. (see figure 2) The interdisciplinary aspect is one way to explain the search for the right strategic partner to forge an alliance with. The reduction of technological uncertainty in the early phases of a project could be a second reason for collaboration with a partner from industry. (5) This will make the search for potential investors a lot easier and reduce the time-to-market for the application. This is also often the phase where a university spin-off is created, which acts like an independent business.

Anecdotal evidence states that it is very hard to become profitable as a company from the start, but the goal of taking market share by aiming a niche market is a much more realistic objective than reaching a positive cash flow. Once this is obtained, the company will be considered as an interesting investment for the big medical device companies which will be eager to take over the company. However if the ultimate goal of market share is not reached, the company will not generate a breakthrough and succumb rapidly. (4)

In conclusion, we can say that a spin-off is most likely to be chosen in combination with the necessary patents and partners.

References

[ 1]	Joseph A. Buckwalter and Timothy M. Wright. Orthopaedic surgeons, scientists, and industry. Journal of Orthopaedic Research, 26(3):279-280, March 2008. [ http]
[ 2]	Colleen Christmas. Hip Fracture. Annals of Internal Medicine, 155(11):ITC6-1, December 2011. [ DOI]
[ 3]	C. Freeman and C. Perez. Structural crises of adjustment, business cycles and investment behaviour. Pinter, London, 1988.
[ 4]	A Hill and M Michael. Engineering acceptance: Representations of “the public” in debates on biotechnology. von Schomberg R, Glasner P, eds., Wheale PR, 1998.
[ 5]	Richard Jensen and Marie Thursby. Proofs and prototypes for sale: The licensing of university inventions. The American Economic Review, 91(1):240-259, March 2001.
[ 6]	Mirjam Knockaert, Mike Wright, Bart Clarysse, and Andy Lockett. Agency and similarity effects and the VC's attitude towards academic spin-out investing. Journal of Technology Transfer, 35(6):567-584, December 2010. [ DOI]
[ 7]	A Hill and M Michael. Engineering acceptance: Representations of “the public” in debates on biotechnology. The Social Management of Genetic Engineering. Ashgate., pages 201-217.
[ 8]	Andy Lockett, Gordon Murray, and Mike Wright. Do UK venture capitalists still have a bias against investment in new technology firms. Research Policy, 31(6):1009-1030, August 2002. [ DOI\| .pdf]
[ 9]	Ian C. MacMillan and Rita Gunther McGrath. Discover your products 7 hidden potential. Harvard Business Review, 74(3):58, 1996.
[ 10]	Wendy Phillips, Thomas Johnsen, Nigel Caldwell, and Julian B. Chaudhuri. The difficulties of supplying new technologies into highly regulated markets: the case of tissue engineering. Technology Analysis & Strategic Management, 23(3):213-226, March 2011. [ DOI]
[ 11]	Einar Rasmussen, Simon Mosey, and Mike Wright. The Evolution of Entrepreneurial Competencies: A Longitudinal Study of University Spin-Off Venture Emergence. Journal of Management Studies, 48(6):1314-1345, September 2011. [ DOI\| http]
[ 12]	Einar Rasmussen and Roger Sø rheim. How governments seek to bridge the financing gap for university spin-offs: proof-of-concept, pre-seed, and seed funding. Technology Analysis & Strategic Management, 24(7):663-678, August 2012. [ DOI]
[ 13]	Mike Wright, Sue Birley, and Simon Mosey. Entrepreneurship and University Technology Transfer. The Journal of Technology Transfer, 29(3-4):235-246, August 2004. [ DOI]
[ 14]	Mike Wright, Andy Lockett, Bart Clarysse, and Martin Binks. University spin-out companies and venture capital. Research Policy, 35(4):481-501, May 2006. [ DOI\| .pdf]