Augustine Medical Case Analysis

Sarah Parlier

June 28, 2016

M/W 1:50PM

Augustine Medical Inc. Case

Situational Analysis

Industry

• Approximately 21 million surgical operations are performed annually in the US.
• 84,000 operations per average 8-hour workday.
• Approximately 5,500 hospitals have operating rooms and postoperative recovery rooms.
• There are 31,365 postoperative recovery beds and 28,514 operating rooms in hospitals in the US.
• 60%-80% of all postoperative patients are rendered hypothermic meaning that 14.7 million Hospital patients’ needs are not being met to the best of their ability. (21 million operations * .70 = 14.7 million patients)
• Given the demand for postoperative recovery room beds, the research firm estimated that hospitals with fewer than seven beds would not be highly receptive to the Bair Hugger Patient Warming System.
• The projection said that one system would be sold for every eight postoperative recovery room beds.
• Competing Products:

• Warmed Hospital Blankets –

• Most commonly used treatment for hypothermia in recovery rooms.
• Takes 6-8 warmed blankets per patient and the cost of laundering these blankets averages $0.13 per pound. (Cost absorbed in hospital overhead)

• Water-Circulating Blankets –

• Cincinnati Sub-Zero, Gaymar Industries, and Pharmaseal are the major suppliers.
• Price of units that measures patient and blanket temperatures range from $4,850 to $5,295.
• Manual control units are priced at about $3,000 although they appear to be discounted by as much as 40%.
• Average life of units=15 years
• Reusable blankets list at from $168 to $375.
• Disposable blankets list at from $20 to $26.
• Volume discounts for blankets can reduce the list price by almost 50%.

• Reflective Thermal Drapes –

• O.R. Concepts sells a product named the Thermadrape, which comes in both adult and pediatric sizes.
• Adult head covers list for $0.49 each.
• Adult drapes list for $2.50 to $3.98 each.
• Leggings are priced at $1.50 each.

• Air-Circulating Blankets and Mattresses –

• The model most suitable is priced at $4,000.

Company

• In July 1987, Dr. Scott Augustine, an anesthesiologist, founded Augustine Medical, Inc. (AM) in Minnesota.
• Their goal was to develop and market products for hospital operating rooms and postoperative recovery rooms.
• Through experience, he discovered that hospitals needed an innovative approach to warming post-surgery patients. Dr. Augustine developed the Bair Hugger Patient Warming System.
• Company executives were occupied with finalizing the Bair Hugger® Patient Warming System in early 1988.
• Original two products: (1) produce and sell patented warming system used to treat hypothermia and postoperative patents, (2) tracheal intubation guide for crisis situations and in the surgical room.
• Product:

• Bair Hugger Patient Warming System is designed to control the body temperature of patients after surgery.
• Specifically, the products are designed to treat hypothermia (a condition defined as a body temperature of less than 36 degrees Centigrade or 96 degrees Fahrenheit) experienced by patients after operations.
• The Bair Hugger system consists of a heater/blower unit and a separate inflatable plastic/paper cover, or blanket. There are many advantages of this product.
• Products are also more effective, less likely to leak water onto expensive equipment, and easier to operate than other competitor’s methods of hearing patients.

• Place:

• The Blair Hugger Patient Warming System would be sold by and through medical products distributor organizations in various regions around the country.
•  These distributor organizations would call on hospitals, demonstrate the system, and maintain an inventory of blankets.
• The margin paid to the distributors would be competitively set at 30% of the delivered selling price on the heater/blower unit and 40% of the delivered price on the blankets.

• Promotion:

• Currently Augustine Medical Inc. is relying on distributors to push their products.
• Augustine Medical Inc. also is promoting their products by creating sales literature for the Bair Hugger Patient Warming System, where features and benefits of the product are detailed.
• Augustine Medical Inc. personal experience indicated that all of these features would be welcomed by nurses and patients alike.

• Price:

• To be determined by Augustine Medical Inc. executives.
• Heater/Blower must be under $1500 to avoid hospitals going through formal review and decision process.
• Only 80% of the hospitals have enough hospital rooms to have use for the Bair Hugger.
• Investor interest in Augustine Medical Inc. and the medical technology it provided produced an initial capital of $500,000. These funds include R&D, staff support, facilities and marketing.
• It was believed that this initial investment would cover the fixed costs of the company during its first year of operation.
• Variable Cost = $380 per heater and $.85 per blanket.

Trends:

• Mature market due to the availability of multiple different technological products.
• Two competitors provide a similar product to the Bair Hugger Patient Warming System, but neither are sold in the US:

• The Sweetland Bed Warmer and Cast Dryer was in use 25 years ago, but is no longer manufactured.
• The Hosworth-Climator is an English made product that provides controlled temperature microclimate by air flow from a mattress.

• Operative patients will be in demand in the market, which will allow hypothermic treatment systems to be in demand constantly. (a requirement for operating rooms)
• Demand from doctors/nurses for technology that is easy to apply and cost effective, as they are more acceptable to use a product that is of easy use/time efficient.
• Doctor/Nurses demand the most effective warming system.
• Trends in the market look for feedback from postoperative patients that have used units to treat hypothermia.
• Plastic blankets are disposable after use, whereas the average life of water-circulating control units in 15 years.

Problem

What should the list price be to hospitals for the heater/blower unit and the plastic blanket?

• The price set for the Bair Hugger Patient Warming System will influence the rate at which prospective buyers will purchase the system since the market is price-sensitive to alternative methods.

Alternatives

Alternative 1: Price above the competitors, then lower over time.

• Advantages:

• It can help the company to generate funds quickly to recover its investment or finance other development efforts.
• The company could gain time to develop new applications for its technology or even the next generation of more advanced technology.

• Disadvantages:

• This could cause the company to get forced out of the market quickly.
• High risk.
• In the hospital, expenditures for equipment over $1500 are typically subject to a formal review and decision process, so if this is priced lower than $1500, so they will have to go through this process initially.

Alternative 2: Price below the competitors.

• Advantages:

• Demand for the product is price elastic. The more substitutes a product has, the greater its price elasticity. Obviously, it is valid in this market because there is a variety of competitive products existing.
• In the hospital, expenditures for equipment over $1500 are typically subject to a formal review and decision process, so if this is priced lower than $1500, they will not have to go through this process.
• They may gain market share since the price will be more favorable to hospitals.

• Disadvantages:

• It will not help the company to generate funds quickly to recover its investment.
• They may create a brand image of being cheaper, which could be good unless associated with low quality.

Alternative 3: Price the same as the competitors.

• Advantages:

• They will have an even playing field with the competition when marketing and selling to hospitals.
• The distributors will have to spend less time explaining why the price is more/less than the competitors.

• Disadvantages:

• They could maintain or lose market share.
• This pricing strategy does not give them any leverage to make this product different from the others when it comes to costs.
• The distributors will have to work harder to sell the products and make the buyers see the differences.
• In the hospital, expenditures for equipment over $1500 are typically subject to a formal review and decision process, so if this is priced lower than $1500, so they will have to go through this process.

Alternative 4: Sell the unit for free in order to monopolize the blanket market.

• Advantages:

• They will make $3-$4 Million in profit per year after the initial year.
• They may be able to get rid of a portion of distributor costs.

• Disadvantages:

• No profit is made initially.
• Risky.

Recommendation

Augustine Medical should sell the unit for free in order to monopolize the market for blankets: $24 for 12 which will constantly need to be replaced. (Alternative 4)