Marketing Planning for Caliper Technologies’ Labchips

Mgmt. 266A: Product Management (Cooper)

William Fang, Greg Kim, Bryant Kong,Simon Male, Rohit Talwani

March 13, 2002

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Planning Objective

To determine the likelihood of various levels of revenue growth for Caliper Technologies’ labchip

product line over the coming year.

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Agenda

• What Are Labchips?• Caliper Technologies• Market Overview• Critical Issues• Hugin Network• Probabilities• Results and Decision Nodes• Sensitivity Analysis• Recommendations• Questions?

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What Are Labchips?

• Labchips are miniature silicon devices used for biomedicalapplications on a micro-dimensional scale

– Use MicroElectroMechanical systems (MEMS) technology

• Can reduce duration of experiments by orders ofmagnitude

– Automate previously manual laboratory processes– Require much smaller amounts of sample and reagents

• Offer mission-critical benefits to researchers– Faster throughput– Cost savings– Reduced human error

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Caliper Technologies

• Public biotechnology company with $32 M in revenuesfrom two main sources:

– Labchips and Agilent analyzer system (est. $19.2 M)– High-throughput screening systems

• Labchip systems are used in chemistry, biomedicalresearch, and drug discovery and development

– DNA, RNA, protein, and cell analysis– Market leader in labchips– Principal strategic partner is Agilent Technologies– Uses lead customer programs to identify new product applications– Recently settled patent litigation with competitor ACLARA

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Market Overview

• Labchip market estimated at $300 M in 2000– Projected annual growth rates of 30-40%

• Early stages of development– Fragmented competition

• Public labchip companies: ACLARA, Cepheid, Nanogen, Orchid• Large bioscience players: Applied Biosystems, IBM, Motorola• Private companies: Many players• Acadamic and government instiutitions: MIT, Dept. of Defense

• Significant market trends– Escalating R&D costs, expiring patents drive customer need– Intellectual property battles —» patent litigation or cross-licensing– Lack of technology standards

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Critical Issues

• Derived from preceding market analysis– Also regulatory, manufacturing, social and behavioral issues– Affect research applications or future uses of labchips

Caliper Technologies Business Ecosystem InfrastructurePolitical FDA regulations for device and

assay approval Foreign regulations Patent litigation FDA regulations for clinical use

Government funding ofhealthcare R&D

HMO reimbursement ofmedical uses

Uses for protection againstbioterrorism

Behavioral Customer process changes(R&D processes, techniciantraining)

Cross-licensing Altered delivery of medication Desire for non-invasive medical

diagnostic proceduresEconomic Access to capital

Price Manufacturing capacity and cost Complementary products

Escalating R&D costs Expiring patents Partnerships with established

companies (Agilent)

Valuation of public labchipcompanies

Social (See Infrastructure) (See Infrastructure) Aging population in industrialnations

Protests against genetic engineeringTechnological Product customization

Micro-scale constraints Lack of standards Interoperability with other

laboratory devices

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Hugin Network

Product

Design

Internal Economics

Customer Need

Demand

Competition

Competition

Product Success

Major Forces Regulation

Regulation

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Internal Economics

• Technical factors dictate product complexity and manufacturing cost

• Combined with pricing decision, this determines Caliper’s margins

Micro-dimensional Constraints

Product Design

Inter-operability

Standards

Manufacturing Cost

Margins

Customization

Price

LeaderFollower

Yes No

HighMediumLow

ProblematicNot a Problem

ComplexModerateSimple

Not CostlyCostly

Very CostlyLow Medium High

Good Acceptable Poor

Low MediumHigh

Demand

Product Success

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High ImpactLow Impact

Demand

• Primary driver of demand is labchips’ ability to meet customer needs

• Secondary driver of demand is value-based price of product

Inter-operability

Customer Need R&D Cost

Process Change

Demand

Product Success

Price

SignificantMediumInsignificant

YesNo

LowMediumHigh High

MediumLow

HighMediumLow

Government Funding

HighMediumLow

Aging Population

GrowingPlateauing

Patent Expiration

RisingPlateauing

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Competition

• Strategic partnerships and cross-licensing determine degree of competition

• Intensity of competition directly impacts Caliper’s margins

Strategic Partnership

s

Margin

Competition

Cross-Licensing

Patent Litigation

IntenseFew

HighMediumLowMany

ModerateFew

IntenseModerate

Little

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Regulation Can Hinder Growth

• Regulation and low access to capital can slow Caliper’s growth

Product Success Regulation

FDA

International

Access to Capital

Appro

val

Rejecti

on

Bull Marke

t

Bear Marke

t

FavorableUnfavorable

ApprovalUnfavorable

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Four Major Forces Impact Product Success

Demand

Product Success

Price

HighMediumLow

Utility(Revenues)

HighMediumLow

Access to Capital

Bull Market Bear Market

RegulationFavorableUnfavorableMargin

Competition

GoodAcceptablePoor

High $ 30.7 M(60% growth)

Medium $ 25.0 M(30% growth)

Low $ 21.1 M(10% growth)

HighMediumLow

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Estimating Probabilities

• Probabilities for starting nodes were straightforward– No other nodes influencing them

• Probabilities for nodes with inputs were more difficult. We

– Decided the order of strength in which input nodes influence thenode

– Arranged in ordinal orders each probability set– Determined the graphical behavior of the probability– Assigned probabilities

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Customer Need has a larger influence on Demand. So we ordered each permutation and set the two extreme values.

Price Low Medium High Low Medium High Medium High LowCN High High High Medium Medium Medium Low Low LowHigh 0.700 0.000Medium 0.200 0.100Low 0.100 0.900

We then determined the graph of the probability appears as follows:

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

1.000

1 2 3 4 5 6 7 8 9

High Medium Low

Demand Example

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Price Low Medium High Low Medium High Medium High LowCN High High High Medium Medium Medium Low Low LowHigh 0.700 0.420 0.189 0.095 0.047 0.043 0.038 0.034 0.000Medium 0.200 0.374 0.554 0.584 0.551 0.456 0.334 0.201 0.100Low 0.100 0.206 0.257 0.321 0.401 0.502 0.627 0.765 0.900

Then we interpolate the in-between values to complete the table:

Demand Example continued

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Default Best Case Worst CaseHigh Price Medium PriceHigh Customization Low Customization

High 0.291 30.7 0.331 30.7 0.265 30.7Medium 0.252 25.0 0.261 25.0 0.246 25.0Low 0.457 21.1 0.408 21.1 0.49 21.1Expected 24.9 25.3 24.6% of default 100.0% 101.7% 99.0%

Price High Medium LowHigh 0.324 30.7 0.268 30.7 0.281 30.7Medium 0.26 25.0 0.247 25.0 0.149 25.0Low 0.416 21.1 0.486 21.1 0.471 21.1Expected 25.2 24.7 22.3% of default 101.4% 99.1% 89.6%

Customization High Medium LowHigh 0.298 30.7 0.289 30.7 0.286 30.7Medium 0.253 25.0 0.251 25.0 0.251 25.0Low 0.448 21.1 0.460 21.1 0.464 21.1Expected 24.9 24.9 24.8% of default 100.2% 99.9% 99.9%

Results and Decision Nodes

• Caliper’s expected labchip revenues are $24.9 M

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Default Product Design Customer Need Competition Access to Capital RegulationDecrease favorable Increase favorable Decrease favorable Increase favorable Increase favorable

UndecidedHigh 0.291 30.7 0.290 30.7 0.293 30.7 0.291 30.7 0.291 30.7 0.2930 30.7Medium 0.252 25.0 0.252 25.0 0.252 25.0 0.252 25.0 0.252 25.0 0.2524 25.0Low 0.457 21.1 0.458 21.1 0.455 21.1 0.457 21.1 0.457 21.1 0.4546 21.1Expected 24.8764 24.8668 24.8956 24.8764 24.8764 24.8970Best CaseHigh CustomizationHigh PriceHigh 0.331 30.7 0.331 30.7 0.333 30.7 0.331 30.7 0.331 30.7 0.334 30.7Medium 0.261 25.0 0.261 25.0 0.261 25.0 0.261 25.0 0.261 25.0 0.261 25.0Low 0.408 21.1 0.408 21.1 0.406 21.1 0.408 21.1 0.408 21.1 0.405 21.1Expected 25.2955 25.2955 25.3147 25.2955 25.2955 25.3243Worst CaseMedium PriceLow CustomizationHigh 0.265 30.7 0.264 30.7 0.281 30.7 0.264 30.7 0.265 30.7 0.266 30.7Medium 0.246 25.0 0.245 25.0 0.249 25.0 0.245 25.0 0.246 25.0 0.246 25.0Low 0.490 21.1 0.491 21.1 0.470 21.1 0.491 21.1 0.490 21.1 0.488 21.1Expected 24.6245 24.5899 24.7687 24.5899 24.6245 24.6026

Average favorable probability 0.334 0.310 0.403 0.400 0.475 Change (0.010) 0.010 (0.010) 0.010 0.010 % change in favorable probability -2.99% 3.23% -2.48% 2.50% 2.11%% change in expected outcome -0.04% 0.08% 0.00% 0.00% 0.08%% change in best outcome 0.00% 0.08% 0.00% 0.00% 0.11%% change in worst outcome -0.14% 0.59% -0.14% 0.00% -0.09%Undecided 0.0129 0.0239 0.0000 0.0000 0.0393Best 0.0000 0.0235 0.0000 0.0000 0.0541Worst 0.0469 0.1815 0.0566 0.0000 -0.0423

Sensitivity Analysis

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Recommendations

• Caliper should focus on the factors that most stronglyinfluence product success

– Build customer demand– Lobby for favorable regulations

• Caliper should use its lead customer programs to identifyand develop labchip applications that are widelyvalued in its beachhead market

– Risk of building too many customized applications• Could get stuck in early market forever

– Need to cross chasm with application that will enable company todominate pharmaceutical market

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Questions?