Bovine Pregnancy Testing, Inc.

Geiger, Joseph J. ; Metlen, Scott ; Haines, Douglas 等

CASE DESCRIPTION

BPT is a business start up case, based upon field research, requiring students to examine initial financing, marketing issues involving changing customer attitudes, and determining appropriate core customer groups. Additional issues include developing an appropriate organizational structure and developing business process arrangements with domestic and foreign customers. The difficulty level is five, with sufficient information provided in the instructor notes to use the case in both senior and graduate level strategy, policy, and entrepreneurship courses. The case is designed to be taught in two class sessions following reading of the case and instructor handouts provided in the case notes (two hours). A formal case write-up and presentation by a student or case team should take approximately 10 hours.

CASE SYNOPSIS

Bovine Pregnancy Testing, Inc., (BPT), is a bio-tech start up firm whose main product, ELISA, is designed to provide dairy farmers with early and accurate pregnancy testing capabilities not requiring manual examinations which can injure and/or abort the fetus. Because the productivity of dairy cows is related to frequency and timing of pregnancies, incremental improvements in pregnancy testing can significantly improve profits. The firm's product cannot be patented but is protected by trade secrets and technical know-how.

BPT is two years old with a small customer base. Growth has been hampered by a lack of capital, resistance to change by dairy farmers, and poor marketing. The current product, which requires blood samples to be sent to regional veterinary laboratories for over night testing, is competitive with traditional manual examinations performed by veterinarians. An upgraded test that can be administered by the dairy operator (i.e., "cow-side") is in the development stage. With 9 million dairy cows in the United States, the product has a multi-million dollar per year sales potential. Interest in the product has also been achieved in at least two foreign countries.

BPT has many challenges: (1) overcoming the resistance of veterinarians who earn fees from the traditional manual testing, (2) creating a compelling argument for angel/venture venture capital financing, (3) determining the core customer group (large or small herds and/or domestic or foreign markets), and (4) managing and operating a start-up business. The case is based upon field research involving BPT leadership, operators of dairy herds, and owner-operators of veterinary clinics and laboratories. Information provided in the case and the instructors' notes provides students with opportunities to explore angel/venture capital financing, marketing high technology products, product positioning, developing financial and marketing elements of a business plan, and exploring many practical aspects of launching a new business.

BOVINE PREGNANCY TESTING, INC.

Garrett and Amy Johnson had great expectations when they decided two years ago to scale up their tiny pregnancy testing business into a larger firm. Prior to the decision, they had taken the results of Garrett's research to perform small-scale pregnancy testing on request from owners/managers of certain wild game animal farms. When the bovine blood test was perfected, they enlisted Garrett's network of fellow researchers, veterinarians, and family members to seek initial customers. The initial plan was to target large dairy herd managers and to work through the large veterinary clinics that typically served the larger operations. BPT believed the product would be an instant success because of two crucial advantages: (1) the test provided earlier detection than the traditional manual examinations performed by veterinarians, and (2) there was no danger of aborting the fetus as a result of performing the manual test. In addition, the cost, while greater than a manual examination, proved to be very competitive when the incidence of fetus loss and earlier detection were taken into consideration (see Table 1). The manual examination, or rectal palpation, required the examining veterinarian to insert her/his gloved hand through the cow's anus until the fetus was reached and manually examined.

Garrett and Amy had analyzed the distribution of dairy herds in the United States (Table 2) and concluded that a profitable firm was possible by contracting with several well-chosen regional veterinary clinics. The owners were equally excited about the potential development of a 'cow side' pregnancy exam that would not require the direct involvement of a veterinarian. They knew the 'cow side' test would be competitive with both the manual tests and the ELISA lab test provided by the veterinary clinics, but thought the problem of market penetration could be managed by targeting only the small herds that were less attractive to veterinarians who relied on providing manual tests for a major portion of their income.

At a recent meeting of the owners with their primary (and first) regional veterinary clinic, it had become apparent that while interest in using the test was shared by two of the partners, both vets and herd owners were concerned because of the threat to their income, concern over the limited data on the reliability of the test when used in high volumes, and general resistance to change by dairy owners. Inquiries at several other large regional clinics by Garrett and friends of BPT produced similar concerns but a willingness to listen and perhaps try out the product. Individuals interested in being 'field representatives' have explored opportunities in the rocky mountain and Idaho regions and have found significant interest. These individuals have suggested that they would work for a 'finder's fee' plus commission. Nevertheless, the BPT owners were becoming discouraged and, as they related to a friend who had performed initial financial analyses for BPT, "We don't have sufficient funds to hire a full time sales force, we don't know anything about an incentive/commission based field representative work force, the cost of developing the cow side test is estimated at $200,000 and will take two years to develop. Family members are not trained or very good at marketing, and we can't seem to rapidly grow a large customer base." When asked about the potential for a foreign market, Garrett's spirit rose: "We have found a veterinary in Europe who wants to license the product and I have a scientist friend in Korea who is also interested. Garrett had also identified individuals in nine foreign countries who might be induced into working with us. Perhaps we should focus on the foreign markets," he asked? "In any event", replied Amy, "we need a break"! "What should we do", she asked?

GENERAL OPERATING CHARACTERISTICS OF DAIRY INDUSTRY

Current dairy management exhibits many characteristics similar to modern manufacturing. Each cow is viewed as a production unit manufacturing milk, butterfat, and cream. Each cow has an identification number used to collect health, production, life cycle, and reproductive schedule and history. Creating and maintaining a productive herd of milk cows requires skillful use of data to ensure timely impregnation of a cow so that optimal milk production can be maintained for the duration of a milk cow's life. It is crucial to determine as soon as possible if a cow has been impregnated once a cow has been bred. If the cow is not pregnant, steps are taken to ensure impregnation during the next menstrual cycle. Delays in pregnancy have significant financial implications including the cost of re-impregnating the cow. More importantly, delayed pregnancy results in below optimum milk production over a cow's lifecycle. BPT's product is designed for early and accurate determination of pregnancy and thus addresses most of these problems.

BPT's PRODUCT-PROCESS MODEL

Small blood samples are collected by the lead herdsperson, documented, and sent to the local vet lab. BPT provides a glass plate containing dozens of small, shallow indentations (wells). Each well is coated with a substance based on an "enzyme-linked immuno assay' or 'ELISA' which is the product of BPT's scientific research. The firm's trade secrets are based on the ingredients in the ELISA coating, the biological/ chemical formulae, preparation, and the manner in which the 'wells' are coated (shelf life of the plates is several months). Blood serum from a specific, identified cow is placed in the well and treated over a short period of time. Each participating veterinary laboratory must be trained and certified in the use of the plates. The results of the reaction between the ELISA coating on the well and the blood serum are analyzed and pregnancy confirmed. The results are accurate 95% (98% accurate against a false positive) of the time at 28 days after onset--meeting or exceeding all other testing procedures. The results are provided to the dairy owner within 36 hours from the time the blood sample was taken.

BPT's BUSINESS MODEL

The business model is based upon BPT manufacturing and supplying the ELISA plates to participating veterinarians who then use them for determining individual pregnancies for the dairy herds. The cost of production per plate (well) test is approximately $.23 per test. The BPT owners believe break even is achieved with approximately 50,000 tests per year (no salary for owners). The gross revenue is $1.00 per test in the US, and is $1.80 per test for potential foreign operations. Additional shipping costs for foreign customers are approximately $0.20 per test.

LAUNCHING THE FIRM

Despite the problems associated with financing, marketing, and organizational structure the Johnson's decided to establish an appropriate management and marketing structure and pursue start up funds. Based upon the essential merits of the ELISA product and the potentially enormous domestic and global markets, they believed a compelling case could be made to investors. They returned to their financial advisor who estimated that start-up funds on the order of $200,000 were needed to finance the firm from 2003 through 2005 with additional 'phase 2' financing needed as the firm grew to $1,000,000 in net sales (see Table 5).

The advisor based his pro forma income statement, balance sheet and external funds needed on a set of assumptions derived from conversations with the owners and an analysis of the industry (see Table 6). The Johnson's also believed that they could produce 1,000,000 tests with their current facility and incremental increases in hourly staff. They agreed that they should hire a part-time (20%) field representative ($40,000/ representative full-time). The development and use of the 'cow side' test was viewed by the Johnsons as vital to achieving their initial sales goal of $1,000,000 sales per year.

Joseph J. Geiger, University of Idaho

Scott Metlen, University of Idaho

Douglas Haines, University of Idaho

Table 1 Cost Savings Using Elisa Test (Source: Bpt Website)

 Manual
Cost Item BPT Test Cost Test Cost
 (per cow) (per cow)

Labor, Blood, or Palpate $0.33 $1.67
Supplies and Shipping $0.50 $0.10
Veterinarian Travel Fee $0.00 $0.00 (1)
Embryo Death $0.00 $1.44 (2)
Test Inaccuracy Cost $0.00 $2.00 (3)
Lab Analysis $1.70 $0.00 (4)
Record Keeping $0.10 $0.16
Total per 100 cows $254 $537

Notes:

(1) No cost for ELISA because the test is shipped to vet; Manual test
travel cost is included in basic site visit costs by vet for manual
test

(2) Cost of lost milk and new cow production--ELISA does not endanger
embryo

(3) ELISA is 98% accurate, cost difference reflects net difference
between manual and ELISA--A false negative results in hormone treatment
prior to next impregnation which aborts an existing embryo an results
in lost milk and calf production

(4) Based upon average sized or small herds; some savings in ELISA per
test costs for large herds.

Table 2 Number of Operations by Size and Percent of Herd
Inventory for 2002

 Total United States Herd Inventory

 Total Operations in the United States

Herd # Operations % Operations Cumulative %
Size

1-29 25680 27.9 27.9
30-49 18525 20.1 48.1
50-99 27865 30.3 78.3
100-199 11860 12.9 91.2
200-499 5155 05.6 96.8
500-999 1750 1.9 98.7
1000-1900 775 0.8 99.6
2000+ 380 0.4 100.0

 Total United States Herd 9,151,700
 Inventory

 Total Operations in the 91,990
 United States

Herd % Inventory Cumulative % # Inventory
Size

1-29 2.3 2.3 210,489
30-49 7.5 9.8 686,378
50-99 20.1 29.9 1,839,492
100-199 16.7 46.6 1,528,334
200-499 16.1 62.7 1,473,424
500-999 12.5 75.2 1,143,963
1000-1900 11.5 86.7 1,052,446
2000+ 13.3 100 1,217,176

(Source: USDA web site)

Table 3 Number of Operations, Herd Inventory, Avg. Herd Size by
Region in Usa

Region # Operations % Operations % Inventory

North West 7,150 7.77 12.25
South West 7,600 8.26 28.15
Central 47,600 51.75 34.39
North East 20,670 22.47 17.33
South East 8,970 9.75 7.88

 Average Herd
Region # Inventory Size

North West 1,121,000 157
South West 2,576,000 339
Central 3,147,000 66
North East 1,586,400 76
South East 721,300 80

(Source: USDA web site)

Table 4 Inventory by International Region (2001)

Region % Inventory # Inventory

North America 8.17 10,206,000
Central America 5.45 6,800,000
South America 16.26 20,300,000
Europe 20.16 25,174,000
Russia & Ukraine 13.98 17,458,000
Asia 7.23 9,029,000
India 28.75 35,900,000
Total 100 124,867,000

(Source: USDA website)

Table 5 Bpt Financial Statements

Income 2002 % Sales

ELISA preg testing $ 58,252
Elk preg testing $ 2,412
Returns, Allowances $ (973) 2%
Discounts $ 2,000 4%
Total Net Sales $ 57,691
Expenses
Advertising $ 11,000 19%
Bookkeeping $ 2,000 3%
Contract Labor $ 8,000 14%
Insurance $ 2,600 5%
Misc. Exp. $ 3,600 6%
Lab. Supplies $ 4,300 7%
Legal Fees $ 1,000 2%
Payroll $ 5,000 9%
Other Contract Svcs $ 3,500 6%
Building Rent/Taxes $ 7,500 13%
Shipping $ 0,900 2%
Travel $ 2,000 3%
Utilities $ 5,000 9%
Total Expenses $ 56,400
Net Income $ 1,291

Balance Sheet % Sales 2002

Assets
 Cash 12% $ 7,200
 Mkt Securities 32% $ 18,225
 Acct. Receivable 21% $ 12,154
 Inventory 24% $ 14,000
 Fixed Assets, Net 48% $ 27,500
Total Assets $ 79,079

Liabilities
 Acct Payable 13% $ 1,850
 Payroll Liabilities 15% $ 725
 Long Term Debt $ -
Total Liabilities $ 2,575
Equity
 Owners Equity $ 100,000
Retained Earnings $ (23,496)
Total Equity $ 76,504
Total Liab and Equity $ 79,079
Total Expenses
Net Income

Table 6 Assumptions Used by Bpt for 2003-2005 Financial Forecast

Income Assumptions for 2003-5
 And a $1,000,000 Sales Est.

ELISA preg testing 50% Growth for three years,
 no increase in $1.0/unit sales

Elk preg testing Flat sales

Returns, Allowances 2% of Sales

Discounts 4%,3%,2%

Total Sales

Expenses

Advertising 21%;25%;20%,10%

Acct/ Bookkeeping 3%,2%,2%

Contract Labor 14%,14%,12%;

Contract Marketing Cost of Field Representatives

Insurance 4%,3%,3%,3%

Misc. Exp. 5%,4%,3%,3%

Lab. Supplies 8%,7%,6%,6%

Legal Fees 2%; assume no litigation

Payroll 9%,10%,11%,11%

Other Contract Svcs Constant 6% of sales

Building Rent/Taxes Plugged--slight increases

Shipping Constant @ 2%

Travel 5%,5%,4%,2% thereafter

Utilities 7%,6%,5%,4%

Total Expenses Total Liab and Equity

Net Income Assume No Dividends

Net Income % of Sales

 Assumptions for 2003-5
Balance Sheet & $1,000,000 Sales Target

Assets
Cash 12% or 44 days of
 expenses; 8.33% or 30 days

Mkt Securities 10% for 3 years, 2.5 %
 thereafter

Acct. Receivable 27%,25%,25% or 90 days;
 40 days

Inventory 20% or 73 days; 30 days

Fixed Assets, Net Estimate of new equipment
 needs
Total Assets

Liabilities
 Acct Payable 13% of Inventory
 Payroll Liabilities 2% of payroll
Long Term Debt See "Plug"

Total Liabilities

Plug To Balance New Debt Need (Not
 needed)

Equity
 Owners Equity
 Retained Earnings
Total Equity

Total Liab/Equity
w/New Debt: