Neuromonics Case

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development stages. • Australian market acceptance. The Australian commercial market introduction showed that unaffiliated clinical audiologists could successfully treat paying customers and duplicate results obtained earlier in clinical studies with non-paying patients. • Commencement of export sales. Neuromonics had commenced export sales in modest volumes to the USA and New Zealand, through leading tinnitus clinics in those countries.

Distribution experimentation in Australia When Neuromonics launched its treatment, the Australian market for tinnitus treatment was undeveloped. Peter Hanley therefore decided on an experimental approach, testing three models of marketing and distribution. In April 2004, Neuromonics opened its own tinnitus clinic in Sydney, followed by another in Perth in January 2005 and Melbourne in March 2005. Also in April 2004, it began selling to independent clinics, training their audiologists to assess and treat patients. The third approach was to send a Neuromonics audiologist to ‘visiting sites,’ renting a room either fortnightly or for one day a week and providing treatment by appointment. By November 2005, it had become apparent that owning clinics outright, while attractive from a control and margin perspective, was also capital intensive. The visiting approach also had limitations. Therefore, it became clear that selling to independent clinics provided the most rapidly scaleable and least capital-intensive approach to growth. Thus, by November 2005, 16 independent clinics were offering the Neuromonics treatment. Neuromonics audiologists were providing training assistance and quality assurance, and Neuromonics was fielding interest from many more interested clinicians. Audiologists Nina Quinn and Sandra Bellekom were hired by Neuromonics in early 2005 as territory managers, responsible for in-house clinic sales as well as with development of sales through independent clinics. Nina and Sandra experimented with various forms of promotion and advertising, including

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direct-to-consumer promotion using print and radio media, as well as to healthcare professionals. In response, a large number of interested patients needing assistance with their tinnitus contacted Neuromonics, and over 500 signed up directly from the campaign.

Funding Neuromonics Until 2005, Neuromonics had been funded progressively through a series of small funding rounds as it reached key stages in its development. The initial funding, in August 2001, comprised A$1.5 million from Innovation Capital, an Australianand US-based venture capital firm with a history of successful backing of health sector start-ups. This funding was drawn progressively as the company met preagreed operational milestones. Subsequent raisings of A$1.3 million in October 2003 and A$2.9 million in November 2004 were provided by existing shareholders, executives and individuals associated with the existing shareholders. To recognise the contributions made by Curtin University, by Dr Paul Davis and by TechStart before August 2001, these three parties received ordinary shares amounting to about 25 per cent of the company’s fully diluted capital base. Another allocation of shares was set aside for issues of options to key staff.

Funding requirements for international expansion It was clear to the Neuromonics management team and board of directors that the major growth potential for Neuromonics was in the international market. The company’s leadership team also concluded (based on its experiences and achievements in Australia and the market demand for Neuromonics’ treatment in the US and Europe) that the company was now ready to embark on international expansion. Peter Hanley was now faced with two critical questions that would have a direct bearing on the company’s funding requirements: • What should be the scope of international growth: focus on one key market at a time, or roll out simultaneously in the USA and Europe? • What should be the pace of the rollout within any one market: take a conservative, capital-rationed approach or invest more aggressively in accelerated growth? Playing on Dr Hanley’s mind in relation to both questions was the knowledge that in the dynamic industry of healthcare technology, there is always the threat of another innovation emerging. Dr Hanley was aware of development work being done around the world with drugs, electrical stimulation and other approaches and, although there appeared to be nothing near to market, he wondered how much time Neuromonics had to build the global leadership position to which it aspired. On the other hand, when it came to the question of scope, Dr Hanley was only too aware of the constraints of ‘bandwidth’ across the small number of individuals in his management team, and the huge operational challenge that would be associated with a launch into each major market offshore. On the question of pace, there was a clear relationship between (1) how much the company could invest in sales and clinical support staff and (2) the number of

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healthcare professionals who could be trained to offer its treatment. Neuromonics could reasonably expect a substantial investment to translate directly into rapid sales growth and, hence, rapid value growth. However, at this stage in the company’s development, it was not easy to forecast sales growth accurately. Any delay in sales would result in significant further capital requirements as costs mounted while revenues lagged. Dr Hanley was also mindful of the investor perspectives on this question. If the company sought to raise funds from the US venture capital community, it seemed likely that incoming investors might prefer the more capital-accelerated approach. This would allow them to put ‘more money at work’ as well as to more rapidly secure an attractive exit via an initial public offering or trade sale. However, any further capital injections would dilute the holdings of current shareholders unless they contributed to the same level themselves. Recognising that each of these approaches implied different risks and rewards, it was not immediately clear to Peter Hanley which approach might best suit Neuromonics at this time. Until November 2005, he had strived to manage Neuromonics conservatively, trying to preserve cash and assuring good value for all expenditures. He had attempted to run a lean organisation with minimum staff, hiring outside expertise on a part-time basis and avoiding long term financial commitments. In November 2005, had the time come to change?

Questions Put yourself in the position of Dr Peter Hanley. 1. What is your assessment of your company’s progress to date? 2. What risks do you believe are inherent in a slower growth strategy, and in a higher