AIP Conference Proceedings 2227, 020038 (2020); https://doi.org/10.1063/5.0000875 2227, 020038
© 2020 Author(s).
Engineering economics of cranio-
maxillofacial (CMF) degradable implant production in Indonesia
Cite as: AIP Conference Proceedings 2227, 020038 (2020); https://doi.org/10.1063/5.0000875 Published Online: 07 May 2020
Shabrina Fadhilah, Anna Amalyah Agus, Prasetyanugraheni Kreshanti, et al.
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Engineering Economics of Cranio-maxillofacial (CMF) Degradable Implant Production in Indonesia
Shabrina Fadhilah
1), Anna Amalyah Agus
2), Prasetyanugraheni Kreshanti
3,4), Hendri DS Budiono
1), Sugeng Supriadi
1,4), Yudan Whulanza
1,4, a)1Departmentof Mechanical Engineering, Faculty of Engineering, Universitas Indonesia, Depok, Indonesia
2Department of Management, Faculty of Economic and Bussiness, Universitas Indonesia, Indonesia
3Cleft and Craniofacial Center Cipto Mangunkusumo Hospital – Plastic and Reconstructive Surgery Division, Department of Surgery, Faculty of Medicine, Universitas Indonesia, Indonesia
4Research Center for Biomedical Engineering, Universitas Indonesia, Indonesia
a)Corresponding author: [email protected]
Abstract. One effort to develop the medical devices industry in Indonesia is to downstream research products that have been carried out by a research institution. Currently, many research institutes that work in the biomedical engineering field have focused on developing medical devices that have funding support from a government agency of Indonesia.
However, a pre-financial study is also needed to be carried out to understand the profitability and business model that proposed with a manufacturer. This paper aims to calculate economic parameters from various scenarios that involved the pre-operation cost to develop a new model. A new product development (NPD) is needed to gain more sales volume to the existing medical device manufacturer. However, this activity is not cheap and mostly needs new investment.
Therefore, we iterated various scenarios such as: establishing a new production line, expanding new products apart from an existing product, getting grant support from government trough collaboration with a research institute, and expanding sales volume to profitable parameter. Our calculation shows that the involvement of a government agency, i.e., LPDP and research institute through new product development, will empower the manufacturer. Ultimately, the profit will return to the research institute as licensing the product property right to the corresponding manufacturer. Here, we showed that a new product of biodegradable cranio-maxillofacial implant would have a Net Present Value (NPV) around -12.7 billion IDR to establish the line production. However, we also showed various scenarios to enable us to have NPV of 6.0 billion IDR.
INTRODUCTION
An implant is a medical device manufactured to replace a missing biological structure, support a damaged biological structure, or enhance an existing biological structure [1]. The surface of implants that contact the body might be made of a biomedical material such as titanium, silicone, or apatite depending on the functional requirement. Thus, bone implants defined as a medical devices to replace a bone or support a damaged bone [2].
Whilst craniomaxillofacial (CMF) is related to facial structure and oral area of humans.
Pair of screws and plates are widely used as a CMF implant. A plate is made with lower elasticity, better deformability, and lower hardness so that it can be adapted accurately to anatomic contours whereas screws are fabricated to have higher elasticity and tensile strength and low deformability. The design should consider the ergonomics principle to accommodate doctors' and patients’ convenience [3]. For example, the anthropometry, motion and strength capabilities (biomechanics), and training for using the equipment are important factors in the design consideration of CMF implant. Therefore, the implant and corresponding tools are expected to be easy to use [4].
We have been developed CMF Titanium Implant since mid of 2017 funded by the Ministry of Higher Education and Research in a project so-called Biomaterial Teaching Industry [5-6]. Overall, the characteristics and
performance of this implant had been investigated [7]. Besides, the UI screw and miniplate titanium prototypes have been successfully manufactured within acceptable criteria. Subsequently, the usability of those prototypes had been validated by plastic surgeons to be not inferior compared to the existing market product [8]. At this moment, we work on the new type of CMF implant which is a biodegradable type implant. This is triggered by the needs of plastic surgeon that on several occasion, they need the biodegradable type to handle the young age of patients or some certain consideration that require biodegradable implant [9]. Our previous study showed that PLA does not adversely affect the body thus making it an appropriate candidate to be used as a degradable implant [10-12].
However, all available CMF implant in Indonesia is still imported from other countries that make them relatively expensive because of the shipment and taxes. Therefore this research is studying the feasibility of manufacturing CMF implants locally. This study aims to determine the economics analysis by comparing three different scenarios of implant product development. The first scenario was establishing a new facility to develop a fresh line production of the CMF implant (degradable type) separate with titanium type. The second scenario was a new product development (NPD) activity to expand the business of a titanium implant manufacturer. Lastly, the third scenario was eliminating most NPD costs that can be categorized as a pre-operating cost by getting funding from the government agency such as the Indonesian Endowment Fund (LPDP) through its innovation grant. Then, the company uses the property right by using the license as monetizing back to the university as an entity of government body. Ultimately, we will be able to have a preliminary financial analysis that complements the technical feasibility of CMF biodegradable implant.
METHODOLOGY
The stages of this study are determine a set of assumptions production processes, sizing the market and calculating economic feasibility parameters [13-15]. The market size is determined from implant usage data at a national center hospital in and education hospitals in Jakarta. In order to perform economic feasibility, a financial analysis is calculated based on these parameters :
CAPEX or Capital expenditure is the money invested by a company in acquiring, maintaining, or improving fixed assets such as property, buildings, factories, equipment, and technology.
OPEX is Operating expenses, the costs a company incurs for running their day-to-day operations. These expenses must be ordinary and customary costs for the industry in which the company operates.
Net Present Value Method (NPV), NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. NPV is calculated as follow:
– (1) All NPV calculation in this study was assumed to have a 10-year-project.
(2)
Internal Rate of Return Method (IRR), IRR is used to estimate the profitability of the project. If the IRR more than the capital budget, then we would accept the project. Otherwise, the project is not worthwhile. In this study, IRR is assumed at 10%.
∑
(3)
Where Ct is Net cash inflow during the period t where C0 is total initial investment costs and t is the number of time periods.
This financial analysis was modeled in three scenarios, which were:
- standard scenario, the company install a totally new line business thus it needed a fresh capital investment altogether with its landfill, buildings, and other infrastructure. The operational cost will be calculated solely to produce this product hence operational cost shall be addressed for this product. As an abstract, direct labor was calculated based on manpower salary for fully 12 months per year.
- expanding the business scenario, the company already has an existing product and it wanted to introduce a new product to gain sales thus more cash inflow. The capital investment shall be refresh but not all components. A new acquisition of landfill, building offices will not be needed. Moreover, several sharing components such as labor can be shared with the existing product. In this manuscript, it was assumed that
the operating cost such as manpower salary will calculate only 4 months per year for its production batch.
This assumption based on the fact that the existing factory was already established and it still has the capacity to expand to other products.
- The government funding scenario, the company awarded funding from the government to have a new product development activity provided that the company has collaborative research with the university as a research partner. Then, the company should buy the license of property right from the previous research activity to develop the product.
Assumptions were also made for manufacturing process production. The manufacturing will be using an injection molding machine with a total production capacity of 2.4 kilograms of PLA. This machine is equipped with two different types of mold since 1 unit of CMF implant is including miniscrew and miniplate. Injection molding with a relatively low stroke volume was selected to fabricate a relatively low amount of production (Fig. 1a).
Additionally, specific encapsulation shall be needed to ensure the cleanliness of the products.
Based on benchmarking to the existing imported product, the weight of the products is 0.04 grams and 0.4 grams for mini screw and miniplate, respectively. In this study, 1 unit CMF biodegradable implant is equal to 4 pieces of screw and 1 piece of miniplate (Fig. 1b). Thus, the weight of 1 unit CMF biodegradable implant is 0.56 grams. This is useful to estimate the total amount of raw material (polylactic acid (PLA) needed in every manufacturing batch and its price. According to a local PLA distributor, the price for PLA is IDR 1,000,000,- per gram. Therefore, the total raw material to produce the CMF biodegradable implant was able to be estimated with known production capacity.
FIGURE 1. a) the typical injection mold machine that used to prototype miniplate and miniscrew; b) resulted miniplate from the injection mold weight around 0.4 grams.
RESULTS AND DISCUSSION Market Analysis and Sales Planning
Determining market size is the first input for the feasibility study of CMF implants. To estimate the number of users, the data collected from Cipto Mangunkusumo National Central Hospital and Gatot Soebroto Military Hospital. 22 plastic surgeons work in both hospitals. On average, they handled 413 cases per year per hospital that were using CMF implants. Assuming that every operation needs more than 1 unit of CMF implant, then demand of around 2,000 CMF implants was determined.
Based on the description above, the sales projection for the CMF biodegradable implant was made. In Indonesia, there are 910 government-owned public hospitals which 59 of them are grade-A hospital. Therefore, it is possible to market the CMF implant to those hospitals with targeted sales of 2000 units per year and assumed to be increased 10% annually during 10 years plant-life. Here, the CMF biodegradable implant was assumed to have priced at IDR 1,800,000,- per unit. This exact price is determined to be under the limit of The Indonesian National Health Insurance standard. Hence, the targeted sales revenue is IDR 3,600,000,000,- in the first year.
Financial Analysis
As aforementioned, there are three different business scenarios reported in this study. The first scenario was establishing a new facility to develop a fresh line production of the CMF degradable implant. The second scenario was the company expanding the business by introducing the next another type of implant, provided that it was already in the implant business. Lastly, the company collaborates with the university to get national funds to do the new product development activity. However, the company must license the property right resulted from the research activity.
Fig. 2 shows the calculation of main expenditure items that categorized into capital expenditures (CAPEX) and operational expenditures (OPEX) for the first scenario. The CAPEX covers mostly first investment such as land, infrastructure, office needs, and pre-operating cost. Here, the pre-operating cost is determined to be the activity related to the pre-market activity such as product prototyping, in-vitro/animal testing, patenting and product registration. Moreover, OPEX consists of the operational cost that needed during the production/manufacturing such as manpower cost, raw material, utilities, sales promotion, business traveling, customer support, insurance, etc. It can be seen that the pre-operating cost and acquiring machinery/equipment are the dominant investment.
FIGURE 2. Breakdown of expenditure items for investing of production facility of CMF biodegradable implant using set of assumption of first scenario
Fig. 3 resumes total investment of every business scenario both capital and operational expenditures. For the first scenario, the CAPEX consisted of infrastructure investment such as land, building, office vehicles and equipment, furniture, and machinery. Approximately a 4.7 billion IDR is needed to build a new production line. In this cluster, as shown in fig. 3a, machinery, and equipment has a big portion, which is 1.7 billion IDR. However, the highest cost of total investment is for the pre-operating process. It is shown in Fig. 3 that pre-operating cost reach around 2.3 billion IDR of total investment. Moreover, the OPEX in this first scenario has a total of 3.0 billion IDR. The highest percentage of OPEX is direct production cost which around 1.3 billion IDR of total investment as shown in Fig. 3b.
In addition, direct labor nominal investment for this case is the biggest compared to two other business scenarios. It is because the manpower was dedicated all the year for this line production only disregard the volume of the product.
In the second scenario, the cost of land, building/infrastructure and office vehicles are being omitted from the total investment. Assumed that the manufacturer is already built and established with a previous type of CMF (metal-based). Here, a new line production of CMF biodegradable implant is added to this manufacturer. Therefore, the CAPEX is allocated to pre-operating cost and machinery/equipment with total CAPEX 3.9 billion IDR. Fig. 2
and Fig. 3 show that the pre-operating allocated as the highest CAPEX component, as well as the first case with 2.3 billion IDR. It takes around 49% of the total capital investment cost.
Furthermore, the OPEX was calculated at 2.0 billion IDR,-, lesser than the first scenario. This is caused by the difference in working hours for direct labors as mentioned in methodology. Significantly, direct labor cost is decreased compared to the first scenario as inferred by Fig. .2
FIGURE 3. a) Capital expenditures (CAPEX) and b) Operational Expenditures (OPEX) breakdown items for every business case
Finally, the CAPEX in the third scenario is shown to be similar to the second scenario. Several factors that are opted out from the component cost is due to expanded existing business. Here, an external fund from Government is invested during the new product development. Therefore, the pre-operating costs are omitted from the investment component at the side of the manufacturer. However, this pre-operating cost will be accounted for in financial analysis balance as an intangible asset. Briefly, the CAPEX consisted of machinery/equipment with a total amount of 1.7 billion IDR. Fig. 3 depicts that machinery/equipment is the total investment needed by omitting the pre- operation cost. Moreover, as well as the second case, the third case’s OPEX is 1.7 billion IDR. Similarly, the portion of OPEX is allocated highly at production cost, 1.3 billion IDR or equal to 62% from total OPEX.
After the total investment is calculated, the Net Present Value calculation is then carried out. However, the cash flow has to be determined first. The cash flow is calculated by subtracting the sales revenue to the operational cost such as raw material purchasing, manpower salary, utilities, and travel expenses. After the cash flow per year has been established, the NPV can be calculated by Eq. 3. The result of NPV for each case is shown in Fig. 4.
Based on Fig. 4b, NVP for every scenario are -12.7 billion IDR; 2.0 billion IDR; 4.3 billion IDR for first, second, and the third scenario, respectively. The negative sign indicates that the scenario is not convincing for the manufacturer/investor. Therefore, the second and third scenarios would be a solution to make this production feasible.
FIGURE 4. a) The Net Present Value (NPV) calculation and b) Resume of financial parameter on all scenarios
The NPV calculation indicates that scenario 2 and 3 has a promising business ground to the manufacturer.
However, it also implies that the revenue of the business is relatively low compared to the existing trading company.
Thus, to make it more interesting, the sales revenue shall be drastically increased. Here, we propose an alternative sales model that combines both CMF implants (titanium and degradable) and sell them as a bundling package. This scenario is justified for the third scenario with an increased volume of degradable implant caused by the selling of titanium CMF implants. It is assumed that the bundle consists of the products by comparison of 1:4 for PLA to titanium. This assumption is calculated based on cranio-maxillofacial reconstruction case data of RSCM hospital.
In the first year, we assume that the sales target will be 110 bundling packages and increased by 10% per year.
This bundle is priced at IDR 60,000,000 per bundle which comprises of 100 pairs of CMF implants per bundle.
Therefore, the revenue of the first year could be 1.3 billion IDR instead of 77 million IDR of the third scenario. This high increasing shows a more promising result for the manufacturer to develop the new product.
Fig
.
4 shows the total investment of this extension of third scenario. Although the CAPEX and OPEX of this scenario are similar to the previous scenario, pre-operating cost of the CMF titanium needs to be added. Here, we use the pre-operation cost, machinery investment cost and production cost which were calculated by Lassandy et al.[16]. It was reported that the pre-operating cost for CMF titanium is 0.8 billion IDR and machinery investment nearly at 6.0 billion IDR. Moreover, this will adjust the total investment of establishing new CMF biodegradable line production from 7.7 billion IDR to 15.2 billion IDR (Fig. 4b). Similarly, once the total investment has been determined, the NPV for this case is easily calculated as shown in Fig. 4b. The NPV for this scenario is around 6.0 billion IDR which belief to more interesting for the manufacturer.
CONCLUSIONS
In conclusion, the line production of CMF implants needs relatively high investment; however to increase the sales volume, diversification of its product needs to be realized. Here, we were able to show the scenario that profitable for CMF implant. We showed that minimize the pre-operation cost into zero by getting fund from government agency i.e LPDP, will give significant effect as shown by financial parameter. Moreover, a sales bundling with titanium CMF will result a new business scenario that more promising for both manufacturer and university as awardee from agency fund. According to the financial analysis of the fourth scenario, the CMF biodegradable implant must be combined with the CMF titanium implant in order to gain higher volume of its sales.
Accordingly, this business model is profitable and worth to propose in part of CMF manufacturer.
ACKNOWLEDGEMENT
This research was supported by the Universitas Indonesia Grant PIT9 in 2019 with Contract Number: NKB- 0084/UN2.R3.1/HKP.05.00/2019. The research activity was an initiative project of LPDP Rispro Invitasi 2019.
Thanks also to Mr. Paulus Napitulu (PT Dynaplast) for the part of the injection machine trial.
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