Vusion, Inc. Market Analysis Sales of process control systems are experiencing strong growth. Sales in 1997 were $3.86 billion and are expected to reach $4.6 billion by the year 2000 and $5.75 billion by 2004. The chemical analyzer industry is slated for rapid expansion, growing at an annual rate of 7.8% from $1.45 billion in 1991 to $3.10 billion in 2001. This market is split almost evenly between liquid and gas analysis. Nearly half this total market is for process control. Within this market, revenues for on-line analyzers will grow at a similar rate and should reach $1.3 billion in 2000, up from $880 million in 1993 (Chemical & Engineering News, March 1995, Vol. 73, 11 p.25). Typical industries that use process control analyzers are: Process Industries Fine chemicals Chemical intermediaries; Pharmaceuticals; Biologicals; Medicinals; Detergents; Fertilizers; Soft drinks, Spirits, Malt beverages; Explosives testing; Paints and dyestuffs; Food flavorings, and; Personal care products (e.g. fragrances and cosmetics).

Clinical Diagnostic Systems

• Diagnostic testing, and;
• Point-of-care testing.

Environmental Management Systems;

• Monitoring water quality
• Waste stream management

Vusion's primary market is process control analyzers for the fine chemicals industry. After Vusion has developed a strong presence in this market it will broaden its R&D efforts and marketing efforts to include medical diagnostics. Vusion will assess other market opportunities on a case-by-case basis and focus on those industries that are the most price-insensitive and where Vusion can quickly deliver the most value and capture the most profit.

Worldwide prescription pharmaceutical sales reached $265 billion in 1997, and the market is continuing to grow. However, profit margins are threatened by strict industry requirements on processes, ever changing government regulations, and increasing competitive pressures. In response, pharmaceutical companies are spending increasing amounts on R&D to combat rising manufacturing costs, which are currently estimated at 24% of sales ("The Drug Industry and PBM companies in 1995", Cool, K.). Of the $21.1 billion spent on R&D in 1998 9% was spent on process improvements totaling $1.91 billion (Pharmaceutical Researchers & Manufacturers of America, 1998 Industry Report). The process improvement investments are classically price-insensitive. Pharmaceutical manufacturers have indicated that Vusion's technology could provide an opportunity to improve their processes by significantly reducing manufacturing costs. This can be achieved by improving upon current quality control methods and relieving chemical analysis bottlenecks within the process.

The market opportunity for Vusion's technology among pharmaceutical manufacturers has been determined by assessing the process control requirements of the small, medium and large manufacturers in the U.S. today. Of the 700 pharmaceutical firms in the U.S. we have estimated that 35% of those companies have small process plant manufacturing facilities, 35% have medium facilities, and 30% have large manufacturing plants. To identify the pharmaceutical manufacturer's return on investment from the introduction of Vusion's technology we estimated its impact of these different size plants:

Typical Small Company Process Scheme

Figure 3

Small Process Facility

Based upon discussions with senior managers at biopharmaceutical manufacturers, Vusion estimates that 15-20% of a small facility's capacity is lost yearly from product quality problems at a cost of $250,000. With Analyzer I in place on one plant line (see Figure 3), a firm of this size would save approximately $180,000/year by reducing total number of lost batches by 66%. With Analyzer 2 in place, such a firm would save approximately $60,000/year by eliminating one lab technician needed to perform Quality Control (QC) experimentation for Food & Drug Administration (FDA) compliance. Thus, the total savings estimated per small plant line are approximately $240,000 per year.

If a small process manufacturing facility has 2 plant lines that need 2 analyzers each, as well as having one pilot plant facility which may use I analyzer, then the total number of analyzers for a small process facility is equal to 5 analyzers, with a total savings of $480,000.

Medium Process Facility

Vusion has estimated that a medium facility will have a similar production scheme as a small facility only it would include 6 plant lines rather than 2. Assuming each of 6 lines requires 2 analyzers - adding 3 extra analyzers for a larger pilot plant - the total number of analyzers for a medium process facility is equal to 15 analyzers, with a total savings of $1,440,000.

Typical Large Company Process Scheme

Figure 4

Large Process Facility

A large process facility (shown in the schematic below) would have a more complex system for production and would work on a much larger scale than both a small and medium facility. Vusion has estimated that a large process facility with I plant line utilizing 4 feed lines to produce one final product could utilize 5 Vusion QC analyzers (see Figure 4). This total does not include additional analyzers necessary for pilot scale experimentation. If we assume that a large facility has a throughput volume 10 times that of a small facility and Vusion's analyzers can similarly prevent 66% of the 15-20% lost batches then the savings, if linearly scaled, would be approximately $2 million per annum.

Market Size

The estimated size of the pharmaceutical manufacturing market niche for Vusion's Electronic Tongue ^TM technology (see also Marketing Strategy for details on industry structure) is shown in Table 1 below:

Based upon the previous set of assumptions for the number of QC analyzers that a given pharmaceutical manufacturing firm would use our calculations indicate a national market for approximately 7,000 analyzers (see Table 1 below). However, analyzer system sales represent only one source of revenue. Vusion's technology incorporates a disposable element (a Sensor Cartridge), that needs to be replaced after each manufacturing run. As a result, the maximum Sensor Cartridge sales for this market would total over 0.5 million units per year as shown in Table 1. These calculations assume a relatively low number of analyzers per plant and ignore the many contract pharmaceutical manufacturers, who will also have multiple applications for Vusion's technology.

It is also important to note that this market estimation only considers the number of available plant lines in the pharmaceutical industry within the U.S. and does not take into account the number of plant lines in biotechnology and other types of fine chemical processing facilities (e.g. producers of chemical intermediaries to supply other manufacturers and users). In fact, large pharmaceutical companies spend 16% of their R&D budget (approximately $3 billion) on outsourcing pharmaceutical development and manufacturing to contract pharmaceutical manufacturers ("The Pharma Giants: Ready for the 21^st Century?", Eagan, R., Hayes, R., 1998). Vusion expects that when the other potential buyers in the fine chemicals market are evaluated that the total market within the U.S. for Vusion's analyzers and Sensor Cartridges will increase substantially.

The most attractive future market for Vusion's technology, once the technology has been fully developed, is the Point-Of-Care (POC) medical diagnostics market. Medical diagnostics consists of the detection of substances in body fluids (e.g. real-time HIV testing). Fast and accurate analyses are essential for emergency medicine and high quality patient care. The estimated worldwide market for medical diagnostics in 1997 was $19.5 billion. These revenues are generated primarily from testing in hospitals and commercial labs, which account for $15.5 billion of the medical diagnostics market (POC Testing/IVD - Industry Report, Sutro & Co. Inc., 1/29/98).

Current federal regulations specify extensive and expensive training for commercial laboratory personnel. These labs are a significant source of hospital overhead. A handheld version of Vusion's technology will provide nurses and physicians with on-the-spot analyses, saving lives and eliminating much of the expense of laboratory testing.

Analyzer technologies that compete with Vusion's Electronic Tongue ^TM in process control are:

• Physical property meters and single chemical sensors;
• Gas chromatography (GC);
• Mass spectrometry (MS) and Raman spectrometry, and;
• High performance liquid chromatography (HPLC).

These technologies either have severe limitations in the complexity of the chemical solutions they can analyze or they do not provide real-time analysis. Given the Electronic Tongue's ^TM capabilities these technologies are considered less of a direct threat as much as complementary to Vusion. This is because its analyzer can be associated with these existing systems to provide another dimension on their current analytical capabilities (see Figure 5).

Figure 5. Competing Technologies

The closest comparable product to Vusion's analyzer is an HPLC unit, which is on-line in pharmaceutical manufacturing environments but cannot provide real-time results. In addition, the results from an HPLC unit need to be interpreted by a highly trained operator. Vusion's system provides easily understandable output that can feed directly into a process control computer or a standard PC. However, a new class of companies is developing electronic "nose" technology for analyzers to detect multiple chemical compounds in gaseous form; these companies present a more serious threat. Vusion has identified three companies in this space - Aromascan, Inc., Cyrano Sciences, Inc., and Illumina, Inc.

The scientific principles of the electronic nose are similar to the Electronic Tongue ^TM, but are applied to vapors rather than liquids. This particular difference is where Vusion's Electronic Tongue ^TM has an advantage in liquid process control environments or any liquid-based chemical analysis. The polymers that are used for the electronic nose are not effective when immersed in a liquid solution, as they absorb liquid at a significantly slower rate than the polymers used in the Electronic Tongue ^TM. Also, the fragile construction of most electronic nose analyzers makes them impractical for use in liquid process streams (see Figure 6 and the summary Table 2 below).