Thrusting a new technology into an established marketplace dominated by industry giants is tough duty for any company. And things aren't made any easier for start-ups by cratering dotcoms scaring off venture capital. Nevertheless, TheraSense, the marketer and developer of a leading-edge blood glucose monitoring technology, launched successfully last summer. It got the most bang for its investment buck by concentrating capital on product development and marketing while outsourcing a range of order management and fulfillment functions to Livingston Healthcare Services, now a part of UPS Logistics Group.

Based in Alameda, Calif., TheraSense brought to the market FreeStyle, a patented glucose monitoring technology that enables diabetics to take a blood sample from multiple sites on their body. Where most test protocols call for fingertip tests, FreeStyle allows that and tests from the forearm, upper arm, thigh, calf and the fleshy part of the hand. Additionally, the technology requires only a fraction of the amount of blood some testing technologies need, and the process using TheraSense lancets and procedures is said to be virtually pain-free.

This may not seem like such a big deal to the average person, but 16 million Americans have diabetes. They consume slightly more than $2bn in diabetes-related products annually. Such industry leaders as Roche Boehringer, Johnson & Johnson/LifeScan, Bayer/Miles and Abbot/Medesinse already are well established in the glucose monitoring arena.

A Type I diabetic needs to test his or her blood glucose level four times a day, while Type II diabetics test an average of twice a day. "Testing doesn't manage the disease, but rather it produces information that helps patients manage their disease, explains Claire Heiss, vice president of operations for TheraSense. "The one thing about this disease is if you can manage to keep your blood sugar within a certain range on a consistent basis, you can avoid complications and live a normal life. But you have to maintain due diligence. You always have to be testing, you always have to be managing."

To these folks, off-finger testing and a pain-free process proves to be a big draw. "We're moving very fast," Heiss acknowledges. "We launched our product on July 1 last year and did $15m of business by the end of the calendar year. We plan on doing well over $100m in 2001 and should break into the black later this year."

In order to bring instant presence and capability to the market in a timely manner without shooting their venture capital bolt, TheraSense managers knew outsourcing would be a critical strategy as they progressed with their business plan in 1999.

"As a start-up company, we wanted to make sure that we established ourselves in a manner that enabled us to compete with the larger businesses already out there in the marketplace," Heiss says. "We couldn't make a heavy investment and end up with just a small logistics activity at first, but we did want to somehow get ourselves established so that we had an effective logistics operation that made us competitive - all at a minimum investment."

And there was the pressure. "We felt the pressure because TheraSense was not a household name, but FreeStyle was a brand new product, and we're pushing the envelope on innovation in glucose monitoring," says Heiss. There was a nearly universal feeling within the company that things needed to go smoothly right out of the chute. "We worried that if we didn't get presented correctly at the beginning, we might not have a second chance. A lot people have been in this field and have offered different ways to make life easier for people with diabetes, but the products generally fail to deliver on the manufacturer's promises."

In short order TheraSense connected with Livingston, which had a lengthy list of name brand clients and an exclusive focus on the healthcare vertical market. Phone calls were made in August 1999; discussions and the exchange of data and analysis followed during the next month. Livingston executives made their presentation to TheraSense, then came site visits.

"We liked the fact that Livingston already was dealing with the different drug companies in distributing to the retail level markets, which would be very similar to the chains of distribution that we would be doing," Heiss recalls.

"We had a reputation in the marketplace as a company that helps with start-up companies," says Vance Moore, vice president of sales and marketing for Livingston Healthcare Services. "We have the infrastructure - accounts receivable, customer service, pick/pack/ship distribution capabilities - and we have carved out a reputation for being exclusively in healthcare. They needed infrastructure, and they wanted healthcare expertise dealing with the trade marketplace, so it was a good match."

Starting Off Right
Eventually a contract was signed in December 1999. Implementation was targeted for April 2000, and the first order was processed in June 2000.

The advantage of getting involved with an experienced third-party operator soon became evident to the TheraSense execs. "Livingston helped us establish at a pretty quick rate effective relationships with retailers," says Heiss. "For example, they helped us set up the accounts, establish where the billing goes, locate the main distribution points, and identify who the key people are at each location."

This is where a lot of businesses fail in the retail environment, Heiss points out. "Either they don't get the right contacts, or they don't open the right communication channels or they don't have the right format on the account. Livingston helped us do a lot of that," she says. "We had our own sales people dealing with the retailers, but establishing the infrastructure to them is where Livingston came in." In fact, Heiss adds, TheraSense executives have been told by several name-brand retailers, including Wal-Mart and Walgreen's, that "as a start-up, we were the first ones that got it right from the beginning. And that's good to hear, because we feel we only have a small window to get ourselves out in the marketplace, and if we don't do it right, we're lost."

The stock grew richer for both TheraSense and Livingston late in the summer of 2000 as UPS Logistics Group reached an agreement to buy Livingston Healthcare Services of Newark, Del., and Livingston's parent company, Livingston Inc. of Oakville, Ontario. The deal included 22 Livingston distribution centers across Canada, specializing in supply-chain management in the high-tech, consumer products and healthcare sectors, as well as six distribution centers operated by Livingston Healthcare Services in the U.S.

For Livingston, the big plus was access to a broader range of supply-chain and transportation services and expertise as well as more comprehensive technical capabilities. UPS Logistics Group in turn acquired a healthy Canadian portfolio as well as an immediate and profitable presence in the medical device/pharmaceutical industry that the company has targeted as ripe with growth opportunities for third-party logistics services. The companies completed their transaction in October 2000. The Livingston name will continue to exist until this summer, when plans call for co-branding of a Livingston/UPS Logistics Group healthcare services product. The Livingston name probably will disappear early in 2002.

Livingston's Moore credits much of the start-up's success to the quality of information assembled by the TheraSense planners early in the venture. "We personally were very surprised at the amount and quality of detail that the account had back three or four months before we went live," he says. "A lot of times when supply-chain managers work with start-up companies, we deal with people who have a lot of hopes but no numbers to back them up. With TheraSense, we were blown away by the amount of detail they had. And the accuracy of the detail was phenomenal."

According to Moore, TheraSense provided a complete listing of their projected SKUs as well as projected volumes for each, and the companies then sat down and collaborated on exactly what services would be needed. Essentially, Livingston agreed to provide TheraSense with an entire suite of services, including order processing and management, pick/pack/ship and other warehouse management functions, accounts receivable, charge-back processing, collections, and to a degree, customer service.

Here's how it works. TheraSense maintains a tight hold on the proprietary elements of its testing regimen. For example, the company manufactures its own test strips at an Alameda facility. San Jose, Calif.-based contract manufacturer Flextronics makes the monitor devices used in the FreeStyle program. The lancing device and lancets are subcontracted to a group formerly known as Gainor Medical Technology, now Facet Technology of Atlanta. Lancets are made in Japan, lancing devices in China. TheraSense is in the process of changing the supplier for control the solution, but that's a commodity item. The testing kit is similar to the razor/razor blade concept: Once the consumer has the testing device, they must purchase test strips, a control solution, lancets, finger caps and other consumables required in the testing process.

Shipping Schedules
Livingston maintains for TheraSense dedicated space in its 100,000-square-foot Newark facility for inventory storage, order processing and fulfillment.

TheraSense sets up shipping schedules from the subcontractors' manufacturing points directly to the Livingston facility as well as from certain supplier locations to the Flextronics plant, where items are assembled into kits. Once they receive the shipment schedule, suppliers arrange inbound transportation. At Newark, the Livingston client management associates receive advance shipping notices electronically and know what's heading inbound from the supplier base.

TheraSense sells products four ways: over the internet, via a telephone-operated customer service center, through retail channels such as chain drug stores or discount houses, and by means of a network of healthcare professionals, healthcare educators and clinics. The latter category is particularly critical to TheraSense, Heiss explains, as most newly diagnosed patients with diabetes go on the recommendation of their physician or healthcare educator when they select their first monitoring kit. "Visibility within the medical community is very important, so a large segment of our own sales force concentrates on healthcare professionals, healthcare educators and related clinics to make them aware of and familiar with our products." Once a patient becomes comfortable with a test kit, the flow of consumables begins; ancillary items generally cannot be used across different manufacturers' products.

Other sales efforts target the retail sector, particularly the large discount stores and pharmacy chains. According to Heiss, TheraSense already has made it into the Big 15 retail channel. "That's pretty good for a start-up, and a lot of it goes back to setting up those accounts and establishing the distribution channels," she adds. "We wouldn't have been able to take on as much as we did as fast as we did without Livingston."

The TheraSense customer service center is a 24/7 contract operation housed in a call center in Pennsylvania. Operated by ICT, the service center is staffed by people trained in the use and application of the FreeStyle system and dedicated to the TheraSense account. The service center dispenses information, answers questions, gives instructions for product returns and can accept orders as well as changes to orders. The latter order-related information is transmitted electronically to the company's logistics management system (LMS) in Newark for further disposition. "Again, by choosing to subcontract, we didn't have the high-dollar investment of establishing our own customer service center, but we can still provide the level of service to compete with the big guys," Heiss says.

Other orders come via the company's web site, TheraSense.com, where browsers can peruse a range of TheraSense products as well as receive information about diabetes and patient/customer care.

Internet sales backed off from an initial share of 15 percent to closer to 3 percent as FreeStyle products took hold at the retail level, says Heiss. She expects the internet share of the pie to remain modest at best, the determining factor being a matter of hassle, not price.

"With our internet presence, we're not trying to compete with our retail level. It's more a matter of offering the convenience to our customers, and we try to do that at a comparable price, taking into consideration the convenience factor," says Heiss. "I think we will always have a steady flow of business on the internet, but until the procedure for medical reimbursement by insurance companies changes, the internet share of the business probably will remain pretty small."

It's a hassle for many people to have to fill out all the forms for reimbursement, then mail them in and wait for the check; it's much easier to walk into the drug store with a prescription card.

The trade orders from the wholesalers, diabetic supply companies and clinics that are not transmitted directly to Livingston's MIS via EDI arrive at the Livingston facility via phone, fax or mail and are manually keyed into Livingston's LMS information system. According to Moore, the source code for LMS originally was Cambar, but it has been modified a number of times over the years to tailor it to the specific needs of the healthcare industry. "It's now a proprietary internal system, combining an order management capability with a warehouse management system," Moore says. Modifications tailored to the healthcare business include accommodations for electronic licensure validation, and highly sensitive lot and serial tracking capabilities.

Internet orders entered on the company's web site are passed to a ProCure software package. It massages the information into order form and dispatches it both to the Livingston LMS as well as to ICP, where the data awaits in case the customer has a question, a problem, an order change, a change of destination address or is in need of more supplies.

All orders received at Livingston's Newark facility by 2 p.m. are shipped out that day, with the last carrier leaving around 7:30 p.m. Standard service for shipments moving outbound from Newark is UPS Ground, though customers have a range of higher service options at alternative delivery rates. Service also is available for heavier shipments on a number of motor carriers, including APA Transport of North Bergen, N.J., and Consolidated Freightways of Menlo Park, Calif. UPS services all of the trade customers, while web customers designate delivery either by FedEx or UPS. Orders weighing in excess of 150 pounds move by a carrier selected by the warehouse managers, using a rate shop mechanism that balances cost with experience in lane.

On the product return side of the equation, TheraSense directs its partners, contractors and web customers to route returned items to company headquarters in Alameda. For retail accounts, the company contracts with Universal Solutions, known in a previous corporate life as One Box, to collect returned products at retail locations and dispose of them in accordance with TheraSense's directives. TheraSense in turn receives monthly reports specifying details of returned items and their disposition. Most of the items are destroyed to eliminate the possibility of sub-par products appearing in consumer channels.

Buoyed by acceptance of FreeStyle in the U.S., TheraSense now markets products on several continents, says Heiss. A partnership with Disetronic Medical Systems AG of Burgdorf, Switzerland, provides sales channels to Norway, Sweden, Finland, Germany and Switzerland. Through other means and partnerships, FreeStyle is crossing borders into Israel, Saudi Arabia, Egypt, Hong Kong and Thailand. A new partnership with Nipro is opening doors to the market in Japan, while other plans call for product marketing launches in Canada and South America in the coming months.

As the FreeStyle market continues to grow, TheraSense intends to make some significant shifts in supply-chain strategy, moving from scheduled shipments inbound to Newark to more of a vendor-managed, pull-driven inventory replenishment program for most products, says Heiss. "We hope to begin making the transition early in 2002."

The company also plans another cross-border foray, this one into the public financial market. According to Heiss, TheraSense was ready to go public last summer when the dotcom rockets started returning to earth at devastating speeds. "We already had filed our papers with the Securities and Exchange Commission, but we started seeing too many companies go out at one price and come down by a factor of ten, so we withdrew," says Heiss. "We didn't want to become a takeover target right out of the gate. Now, we're in the beautiful position where we can pick when we go to market, and we will do it when the market straightens itself out and some stability returns."

For Livingston's Moore, TheraSense has been a wonderful sanctuary from some of the headaches that traditionally plague start-ups and their third-party providers of logistics services. "TheraSense is one of those rare clients that had expectations that were realistic at the beginning, and then they executed according to their game plan."