Using Encapsulation Technology to Cure Diabetes
Executive Summary
Biocapsule, Inc., has developed and patented a process for the
encapsulation of living cells that can be used as substitutes for defective or
malfunctioning organs like the pancreas. This is a self regulating living cell
system that releases insulin on demand to maintain critical body functions. In
contrast to all current insulin delivery systems, this is the first product that
provides a cure for diabetes.
Transplanted inside the body, these encapsulated pancreatic cells
function just like the human cells they replaced by being self-regulating in the
insulin they release. A healthy person's pancreas has cells that produce insulin
when the body needs it. In a Type I diabetic patient the pancreas does not
produce insulin. Encapsulated cells transplanted into the peritoneal cavity of a
diabetic patient mimic the natural functions of a healthy pancreas, enabling the
patient to live a normal life.
This statement is from the executive summary for a proposal from a biotechnology
company that has developed a unique encapsulation process for living cells. Additional
information about diabetes and the capsule process appears on the following pages.
You have been hired by the medical researchers who developed the technology to help
them prepare a business plan. These researchers need an estimate of revenues for their proposed
capsule company for a ten year period beginning in the year 2000, and they want you to develop
the revenue estimate for them. In developing your revenue estimates assume that your treatment
will be used only by diabetics who are IDDM (insulin dependent). The researchers who have
developed this technology plan to market the treatment directly to doctors and hospitals who will
administer the treatment to patients who need it.
Use the information on the following pages plus any other information you choose to
prepare this revenue forecast. Make sure you can justify the assumptions you use in preparing
your estimates, and be sure to use published data wherever possible to support the sales numbers
you eventually develop. Provide a reference for any data you use so the reader of your estimates
can see exactly where you got the numbers you use in your estimate.

Copyright  1998 Germain Boer. Please do not use without permission of the copyright holder.
1
I. Introduction
Nature of the Disease
People with diabetes have a metabolism disorder that affects the way the body uses
digested food for growth and energy. In people with normal metabolism the digestive juices
convert the food they eat into chemicals, including a simple sugar called glucose. This glucose
then passes into the bloodstream where body cells use it for growth and energy.
A hormone called insulin, produced by the pancreas, enables the glucose to enter into the
body cells so the cells can grow and produce energy.
In a normal, healthy individual the pancreas, has small clusters of cells called the islets of
Langerhans, which produce insulin. The output of insulin is tightly regulated, and the level of
insulin rises and falls with the glucose level. In people with diabetes, however, the islets in the
pancreas either produce too little insulin or the body cells do not respond to the insulin produced
by the pancreas islets. Consequently, in the diabetic person the glucose builds up in the blood,
overflows into the urine, and passes out of the body. Thus the body loses its main source of fuel
(glucose) even though the blood contains large amounts of it.
Types of Diabetes
The medical profession classifies diabetes into two categories:
Type I--Insulin-dependent diabetes (IDDM)
Type II--Noninsulin-dependent diabetes (NIDDM)
Type I Diabetes
In type I diabetes (also frequently referred to as IDDM) the pancreatic cells that produce
insulin, the beta cells, are destroyed by the body's own immune system. This causes the pancreas
to produce little or no insulin. The only way a patient with this form of diabetes can stay alive is
to take daily injections of insulin as a substitute for the insulin not produced by the patient's
body. From 5 to 10 percent of all diabetic patients in the U.S. have this form of diabetes.
Type II Diabetes
The medical profession refers to the more common form of diabetes, Type II, as
noninsulin-dependent diabetes (NIDDM). This form of diabetes afflicts approximately 90 to 95
percent of those in the U.S. diagnosed with diabetes. This form of diabetes is most common
among adults over 55, and it may be treated with diet, exercise programs, and oral medication.
Although this group does not require constant insulin injection. However, about one-half require
some form of insulin medication.
2
Other Health Problems Related to Insulin-Dependent Diabetes
Because insulin injections cause peaks and valleys in insulin levels that do not match the
glucose levels in the blood, they are a poor substitute for the natural production of insulin by the
pancreas. These variations in glucose levels cause a number of serious problems for the diabetic
patient. Diabetes can cause damage to both large and small blood vessels, resulting in
complications affecting the kidneys, eyes, nerves, heart, and gums.
Kidney disease. About 10 to 20 percent of people who have had diabetes for 15 or more
years develop a kidney disease called diabetic nephropathy. In this disease the small blood
vessels that serve as a filtering system in the kidneys become damaged. In some cases this leads
to complete failure of the kidneys. Diabetes is the number one cause of kidney failure in the
USA and the most common reason for kidney transplantation.
Eye disease. Diabetes can also affect the small blood vessels in the back of the eye, a
condition called diabetic retinopathy. Patients who have had IDDM for more than five years
must undergo an annual eye examination to monitor any damage to the eye. Laser surgery may
be required in some cases to repair eye damage. Diabetes is the number one cause of nontraumatic blindness in the USA.
Nerve disease. One type of nerve disease can affect the hands, feet, legs, toes, or fingers.
A person's feet, legs and fingertips may lose feeling, burn, or become painful. Doctors prescribe
pain-killing drugs for the pain, and patients must carefully examine their feet if they lose feeling
in them. Otherwise, a minor scratch may turn into a dangerous infection. Consequently, many
diabetics must also regularly visit a podiatrist as well as their normal doctor.
Another form of nerve disease associated with diabetes affects internal organs and can
lead to digestive problems, incontinence, and sexual impotence.
Peripheral vascular disease. Because of poor circulation some people with diabetes
develop infections and gangrene of the feet. This may require amputation of the lower
extremity. Diabetes is the number one cause of non-traumatic lower extremity amputations in
the USA.
Cardiovascular disease. Heart disease is more common in people with diabetes than in
healthy individuals. This occurs partly because people with diabetes tend to have more fat and
cholesterol in their arteries, and when too much of these substances build up heart attacks may
occur. Diabetic patients usually have blood cholesterol and triglyceride levels checked annually.
Periodontal (Gum) disease. Patients with poor control of their blood sugar are at risk for
developing gum infections and infections of the bone that holds the teeth in place.
The longer an individual has diabetes the greater the probability he or she will experience
one or several of these diseases.
3
People with diabetes:
Visit a doctor at least four times per year
Have an annual eye exam
Have blood tests performed four times per year
Must monitor their blood sugar at home
Treatment Approaches for Insulin-Dependent Diabetics
People with this form of diabetes must give themselves insulin every day. Insulin must
be injected with a needle and a syringe. Alternative methods for injecting insulin into the body
involve the use of pumps that deliver a steady supply of insulin through a tube or implants that
slowly release insulin into the body.
Daily Insulin Injections
Patients who give themselves daily injections (several injections per day is the norm) of
insulin must calculate how much insulin to take each day to keep blood sugar levels from rising
too high or falling too low. Each day the diabetic patient must also measure the blood sugar
level and record this information in a diary along with any special information about extra
activities or sickness that might affect the sugar level of the blood. In addition, IDDM diabetics
must have a hemoglobin A1c test at least every three months. Patients must carefully monitor
blood sugar levels in relation to the foods they eat to create a balance between food intake and
insulin usage.
Insulin Pumps
Instead of taking daily insulin injections, patients may use a pump that provides a steady
steam of insulin to the body. One advantage of this method is that it avoids the peaks and valleys
of insulin levels common in a treatment regimen that uses daily injections. The patient using a
pump must adjust the level of insulin streaming to the body based on planned exercise and food
intake.
Although the pump is better than multiple daily injections in mimicking the body's
secretion of insulin, they still have problems. The pumps do not have a feedback mechanism that
can automatically measure the blood glucose level and modify the insulin level accordingly.
II. Development of a New Capsule for the Treatment of Diabetes
Capsule Treatment for Diabetes
We have developed a capsule that contains live pancreatic islets of Langerhans that
produce insulin as the body needs it. This natural action of the islet mimics the production of
insulin by a healthy pancreas and enables the patient to avoid the fluctuations in insulin levels
4
associated with all other methods of insulin treatment. With this treatment procedure a physician
inserts the capsules into the peritoneal cavity of the patient through laproscopic surgery. The
capsules remain in the patient where they produce insulin only when the patient's body demands
it. Eventually all the islets in the capsules may stop working, and the patient may undergo
another treatment in which additional capsules are inserted into the peritoneal cavity, and the
inactive capsules removed. We expect that patients will require annual replacement of the
capsules and that hospitals will expect to earn a margin of approximately 20% of the price
charged for the capsules.
The patient using this treatment can lead a normal life because the action of the capsules
works to regulate glucose levels in the blood just like a healthy pancreas. Instead of having the
pancreas produce the islets for regulating the glucose level, the capsules provide them. This
means that patients using this treatment avoid the secondary health problems like blindness, heart
disease, and amputation caused by the fluctuations of glucose levels in the blood for patients
using insulin injections to regulate glucose levels. There is also a problem with unpredictable
variability in the absorption of the insulin at the injection site.
In 1998, despite the efforts of patients and their doctors, the blood sugar cannot be safely
normalized for long periods of time with existing treatment procedures.
Expenditure Patterns for Diabetes Treatment
The following graph shows the typical expenditure pattern for a patient who has diabetes
for a long time. The dollar amounts on the bars represent the extra health costs a patient incurs
above the average amount a healthy patient spends per year.
Annual Extra Health Costs
Annual Expenditures Above Average for
Diabetic Patients
$16,982
18,000
$14,920
16,000
14,000
12,000
$9,017
10,000
8,000
6,000
4,000
$3,657
$3,748
Yr 1-7
Yr 8-14
2,000
0
Yr 15-21
Yr 22-28
Number of Years As A Diabetic
5
Yr 29-35
The Eli Lilly company provided the following information on insulin prices.
Year
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
Percentage
of Original
Price
100%
86%
64%
38%
28%
19%
15%
12%
10%
8%
7%
5%
5%
4%
The heart pacemaker was developed in 1970, and the following data show its growing
use from 1979 through 1996. The data show unit sales in thousands, i.e., units sold in 1979
equal 42,000.
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
42
44
26
31
25
39
40
32
89
120
107
97
121
113
123
139
136
155
6
Additional Information
The following quotes provide additional information about diabetes and the number of
people who have the disease.
I. From the American Diabetes Association Web Page
http://www.diabetes.org/ada/c20f.html#toll
Copyright  1997 American Diabetes Association
The Dangerous Toll Of Diabetes
There are 15.7 million people or 5.9% of the population in the United States who have
diabetes. While an estimated 10.3 million have been diagnosed, unfortunately, 5.4 million people
are not aware that they have the disease. Each day approximately 2,200 people are diagnosed
with diabetes. About 798,000 people will be diagnosed this year.
Diabetes is the seventh leading cause of death (sixth-leading cause of death by disease) in
the United States. Based on death certificate data, diabetes contributed to more than 187,000
deaths in 1995. Diabetes is a chronic disease that has no cure.
Diabetes is a Silent Killer
Many people first become aware that they have diabetes when they develop one of its
life-threatening complications.
Blindness. Diabetes is the leading cause of new cases of blindness in people ages 20-74.
Each year, from 12,000 to 24,000 people lose their sight because of diabetes.
Kidney Disease. Diabetes is the leading cause of end-stage renal disease, accounting for
about 40% of new cases. In 1995, approximately 27,900 people initiated treatment for
end stage renal disease (kidney failure) because of diabetes.
Nerve Disease and Amputations. About 60-70 percent of people with diabetes have
mild to severe forms of diabetic nerve damage, which, in severe forms, can lead to lower
limb amputations. In fact, diabetes is the most frequent cause of non-traumatic lower
limb amputations. The risk of a leg amputation is 15-40 times greater for a person with
diabetes. Each year, more than 56,000 amputations are performed among people with
diabetes.
Heart Disease and Stroke. People with diabetes are 2 to 4 times more likely to have
heart disease which is present in 75 percent of diabetes-related deaths (more than 77,000
deaths due to heart disease annually). And, they are 2 to 4 times more likely to suffer a
stroke.
7
Direct and Indirect Costs of Diabetes
Diabetes is one of the most costly health problems in America. Health care and other
costs directly related to diabetes treatment, as well as the costs of lost productivity, run $92
billion annually. Some estimates run as high as $138 billion which includes all health care costs
incurred by people with diabetes.
What is Diabetes?
Diabetes is a disease in which the body does not produce or properly use insulin, a
hormone that is needed to convert sugar, starches and other food into energy needed for daily
life. The cause of diabetes is a mystery, although both genetics and environmental factors such as
obesity and lack of exercise appear to play roles. There are two major types of diabetes:
Type 1. An autoimmune disease in which the body does not produce any insulin, most
often occurring in children and young adults. People with type 1 diabetes must take daily
insulin injections to stay alive. Type 1 diabetes accounts for 5-10 percent of diabetes.
Type 2. A metabolic disorder resulting from the body's inability to make enough, or
properly use, insulin. It is the most common form of the disease. Type 2 diabetes
accounts for 90-95 percent of diabetes. Type 2 diabetes is nearing epidemic proportions,
due to an increased number of older Americans, and a greater prevalence of obesity and a
sedentary lifestyle.
Gestational diabetes develops in 2 % to 5% of all pregnancies but disappears when a
pregnancy is over. Women who have had gestational diabetes are at increased risk for
later developing type 2 diabetes. "Other specific types" of diabetes result from specific
genetic syndromes, surgery, drugs, malnutrition, infections, and other illnesses.
Who is at Greater Risk for Type 1 Diabetes?
Siblings of people with type 1 diabetes
Children of parents with type 1 diabetes
Who is at Greater Risk for Type 2 Diabetes?
People over age 45
People with a family history of diabetes
People who are overweight
People who do not exercise regularly
People with low HDL or high triglycerides
Certain racial and ethnic groups (e.g., African Americans, Hispanic Americans, Asian &
Pacific Islanders, and Native Americans)
Women who had gestational diabetes, a form of diabetes occurring in 2-5 percent of all
pregnancies or who have had a baby weighing 9 pounds or more at birth.
8
Impaired Glucose Homeostasis
Impaired Glucose Homeostasis (or metabolism) refers to a condition in which blood
sugar levels are higher than normal but not high enough to be classified as diabetes.
There are two categories that are considered risk factors for future diabetes and
cardiovascular disease:
1.Impaired Glucose Tolerance (IGT) when results of a 2-hour oral glucose
tolerance test are between 140 to 199 mg/dl. IGT is a major risk factor for type 2
diabetes and is present in about 11 percent of adults, or approximately 20 million
Americans. About 40-45 percent of persons age 65 years of age or older have
either type 2 diabetes or IGT.
2.Impaired Fasting Glucose (IFG) when results of an 8-hour fasting plasma
glucose test are greater than 110 but less than 126 mg/dl.
Type 2 diabetes is more common among these ethnic groups:
African Americans. African Americans are 1.7 times as likely to have type 2 diabetes
as the general population. An estimated 2.3 million African Americans, or 10.8%, have
diabetes.
Hispanic Americans. Hispanic Americans are almost twice as likely to have type 2
diabetes. For example, diabetes affects 1.2 million or 10.6% of the Mexican American
population.
Native Americans. Overall prevalence of type 2 diabetes in Native Americans is
12.2% vs. 5.2% of the general population. In some tribes, 50% of the population has
diabetes.
9
II. From a paper reporting the results of a study on diabetes.
Rubin, Robert J., William M. Altman, and Daniel N. Mendelson "Health Care Expenditures for
People with Diabetes Mellitus", 1992, Journal of Clinical Endocrinology and Metabolism (Vol.
78, No. 4, 1994), pp. 809A-809F.
The following information comes from pages 809C and 809D of the paper.
Total health care expenditures for people with diabetes
Total U.S. health care expenditures in 1992 were approximately $720.5 billion. Health care
expenditures for diabetics totaled about $105.2 billion, or 14.6% of total U.S. health care
expenditures in 1992. When the cost of free care furnished by health care providers is excluded
($44.1 billion), 1992 health care expenditures totaled $676.4 billion, and expenditures for
diabetics totaled $101.8 billion, or 15% of total U.S. health care expenditures. Expenditures for
confirmed diabetics totaled $85.7 billion in 1992, of 11.9% of total U.S. health care
expenditures.
Table 2 summarizes per-capita annual health care expenditures in 1992 for diabetics,
nondiabetics, confirmed diabetics, and the total population (diabetics and nondiabetics) by type
of service. Per-capita annual health care expenditures for diabetics averaged $9,493 in 1992
compared with $2,604 for nondiabetics and $2,912 for the total population (P < 0.01). Diabetics
therefore incur annual health care expenditures 3.6-fold higher, on average, than nondiabetics.
All differences in average annual expenditures between diabetics and nondiabetics are
statistically significant (P < 0.01), except for dental costs. Table 3 shows than per-capita annual
health care expenditures for diabetics exceeded expenditures for nondiabetics across all age
categories. Differences between diabetics and nondiabetics were statistically significant at P <
0.01 in all age categories except for ages 0-34 yr. Per-capita annual health care expenditures for
the 7.68 million confirmed diabetics were $11,157 in 1992, or $1,664 higher than for all
identified diabetics, and 4.28-fold greater than for nondiabetics.
To obtain a more conservative estimate of prevalence and costs, we also calculated figures
for only those diabetics whose diagnoses could be confirmed through rigorous validation criteria.
The results were no less significant; although confirmed diabetics constituted only 3.1% of the
population, they accounted for 11.9% of total health care expenditures, or approximately 1 in 8
U.S. health care dollars spend in 1992.
10
TABLE 2. 1992 per-capita annual health care expenditures for diabetics and nondiabetics by
setting
Diabetics
Total expenditures
Inpatient
Office visit
Outpatient
Drugs and DME
Dental
Home Health
Emergency room
$9,493
5,885
989
Nondiabetics
($622)
(562)
$2,604
1,222
($103
(55)
Confirmed
Diabetics
$11,157
7,153
Total
Population
($933)
(809)
$2,912
1,431
($107)
(62)
3.6
4.8
1.8
3.4
4.4
0.9
5.3
1.4
(67)
554
(71)
1,045
(91)
573
(68)
(246)
330
(19)
1,225
(327)
366
(22)
891
(28)
201
( 5)
1,056
(35)
232
(5)
130
(13)
145
(4)
110
(12)
144
(3)
357
(62)
67
(9)
438
(80)
80
(10)
115
(11)
84
(4)
131
(16)
86
(4)
1,127
Ratio of
diabetics to
nondiabetics
SE in parentheses. All differences between diabetics and nondiabetics are statistically significant at P < 0.01, except
for dental costs. All differences between confirmed diabetics and nondiabetics are statistically significant at P <
0.01.
TABLE 3. 1992 per-capita annual health care expenditures for diabetics and nondiabetics by
age
All ages
0-17
18-24
25-34
35-44
45-54
55-64
65-74
75+
Diabetics
$9,493 ($622)a
2,342 (801)
2,809 (658)
6,531 (2638)
6,946 (1821) a
11,102 (2218) a
9,337 (1839) a
10,669 (1188) a
10,346 (1144) a
Nondiabetics
$2,604 ($103)
1,181 (85)
1,923 (104)
2,416 (142)
2,087 (124)
3,695 (778
3,603 (241)
5,112 (292)
7,103 (453)
Total
Population
$2,912 ($107)
1,183 (85)
1,931 (139)
2,492 (152)
2,241 (132)
4,141 (747)
4,218 (291)
6,039 (336)
7,568 (462)
Ratio of diabetics to
nondiabetics
3.6
2.0
1.5
2.7
3.3
3.0
2.6
2.1
1.5
SE in parentheses
a
Differences between diabetics and nondiabetics are statistically significant at P < 0.01
11
III. Web pages with information about the disease.
http://www.niddk.nih.gov/
http://www.diabetes.org/default.htm
http://www.cdc.gov/nccdphp/ddt/survl/compare.htm
IV. Additional web pages with information helpful for this case
For population data for the U.S., use the following web page.
http://www.census.gov/population/www/
For information on price indices related to medical costs, try the following page.
http://146.142.4.24/cgi-bin/surveymost?cu
V. Prices for Laproscopic procedures
The following prices were provided by a local hospital for some typical laproscopic
procedures.
Procedure
Hospital Charge
Surgery Center
Charge
$2,500 - $3,200
Laproscopic
$3,200 - $4,000
Appendectomy
Laproscopic
$5,600 - $6,000
$3,900 - $4,300
Colonestectomy
Simple Laproscopic
$500 - $600
$400 - $500
examination
$5,000 - $7,000
$4,000 - $5,500
LAVH
*Laproscopic Assisted Vaginal Hysterectomy
12
Physician
Charge
$3,000 - $3,200
Operating
Room Charge
$500 - $600
$4,500 - $6,000
$800 - $900
$500 - $600
$500 - $600
$5,000 - $6,500
$2,000 - $4,500