Consumer Medtech Panel Part Deux – “We had to come, it’s a sequel!”

Co-authored by Holly Rockweiler

A sequel is always a hit at the box office, so on April 5, 2016, SBAA hosted another panel on the thrills and challenges of the consumer medical technologies. This time, four new panelists joined everyone’s favorite director (host) Josh Makower, MD at the Palo Alto Office of Wilson Sonsini Goodrich & Rosati (WSGR) for a deep dive into consumer medtech, brought to you by our executive producers (otherwise known as sponsors), WSGR and Silicon Valley Bank.

The last panel asked whether the grass is really greener in consumer medtech (the allure of selling directly to your customer, the chance to skip the FDA, and potentially no need for reimbursement, oh my!). This 2016 redux explored the decisions 4 early stage companies have made in their pursuit of a smash success.

Eargo’s hearing aid of the future (Source)

In the early going it’s just like any other great medtech company: follow the unmet need and listen to your users

On the panel were Raphael Michel (CEO and Founder of Eargo, makers of consumer-focused hearing aids), Kelly Brezoczky (CEO and Founder of Butterfly Health, makers of a daily disposable solution for fecal incontinence), Sean Kerman (Founder and VP of Engineering at Owlet, makers of a pulse oximeter baby monitor) and Biodesign alum Varun Boriah ’13-‘14 (Co-Founder and CEO of Lully, makers of pediatric sleep solutions). The common thread among each founder’s story was his or her insight on an unmet need that had been ignored by so many before them. Raphael, a mechanical engineer with an MBA, built the first Eargo prototype after he learned from his father, an ENT, how frequently patients refuse hearing aids that could really help them.  After a successful career at Procter & Gamble, Kelly started her company to address the often-overlooked suffering of people with bowel incontinence.  Sean started Owlet during his Master’s program in Electrical Engineering at BYU based on direct consumer research with new parents desperate for peace of mind while their babies slept.  Varun started Lully out of the Stanford Biodesign Fellowship based on the insight that parent sleep quality is highly dependent on their children’s.

The Butterfly body liner (Source)

With a clear, unmet need, how do you determine product-market fit?  For Butterfly, it was a combination of high ratings of their prototype from 10 patients, a strong IP position, and proof of manufacturability. Lully evaluated product-market fit by measuring both the response to an online ad asking parents to pay to participate in their clinical trial and the efficacy of the prototype in a trial. Owlet raised $300k in a Kickstarter campaign and also used a fake website to see how many people would try to buy their product before it was available. Eargo had an “unfair competitive advantage” because the inventor of the Eargo hearing device is an ENT surgeon with a deep understanding of (1) what his patients were looking for in a hearing aid and (2) how to design a product for the ear. Raphael rapidly iterated prototypes of this invention until he received universally positive feedback from users, both existing hearing aid users and first-time users.

Owlet’s baby monitor (Source)

If you got the money, honey, I’ve got the time…

With a great need and a great product, it should be easy to make it rain, right? Not so fast… The panelists unanimously agreed it is challenging to fundraise for consumer healthcare products, but their stories highlight the power of grit and tenacity. Raphael raised his first funds from his friends’ faith in him, living check-to-check for the first 9 months. But things changed when he closed a seed round in the summer of 2013. In the panelists’ experience, traditional medtech investors were scared by the consumer marketing requirements; yet tech investors were afraid of the FDA and wanted much more extensive consumer market research than each company had.  Raphael focused on “hybrid funds,” i.e. funds that had both consumer and health groups, as they would understand both sides of Eargo’s business. This was a huge success for him, and he was able to raise a significant round.  In Sean’s case, Utah investors expected revenue before investing, so his team joined the Techstars accelerator and moved to New York where the investors were more used to Owlet’s approach to building a company. In retrospect, he said, Owlet should have raised money earlier to keep up with its rapid sales growth. Varun’s experience was that Seed fundraising was a 5-month, time-consuming effort that significantly impacted Lully’s small team’s ability to continue developing. To improve her fundraising chances, Karen (1) made sure the team hit every milestone between their Series A and B, and (2) focused on building product awareness in their fragmented, baby-boomer market.  Karen knew from her P&G experience that a strong brand is highly valued by consumer product investors. This is expensive and time-consuming to build, requiring a deep knowledge of your target customers, but for Butterfly this made sense because they needed scale to test the retail market.

Lully’s Sleep Guardian (Source)

Making it happen

Product: check. Funding: check! But now…how do you build product at the right volume as you grow?  Tailor your manufacturing to fit your company’s unique needs. All four panelists spoke of the importance of partnering with a solid contract manufacturer (CM), yet each company took a slightly different approach. Lully introduced its product in stages.  For the first 6 months, Lully repurposed an off-the-shelf product with about 80% of the functionality they needed. This allowed them to answer a number of market and design questions before jumping into their own manufacturing.  Lully’s US manufacturing gives them brand value with their target demographic; they started with a CM in Portland, OR but soon moved it to Fremont, CA, which is closer to their company headquarters, in to maintain better quality control.  For Owlet, it was more complicated. It took the company 18 months, the help of some incredible technical consultants, and all of their Seed funding to build a fully functional product. Though their initial price was higher than they expected, they made major technical breakthroughs that led to market differentiation in the end. On the manufacturing side, they started in the US for similar brand value, but ultimately the COGS didn’t fit their business model so they moved to an OUS manufacturer that met their high quality bar.

Butterfly’s high-volume paper product required $2 million upfront to establish their line with their US CM, and then the company had to work in earnest to reduce the COGS to pennies per piece.  Eargo outsourced non-critical components as early as possible and found that their CM provided significant design help for free.  Eargo also split manufacturing of their labor-intensive product between two CMs in Asia to protect against the likelihood of counterfeit devices also being produced.  In summary, the panelists provided lucid but very different perspectives on US vs. OUS manufacturing.  Control of final product is easier when it is built close to home, but cost saving (and surprisingly quality improvements) could be found outside the US with a careful selection process.

“It’s the marketing, stupid”

Ok, with all of the groundwork in place, is the grass indeed greening? How do you market a consumer health product, and do you need FDA’s blessing or not? Eargo answered the question with a hybrid team. The fact that their R&D people are from the medical device world and their marketing people are from the consumer electronics world helped navigate the nuances of selling a consumer health product. With a deep understanding of their target consumer, Eargo’s Chief Business Officer pushed humor in their marketing campaign as a way to destigmatize hearing loss and connect to their customer’s emotions.  For Kelly, the key to Butterfly’s success was getting the right marketing claim language (approved by both the FDA and the FTC) and perfecting the entire consumer experience (even the packaging!).

Owlet made the bold choice to go directly to the consumer with its product (rather than making it a prescription). This meant they had to sacrifice the specificity of their claims, as they marketed the product as a general wellness device. With the help of a brand consultant, Owlet decided to market their product as a “breathing monitor” rather than a “pulse oximeter”.  This simple change made their product easier for consumers to understand and dropped customer acquisition cost by 90%.  At Lully, since night terrors are not considered a medical condition, their product is not technically a medical device.  They had initially entertained pursuing a De Novo 510(k), but they decided that the trade-off between the high capital expense and extensive time commitment vs. more powerful claims wasn’t worth it, as market research informed them that both pediatricians and parents were fine with broader, consumer-level language.  Across the panel’s response, it was clear that there are significant differences when marketing a product to a consumer vs. a clinician.  Kelly, in her final point, highlighted that it can be important for your marketing efforts to connect with both the doctor and the consumer if consumers are likely going to ask the doctor for his or her recommendation.

In marketing to consumers, companies need to consider both the FDA and the FTC (Source)

Always be closing…

If you build it, they will come right? If only it were that easy. Josh’s last topic for the panelists was sales channels.   Most of Lully’s sales come from their website, which they love, as this channel gives them complete control over product messaging. Lully plans to stick to online sales because, as Varun put it, “no one is going to Target looking for a night terrors product.” Online, targeted marketing has been their key to success.  Sean mentioned similarly that Owlet sells primarily through its own website. The company had experimented with selling on Amazon, but found that their marketing dollars converted to higher sales when they were on their website exclusively. He thinks Amazon will be an effective channel though when they are selling at higher volumes. Currently, Eargo also only sells online and over the phone, as this allows them to engage with and learn from their customers.  He recognizes that retail is great place to scale quickly, but it is a high bar for which they aren’t currently ready.

Kelly had a more traditional sales strategy, dictated of course by a keen understanding of the Butterfly customer. According to Kelly, less than 1% of incontinence products are sold online; therefore, Butterfly went straight to retail.  While the Butterfly product is available online, the prices are higher there, so they don’t undercut their retail partners.  Kelly added that their Amazon channel is growing sales twice as fast as any other channel however, leading her to question a long-standing belief that retail is the best channel for consumer medical devices.  She pointed out that while consumers do visit brick and mortar stores to purchase products like Butterfly’s, no one spends a lot of time in the incontinence aisle, so this is a difficult place to educate customers about a really disruptive innovation. In summary, determining the appropriate sales channel for a consumer medical product, like every other aspect of your business, is driven by knowing your customers and how they want to be reached.

Where is the consumer? That’s where you need to sell! (Source)

Consumers rule…just make sure you listen to them!

Part 2 of the Stanford Biodesign Alumni Association’s consumer panel highlighted four products, four companies, and four stories of how the consumer medtech world is evolving and improving consumer’s lives. It’s clear that the simple distinction of marketing to non-clinical customers drives a broad array of design, fundraising, and manufacturing decisions in directions very different from that of traditional medtech products. While the panelist answers diverged based on their very specific product needs and market insights, a few golden rules stood out:

1. Validate your product-market fit early on with unbiased data from the actual purchasers of the product
2. Understand your potential investors well, and focus on building value and your brand early to optimize fundraising success
3. Manufacturing site selection is critical because it affects customer perception of your product, operational scalability, COGS, and product quality
4. Market and sell to your customers with claim language and sales channels that meet them where they are

All of these lessons are reflected in Biodesign core tenets of starting from an unmet need, knowing your user, and stakeholder analysis. And with the growing power consumers wield over their healthcare, this panel provided critical insights for the changes that can be expected in next decade and beyond.  Josh’s questions and the varied answers given by the panelists gave all who attended great examples of how to build a successful consumer medical product.