Welcome back to the latest episode of The Speed of Lighthouse. My name is Justin Starbird, and today I will be joined by CEO of Lighthouse, Robert Austring. Today is exciting because we're talking about the concept of commercialization for new products.
Q - Justin Starbird: The topic of discussion is really the concept of commercialization and how to bring a product from concept to commercialization.
As you've taken over Lighthouse in the last few years and grown the business, you guys have gone through some changes and some systematic adjustments to help your clients become more efficient, face new regulatory issues, and start to see success. We want to dig into some of those things today. What I'd like to start with you is to understand a little bit about your background and how you came to Lighthouse.
A - Robert Austring: I've been involved in medical devices for 40 plus years. I started my career in the engineering side of the business in doing research and development and product development. I then moved into the operation side of the business, and then subsequently, got into the sales side. I've spent equal parts of my career over that 40 years in those various segments, so it's given me a very well rounded perspective of the business and what it takes to bring products from concept and into commercialization. I think it's a very important perspective to have.
I've been involved in Fortune 100 companies for parts of my career, and I understand what that development process looks like in the transfer into manufacturing. I've been involved in contract design firms and then transferring to a contract manufacturer, and then I've been involved with firms that do the contract design and contract manufacturing. I've seen the pros and cons and the challenges associated with each of the approaches, which has allowed me to put together a process here at Lighthouse that I think adds tremendous value for our clients as we take their products from concept into commercialization.
I was running a smaller company similar, prior to Lighthouse. I was running the medical device side of that company and driving business development for them and knew of Lighthouse. Lighthouse was actually a client as we were a client, a similar kind of business. We did contract design and then transition to contract development. I knew the founder at Lighthouse, and we talked about what it would take or what it would be like to work together to truly grow Lighthouse. At the time, Lighthouse was primarily a contract design firm. They had some private-labeled equipment, but they really specialized in the world of optics centrally around medical procedures.
The world of endoscopy is where the founder had spent his time since the early '80s and really gained worldwide reputation in specializing in that space and understanding the challenges associated with putting together a device that functioned within those various procedures. Every arthroscopic endoscopic procedure is different in what it requires technically, from the lensing to the illumination to the image quality, et cetera. That really set a platform for us.
When I agreed to take over the company, a couple of things needed to change. It's very difficult to grow a business that its primary revenue stream is non-recurring engineering. As the acronym NRE stipulates, non-recurring engineering means it's non-recurring. You do some consulting, and then it goes away. That's hard to grow a business. It's not predictable, it's not sustainable.
A big change needed to happen, and we needed to pivot, and that pivot meant that we needed to become a contract manufacturer. The curve we threw here was, we wanted to develop those devices for our clients and then produce those devices for our clients. The value to that is primarily associated with the fact that from concept, we are taking into consideration the manufacturability of that device. From day one, we consider how it's going to be to manufacture.
That's important for a couple of perspectives: One, that's many times overlooked, is the economics. You have to design a product to be economical and fit the business model that the client has defined. They go out and they have a targeted sales price, and that sales price is driven by an equation that considers what their margin needs to be, it drives back to what the cost of goods of the devices. We need to understand that from concept. What that allows us to do is ultimately produce a device that meets the economic requirements.
The other value is the fact that while we're considering how to design it, we're designing for manufacturability from concept.
One of the biggest challenges that I've experienced that most of us experience is the transfer from product development from design verification, validation into manufacturing. Many times what happens there is there's delays associated with the transfer to manufacturing because there are issues that don't allow it to be manufactured, and that could force you to go back through a design iteration. What happens there is you lose time, and time is a problem because everyone desires to get their products into the market.
Q: That makes a lot of sense because one of the things that Lighthouse is known for is your specific developmental path that helps expedite that process to commercialization. One of the things I'd like to learn more about is how do you help companies become more efficient and actually take the concept to commercialization from the back of the napkin to an opportunity for you guys to actually bring it in-house and do the manufacturing.
A: Exactly, what I just outlined for you gave me 40 years of what works and what doesn't. Of course, I believe we learn from our mistakes and the challenges. When I came here, I thought it was important that we put a process in place that allows us to avoid those pitfalls; the pitfalls associated with regulatory strategies, the pitfalls associated with design for manufacturability, the pitfalls associated with having a great product, but finding out that it can't be sold because it's non-economical. They can't make a margin on it, and therefore, there's no product.
I've been approached as recently as a month ago by a company that was looking for assistance. They spent many millions of dollars developing a device and had the device and had been through verification, but it turned out it was too expensive to produce. Therefore, the company couldn't make margin, and now they were in a position of either having to can it or look at some other way to produce it. It's not an unusual challenge.
With that, I felt it was important that we put this process in place where we really emphasize the planning phase, as we call it, which is our phase one. We spend a good deal of time in that phase. I'm not going to say it's the longest phase, because it's not, the development phase is longer. The point is this, we want to invest time in defining the product requirements. We want to invest time in developing the product strategy around the regulatory side of the business, and then also, considering costs.
By narrowing and creating a real focus on what that product is and the strategy to bring it to market, allows us to then go into the development phase and really have an effective, efficient process because we know what the endgame is. We've tried to address the issues upfront so that we're not just meandering down a development path. It's a very focused path. It's a very focused effort.
Q: As you're going through phase one and doing this planning. Obviously, you're trying to have the foresight to know what the product is going to be able to do at the end. How do you plan for regulatory hurdles that could be coming your way depending on the findings from the development? As you go through, do you know in advance the regulatory hurdles that you'll be facing or is that part of the planning stage to go through and say, "If we do this, then we'll hit this regulatory issue, or if we do that, then we may be faced with something else."?
Is that what goes on? Is that part of the planning process as well?
A: Absolutely. Our clients are very diverse in terms of the size of their business. Some are virtual companies, trust, and some are Fortune 100 companies. Each client has a different understanding of the requirements for the regulatory side of development. Most everyone understands what they want their product to look like, but what they haven't really necessarily thought through is the regulatory strategy, that also comes back to the economics, which we can touch in a few minutes. On the regulatory side of the business, at the end of the day, our client is responsible for the regulatory submission.
What we do is, we work with our clients to, one, educate, to, two, supplement their understanding of what the requirements are going to be. We have a very collaborative process where we talk about the regulatory approach. Is this a 510(k) device? Is this an exempt device that doesn't require a 510(k)? Those are two entirely different strategies. If it's a 510(k), is it based on a predicate device or is it completely new?
If it's a predicate device, there's a statute of equivalence that has to be established. We can go in and define what those criteria are that we have to demonstrate equivalence to, and we'll walk through that and define those in the project plans and actually create a matrix so that we know what we're designing too. What are the constraints? What are the parameters that this device has to fall within in order to establish equivalence. That's absolutely critical.
You don't want to get to the end of development where you're doing design verification, and find out that you don't meet equivalence because now you've wasted time and money to a point where you can't get approval or you have to go down a different path for approval. Walking through the regulatory strategies and vetting that strategy, in some cases, our client will bring an expert in, a consultant, that will supplement that exercise. What's very important is that the function of that planning phase, there's a strategy developed within that planning phase that carries us through the entire development process.
Q: Looking at how often a device doesn't make it to commercialization, I feel like sometimes you run into, going through this planning, the hurdles that actually prevent it from end up getting to its end goal because you're able to stop them from going too far down the path because of that knowledge of regulatory issues and seeing the potential pitfalls of manufacturing over the last 40 years of experience that you've accumulated. Is that fair to say?
A: That is absolutely fair to say. One of the other challenges we face with our clients is, in many cases, the imaging system is a complimentary device to the primary device. The client is actually developing a regulatory strategy for the primary device, and the scope, in this case, an endoscope or the vision system is a complimentary device. Many times we're actually having to assist the client or create questions for the client around the primary device, which isn't necessarily associated with the endoscope.
We feel it's important that we have those discussions. We had a program where we spent three plus years developing a scope for a primary device. We didn't have involvement in the regulatory strategy for the primary device. Everything was completed. We had a beautiful scope, they had a functional device, they submitted to the FDA, and the FDA disapproved the submission. The device went on the shelf along with our scope. Very disappointing, but there's only so much we can do, but by having the dialogue.
Many times it creates more questions and it enables our client to go out and secure additional resource to address those questions and those concerns. Frankly, I think it's important that you even get in front of the FDA and present your strategy and get their blessing and buy in early in the process before you get too far down the development plan.
Q: This sounds like it's almost counter-intuitive because it could elongate the planning stage, but by having this type of one stop shop thought process, does this actually condense and compress the timeline for delivery at the end of the day?
A: Absolutely. What you don't want to do is have to be faced with a design redo or an iteration. There's enough of those as you move through the development process. To get to the end and then find out that you haven't met the requirements for the regulatory side or the requirements for the cost side or the requirements to get it into manufacturing, you're going to start over, you're going to do over. That's very expensive and you're delaying your entry into the market. One of the things that I really emphasize to our clients, in many cases, at the prospect stage, is the fact that this is a partnership.
Our objective at Lighthouse is to get into manufacturing. We are, for all intents and purposes, a contract manufacturer. Our desire is to get these products into the market as rapidly as possible and generating revenue from this new product as rapidly as possible. I'll tell you, I have yet to meet a client that doesn't share that objective. Unlike many design firms that only do non-recurring engineering, that's their revenue stream. They're really happy to spend 10 years developing a device and never taking it to market. I don't mean that as a slam, but that is their business model, is to design work.
They're not nearly as motivated as Lighthouse to get this product into manufacturing. It's important that we understand and assess the process to ensure that we're as efficient and as effective as possible to manage each of these primary criteria, regulatory costs, product performance, as we can to mitigate the redo or the reiteration that might happen because you didn't meet the criteria at the end.
Q: You just touched on the ability of Lighthouse to actually not just plan and take a product or a device from the back of a napkin and concept to commercialization, but then beyond the commercialization to the manufacturing that allows you to stay involved in the process. Has your ability, from the company standpoint and your team, your ability to bring manufacturing to the table helped the commercialization process be more efficient?
A: It has. I'm going to approach this from a little bit of a different angle. Once you're in the commercialization, that first year everybody talks about the hockey stick. We'd all love to have a hockey stick, but you never know, right?
Once you get through the hurdles of the regulatory pathway, now you got to get into the market and then you have market adoption, you have the acceptance of your product and how well-received and accepted is that product. Everybody hopes that you're going to go from 0 to 100 or 100,000 a year that first year, but that's rarely the case. One of the things that has to be considered when I talked about design for manufacturability, is you have to consider the scaling process. As I said before, I haven't met a client that's not interested in commercializing. I also haven't met a client that's willing to invest a million dollars in automation before they have a product. That's an important point because when you think about scale up, you have to recognize that there are a number of factors associated with that and it requires, one, a capital investment, and if you don't have experience relative to the product's acceptance in the market, it's an unknown, it's a variable. How many are you going to sell in year one? Well, we all have a plan, the reality of the plan plays out as it's going to play out based on adoption.
You have to consider the approach that you take for manufacturing that product in year one, in year two, in year five. It's essentially a step function. What I share with my clients is, in year one, typically, you're going to face restricted margins on the product because the cost of goods is going to be higher as you're leveraging more labor to produce the product. The reason you're leveraging labor is that you're not investing in automation. Try and establish a platform in this design for manufacturing as part of the planning phase and in the strategy by which we develop a product.
We try and establish a platform that allows us to iterate that platform over the first several years such that the first month maybe it's all hands-on with some work aids, and then the next month it's semi-automation here and then you're continually adding level of automation as demand becomes defined, as there's an ROI around investing in that automation.
That has to be considered at the beginning of the process when you're taking it from a napkin. We have to have a strategy. We have to have a concept on how we're going to approach this. We meet with our clients in that planning phase and we talk about what their year one projections are, and year two, three, year five, and hopefully, they've done that homework. If not, we force that homework to be done so that we can put a strategy together that makes sense and positions them to be successful. The worst thing you can do is launch a product, and everybody loves it, but they can't get any because it's back order because the capacity is not there.
Q: As you go through the planning stage, the future is always perfect, as they say. You go through the planning and you put out these nice charts and projections for year one and then two through five. What are the client's objections potentially to, at the same time, not just invest in the development of the product to come to commercialization, but then do they create any barriers or obstacles for you in that investment stage in terms of the actual production for manufacturing? What's their hesitation at that point?
A: As I said, every client is different. Some of these clients are virtual companies that are in startup and their funding is limited. We're happy to work with those firms as well as the Fortune 100s who have the capital to invest.
In some ways, they approach certain aspects more conservatively, and other aspects, they approach things more aggressively. It's the same way with the larger companies. In some cases, they can afford to approach things in a more aggressive way. From an investment perspective, the larger companies tend to be more aggressive than the smaller companies because they have the funds, and typically, it's inverse as they talk about strategy. The smaller guys want to be more aggressive in the approach and the schedules and the timeline. Then the larger companies, they typically take more time to make decisions.
Q: One of the things that I would think is that if you're committed to go and you create a new product or commercialize something, then you'd be committed to the plan for scaling as well. Looking at who the array of clients are that you work with, do you get push-back at any specific stage or is there a certain product that you go about manufacturing that tends to lead to more potential obstacles or questions? How do you help them understand that there are specific challenges between the commercialization process and then manufacturing, and then once you're manufacturing, scaling that up? Where do you see the difference that your experience allows you to have to guide and shepherd them through those things?
A: When you're in the planning phase, we're outlining strategies for the client and their consideration. It's all a balance. You find that balance. All we can do is share the information, the experience that we have and the expertise that we have with our clients and leave them alone. It's a very collaborative process between Lighthouse and our clients. We typically meet once a week, and we walk through technical strategy, we talk about the status of where we're at in the program and so on and so forth.
It's different for each client in how they want to absorb that information. What I was alluding to is, the smaller guys that have limited funding, they're concerned, but they're not as concerned about year three, if you will. Right now what's in front of them is, in many cases, they want to get a demo so they can get that in front of investors and generate additional funding. You have to help them not lose sight of the longer term strategy and the longer term plans.
In many cases, there are some clients, that will take and roll this into a business plan and use this as part of their portfolio and use this to justify to investors. There are others that are basically saying, "Look, when we get there, we get there, and we'll do our best. We appreciate the information, and we'll move forward." All we can do is continually hold it up and share it with them and educate them as we move down the path. Once you launch a product, it's a different discussion entirely. Now we have something tangible as opposed to conceptual.
Q: You have something to sell too, or they do, and now it's about letting the market tell you exactly what's going to work and what's not going to.
A: Yes. That's very true. It's interesting as you and the client journey down this development process, if you will. The excitement that they have as they begin to get demonstration models in their hands, and they keep working down and then we get towards the verification phase and then, in many cases, we're doing labs with docs and you have to start to get the feedback from the doctors on what their perception of the product is. It really begins to create a buzz. What happens now is the conversation begins to change and they begin to maybe open their eyes a little bit, or maybe they begin to believe in where this product is going to go, and now they're more receptive to thinking about how do we produce this thing as demand escalates over years one, two, three through five, et cetera.
Q: Once you have a product that you've taken from concept where you've gone to the planning stage, you've gone to the development stage, you're now at the commercialization stage and even beyond year one in manufacturing and working with them on the actual business, because you're now part of the business if you're manufacturing it for them. You're part of the process.
Regulations seem to change on a daily or a weekly basis. How do you help the clients walk through the process of having a product that's out there and having the regulations change specific to what the use case is now, and how do you help them watch for that and be prepared for that?
A: There's only so much we can do. Once we've entered that manufacturing phase, unless there's discussions around a next generation device, the client is primarily responsible for the regulatory process. They may come back to us and talk about it, but generally, once you have a 510(k) approval, they're not going to change the regulatory process, the approval process. Once you're approved, it's static, but as you move into, maybe, a different use case, then there's justifications that have to occur. It's around labeling. You go out and you get a device and you get it approved. Basically, you're getting that approved against a label claim. If you want to expand the application of that device, you have to go through some additional work to do that. That's generally our client's responsibility. Now, as always, we're certainly here to help counsel them on it, but generally speaking, they would really be engaging in-house counsel or hiring a consultant that talks about that strategy.
Q: You do work with companies on iterating the next generations. Once you've got something out there, then you're always working with them to continue to innovate and improve what they've got. That's always neat to see additional generations of products come through the doors and say, "Oh, man, I remember when that was just the back of a napkin," and today you're on version three or four. Could you talk a little bit about the successes that you've had with some of those clients?
A: Yes. I mean, to a degree. You bring up a great point. An effective strategy really involves launching that first product but being already considering what the next gen looks like. In many cases, I appreciate a leapfrog approach. Where we add value there for our clients is helping them understand where it can get to. What are the constraints in the technology? Because of our diverse experience in various procedures for imaging and each one is a little different. When you're looking at arthroscopy in the knee, it's different than laparoscopy or video laryngoscopes. What we're able to do is help them understand what are the limits of their current device. What are we seeing technologically that could be advanced to the next generation. Having those discussions around the strategies, for that next gen, is very important.
We're doing that today. In fact, we're putting a prototype together. Our client is pretty satisfied with their current device. From their perspective, I see that, but we, actually, have the ability and, I'm going to tell you, we can peek behind the curtain. We know what else is out there. We know what's coming down the pipeline. If our client were able to see that, they wouldn't be as satisfied with their device. Part of what we're doing is helping them see what that next gen looks like and getting them excited and, actually, seeing the strategic importance of getting into a next gen and not just sitting back and sitting on your laurels, if you will, and being happy with what you got in front of you today.
Q: It's really fascinating to know that not only are you at the forefront of technology and working with clients all over the country and all over the globe, but you're based right here in Maine. Tell us a little bit about what that means in terms of staying competitive and, actually, the advantage of being here and sitting in Windham, Maine versus in another area of the country.
A:The quality of life here is fantastic. That enables us to offer something that you can't in most areas of the country. We don't have the congestion, the crime. It's a little more rural, but the quality of life is fantastic. That allows us to bring in some talented individuals that are looking for that, that want to get out of the mass of LA or Boston and some of the challenges associated with there. It's really great for the families as well. The other thing that's really important is, we're a niche-based business. We work in a very narrow focused space. We work for competitors but what's important is that we are very careful about the intellectual property. Our clients own the intellectual property and we protect that vigorously. Which is to say this, being in Maine allows us to protect that intellectual property because I don't have to be concerned.
If I'm in Boston, I've got competitors next door or down the street or two blocks away or five blocks. There's so much cross-fertilization of talent and technology that this stuff can get amalgamated throughout a space very quickly. Because of where we're located, I think it actually helps restrain some of that, which I think is a benefit. I've worked with a company where we had all of our design headquarters in the Midwest. Then I had engineering offices in China and Taipei. We did manufacturing in the Philippines. What was important is that we didn't do the whole device in any one location. We split it out in order to protect the intellectual property, especially when you're working in Asia. It's kind of a similar approach here where we're very careful about what gets out where and who gets a chance to see the full picture.
Q: I think that all of those things are what has led to the success of Lighthouse Imaging being at the forefront of technology, of the regulatory strategies and, really, the development of the next generation of medical devices. Seeing how you guys have advanced over the years, how you've shifted the business, since you've come on, to now include forms of recurring revenue and then continuing to work with your clients as you have over the years to develop those next generations, that's really exciting to see. I'm glad to be a small part of that. Thank you for joining me today and going through some of the stuff. I think it'll be really good to bring together and, actually, share with our community.
A: Wonderful. I've enjoyed the dialogue. It's a lot of fun to talk about this. We're very passionate about what we do here. We love the opportunities, the diversity, the technologies and, at the end of the day, we're helping improve the quality of people's lives. There's something to be said about that. Going home at night, feeling good about what you do every day.