How to Achieve Success in a Difficult Market: Interview with Mike Morena (Founder of AdhereTech)

In this interview I speak with Mike Morena who is a mechanical engineer that co-founded a successful pharmaceutical device company.

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Mike Morena co-founded the company AdhereTech that sells a medicine adherence hardware device to major pharmaceutical companies. He is also an active expert available to help you inside our Hardware Academy program.

Can you tell us a bit about your product?

AdhereTech is a startup in New York City which provides adherence solutions to pharmaceutical companies for their drugs and the patients that take them.

Medication adherence is defined as a patient’s ability to take their medication as prescribed. For example, if you are supposed to take one dose a day for 30 days, if you take all 30 doses, that would be 100% adherence.

The other term that needs defining is “persistence,” which is about adherence over time. If you have a chronic therapy that you stay on for years, you “persist” on that therapy.

Our company creates value for our customers by increasing adherence and persistence to drugs. We do that through a novel technology that we put inside of pill bottles – so we make smart pill bottles.

The pill bottle tracks when people do or don’t take a dose of medication, specifically pills. It looks and works just like a normal pill bottle except it tracks when you do and don’t take medication through a variety of sensors inside the bottle.

The sensors detect when you did and didn’t take your medication. That information gets sent via cellular connectivity into our back-end platform so to determine what to do with it based on a variety of factors, such as the patient’s profile, their preferences, the drug they are taking, etc.

We can then customize an intervention based on the real-time data that the bottle provided in order to get you back on track and inspire behavior change.

For example, we could send you a text message reminder if you missed a dose, or we could ask you why you missed it. We can also send that information to a doctor, pharmacist, or caregiver.

How well does it work?

We found that the technology effectively increases patient adherence from around 80% to close to 100%, specifically for the types of drugs where adherence is crucial, such as oncology medication, HIV medication, and multiple sclerosis drugs.

Can you describe the overall business model?

We found that we could incentivize the pharmaceutical companies to pay for the service, especially for high-value drugs, because the service would generate one to two additional refills per patient per year due to the increased adherence rates.

We work mostly with specialty pharmacies, and around 90% of them are mail order facilities such as Express Scripts. That tends to be how specialty drugs are delivered. You can’t typically fill them in a local pharmacy, believe it or not.

Those pharmacies are actually very engaged with the drugs that they distribute. They know a lot about the patients they’re serving.

So, we have a network of pharmacies that we have agreements with that fill your prescription in our pill bottles and set you up as a patient on our platform when you go to get your refill.

It works like this: you get prescribed one of the drugs that’s on our platform. You go to get your refill, which would most likely involve a phone conversation with a pharmacist or a pharmacy technician who would then go through the regular process of filling your prescription for you.

During that conversation they would introduce our service to you: “We have this program that you’re eligible for, whereby you can get your next prescription filled in a smart pill bottle. It’s 100% free for you. You don’t need WiFi or a smartphone. You just have to opt in on the phone.”

Then, they ask the customer a few questions, such as what time they want to take the medication, what sort of interventions they’d like in terms of reminders, etc.

Once the patient receives the bottle and activates it (by pulling a tab on it), the bottle is active on the AT&T network and starts sending us data.

Pharmaceutical companies have found the ROI to be very high for them, and it makes a lot of sense with specialty drugs.

There are around 10 drugs on the platform, and tens of thousands of patients use it every day. It’s an IoT product that drives a lot of value for people’s lives and is also a very profitable business.

The value chain in healthcare is a little different than most businesses. You have to figure out how to incentivize.

We went the path of developing a single pill bottle because that makes very clear sense to the pharma company in terms of what the benefit is, in terms of increasing adherence to that drug, as opposed to a poly-pharmacy solution where it would be like many drugs in one. It’s a unique business model and a unique product.

The other business model that we use is not necessarily about driving adherence but is more of a measurement tool for a clinical trial or a research trial where adherence is typically a valuable piece of information when evaluating the efficacy and toxicity of drugs that are being tested.

So many trials still use handwritten diaries, which is crazy. Our technology makes it easy to capture the data.

Are your customers the drug companies or the patients?

Even though the paying customers are other businesses, ultimately the user is the patient. We do need to have a patient-facing mentality because we have to make the product easy to use so that it fits into the lives of patients.

We act as a connection point between the patient and their pharmacy, then to their doctor, then to the other interventions to get them the information they need. It’s a communication platform as well as an adherence platform.

It connects the patient to the drug therapy that they’re used to taking in a more enhanced way. Pharmacists can quickly pull up a dashboard and see that you missed the last five doses.

It’s important to note that it’s not always simple forgetfulness when doses are missed. A lot of the drugs we work with are part of complicated therapies. There might be dose changes, schedule changes, and side effects. There could be a number of reasons that a patient goes on and off their drug therapy, and our tech can get them help much faster than they would without it.

Do you manufacture the bottles yourself?

We don’t have a manufacturing facility ourselves. We outsource it to a contract manufacturer, but we are the OEM of the pill bottles, yes.

We design and write the software, and develop everything that touches the physical product, so AdhereTech does both software and hardware.

Is your profit based on the cost of goods sold which you mark up, or is there an ongoing fee that the pharmacy must pay?

There is a subscription component, yes. Every month that a patient is active, that’s a monthly subscription. That’s where the value is made.

We’re not like a consumer electronic where it’s three times cost of goods sold or anything like that. It’s really a subscription. We’re hoping that patients use it for multiple years and that’s where we generate value for our company.

Is this considered a medical product which requires FDA approval and special medical certifications?

We provide a medical device – I won’t go too much into the nitty gritty, but medical devices in the US are divided by the FDA into three classifications based on levels of risk. We’re considered the lowest risk, which is Class I.

Some Class I devices do require what’s called pre-market approval, but others – including ours – are considered low-risk enough that you have to do just the bare minimum, which is basically register your product with the FDA and implement a few processes and procedures.

Ultimately, our device is really just a reminder device. I like to compare it to an insulin pump, which you can theoretically also call an adherence product. But an insulin pump actually physically doses the medication into your body, and our device doesn’t do that.

You could take the pill out and not consume it. You could throw it away. Ultimately, what our device is doing is generating reminders and generating data, so it’s an FDA Class I, 510(k)-exempt product. FDA approval is a weird term that people often use that really doesn’t apply to most classes of medical devices.

When you were first starting out, did you find much resistance from the big pharmaceutical companies? Was it difficult to get through to decision makers? Did you have a prototype you could show them or was it just a drawing and an idea?

In the very early days, our CEO, Josh (who is a really impressive person) was able to sell our product to a customer before we even had a prototype!

We ran a research study with Walter Reed National Military Medical Center in Bethesda, Maryland. We got written into a research project that got approved, and they called us up saying they needed the pill bottles.

So, we had to go and build the pill bottles. It was a crazy time!

We were able to get off the ground through that. We worked with a small design firm on a generation one design, and we built under a thousand of them so that we could go out and get some data.

This is really what we needed to show more sophisticated investors that the product works, that it’s usable, and that patients will adopt it.

Then we raised money on that first-generation product and on early results that showed that our product increased adherence, which is ultimately what we were trying to prove. That really enabled us to grow the business and redesign it for mass manufacturing.

When it came to penetrating pharma companies, we would run pilots with them. They wanted to see that it worked for the patient and the therapy that we were trying to target at their business.

There was a lot of interest because we were the only people that were successfully using this technology in the form of a pill bottle, which is so easy for a patient to use.

We did all sorts of different pilots with pharmaceutical companies – we would do a hundred patients, a thousand patients, over a year, over six months – all sorts of combinations.

Then, we would get the data and they would compare it to a cohort of patients who weren’t part of the pilot, and they would evaluate the return on their investment. They clearly saw the value in terms of increased adherence, and that’s how the business would grow.

Those pilot projects were small, but they were profitable. We were able to fund the company, at some points, just based on those pilot projects, which is ultimately how you have to get into that type of industry.

I’ve been in the health tech environment for almost seven years, and I haven’t seen anybody just land an enterprise sales deal. It’s all about small pilots.

They want to see if your product works, to evaluate it on their own terms. That unfortunately takes a long time in the world of healthcare, but that’s the way it works.

When you got that first trial at the military base, did you even have a proof-of-concept prototype? Had you given much thought to the design of the product in terms of the technology?

Honestly, it’s been such a long time, I can’t even remember, but we didn’t have a lot. We had a very rough 3D printed single unit, hacking together how this thing might look. It certainly wasn’t ready to be delivered. We had to go back and make sure the product could be made.

Our plan at that time was just to raise money based on that information because ultimately, we knew that the product that we were able to put together for this first customer was not the one that we wanted to manufacture in high volumes.

Designing an electronic product takes a lot of money. It takes a lot of engineering resources. We knew that our first generation was good, that it had most of the features that we thought it needed, and we got tons of feedback on what was good about it and what wasn’t good about it.

We knew that wasn’t going to be the product that we’d live with forever, but it would get us enough information to prove firstly that it was a good idea, secondly that it worked, and thirdly that we were the people that could execute.

Those three things really helped us go to investors and raise the money we needed to design and manufacture the second generation, which is ultimately the product that built the company.

So, the first prototype was self-funded for the most part?

We had some small angel investors, but it was pretty much before any legitimate fundraising.

Then once you got that prototype, you were able to use that to collect data and then use that to get professional, larger investors involved?

Yes, that’s correct.

And would you recommend that route for others?

Ultimately, you have to decide what’s right for you and for what you’re trying to do, but I always tell people that when you’re building a hardware company, you’re not just building a product. You’re building a machine that can build products.

You don’t need to think about that initially, but you have to eventually understand that there’s a ton of effort that goes into getting your first-generation product out there, but that’s not the last product that you’re ever going to make. It’s not the last product you’re ever going to design.

If you’re a successful business and customers like your product, they’re not going to be buying your first product for 20 years. They’re going to buy the next thing that you make, and then the better version. The market will force you to make changes.

You have to think about getting to the point where you can build a product and sell it, but you also have to think about building an engine – a team – that is ready to make it even better once you prove that it works.

That’s the next phase of building a hardware company. That’s hard to do, but you have to keep in mind that if things go well, you’ll need to support the product, you’ll need to address changes to the product, you’ll need people to do shipping and supply chain and all those things. There are a lot of pieces to a hardware company.

I always tell people they shouldn’t start a “hardware” company. Rather start a “solution” company that uses hardware, because no one wants to help you build a hardware company.

They want to help you build a solution, so if you speak in those terms, you think beyond just building the products.

This applies to companies that are building products that generate what I would call a lot of value. I’m not talking about a widget or a flashlight, or a side business where you sell bottle openers on Amazon.

There’s no engineering infrastructure behind that. That’s just something you designed, you found a manufacturer, and you sell it. You don’t make a ton of money because it’s not a high-value product.

I’m curious about your founding team, which was yourself (a mechanical engineer) and two others. Can you tell me a bit about the other founders?

We had three founders: I was the COO, Josh was our CEO, and John was our CTO. Initially, we all wore a lot of hats. Everybody did many things in the early days.

Josh was in charge of sales, marketing, investor relations, raising money – doing all things related to starting up a business.

John, our CTO, did everything when it came to software, whether that was firmware inside the pill bottle, a website that was the backend system, a cloud that could talk to our pill bottles – all those sorts of things.

And I did the pill bottle. I did mechanical design, worked with outside design firms, outside consultants, electrical engineers, mechanical people, manufacturing people, regulatory testing – all that stuff is what I did.

Josh was out there selling, building a book of business for us, working with investors, pitching our business thousands of times – maybe tens of thousands of times – to anyone who wanted to listen.

John was writing software and helping us build an engineering team. That’s what the three of us did.

Since you don’t have an electrical engineer on your founding team, did you end up outsourcing the electronics design?

It was a mix. I looked at the design. We worked with a variety of people – two design firms and some consultants. We certainly did not do all of the product development in-house.

We did a lot more software in-house than we outsourced, and we did a lot more hardware outsourcing than we did in-house. But ultimately, I treated the design firms almost as an extension of our company.

There were things that I would do, there were things that they would do, there were consultants that would do certain things. We worked mainly with two design firms. We still have a strong relationship with one of those today, and they continue to be part of our team.

We still pay them a consulting fee, but we treat them like an extension of our company. They did a lot of electrical design, mechanical design, and industrial design for us.

By this point, you already had more serious outside funding, is that correct?

Yes, that’s correct.

It sounds like you worked more with a design firm and not individual freelancers?

Correct. There were times where we did certain things with freelancers, though they weren’t really freelancers, more what I would call a smaller, more specialized consulting company.

Specifically for antenna design, you won’t find a lot of full-service design companies that have that expertise in-house. They might be very knowledgeable about RF and wireless modules and the like, but when it came to actually designing an antenna, that’s where I worked with a specialist.

For the cellular function, you used a pre-certified module but then had a custom antenna designed, is that correct?

The cellular world is the only world that I know of where you literally have to put up numbers to prove the performance.

You can build a WiFi product and have the world’s worst WiFi performance, and no one cares. There are no rules that say you must have a certain level of performance.

But in the cellular world, there are performance metrics that you must pass in order to be allowed on the carrier networks, because ultimately your device reflects not only your device but also the network that you’re operating on.

You could imagine if you built a cellphone and it had terrible reception, people would either interpret that as a bad cellphone or as a terrible network, and the networks don’t want that. You have to meet their standards.

If you take an off-the-shelf antenna and whack it into your product, it might work. But if it doesn’t meet the performance metrics, the carrier won’t approve it to be on their network and then you can’t deliver devices. It’s a different beast.

I always tell people when you’re working in the cellular world, when you select that module, you also need to think about the antenna upfront.

You have to go put it in a chamber and measure the radiated power and the sensitivity and make sure you’re in the ballpark, so that your early design decisions don’t put you in a corner where you can’t change it and improve it later, because you’ll be stuck.

Was having limited space a significant factor for your design?

Yes, it was very tight. There are two circuit boards, a battery, and an antenna.

In the second generation (the 2G/3G device), we actually used an off-the-shelf antenna. We went through a lot of work trying to figure out where to put it in the product.

Then, once we figured out a place that it went – that naturally allowed it to be assembled – we went with that off-the-shelf antenna.

Two years later, AT&T decided they were shutting down the 3G network, so we needed to switch to LTE. Then, the LTE bands go down in frequency, which means the antennas go up in size.

So, all of a sudden, we couldn’t fit an off-the-shelf antenna in the place that we had the current antenna, so we had to design a custom one to basically fit in the space that we had so that we didn’t have to change the form factor of the device too much.

The LTE antenna is around two-and-a-half times bigger than the 3G/2G antenna. It’s huge. That’s mostly because it has to be a very wide-band antenna.

For a 2G and 3G device, there are basically four or five frequencies you need to operate at, but for an LTE device, there are around 30.

They chopped it up so much that it’s very hard to be able to have one antenna that can be on all the different bands all over the world.

There’s a significant cost jump going from a 2G/3G solution up to LTE. Was that an issue for you?

Believe it or not, we saved a little bit of money moving to LTE because we moved to LTE-M/NB-IoT, and those modules are trying to come in at a low price point.

They’re very de-featured compared to an LTE Cat 4 module, which has a very high speed, has voice over LTE, probably has a little Linux operating system inside of it, believe it or not. It’s full of features.

Whereas with LTE-M, they go to half-duplex, ultra-low power, long range, but very slow speed, and that enables them to bring the price point down.

It wasn’t a big difference, but it did come down slightly going to LTE-M, which is exactly what they’re targeting. Had we gone to any other LTE category, the cost would have gone up significantly.

You don’t want to put a V8 engine on a bicycle! That’s such a waste.

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