Money for High Tech

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Published in U.S. 1 Newspaper on May 17, 2000. All rights reserved.

Songbird: Now Hear This

E-mail: BarbaraFox@princetoninfo.com

Most Americans feel that any disability — poor

eyesight, obesity, acne, crooked teeth — can and should be corrected.

But if you tell someone he is hard of hearing and should get that

corrected, he resists. For hearing aids, the average lag time between

diagnosis and purchase is a whopping seven years.

Why? Sometimes wearing a hearing aid carries a certain stigma. It’s

like going from regular glasses to bifocals. It means you’re "old."

Sometimes the barrier is financial. Hearing aids cost $1,000 for plain

vanilla models and up to $4,000 for the high tech versions. If your

hearing bothers you "only a little," if you can get along

by turning the TV volume "a little higher" and asking people

to speak "a little louder," why spend that money?

At the urging of a venture capitalist, Sarnoff Corporation dipped

into its bag of technology tricks to come up with a new concept for

hearing aids: Make them cheaper by making them disposable, like throw-away

contact lenses. Sarnoff’s 12th spin-off, Songbird Medical Corporation,

has been incubating on a hush hush basis for 2 1/2 years, but when

it hopped out of the nest this spring it sent the audiology world

a-twitter. Scheduled to be on supplier shelves this fall, Songbird

must vie with Siemens, the largest hearing aid manufacturer in the

world, to capture the baby boomer market. At a cost of $39 the Songbird

Disposable Hearing Aid fits 80 to 85 percent of adult ears, lasts

40 days, and provides an economical and convenient way for a new user

to enter the hearing-aid market. Sarnoff thought it up, developed

the product, sought financing from venture capital firms and Johnson

& Johnson, hired contact lens veteran Fred Fritz as CEO, and moved

the company out to Cedar Brook Drive, where it now has 60 employees

plus a 10-person sales team. Sarnoff owns 20 percent of the company.

"It’s been thrilling, very fast paced, with very high highs and

significant lows," says CEO Fritz.

Songbird’s formidable competitor is Piscataway-based Siemens Hearing

Instruments. Its director of audiology, Thomas Powers, points out

that Songbird’s "is one size fits all and it is older analog technology.

We have stayed in the custom market," says Powers, "and are

pushing [digital] technology a lot farther."

Fritz contends that Songbird and Siemens will have different markets.

The hearing aid industry is notorious, he says, for having failed

to penetrate the market; less than half of those with severe hearing

loss have bought an aid. For those with mild to moderate loss —

and the much vaunted baby boomer generation now falls into this category

— the untapped market is even bigger. "We think Songbird will

attract a lot of people into the hearing correction market," says

Fritz. "While the vast majority we hope will stick with us, we

could have an uplifting effect on the market."

"There is some trepidation about Songbird capturing a large part

of the market but a number of people have come to the belief that

it can expand the market. There are 27 million hearing impaired people

and fewer than 7 million own or use hearing instruments," says

Karl Strom, editor of the monthly trade magazine Hearing Review in

Duluth, Minnesota.

"We haven’t done a very good job of getting to the untapped market,

people with a mild hearing loss. We could sell into their comfort

zone. They don’t want something on a permanent basis. This group can

be reached by advertising," says Wayne Staab, an audiologist in

Phoenix, Arizona, who helped develop Songbird.

Part of the selling challenge is that people who have hearing loss

sometimes forget what "clear" is like. But in one market research

group focusing on the challenges of hearing impairment, one woman

said that what she really missed is "being able to hear a song

bird."

Songbird Medical began when a venture capitalist came

to John Aceti, Sarnoff’s director of health care product development

and husband of fitness trainer Gloria Aceti. He grew up in Jersey

City, where his father was a bricklayer, and he studied mechanical

engineering at Stevens Institute of Technology, Class of 1977, and

has an MBA from Rider. Aceti discovered that the scuttlebutt among

seniors is that hearing aids don’t fit well, don’t work well, are

irritating, and require many visits to adjust.

Those descriptions may no longer fit the latest models, but the hearing

aids on the market do require a high initial cost. Patients with hearing

loss in both ears are told to buy two aids for safety reasons. (If

only one ear hears well you might look in the wrong direction when

a car honks.)

Five years ago a North Jersey company, Telebrands, imported hearing

aids from China and sold more than 400,000 units through Sam’s Clubs

for $29.95 in six months. But the company failed to file for appropriate

approvals from the FDA, and had made some claims that prompted lawsuits

and withdrawal of the product.

"It was a crummy product," says Aceti, "but it showed

a huge pent-up demand." It also showed that many people don’t

want to pay a lot of money for an expensive device that might get

lost. Telebrand’s success resulted in copy cats that traditional manufacturers

consider ripoff devices and that sell for up to $300 apiece through

the mail.

Aceti was convinced that he could achieve economies of scale and get

quality as well. "Six companies told me I could never make it

and never sell it," he says. "I was certain I could make this

thing. I gave a group of engineers at Sarnoff the challenge."

He ran the business from Sarnoff for six months until Fritz signed

on. "We had a wonderful first meeting," says Aceti. "Fred

asked me what was the issue in producing this. I said I didn’t know

how to sell it. He said, `If you know how to make it, I know how to

sell it.’"

In two years, says Aceti, "we have accomplished everything we

set out to do. Fred has hired one of the most outstanding management

teams I have ever seen." Tom Squeglia was vice president of sales

for disposable contact lens at Vistakon. Mike Tardugno was head of

operations for Bausch & Lomb, which went head to head against Johnson

& Johnson in contact lenses. David Preves is a world-recognized leader

in hearing-aid design. "When we hired David, the industry started

to buzz," says Aceti.

Most conventional hearing aids are shipped out unprogrammed for the

audiologist to program with a screw driver or the computer to match

a patient’s hearing loss. In contrast, the Songbird product is based

on the disposable contact lens model: the amplification and frequency

response characteristics come preprogrammed. The audiologist can dispense

your prescription on the spot.

The price of Songbird, at just under $1 a day, is about the same as

the basic $1,000 hearing aid says Fritz, if you include repair costs,

but the sound quality is comparable to the best $3,000-plus products.

The traditional product lasts five years, and audiologists get to

keep 50 to 66 percent of the price as gross profit. The Songbird product

will produce a reasonable margin, says Fritz, though over a longer

period of time. "The reason they would be interested is to attract

the non-users," says Fritz.

The device has a built-in battery, so no battery door is needed. That

opens up space for a microphone seven times bigger than usual. Because

the device does not need to last five years, the tip does not need

to be durable and hard. Songbird uses a very, very soft mushroom-shaped

tip that is quite comfortable. Manufacturing techniques are high speed

and sophisticated.

Songbird hid itself quietly until this spring (except for quarterly

reports generating publicity on the venture capital funds it was receiving),

and Fritz says that thanks to this two-year head start, he is not

worried about look-alike competition. His intellectual property patent

portfolio is, he says, "very robust," and he has exclusive

arrangements with his suppliers. The integrated circuit, and the electronic

assembly are classified secrets, but the microphones and speakers

are made by Star Micronics in Japan. Energizer is designing and producing

a custom battery.

The final assembly takes place at Cedar Brook Drive, and United Parcel

Service is handling the outbound logistics. Songbird’s accountant

is Robert Esposito of KPMG on Lenox Drive, and New York-based MPMC

(Mockler Preston Bergo) is the ad agency in charge of a $16 million

annual advertising and promotion budget. Duane Mason at Boston-based

Prism Venture Partners is the lead financial investor. Investment

bankers have yet to be named.

In all categories in last fall’s field trials Songbird beat the $3,000

hearing aids. At the American Academy of Audiology meeting in March,

6,000 people said the untapped market is the number one issue. "We

totally stole the show," says Fritz. Nevertheless, some audiologists

are refusing to handle this product. One (a consultant for a competitor)

was quoted as saying, "anybody that gets involved with this ought

to have psychoanalysis."

There is also concern, magazine editor Strom says, about disreputable

audiologists using bait and switch tactics. "Songbird is trying

to be very careful about that," he says.

Fred Fritz seems perfect for this job: he is both an engineer and

a marketing veteran for disposal contact lenses. He grew up in northwest

Chicago, where his father was a self-employed auto mechanic and his

mother a secretary. He majored in engineering at the University of

Illinois, Class of 1972 (and went back to his roots in this job, where

he has produced a half-dozen patents). He worked for Schwinn bicycle

company and as a dormitory food service supervisor, which gave him

the work experience to be admitted to Harvard’s MBA program immediately

after graduation. He majored in marketing, joined Quaker Oats, then

went to Schering Plough’s contact lens division. He launched the "turn

your brown eyes blue" disposable contact lens product, ran the

$300 million over-the-counter drug business, and ran the $500 million

Dr. Scholl’s division. He made the jump from mega company to start-up

when he was 47 years old, having been recommended by "a fellow

who knew somebody who knew me." He and his wife Helen have daughters

ages six and nine.

Comparing small companies to big companies, Fritz says his current

situation is "a lot more dramatic and different." To deal

with disappointments in small companies, he says, "you watch for

things that could kill the company. You are striving for survival

and to get to market launch." Danger signs could be significant

technical challenges or setting up supplier partnerships. A start-up

company has to ask large and not so large companies to develop a component.

"They had to believe in what we could achieve."

Sales could be another bugaboo, but Songbird has its own selling organization,

and the vice president of sales and marketing spent two years meeting

the audiology community; his team has two managers and 10 sales reps.

Now Sarnoff engineers need another project. Aceti’s immediate superior,

Satyam Cherukuri, Sarnoff’s managing director of science and systems,

says his engineers are working to take the Songbird device from analog

to digital, and then to make miniature devices, probably using wireless

technology, for other health care settings.

Picture this: your elderly mother wears a miniature sensor that "talks"

to a box by her telephone. You or her caregiver can call in to monitor

her vital signs. Has she gotten out of bed, and how long has she been

up? Most monitoring devices now are bulky and require wires. Like

the hearing aid, they are rejected by potential users.

Says Aceti: "We are feeling really good about what we have done.

And I believe that Sarnoff’s ability to miniaturize electronics will

play a key role in solving the problem of healthcare for older Americans."

Songbird Medical Corporation, 5 Cedar Brook Drive,

Cranbury 08512. Fred Fritz, CEO. 609-409-4500; fax, 609-409-4510.

URL: www.songbirdhearing.com.

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Money for High Tech

High technology companies can get incentives to locate in New Jersey cities and downtowns under the New Jersey Cyberdistricts Program, which

offers grants to municipalities and qualified not-for-profit developers to create and market "Cyberdistricts."

"Our cities were built by industry," says Governor Christie Whitman. "The goal of this program is to help them retool for the 21st

century’s most important industry: information technology."

Whitman set aside $2 million for Cyberdistricts this year. Of that amount, $1.5 million is reserved for urban municipalities eligible for

assistance from the New Jersey Redevelopment Authority.

There is no maximum grant amount. Applicants are encouraged to partner with telecommunications companies, Internet service providers,

business associations, commercial and industrial real estate owners, colleges and universities, and community development corporations.

Get a copy of the RFP from the NJRA at 609-292-3739 or by writing to Leslie Anderson at the NJRA, Box 790, Trenton 08625.


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