In conversation with Elias Vamvakas

As CEO of San Diego-based TearLab (NASDAQ:TEAR; TSX:TLB), eye care entrepreneur, Elias Vamvakas, has scored another home run with a medical device for the diagnosis and management of dry eye disease (DED). The TearLab Osmolarity System uses a novel lab-on-a-chip approach that requires less than 50 nanoliters of tear fluid in order to measure tear osmolarity, and objectively diagnose DED.  TearLab’s technology eliminates the challenges that previously prevented point-of-care osmolarity testing and can produce a sample-to-answer result in less than 30 seconds. Prior to his involvement with TearLab, Mr. Vamvakas was a co-founder of TLC Vision, which pioneered LASIK laser eye surgery in the U.S. In this interview with, Mr. Vamvakas reflects on the first six quarters of TearLab’s commercial roll out.

Let’s begin with an overview of what you’ve learned in the past six quarters.

For the vast majority of eye doctors, this is the first time they have used a lab test to determine a disease rather than just looking for signs and symptoms in an eye exam. This is also the first time that a practice has had to apply for a laboratory license and a biller has had to deal with an entirely different fee schedule.

To add to the complexity of adoption, our test is focused on a disease that, while possibly affecting approximately 50% of the patient population in a doctor’s office, is not well understood or easily diagnosed.  Even though doctors already spend a lot of time trying to accurately diagnose DED, the current cadre of tests is not specifically reimbursed. In addition, the multi-factorial nature of the disease means that it is not easily treated despite the availability of many treatment options. These factors have led many practices to avoid dealing with the disease, leaving many patients dissatisfied, going from doctor to doctor in a constant search for relief.

We believe TearLab is changing all that. We have an objective test that can both identify and quantify disease quickly. Years of peer-reviewed literature support osmolarity as a gold standard for diagnosing and managing DED. Accordingly, the TearLab test gives doctors different information than they have had access to previously, allowing them to make more informed decisions.  It takes very little doctor time and provides fair reimbursement for practices. Importantly, it can also allow doctors to effectively manage treatment, helping to identify the right therapies and allowing them and their patients to monitor progress.

I would like to share with you something Dr. Eric Donnenfeld said in a recent interview in Medscape magazine: “We have osmolarity for measuring dry eye and an evidence-based system where we can look at dry eye and provide real-time information that’s reproducible, so that the clinician doesn’t have to do archaic tests. We can now rely on evidence-based medicine to make a diagnosis. Once we have that diagnosis, we can treat appropriately.”

What are the challenges to successful implementation of your device?

Using the TearLab system is fairly simple and straightforward.  Having said that, we have found four factors that must be considered and managed in order to achieve successful implementation.

Number one is the commitment to treat and manage DED. As I mentioned earlier, despite the tremendous opportunity presented by the prevalence of the disease and its impact on patient quality of life, the case for a doctor choosing to proactively build a DED practice is not always self-evident. Often, that decision only becomes obvious after they have successfully implemented TearLab in their own practice or observed one of their partners having success with the test. The result is that large practices often initially accommodate just a couple of doctors who are excited about using TearLab, while the rest of the group observes from the sidelines.

Number two is reimbursement. While reimbursement from Medicare is fixed and uniform across the country at $22.70 per test, or $45.40 per patient, private insurance coverage varies considerably. The vast majority of private plans cover our test; however, the level of reimbursement can vary by state and by plan, even with the same insurer.

Number three is practice-testing protocol. One of the unique aspects of implementing a lab test in a practice is that a patient can be tested before his or her session with a doctor, which is known as upstream testing. To facilitate this, it is critical that a doctor, or group of doctors establish a testing protocol so that the doctor’s staff can be trained appropriately and they have clear guidelines as to which patients a doctor wants tested. We have found that establishing such a testing protocol is one of the biggest success factors to implementation, especially in multi-doctor practices where there aren’t necessarily standard or uniform practice patterns in place.  [Editor’s Note: An example testing protocol can be found here.]

And finally, number four is clinical interpretation. While osmolarity testing has been considered a gold standard for DED, with scientific papers dating back 50 years, the reality is that osmolarity testing was previously not available at the point of care. An average doctor knows very little about osmolarity, what test numbers mean, or how to use them in his or her practice. Doctors understand that symptoms and disease don’t necessarily correlate, but they are confused when a patient with symptoms has a normal osmolarity reading. Similarly, if they have not used the device extensively, they can mistake variability in the disease—in other words, instability of the tear film—for inaccuracy of the test.  As Dr. Marguerite McDonald said at the 2013 annual meeting of American Academy of Ophthalmology, “The device is great, the disease is bad.”

We have learned that it is highly likely every TearLab account will have to deal with one or more of these issues, and that usually happens early in the adoption of the technology. They may experience a private insurer denying a claim, which could be as simple as forms filled out incorrectly. Techs in a practice might not really understand what they should be doing. Or a doctor could get results that he or she can’t explain. Any of these can cause a doctor to stop testing until the problem has been resolved. Unfortunately, until we are able to get back to them and help remove the roadblock, the account will remain unproductive.  Accordingly, we have discovered that one of the most important elements to our success, and to utilization growth in every practice, is how quickly and how often we visit our accounts.

This becomes even more important with larger practices that participate in what we call our Masters program. When you are dealing with 20 doctors and 50 techs, all at different levels of comfort and adoption, there is a tremendous amount of handholding required.

Is revenue per device the right metric to judge the success of TearLab?

While I think revenue per device is the best long-term metric to monitor, it has little value at the early stages of adoption. The implementation process creates natural variability in card usage and account revenue. Overall fluctuations in revenue per device are exaggerated by large accounts going through the initial stages of adoption. What we typically see early on is a couple of doctors getting excited about the TearLab test. In most cases, they recognize the impact that unstable tear film has on their surgical outcomes. They start to use the device and realize the value of having an objective test result number to identify and manage patients, the efficiency advantages of upstream testing, and the improvements in patient care, satisfaction and compliance. However, they also realize the logistical challenge that having a TearLab device in a central location presents.  So, they request access to a device in all of their examination lanes. Over time, other doctors in the practice observe both the effectiveness and the efficiency of upstream testing and request TearLab devices in their examination lanes.  You can see how this leads to revenue per account growing significantly, while, at the same time, revenue per device fluctuates.

Can you give us an example of one of your earliest customers in the Masters program?

Sure. I, of course, will give you one of our best customers. This account was first sold in early 2011. That was before we even had a CLIA waiver.  A couple of world renowned doctors that were part of a very large practice with more than 20 doctors decided that they wanted to have our technology, buying seven units for multiple office locations.

In their second year, a couple of other doctors in their practice joined them in adopting the TearLab technology, and they ordered an additional nine units. During that second year, there were several starts and stops as they faced reimbursement issues and administrative logistics challenges, including an electronic medical records implementation that monopolized most of management’s time. This practice is quite sophisticated and very well run. So, when management was able to get its arms around the financial metrics of TearLab, and with feedback from the vast majority of doctors in the practice that they wanted to universally adopt upstream testing, they decided to implement a TearLab device in every lane, ordering an additional 60 units to bring the total to around 80.

How did you come up with your go-to-market strategy?

We recognized that adoption of our test is the key to our long-term success. We learned early on that when we just sold devices outright, most doctors didn’t know how to integrate them into their practice. We had to find a way to motivate them to incorporate TearLab in their daily testing protocols. This resulted in our Use programs – free use of a device with a caveat. Customers had to sign a three-year contract to test at least three patients a day. We believed that a daily, but not onerous, test volume requirement would motivate customers to integrate the test into their daily routine.

As doctors started to use our device, we found the minimum Use agreements to be a barrier to adoption by large practices, which could not administratively cope with a single device in a central location and needed to have it easily accessible where their techs were doing all of their other testing. We had doctors who loved the device but still wanted to return it, because it was causing a backlog for their techs and slowing down their entire operation.

The decision for us was obvious. Our only goal is adoption. Having doctors who want to integrate the device into their practice is a key first step. Having the device present in every examination lane is of significant value and strategically important. It not only reinforces regular use, but it helps in converting other doctors who may use the same exam lanes to trying the test themselves.

There were no significant financial barriers to building this business, given the low capital cost of our device. The only concerns we had were internal. We did not want our sales people to have a financial incentive to place devices where there was no need. So, we implemented a commission structure that discouraged placing devices that were not going to be utilized. On selling a Use program, a rep receives a one-time bonus when the doctor signs an agreement, plus an ongoing commission on card sales. With Masters accounts, we only pay the one-time bonus for every $15,000 of revenue generated by the account. The rep also receives an ongoing but different commission on card sales. Having said all that, I think it’s important to point out that we are always reviewing our entire go-to-market strategy and are reviewing and adjusting our compensation programs to match the specific objectives of our organization.

The Masters program has opened the floodgates for device placements for us. (The chart  shows the quarterly placements of Masters devices placed in the first nine months of 2013.) At the same time, it has stressed our ability to manage the business as effectively as we would like. Our placements have grown so quickly that both our sales organization and our support team have not been able to grow quickly enough to accommodate the demand we have seen.

To keep pace, we are aggressively building our organization, which currently has more than 100 employees, and are looking to restructure and grow our sales organization. In a business where we have identified that the number of touches to a customer is the key ingredient for revenue growth and implementation, we have a clear plan of action.

In the meantime, what we are seeing in our Masters program is that those accounts that have had a lot of attention, like the one I described earlier, are flourishing and growing beyond our expectations. However, the vast majority of our other Masters accounts have either not been appropriately trained or have hit one of the obstacles that I described earlier. Those accounts are, therefore, waiting for help and support to get started. For that reason, we are focusing our sales force on reconnecting with our existing Masters customers rather than making new sales.

If there were one thing that can make a difference in the success of adoption, what would it be?

We have actually spent a lot of time analyzing our business and trying to study all of the variables that make a difference. Assuming, of course, that a practice has already bought into the clinical significance of osmolarity, then to pick one, I would say it’s establishing a protocol.

We discovered that most of our Use accounts and many of our smaller Masters accounts are doing very well. We attribute that to the ability of an individual doctor or small group of doctors to decide on their protocol and align all of their staff to how they want to run their practice.

Average utilization of our Use contracts, made up of mostly small single-doctor practices, is right on track.

This chart shows us a couple of very important things. The first is an inflection point at Q2-2012. This is when our CLIA waivers started to be received and Medicare reimbursement kicked in. The second thing that we see is an initial drop in average revenue as new accounts are initially challenged in their adoption by one or more of the four critical barriers that I discussed earlier.  Then, we see the utilization curve jump when we are able to spend time with the accounts and help them with their integration.

What are you going to do differently in 2014 than you did in 2013?

We will change the way we assess the number of devices we are going to place in large Masters accounts. Unlike the good protocol development and buy-in experience of smaller practices that I described a minute ago, in larger practices, there are many doctors and many opinions. Everyone wants to do things his or her own way, and, in most cases, there is no standardized centralized process for operating the practice. Techs often are confused about which doctors want which patients tested. In most accounts, we are initially approached by a couple of the doctors in a multi-practice setting. They are usually the cornea doctors who have used our devices or have done research and understand the value of osmolarity in their practice. They believe that they can convince their partners to practice with TearLab, but we now know that it doesn’t always happen. Our approach last year was to put devices in every lane if we had management and key doctors as champions. We believed that they would be able to easily create consensus in a protocol and management would be able to implement throughout the organization. Our approach in 2014 is to put devices only in the lanes of doctors who have bought into the clinical value of TearLab. We still believe that the rest of the practice will see the benefits of adopting a lab test diagnostic, but we will not give them a TearLab until they are ready to embrace the technology and have a clear view of how they are going to use it in their practice.

What can you say about the future?

We continue to be very excited about the opportunity we see ahead of us and believe that tear osmolarity and other lab tests will become the standard in the eye care industry, as they are in medicine in general. In addition, we believe that DED will become a major focus of the pharmaceutical industry and that having an objective test to diagnosis and monitor DED will become more and more important.

Our primary focus will be the integration of the TearLab test in a doctor’s practice, and we will provide human resource support, along with tools and technology required to help make that process easier.

We will build a sales organization that is focused, measured and compensated on growing revenue from our installed base, while, at the same time, continuing to grow that base of happy customers.

Our marketing is going to concentrate on doctor education and building our clinical value proposition.

Finally, our R&D team will continue working on our next test or, I should say, panel of tests.  Concurrently, we will be looking for new avenues and manufacturing processes that can reduce the cost of producing our disposable chips.