What happened
Shares of baby health stock Owlet (OWLT) fell as much as 31.3% in trading early on Monday after the company got a warning letter from the Food and Drug Administration (FDA) implying that the company is improperly marketing products. Shares recovered quickly after their early drop, but were down 23.5% at 2:10 p.m. EDT.
So what
The FDA letter said, in part, that "Owlet's marketing and functionality in the U.S. renders the Smart Sock a medical device requiring premarket clearance or approval from the FDA, and that Owlet has not obtained clearance or approval." The Smart Sock is a device that is attached to a baby's foot that monitors their sleep.
In an investor update, management said that it's working with the FDA on the regulatory status of the product and is going through the approval process for a new medical version of the Smart Sock, which it says is not currently being marketed. But the FDA is saying that its current monitor is marketed as a medical device.
Image source: Owlet.
Management gave a quick investor update this morning and said it hopes to modify marketing and/or packaging, if necessary, to not be qualified as a medical device while seeking approvals that may be required. We don't yet know if changing claims on the product will please the FDA.
Now what
I will point out that the core technology in Owlet's monitor is available on millions of smartwatches around the world and is used every day. It's not entirely clear at this point why those devices aren't considered "medical devices" but a monitor on a baby's foot is.
Management also noted that devices are changing rapidly and that regulatory expectations are evolving. Long-term, I think this letter shows just how difficult it can be to make new products in the child health space, and I think Owlet will find a way to keep its products on the market while meeting FDA requirements. When it does, it'll have an even larger moat around the business, which should be bullish news for investors, despite today's FDA-driven drop in shares.