CEO SUMMARY: Here’s a little-known side to diagnostics giant Beckman Coulter Inc. Its efforts to expand into the fields of biomedical R&D and clinical research is a strategic shift designed to give it early access to promising technology that could be introduced into the clinical diagnostics marketplace. In this exclusive interview, John (Jack) Wareham, Chair, President, and CEO of Beckman Coulter, outlines the market trends driving healthcare and how they impact diagnostics. He explains why Beckman Coulter recently made changes to its organization and discusses the types of new products soon to be heading into the marketplace. The interview was conducted by Robert L. Michel, Editor-In-Chief.
“The twin macro trends of demographics and technology will act to the benefit of diagnostic testing.”
—John (Jack) Wareham
EDITOR: Several developing trends are influencing and changing the diagnostic testing marketplace. Most clinical lab administrators and pathologists are unaware that Beckman Coulter Inc. is responding to these trends with fundamental changes to its corporate business strategy. Since these same strategic drivers will also affect clinical laboratories, I’d like to explore three levels of strategic analysis within Beckman Coulter. Could you first identify the global, or macro trends you see influencing the healthcare marketplace? Second, how will these trends specifically impact clinical diagnostics? Third, how is Beckman Coulter’s strategic response to these market dynamics changing the company from what it was following the 1997 merger of Beckman Instruments, Inc. and Coulter Corporation?
WAREHAM: We can start with broad trends, then address the specific business strategies we are implementing in response to those trends. From the global perspective, I see two macro trends now actively reshaping healthcare systems worldwide and changing the way diagnostic testing is used. One involves demographics. The second involves technology.
EDITOR: By classifying these trends as macro, are you saying they will have major influence on shaping the way government and society debates and implements changes to the way healthcare services are organized, delivered, and reimbursed?
WAREHAM: Yes. These two macro trends, demographics and technology, will underpin the most significant changes to healthcare. Among other things, they will directly stimulate the expansion of diagnostic testing in new directions.
EDITOR: Let’s start with demographics.
WAREHAM: By far, I believe demographics will be the major driver in the ongoing evolution of healthcare. There is widespread agreement among demographers that the populations of both the United States and Western Europe are aging.
EDITOR: Which implies a higher utilization rate for healthcare services.
WAREHAM: Certainly, but the thing to watch is how demographics impacts the cost of healthcare. Because it is the prospect of higher costs which will drive policy. However, there’s a catch.
EDITOR: Please explain.
WAREHAM: In most societies, public policy is driven by circumstances. And since most political systems are reactionary, policy responses to rising healthcare costs often lack innovation and breakthrough thinking. That’s because public policy-makers, whether elected officials or appointed regulators, are risk-averse.
EDITOR: That’s an accurate description of the political gridlock which often surrounds both legislation and regulation governing healthcare services. The effect is to stifle innovative solutions to problems in the healthcare system.
WAREHAM: Certainly that’s an element. But this demographics trend involves more than the aging populations of the United States and Europe. China and many populous third world countries have extremely young populations. The introduction into these countries of medical technology common in the Western World is fueling a demand for more of these services.
EDITOR: You’ve described a type of “yin–yang” trend. Across the globe, demographics is going to drive the social policy of various countries in contrasting ways. In the United States and Western Europe, aging populations will require more healthcare even as there are fewer young workers per capita to fund government health programs. In countries like China, with young populations, the demand will be for medical care which uses the technology and quality standards of the developed nations.
WAREHAM: “Yin–yang” is a valid way to characterize this trend, because it represents two distinct forces that will change healthcare systems. In each case, the common denominator is that the overall cost of healthcare will increase.
EDITOR: Could you define your second macro trend?
WAREHAM: The second trend of overwhelming importance is the ongoing cascade of improved technology. Not only is there a geometrically-increasing volume of technology hitting the healthcare marketplace, but a new phenomenon now affects technology. Medical technology is increasingly global.
EDITOR: You seem to be saying that, in conjunction with new technology itself, the way it diffuses in countries throughout the world is now different than in the past.
WAREHAM: Correct. On a daily basis here in the United States, we only see little increments and don’t fully appreciate the impact of major changes. However, taken collectively, there’s a lot of movement and change in technology which contributes to lengthening life and also improving the quality of life.
EDITOR: How does this shape itself into such an influential macro trend?
WAREHAM: As people become aware of better technology that would improve their health and their quality of life, they want access to it. Simply put, this is where the demographics trend intersects with the medical technology trend. Throughout the world, we are seeing an acceleration in the way new technology is diffused and adopted.
EDITOR: Does this mean medical technology is moving faster than ever across international borders?
WAREHAM: Definitely, and technology is intricately linked to demographics. In almost every country, you can find a demographic group that will either drive new medical technology or pull it through.
EDITOR: For example, in the United States, the Medicare population wants access to newly-developed prescription drugs which are life-extending. They push to have the health system fund such services. On the other end of the demographic spectrum, young couples in China want access to surgical and other procedures which may save their child’s life. They want the healthcare system to adopt medical technology already in wide use in more developed countries.
WAREHAM: Yes. Those are good examples. In both cases you’ve mentioned, demographics and technology are intertwined and require a policy solution by society. After all, someone has to pay for all that technology and healthcare.
EDITOR: Although you’ve not mentioned it specifically, one consequence of these two trends is that the demand for diagnostic testing should be very strong in years to come. Demographics of most populations favors more test utilization. Technology promises diagnostic tests of greater clinical value. Both factors would be good for diagnostic manufacturers and clinical laboratories.
WAREHAM: That’s correct. I consider these two macro trends to be primary change agents to the healthcare system. For example, they are the market forces which give the developing fields of genetics and proteomics such great potential.
EDITOR: Let me take a crack at summarizing your view of the healthcare market. In simplest terms, you see increased costs associated with healthcare as a primary change agent to healthcare systems around the world. Demographics will fuel a demand for health services. This demand will have different components, depending on whether the population is younger or older. Medical technology which improves and lengthens life also represents an increase in costs to the healthcare system. Together, these two trends place pressure upon the healthcare system to expand health services without bankrupting the nation.
WAREHAM: That certainly describes the general environment into which Beckman Coulter must offer relevant products. But, medical technology both saves lives and improves the quality of life. While total costs may go up, there is also positive impact on longevity and quality. These are the macro trends shaping our business strategy. In response, we’ve begun to shift our focus and develop products which meet the needs of customers throughout the biomedical testing continuum.
EDITOR: Let me stop you for a moment. Most clinical lab executives and pathologists perceive Beckman Coulter to be a diagnostics company, with a particularly strong market share in chemistry and hematology. What is the “biomedical testing continuum” and why is it causing Beckman Coulter to change its strategic focus?
WAREHAM: The biomedical testing continuum has always existed. Across this continuum are biological testing applications that include research and development of pharmaceuticals, research and development of biological processes, and clinical trials and clinical research that all have medical applications. So it’s broader than just diagnostics.
EDITOR: Has the biomedical testing continuum changed in recent years? Is that a factor influencing the shifting business strategies at Beckman Coulter?
WAREHAM: The simple answer is yes. Compared to, say 20 years ago, the sheer volume of activity in the biomedical testing continuum has increased by impressive amounts. We currently estimate the total market at the manufacturing level to be about $31 billion per year.
“We believe there will be continued downward pressure on reimbursement for routine testing.”
EDITOR: How is it segmented?
WAREHAM: We divide it into three segments. The biggest is clinical diagnostics—those tests involving patient care. At the manufacturer’s level, this segment is $20 billion per year. Next is research and development, at $8 billion per year. This is the type of bio-assay work that includes basic science. Third is clinical research. It’s the smallest, at $3 billion, but it’s the critical link which moves technology from R&D labs into clinical diagnostics.
EDITOR: Does Beckman Coulter sell into all three segments?
WAREHAM: Yes. We mirror the aggregate market. Our clinical diagnostics business is about $1.3 billion. R&D testing sales are $400 million and clinical research totals about $200 million.
EDITOR: Given Beckman Coulter’s long service to clinical diagnostics, how have recent changes to the bio-medical testing continuum altered the strategic direction of your company?
WAREHAM: I can best answer that by describing two themes we continue to observe in the laboratory marketplace. First, we believe there will be sustained downward pressure on reimbursement for routine clinical testing. This forces labs to do more with less. Consequently, the critical success factor for Beckman Coulter and other diagnostic manufacturers is to provide products which enable labs to do those same tests at lower costs.
EDITOR: Even as volume and utilization increases because of demographics.
WAREHAM: True. Which places the laboratory, and its vendors, under pressure to continually automate, reduce costs, and make lab operations more efficient. However, if you look at the success high-volume labs have had in cutting costs throughout the last decade, the potential to squeeze further significant gains from this area grows increasingly difficult with current processes. Continued new automation and workflow improvements are what we strive for. Ultimately, many of these innovations will help make healthcare more cost-efficient.
EDITOR: So one theme is the diminishing potential of further cost reductions in how routine clinical testing is performed.
WAREHAM: Yes, given the expectation that labs will face continuing pressures to slash costs in the foreseeable future. That brings me to the second theme. We all expect that there will soon be new things to test for which improve the quality of life and possibly may even extend life. But as that happens, there will be a short-term collision with the need to control the dollars. Ultimately, many of these innovations will help to make healthcare more cost efficient.
EDITOR: That’s your intersection of demographics and technology as they impact the American healthcare system.
WAREHAM: Correct. We already see the tension in how reimbursement is established for existing and new tests. It does no good to introduce a new test if labs cannot get paid for it. It’s reasonable to expect further stress within the healthcare system until these issues are sorted out satisfactorily.
EDITOR: As you lay this out, I can see how your two macro trends play into the two “micro themes” you’ve just described.
WAREHAM: These are the market forces which have been shaping our corporate strategy. So let’s step back and look at what Beckman Coulter is doing. One of the biggest efforts in the two areas we call Clinical Diagnostics [patient care testing] and Life Science Research [research and development] is to simplify and automate our customers’ processes. Now, most clinical lab administrators and pathologists are familiar with our automated systems and work process design services. However, what is less well-known is that, for years, we’ve had an equivalent program in the Life Science Research community to automate and simplify their processes, particularly in the drug discovery testing marketplace. There is great synergy between the two market segments because so much of the simplification and automation is the same for both.
EDITOR: That’s logical, given the similar nature of the underlying testing technology. But I would bet that at least two things have caused you to place greater corporate emphasis on the Life Sciences Research market than in past years. First, it must be undergoing huge growth with the money flowing into genomic and proteomic research. Second, if you are placing instruments in research labs, it must give you an early peek at promising diagnostic testing technology and put you first in line to partner in bringing that technology to clinical labs.
WAREHAM: That’s correct on both counts. We call it the “biomedical testing continuum” for a reason. We believe that technology is developed in the R&D labs. Some of it then moves into clinical research, which is the stage where it proves whether or not it is effective for clinical applications. If so, it then moves into general clinical usage. We want to be there at every step in that continuum. In fact, that is why, in March of this year, we created a new division to serve the clinical research marketplace. Called the Specialty Testing Division, it positions us to better capture new technologies earlier and then drive those of significant routine clinical importance into the patient care markets.
“Remember the value component in our healthcare system. New lab tests must add clinical value for the system to be willing to pay adequate reimbursement.”
EDITOR: I guess you could call this a leverage strategy. Your biggest revenue component is clinical diagnostics—what you call Patient Care. Yet the products you place in R&D and clinical research settings position you to learn about promising new technologies which can eventually be introduced into the clinical diagnostics marketplace.
WAREHAM: That’s right. Remember the value component in our healthcare system. New lab tests must add clinical value for the system to be willing to pay adequate reimbursement. Beckman Coulter, working with research organizations already using our instruments and other products, can identify promising technology and participate in developing it for clinical use. The Access® Hybritech® PSA and Free PSA assays are good examples of how tests can improve the quality of life and length of life.
EDITOR: Is this leverage strategy working? What kind of new testing technology does Beckman Coulter expect to introduce during the next 24 months?
WAREHAM: Speaking broadly, there are probably three areas where we have new products moving through the pipeline. First is the whole field of flow cytometry. We have ongoing collaborations with a number of clinical research organizations. We expect to introduce a variety of products in the flow cytometry market.
EDITOR: Number two?
WAREHAM: Second involves our Immunomics Operations. The line of products we call iTAg™MHC Tertamers allow direct ex vivo quantitation of antigen-specific T cells. These are run on flow cytometers. Currently applications are mostly in research labs and to support development of new vaccines. We are optimistic that these products will move into the patient care market.
EDITOR: And the third product line?
WAREHAM: Not surprisingly, it’s a variety of micro-arrays with a particular emphasis on proteomics. Our program is called Progressive Micro Arrays. We currently have low-density arrays and are working to move those up to high-density arrays that would allow multiplex testing to occur. First users of these products are R&D labs.
EDITOR: Eventually those three areas of product development will take Beckman Coulter into segments of the clinical diagnostics marketplace where it has not always had a major presence.
WAREHAM: That may be true, but the underlying corporate mission of the company remains unchanged. Beckman Coulter is focused on simplifying and automating laboratory work processes and providing greater value.
EDITOR: In that context, your corporate mission to other diagnostic companies is like Honda’s is to other automobile manufacturers. Whereas Ford defined themselves as an expert in making cars, Honda defined themselves as in expert in designing and manufacturing engines. That’s why Honda produces automobiles, motorcycles, outboard motors, lawn mowers, and similar devices. The way you’ve defined your company’s core competency, it’s positioned to support any line of biological testing which benefits from work process simplification and automation.
WAREHAM: I think that’s a reasonable comparison. As we’ve shifted our emphasis to serve all three segments of the biomedical testing continuum, our product lines have proven to be relevant and effective in any type of lab setting and for a wide variety of applications.
EDITOR: Based on the insights you’ve shared today, I think clients of THE DARK REPORT now understand how the evolving business strategies of Beckman Coulter will position it to serve some new, and possibly surprising, areas of routine clinical testing.
WAREHAM: Thank you. I don’t often get the opportunity to directly tell this part of our story to the clinical laboratory community.
EDITOR: Of equal importance, you’ve provided some valuable business intelligence on key trends you see shaping the healthcare marketplace. Many of our clients are developing strategies for their lab organizations and will incorporate these observations into their own business planning. Jack, thank you for your time today.
WAREHAM: Thank you, Robert.