“Innovating from our core technologies will lead Sysmex into very different areas of laboratory testing.”
CEO SUMMARY: Sysmex America, Inc. surprised many this year when it hired its own sales and service team and begin distributing its products directly to laboratories in the United States. In this exclusive interview, COO John Kershaw explains why Sysmex moved away from its successful distribution agreement with Roche Diagnostics. He also reveals some surprising new products in the Sysmex R&D pipeline. In this wide-ranging interview, Kershaw discusses the American healthcare system, strategic drivers he believes will reshape the laboratory testing market, and how Sysmex will respond to these threats and opportunities. This interview was conducted by THE DARK REPORT’S Editor-In-Chief, Robert L. Michel.
EDITOR: Let’s explore three themes during this interview. First is the American healthcare system and your views about how and why it’s changing. Second, what strategic drivers will reshape the laboratory testing marketplace during the next couple of years? Third, what new products and services will Sysmex Corporation offer in response to these trends?
KERSHAW: That’s a good progression. We can start with the macro view, then drill down to very specific topics.
EDITOR: Agreed. Here is the first question. When Sysmex looks at the American healthcare system, what issues and trends does it consider to be most significant?
KERSHAW: We see the increased cost of healthcare as the single most alarming issue. In each of the past four years, there’s been a double-digit increase in the cost of healthcare benefits. Many companies have had between 15 to 20% cost increases in their healthcare benefits.
EDITOR: That’s a huge cost increase.
KERSHAW: Yes, and it’s a cycle which must be broken. But no one has yet demonstrated an ability to control healthcare costs.
EDITOR: What may break this cycle?
KERSHAW: There are two contributing factors which must be resolved. First, we think most of the increased health costs stem from inefficiencies within the system, not from higher rates of utilization. Second, we believe the “profit motives” inherent in our healthcare system significantly contribute to higher costs.
EDITOR: What can affect this?
KERSHAW: Healthcare costs will be most affected by a shift in emphasis to preventative medicine and testing. Acute response medicine costs infinitely more in dollar terms than a good preventative program does.
EDITOR: What about other change agents in the U.S. healthcare system?
KERSHAW: The aging population is one obvious trend. But the United States will differ from other industrialized societies because of high rates of obesity. This is not mirrored by other countries. In tandem, the two trends of aging and obesity will cause a different mix of diseases in the United States. For example, obese elderly individuals will suffer from bone and joint problems not seen in other developed countries.
EDITOR: The combined impact of aging and obesity on the U.S. population has been neither widely recognized nor discussed with much detail.
KERSHAW: That’s because this is a new phenomenon and healthcare researchers are seeing new health issues which were unimagined a decade ago.
EDITOR: Please provide some examples.
KERSHAW: Adult onset diabetes is affecting entirely new groups of people here in the United States. In recent years, the incidence of 30-and 40-year olds diagnosed with this disease has increased dramatically. This surprised researchers, with worse news to come. In the last year or so, a disturbing number of juveniles have surfaced with either full-blown Type II diabetes or pre-diabetes symptoms. These developments are so new that policy makers have yet to fully grasp the scope of the problem or how to respond to it.
EDITOR: How does Sysmex expect the healthcare system to respond to such disturbing trends?
KERSHAW: In our healthcare system, change is driven by money. The greatest cost savings and efficiencies will come from preventative treatment and early detection. Sysmex believes that both private and government payers will begin to shift a higher proportion of healthcare funding into prevention and early detection. One dynamic which will support and accelerate this development is the steady increase in the number of technologies which support more accurate diagnosis and therapy.
EDITOR: Are you hinting that a golden age of clinical diagnostics may be approaching?
KERSHAW: That might be a stretch. We expect new diagnostic technologies will contribute incremental improvements in the system. But let’s go back to the theme of money as healthcare’s change agent. Today, reimbursement emphasis in the U.S. is weighted to reward acute and episodic care. However, that is the most expensive way to treat anyone’s health problems.
EDITOR: You are referring to the traditional argument about it being cheaper to treat an individual’s high blood pressure than it is to later deal with that patient’s acute cardiac event.
KERSHAW: Yes. Personally, I think the examples of Germany and the United Kingdom are instructive. In Germany, the emphasis is shifting to primary care. In the United Kingdom, budget dollars are moving away from hospitals and over to clinics. Both countries recognize the need to emphasize prevention, early detection, and early intervention relative to acute and episodic care. That has yet to happen fully in this country.
EDITOR: These are fascinating insights. Let’s focus now on how these trends will affect laboratory testing and in vitro diagnostics.
KERSHAW: Sysmex began looking at these issues six years ago. The aging trend has been a problem in Japan—where Sysmex Corporation has its headquarters—for at least 15 years. We’ve tracked disease types and began monitoring their impact. Of course, lifestyle differences between Japanese and Americans make a direct comparison difficult. However, the health system’s response to the aging Japanese population has given us insights on how we should prepare for aging of the population in the United States.
EDITOR: What emerged from these strategic studies?
KERSHAW: Not what you’d expect. A review of the literature about genomic and proteomic research and technologies led us to conclude that most biotech companies, including some of the biggest IVD firms, are taking a scatter-gun approach, as an industry.
EDITOR: Explain that, please.
KERSHAW: There’s a lack of central focus in the collective R&D efforts of the biotech industry. Individual companies are pursuing very defined opportunities. Some of healthcare’s giants seem to be opportunistically waiting. If a technology begins to show clinical promise, they are ready to step in and acquire or joint venture to gain access to that technology.
EDITOR: Has Sysmex decided on a different strategy?
KERSHAW: That’s the right question. It strikes to the heart of our company, which is led by executives greatly influenced by many Japanese cultural traits.
EDITOR: I bet you’re about to say something about continuous improvement, that concept of Kaizen.
KERSHAW: That’s a good guess. We’ve settled on a strategy of emphasizing and building upon our core technologies. Sysmex believes it is a world leader in as many as 17 unique core technologies. It wants to use its engineering strengths to continuously develop these core technologies, which include flow cytometry and the chemistry of cellular events, among others.
EDITOR: Do you have an example?
KERSHAW: Cervical cancer screening illustrates how we want to combine a core technology we possess with new technology that may have been developed elsewhere. We took our flow cytometry expertise and, with another reagent company, are developing a methodology with a goal to create an efficient first-line screening test for the detection of cancerous cervical epithelial cells by flow cytometry.
EDITOR: As a company well-known for its expertise in hematology, this type of product will probably surprise many in the lab industry.
KERSHAW: We’ve got a lot more surprises like that one. Another development project involves molecular diagnostic instrumentation for the intraoperative detection of metastatic carcinoma in lymph nodes. The first application is in breast cancer. Existing laboratory practices involve the use of manual tissue sectioning and microscopy, with or without the use of staining procedures. These methods are time-consuming and need to be performed by highly skilled personnel (i.e., pathologists). Because of the time constraints, intra-operative lymph node assessment is not as comprehensive as the formal microscopic lymph node assessment, which still needs to be conducted post-operatively.
EDITOR: How does Sysmex want to improve this current situation?
KERSHAW: Our solution is an automated instrument, which does not require the same level of expertise to operate. LAMP (Loop-mediated isothermal amplification—Eiken Chemical Co., Ltd.) is the principle method used. It is a one-step isothermal method that does not require nucleic acid extraction prior to amplification. The result is enhanced diagnostic performance within a 30-minute time frame, without the need for highly skilled intervention. Sysmex is working on this project with a leading cancer center in the U.S.
EDITOR: How soon might this instrument system be available?
KERSHAW: It is currently undergoing clinical trials in Japan and the early results are promising. Sysmex projects an introduction into the United States by 2006.
EDITOR: Are there other examples of this core technology/new technology marriage within Sysmex?
KERSHAW: In Japan, Sysmex offers a fully-automated fecal occult blood testing instrument. The measurement principle is latex immuno-nephelometry, with a lower limit of detection and enhanced analytical sensitivity when compared to traditional methods of detecting blood in stool. The method is highly specific for human hemoglobin and is fully automated. Not only does it incorporate a better process—which is med tech friendly—for specimen collection and prep, but we think the economics of this test will support its use in an early detection mode. Another area of development involves the predictive qualities of certain markers for pharmacogenomics applications. This takes a core technology found in our hematology products and applies it outside hematology.
EDITOR: None of these new applications are in hematology.
KERSHAW: This product development is in addition to our continued development in hematology. Hematology will remain our primary focus for utilizing our core technologies. However, Sysmex today is a different company than it was just ten years ago. It has taken inspiration from Sony Corporation. Sony has a reputation as a pure innovator. It starting by taking existing technologies and creating something innovative. The Walkman—a miniature stereo system—is an example. Revenues generated by those successes were used by Sony to create products based on its own breakthrough technology innovations.
EDITOR: Are you saying, then, that a key attribute within the Sysmex corporate culture is innovation?
KERSHAW: Yes. This process started a decade ago and is beginning to bear fruit. We have several interesting and innovative diagnostic products to introduce in coming years.
EDITOR: How does laboratory information fit into the Sysmex strategy. In 1998, your company bought MOLIS, a laboratory information software system.
KERSHAW: The MOLIS acquisition was a direct result of our effort to seek out “preventative care” opportunities, particularly those that would be useful in the Japanese healthcare system. As we all know, laboratory test data plays a key role in prevention and early detection.
EDITOR: True, but most IVD companies have been slow to address opportunities in laboratory information. What stirred Sysmex to act?
KERSHAW: There were two pieces to our analysis. First, acute and episodic care is generally treated in hospitals. If you move out of that environment, you must serve patients who are in doctors’ offices, health clubs, and similar settings. As an example, if an analysis is done on an individual in a health club, it won’t do much good to report a set of numerical results. Rather, you will want to say to that patient “your hematogram fits the profile of a long distance runner.” That type of report is one that a layman can understand.
The MOLIS acquisition was a direct result of our effort to seek out “preventative care” opportunities.
EDITOR: So the first part of this strategy is tied to the ability to deliver laboratory test information to any location, in or outside of a healthcare facility. Further, your software allows you to analyze the lab test data, compare that to known profiles, and offer the individual a sophisticated analysis.
KERSHAW: That’s right. It allows us to move out to the patient. The second piece involves clinical laboratories. Today, medical technologists review all laboratory tests to identify results which are abnormal. Alab software system has rules to help the med tech. However, about 98% of all lab test results are normal. The opportunity is to help the med tech, and the clinical pathologist, with those 2% of the test results which are abnormal. The shortage of med techs heightens the opportunity for us to provide a useful solution.
EDITOR: But why an LIS system?
KERSHAW: We went outside Sysmex because we wanted to buy an information solution which was designed and built upon a strong foundation of current generation technologies. The MOLIS acquisition infused a broad range of IT knowledge into our company.
EDITOR: What plans do you have for your LIS?
KERSHAW: Today, MOLIS is a separate business, with separate market characteristics. We believe it will evolve into a much closer relationship with the diagnostic testing process.
EDITOR: I find it interesting that some of the other major IVD companies are announcing ventures and collaborations with healthcare IT companies. That seems to affirm your strategic analysis of where the marketplace will end up.
KERSHAW: Maybe so. But we expect a major change. Today, clinical information systems sit between the lab testing instrument and the traditional laboratory information system (LIS). We predict that laboratory customers want a single, integrated IT solution which can collect lab test data, compare it to a patient’s cumulative data, and then predict, analyze, and support diagnosis and treatment.
EDITOR: That’s a tough vision to convert into reality.
KERSHAW: In the United States, the LIS business is a challenge for Sysmex. We face large competitors with lots of control over their customers. A “me-to” product will not survive in this environment.
EDITOR: Could we now shift gears and talk about the changes that occurred to Sysmex America during the past year? Specifically, why the decision to move away from the distribution agreement with Roche and establish your own sales and service-team in this country?
KERSHAW: This was a difficult decision and fraught with significant risk. On one hand, the Sysmex–Roche relationship was always successful. On the other hand, Sysmex found that, to build market share in the United States, a distribution-only business model was not ideal.
EDITOR: Why is that true?
KERSHAW: In this country, Sysmex found itself facing two fundamental disadvantages. One, it did not manufacture in the United States. Two, it did not distribute directly in the United States. Each situation erodes the normal pricing margins enjoyed by any IVD company which manufactures here and directly distributes their own products. Recent healthcare trends in America further exacerbated this financial consequence.
EDITOR: What else contributed to this major strategic change?
KERSHAW: There were two contributing factors. First, Sysmex has a pattern of going to direct distribution and enjoying substantial success. When we went direct in Germany, we had the lowest market share. Ten years later, Sysmex held the top market position. It was a similar story in the United Kingdom when we went direct.
EDITOR: And the second factor?
KERSHAW: Today we have substantially more financial resources. In 1999, international revenues at Sysmex totaled $300 million. This year, Sysmex will post revenues of $720 million. This allows us to do a more effective job to support our customers in the United States, currently the world’s single largest healthcare market. Sysmex has evolved into a customer-concentric company and direct distribution supports this attribute.
EDITOR: Does “close to the customer” reflect, like continuous improvement, a Japanese cultural trait that underpins this business strategy.
KERSHAW: Yes. Customer expectations are a key part of defining our quality. They also point us to product enhancements which add value.
EDITOR: We spoke about the Sysmex–Roche relationship. Will any- thing change in your business relation- ship with Dade Behring Corporation?
KERSHAW: No. If anything, it will become tighter. Our two companies engage in joint manufacturing and joint development of new coagulation analyzers and reagents. Our product lines are complementary and the existing structure works extremely well.
EDITOR: John, you’ve shared valuable insights about the healthcare system and diagnostic testing trends. You’ve also talked about the research and new products under development at Sysmex. Now that Sysmex is building a new sales and service team in the United States, there will inevitably be differences in the public face of Sysmex. How can you help our readers understand what you believe will differentiate Sysmex from other IVD companies during the next few years?
KERSHAW: Think “best of breed!”
EDITOR: That’s an easy phrase to remember, but how does it relate to the new Sysmex business strategy?
KERSHAW: In today’s marketplace, there’s a competitive strategy we can describe as the “total supplier business model.” These IVD companies want to convince a laboratory to buy all its instruments and reagents from a single source.
EDITOR: So what makes “best of breed” an effective answer to that competitive approach?
KERSHAW: Sysmex strongly believes that laboratories want a solution which incorporates the best demonstrated technology and delivers the highest possible level of clinical accuracy and quality. As I mentioned earlier, Sysmex has world-class excellence in 17 technologies. These are our springboards to further innovation which supports higher clinical outcomes on an operationally-robust platform. In the long run, we think “best of breed” wins out over the “total supplier business model.” In hematology, for example, our research indicates that Sysmex’ core technologies can make substantial contributions to advance the capabilities of medicine.