Beckman Coulter’s Strategy Reflects Consolidation Trends

Diagnostic testing remains an undervalued asset

CEO SUMMARY: Rapid changes to the clinical laboratory industry had equally profound impact upon the major diagnostic companies. At Beckman Coulter, Inc., market forces triggered a decade of acquisitions and internal consolidation.The company looks very different today than it did ten years ago. Here’s a look at how Beckman Coulter views the near future for clinical laboratories, along with its business strategies for developing new diagnostic products.

RECENTLY BECKMAN COULTER, INC. announced that it would raise $500 million through a public securities offering.

To learn what Beckman Coulter intends to do with this half billion dollars and how it may affect both hospital labs and commercial labs, THE DARK REPORT traveled to Beckman Coulter headquarters and met with its executive team.

Following a decade of aggressive changes, including the purchase of Coulter Corporation in 1997, Beckman Coulter transformed itself into one of the world’s three largest diagnostics companies. Its revenues now top $1.8 billion per year.

Growth through acquisition was a business strategy directly linked to Beckman Coulter’s view of how the healthcare marketplace is evolving. This market assessment drives several individual business strategies at the company.

As the company looks at the healthcare systems of the United States and other countries, it sees an interesting development. “There’s a common thread running through changes in the health systems of many countries,” said Michael J. Whalen, Vice President and Director of Worldwide Diagnostics Strategic Marketing at Beckman Coulter. “Healthcare is increasingly viewed as less of an automatic birthright for all citizens,” observed Whelan. “Instead, it’s recognized that there is an economic connection to healthcare services. Governments are beginning to teach their citizens that the cost of care is now an essential part of the overall healthcare equation.

“What is interesting about this theme is that the cost of care has always been visible to patients in the United States,” he added. “This is less true of other countries, where universal healthcare was organized in such a way that patients never learned what it cost to individually provide them with healthcare.

“If you accept the thesis that national health systems are moving toward better linkage between the cost of care and the quality of care, then the United States’ healthcare system will probably be the source of much innovation that other countries’ healthcare systems will copy.

“We believe that laboratory testing will benefit as national healthcare systems begin to emphasize cost-benefit analysis,” stated Edgar E. Vivanco, Beckman Coulter’s Senior Vice President of Diagnostics Development and Corporate Manufacturing. “Most laboratorians understand that lab testing is a highly cost-effective way to improve patient outcomes while reducing the overall cost of care.

“However, there is still a gap,” continued Vivanco. “The reality is that laboratory medicine can improve healthcare quality and reduce costs. But government-run health systems around the world have yet to fully recognize this fact and take advantage of it.

Better Pricing For Lab Tests

“We predict a change to this situation,” he added. “It will be increasingly recognized by both the healthcare community and legislators that laboratory reimbursement must be adequate and new laboratory technology must be appropriately priced.”

THE DARK REPORT has repeatedly noted the existing ability of laboratory medicine to reduce costs while improving patients’ healthcare outcomes. Whelan and Vivanco concur, but they also believe that government healthcare regulators are the fulcrum for future change.

As the economics of providing care to aging populations continues to increase healthcare spending, Whelan and Vivanco think government health program administrators will soon recognize that diagnostic testing is a tremendous, cost-effective tool for improving the cost-benefit performance of their healthcare systems.

“As this happens,” explained Whelan, “government-run healthcare systems will give greater emphasis to laboratory medicine and new diagnostic technology. That should result in two positive outcomes for the laboratory profession.

“First, it means that reimbursement and access to laboratory testing will improve,” he said. “Second, it means that investments in new diagnostic technology will be encouraged and there will be faster ways to move new diagnostic technology through clinical studies and into widespread clinical use.”

Cost-Benefit Analysis

But this theme of increased economic cost-benefit analysis to healthcare services worldwide has yet to play out in the marketplace. In the meantime, Beckman Coulter’s business strategy also addresses existing trends within the diagnostics industry.

“Tremendous consolidation on both the provider side and the vendor side continually changes the cost-effective point that enables a diagnostics vendor to deliver top quality products and services,” stated Whelan.

“Let me discuss some specific ways this impacts our laboratory customers,” he said. “First, in the former business model, laboratory customers wanted several diagnostics vendors. Having multiple vendors was one way labs maintained leverage over their vendors. Also, using multiple vendors was a common technique to squeeze down prices.

New Lab Purchasing Model

“But these old business practices are giving way to a new business model,” explained Whelan. “Laboratories now want ongoing, long-term partnerships with a limited number of diagnostics vendors. This is a collaborative business relationship, with both lab and vendor working together to manage costs, improve productivity, and increase the effectiveness of laboratory testing.

“This means that diagnostic vendors and laboratories have more sophisticated business relationships than they did in the old business model,” Whelan stated. “It requires the vendor to have more people with advanced technical skills. These additional costs are changing the break-even point for vendors.

“It’s also why having a single product line makes it difficult for a diagnostics partner to be an effective partner for a commercial laboratory or a hospital lab customer,” added Vivanco. “If the vendor is going to be involved in the lab’s work flow design and management, having an integrated suite of instrument and test solutions improves its ability to add value to the lab customer.”

Because this is an ongoing marketplace trend, many laboratory executives and pathologists may still have vendor expectations based on the old model of multiple suppliers and contract-by-contract efforts to ratchet down prices. The collaborative purchasing model between supplier and customer has yet to arrive at many lab organizations.

New Partnering Model

“You can see the impact of this new partnering model at Beckman Coulter,” continued Whelan. “We’ve done acquisitions to broaden our technology and product offerings. We’ve built our asset base to support increased research and development, as well as customer support.

Under this new business model of long-term supplier/customer relationships, the technology offered by the diagnostics vendor becomes a critical success factor, in several important ways. “For example, laboratory customers increasingly want an instrument which is simpler to operate,” Whelan noted. “That means the operator can walk up, hit some buttons to launch the test process, and walk away while the instrument does the work.

“But what most laboratorians don’t understand is that, the simpler an instrument is to operate on the outside, the more complex the instrument is on the inside,” observed Whelan. “And software is the biggest factor in making a test instrument simple to operate.

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Diagnostic Technology

“So basic diagnostic technology, when combined with complex software, needs more service resources to maintain it and upgrade it through each generation of new technology,” explained Whelan. “The sophistication needed by vendors to support and maintain the lab’s use of these instruments is a source of increased expenses. This is why diagnostic companies have consolidated and expanded the range of instruments they provide to laboratories.”

Whelan’s point touches on another aspect of diagnostics technology which is seldom appreciated by laboratorians. That is the backwards compatibility of each new generation of lab tests. “Currently, most laboratories keep an instrument for an average of six to seven years,” commented Whelan. “We want to differentiate Beckman Coulter from other vendors by our capability of integrating new generations of assays that can run on the earlier generations of our instruments still in use by our laboratory customers.

Renamed AdvaMed Promotes Diagnostics

CLINICAL LABORATORIES HAVE an overlooked ally in the campaign to gain wider recognition of the value of diagnostic testing.

This ally is AdvaMed, the Advanced Medical Technology Association (formerly HIMA, the Health Industry Manufacturer’s Association). During 2000, its President is John P. Wareham, who is also the Chairman, President and Chief Executive Officer of Beckman Coulter, Inc.

One of AdvaMed’s major initiatives is to educate governments, payers, and providers about the value of diagnostic testing. In particular, AdvaMed is advocating that HCFA (Healthcare Financing Administration) should “modernize its procedures to pay for in vitro outpatient tests.” It says that “current procedures prevent ‘covered’ technologies from being integrated into Medicare, thus restricting beneficiary access to needed services and effectively stalling use of new technologies.”

Technology Is Essential

“This is where diagnostics technology is an essential factor,” noted Whelan. “Beckman Coulters’s acquisitions during the 1990s were designed to acquire bioassay technologies that are fundamentally robust and can be upgraded with future improvements. This allows our lab customers to maintain forward and backward technology compatibility even as they introduce the latest generation of tests into their lab organization.”

Whelan is describing a strategy similar to that of Microsoft’s business strategy of DOS/Windows compatibility. Each version of DOS and Windows was designed to be compatible with earlier versions. As a result, Microsoft customers were assured that, no matter what version they used, any other DOS or Windows user could open and use those files. Beckman Coulter wants the same kind of backward and forward compatibility to each generation of lab tests that it introduces.

The robust diagnostic technology of each testing line is designed to be compatible in another way. “For example, we want the chemistry to be the same, whether it is a large lab using our high-volume instruments or a small lab using our lower-volume instruments,” noted Whelan.

Chemistry Doesn’t Change

“That means if a rapid response lab in a hospital is using our Cx instrument, and the core lab is using our Lx instrument, the chemistry is the same. The chemistry doesn’t change just because it is a different model of our instruments,” Whelan said.

“Although many of our customers appreciate and value this technology compatibility, few realize what a complex challenge it is to maintain this compatibility across each line of instruments and between generations of instruments and tests,” he added.

Since 1990, the widespread changes to healthcare worldwide stimulated equally radical changes to how Beckman Coulter was organized. “Consolidation among providers, such as commercial labs and integrated hospital networks (IHN), caused us to reorganize our company into new strategic alignments,” recalled Whelan.

“We also took a bold step in Europe in 1994,” he continued. “We reorganized operations into a single European corporate office. This replaced our individual, country-by-country, business model. At the time, few companies had attempted this. But we’ve been successful. As the European economic market becomes increasingly unified, a regular flow of companies is visiting our European operation to study our business model.”

Business Performance

Michael Whelan and Edward Vivanco have described a series of business strategies designed to improve Beckman Coulter’s ability to partner with a broad cross section of commercial and hospital laboratory organizations. These strategies also position Beckman Coulter to sell in countries throughout the world.

It may be that many laboratory administrators and clinical pathologists cannot easily recognize and describe Beckman’s individual business strategies of: 1) long term partnerships with customers; 2) robust bioassay technologies that can be evolved while maintaining instrument capabilities; and 3) common test technologies across different-sized instrument platforms.

But Beckman Coulter must be doing something right. In the market segments of clinical chemistry, hematology, and cytometry, its products rank one or two in overall sales. One result from its acquisitions in the 1990s is that Beckman Coulter can now offer tests which make up 75% of all hospital testing.

Research Diagnostics

Many clinical laboratorians are also unaware that Beckman Coulter has a thriving business in research diagnostics. Not only is this a profitable business, but it contributes to Beckman Coulter’s clinical diagnostics sales effort. By selling a variety of products to research organizations, the company stays updated with new research discoveries.

“Our sales split between research and diagnostic testing helps us bring new technology to the clinical lab marketplace,” noted Vivanco. “Several years ago, we developed a DNA sequencing instrument. In recent years, we modified the software used in our chemistry instruments and married this software to our DNA sequencer. That allowed us to introduce the first automated HIV typing sequencer instrument into the clinical laboratory marketplace.”

Although Beckman Coulter executives Whelan and Vivanco were open and detailed in sharing insights about the business strategies and market analysis which guides their company, they became somewhat inscrutable when it came time to discuss the specific details of how the $500 million shelf offering will be used.

“Stay The Course”

“Beckman Coulter has not disclosed specific plans for this money,” said Whelan. “Beckman Coulter expects to ‘stay the course’ with the business strategies we’ve discussed here during the next two years.

“However, we have our eye on several innovative products and services,” he continued. “As healthcare e-commerce proves its viability, we are prepared to incorporate those features into our products. But the rapid changes to both the market and the technology of diagnostics make it difficult to offer accurate and specific predictions about what our company will be doing in a couple of years.”

Notwithstanding Whelan’s comments, once Beckman Coulter arms itself with another half billion dollars of capital, it is certainly going to be a tough competitor in the marketplace for diagnostic instruments.

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