Its recent financial restructuring now complete, Dade Behring prepares a “brand building” campaign
CEO SUMMARY: Dade Behring is poised to become a tough and high-profile competitor in the laboratory diagnostics marketplace. Earlier this month, it finalized a major financial restructuring. Following two years of negotiations with its banks and bondholders, Dade filed a “pre-pack- aged” Chapter 11 bankruptcy in August. The goal was to swap $700 mil- lion of debt into equity, preserve valuable tax benefits, and, through the Chapter 11 filing, emerge, upon discharge, with publicly-tradable stock (without the need for a public offering). (See TDR, August 5, 2002.) That goal was met on October 3 when the judge discharged Dade’s Chapter 11 filing. From this date forward, hospital lab administrators and pathologists will see a different Dade Behring. To understand these changes, THE DARK REPORT recently traveled to Dade Behring’s headquarters in Deerfield, Illinois to meet with President and CEO Jim Reid-Anderson. This interview was conducted by Editor-in-Chief Robert L. Michel.
EDITOR: This interview is timely for an important reason. Last month Dade Behring, Inc. completed a major financial restructuring. Armed with a strong balance sheet, Dade Behring now has plenty of financial strength to intensify both research and sales and marketing. What’s going to be different about the newly-energized Dade Behring?
REID-ANDERSON: We think the main difference is that Dade Behring now has the opportunity to develop its brand of clinical diagnostics. Our emphasis will be to expand the impact of our brand to the benefit of our laboratory customers.
EDITOR: Dade Behring is already a recognized company throughout the lab industry. More specifically, what do you mean by “develop its brand of clinical diagnostics?”
REID-ANDERSON: In strategic terms, “brand” implies the attributes of a company and its products. For example, say “Rolls Royce” and people immediately understand the attributes of this brand, which involves high quality. Another brand with different attributes might be “McDonalds,” known for a predictable quality of food anywhere in the world, speedily served in clean surroundings. Dade Behring has its unique attributes. In this context, promoting the brand helps the lab industry better understand Dade Behring and the value it represents.
EDITOR: Okay, let’s get more specific. If I say “Dade Behring,” what attributes do you want to come to mind?
REID-ANDERSON: As a starting place, we’d like to be recognized as the largest company in the world solely devoted to clinical laboratory services and diagnostics. Other large competitors have extensive business operations in pharmaceuticals and bio-research. We believe our single-minded dedication to serving the needs of clinical laboratories is a major point of differentiation.
EDITOR: That certainly is a unique attribute. What other elements will you emphasize as part of the Dade Behring brand?
REID-ANDERSON: Within our company over the past two years, we’ve used the term “customer excellence” to describe the attributes that differentiate us from our competitors. One key strategy is to become known as a source of the “total lowest cost solution” for laboratories.
EDITOR: How will Dade develop that as a point of differentiation?
REID-ANDERSON: To meet our objective as the “total lowest cost solution,” we are designing instrument systems that provide additional benefits beyond quality of test result, throughput, competitive cost per test and the like. We’re engineering our systems to better support the evolving new models of clinical laboratory operations. So not only are we designing our instruments to maximize their effectiveness at performing assays while reducing costs, but we want them to reduce the management complexity of the lab itself.
EDITOR: Meaning that you want your instruments to become tools for enabling work flow process redesign, for example.
REID-ANDERSON: Conceptually, that’s correct. Our design teams are looking at the laboratory as an organic whole. Part of our design criteria now includes the impact certain designs can have in helping a laboratory manage workflow in the simplest way possible to support high quality, high productivity and the total lowest cost solution.
EDITOR: Let me stray from the subject of branding for a moment. You’ve just described a different design approach for diagnostic instruments, one that goes beyond traditional features of accuracy, volume, and consumables priced ac- cording to volume. What other elements are changing the way you design instruments for the next generation of laboratories?
REID-ANDERSON: Good question! We are furiously engineering a higher level of informatics capability into our instrument systems. Our instruments will be Internet-capable. Our guiding design goal is to help our lab customers eliminate paper and further reduce both the cost and complexity of managing their laboratory.
EDITOR: Do you believe you have a functionality in this area that differentiates you from other manufacturers?
REID-ANDERSON: Yes, because our development efforts are conducted under a program we call “CCPD.” CCPD stands for “customer-centered product development.” For the past two years, we’ve had customer teams helping us develop our next generation of instrument systems. These teams include both Dade Behring customers and customers using only our competitors’ products.
EDITOR: Since we are speaking about “next generation” diagnostics, I’d like to ask which key healthcare trends you believe will have the greatest impact on clinical laboratories in the next few years.
REID-ANDERSON: That’s easy. I believe that the healthcare industry as a whole—and the clinical laboratory industry—will be most influenced by two fundamental trends. First is the inadequate supply of trained medical professionals. Second is a sustained pressure to drive down costs.
EDITOR: It’s interesting that you emphasize two rather broad trends as the primary drivers of change in healthcare in coming years.
REID-ANDERSON: Put the two side-by-side. If there is an inadequate sup- ply of technically-trained medical professionals, it doesn’t matter what type of advanced medical technology is available. Healthcare is a people-based service. Acute shortages of technically- trained medical professionals affects the ability of consumers to access care.
EDITOR: We see the effect of that shortage in certain regions around the country. Without adequate MT and MLT staffing, labs in some cities are forced to send out substantial volumes of testing. That affects both cost and turnaround time.
REID-ANDERSON: Definitely we will see more of that type of situation. On the cost side, all demographic trends point to an ever-higher demand for healthcare and the inability of governments, employers, and patients to pay for it. There will be intense pressure to eliminate unnecessary costs in every segment of the healthcare system. Laboratories, with their high labor component, are one of the first healthcare sectors to directly feel this pressure to reduce costs.
EDITOR: From my perspective, the wholesale consolidation of independent commercial laboratories in the early 1990s, followed by similar consolidation in hospital laboratories during the second half of the 1990s, is an example of cost-cutting. Declining reimbursement forced lab directors to eliminate costs. Reducing laboratory staff by consolidating specimen volume was an obvious way to do that.
REID-ANDERSON: Take that example one step further. In today’s laboratory marketplace, widespread consolidation is a fact. How do laboratory administrators and pathologists achieve the next round of significant cost reductions, while still maintaining high quality and a full menu of testing?
EDITOR: Is the answer to your question found in your earlier statement? You mentioned that Dade Behring wants to engineer instruments which not only improve the quality and integrity of testing, but can also be used as tools that help lab administrators reduce management complexity in clinical laboratories.
REID-ANDERSON: Yes! We recognize a move within healthcare to adopt the quality management systems and methods which other industries have used so successfully to reduce costs while improving product quality. Lab- oratories, with their daily high throughput of specimens, are one of the first areas of healthcare to pull in this management philosophy and put it to work.
EDITOR: THE DARK REPORT has published many stories about the growing number of laboratories which have been first to implement quality systems like ISO-9000, Six Sigma, and Lean.
REID-ANDERSON: Among our lab customers, we see a growing interest in learning more about these management and quality systems and how to use them. In response to this demand, we established a management consulting resource to provide our customers with more sophisticated techniques they can use to deploy resources in their laboratory.
EDITOR: This ties in with the engineering philosophy of designing diagnostic instruments which, by their form and function, enable lab directors to simplify work processes by using ISO-9000 and Six Sigma principles. Is that right?
Among our lab customers, we see a growing interest in learning more about these management and quality systems and how to use them.
EDITOR: To bring us back on topic, cost-cutting pressures in healthcare are causing clinical laboratories to change many long-standing management philosophies. Outside the United States, what other signs tell you that cost control is intensifying?
REID-ANDERSON: Internationally, you see it in Europe. Germany is using DRGs (diagnostic related groups) to control costs. The approach in France is to base reimbursement on cost. Most European countries have an aging population, just like Canada and the United States.
EDITOR: What role do you see for government in influencing the direction of healthcare in the United States?
REID-ANDERSON: My sense is that the government will be more involved in policy matters than specific reimbursement issues. It doesn’t seem like Congress is inclined to take actions that might trigger “radical change.”
EDITOR: Are you saying that we are unlikely to see politicians take a strong hand in recasting the American healthcare system?
REID-ANDERSON: In recent years that has certainly been true. Congress has struggled to enact legislation which addresses such issues as rising drug costs, growing numbers of uninsured, and obvious, common-sense reforms to the Medicare and Medicaid program. It is unlikely that our government institutions will initiate changes considered bold and daring. Within the United States, those types of initiatives will probably come from employers. As their healthcare costs increase, they will be willing to experiment with new models for the delivery of healthcare to their employees.
EDITOR: Let’s move our discussion from influences shaping the overall healthcare system down to a specific look at the clinical laboratory industry. Given your belief that a shortage of technical staff and cost-pressures will be primary drivers of change, what will these trends do to clinical laboratories as we know them today?
REID-ANDERSON: We’ve already discussed how lab directors will be adopting more sophisticated management methods to drive down costs while sustaining high quality lab services. That certainly changes the way labs buy diagnostic instruments and deploy them in the laboratory.
EDITOR: Keeping in that theme, let’s look at diagnostic technology. Genomics and proteomics certainly have attracted most of the attention. What is Dade Behring’s take on technology trends?
REID-ANDERSON: One major emphasis will be a demand by clinicians and patients for increased accuracy from lab testing.
EDITOR: That’s a fascinating insight. Are you referring to a growing awareness by consumers that lab tests are generally less accurate in the real world than consumers have traditionally believed?
REID-ANDERSON: It’s not that tests have been inaccurate. A high level of accuracy already exists. There simply is a need to raise the standards to even higher levels of accuracy.
EDITOR: I can offer conventional Pap smear testing as an example of a shift in consumer perceptions. The direct-to-consumer advertising done by Cytyc Corporation educated consumers to the flaws of the conventional Pap smear and offered ThinPrep® as a “better” Pap test. That’s certainly been a factor in demand for this test.
REID-ANDERSON: It illustrates the trend that labs will need to deliver a higher level of accuracy to meet the changing needs of clinicians and consumers.
EDITOR: What is Dade Behring’s strategy to respond to this trend?
REID-ANDERSON: First, let me say this about “accuracy.” As our industry makes diagnostic tests which are more accurate, two benefits result. First, the quality per episode of care improves. A more accurate test result allows the physicians to practice a better quality of medicine. Second, a more accurate test cuts costs because it eliminates the need for additional testing and the costs related to an imprecise diagnosis.
EDITOR: Both benefits are appropriate responses to the pressure for better quality at lower cost.
REID-ANDERSON: Yes. In responding to the demand for improved accuracy, we have technology which allows us to move test accuracy to higher levels with each generation of products.
EDITOR: Please explain.
REID-ANDERSON: A good example is an instrument system we call Epsilon. It’s being engineered to meet lab needs in four ways. First, it will offer the “total lowest cost solution” that we discussed earlier. Second, it will combine routine chemistry, immunoassays, and nephelometry in one system. Third, because space is a premium in most labs, it will occupy a footprint that’s half of the products offered by competitors. Fourth, the assays run on this instrument will be noticeably more sensitive. The technology to accomplish this came through our acquisition of Behring.
EDITOR: You indicate that there is core technology within Dade Behring that you expect to generate successive generations of more precise diagnostic assays.
…laboratories will need to deliver a higher level of accuracy to meet the changing needs of clinicians.
REID-ANDERSON: That’s right. We are focusing these technologies on applications for the central laboratory. We want to help that customer move to higher levels of diagnostic performance.
EDITOR: Is there a core competence at Dade which strategically underpins your market directions?
REID-ANDERSON: Currently we are the number one company in protein testing in the world today. We believe it opens the door for us to be a major player in proteomics. But that will take at least ten years to occur.
EDITOR: Explain your proteomics strategy, please.
REID-ANDERSON: We have a protein-based technology called “LOCI.” We consider proteomics to be at a “cradle” stage and we have the cradle. As research labs identify new proteins, we expect LOCI technology will enable us to adopt that research into assays for use in clinical laboratories. It’s a convergence strategy that will marry our LOCI technology with new proteomic assays.
EDITOR: These are certainly ambitious business plans. Could you talk about how Dade’s financial restructuring impacts the implementation of your business strategies?
REID-ANDERSON: Dade now has a strong balance sheet to go along with the strong revenue growth we’ve posted in the past two years. This allows us to boost the money we spend on research and development. For example, three years ago we spent 6% on R&D. This year it is 9% and it will continue at that level.
EDITOR: Other examples?
REID-ANDERSON: We are investing substantially in our people. It is one place we can differentiate ourselves. Remember the strategy of the Dade Behring brand? We want to be known as an organization where the people and the products contribute equally to bringing our customers the “total lowest cost solution.”
EDITOR: With your emphasis on quality of people and quality of products, I’d like to ask about Dade’s relationship with the Food and Drug Administration (FDA). That’s been a hot issue in the diagnostics industry.
REID-ANDERSON: Quality costs—and we are spending to achieve quality. Our lab customers understand how much quality costs within their own lab. I’d like our customers to know this. We invest the necessary resources to insure a high level of quality with our products and services. To insure our compliance with FDA good manufacturing practices, we have internal teams that do “surprise audits” at our plants using FDA rules. Because of this and other investments in quality, field corrections within our company are down one-third in the past two years. This type of activity to boost quality costs a lot of money. Our clients will never see much of this because it goes unnoticed for all the right reasons.
EDITOR: Those are interesting in- sights into Dade’s corporate culture. Jim, we’ve covered quite a few sub- jects during this conversation. Is there anything you’d like to add about the Dade Behring story and why it will be a different company following its financial restructuring?
REID-ANDERSON: There is one additional point I’d like to communicate. For me, this entire restructuring process was amazing in unexpected ways. For the past two years, Dade’s employees and customers responded to the circumstances with unwavering support. During the entire process, we’ve had the full understanding and confidence of everyone—vendors, employees, and customers. These relationships confirm that Dade Behring has solid roots in the marketplace. I’d like to thank everyone for their patience and support.
EDITOR: Not every company enjoys such loyalty. That is a good starting place to build the Dade Behring brand.
REID-ANDERSON: Yes. Thanks for the opportunity to talk about the changes and business strategies unfolding within Dade Behring. We are excited about the opportunity to do more in the marketplace.