Medical Device Link.

Big Growth

John P. Wareham, CEO of Beckman Coulter, on corporate growth and the megamerger that formed his company.

Interview by Greg Freiherr

Bigger is better. It provides the market share and technology base needed to achieve what would otherwise be impossible. There are few examples that illustrate this principle better than the 1997 megamerger between Beckman Instruments Inc. (Fullerton, CA) and Coulter Corp. (Miami).

The union between these two companies laid the groundwork for integrating technologies to address the needs of clinical laboratories. With other acquisitions, including Hybritech Inc. (San Diego) in January 1996 and the rights to the Access immunoassay system from Sanofi Diagnostics Pasteur (Chaska, MN) in April 1997, Beckman Coulter has forged one of the broadest product lines in the in vitro diagnostics (IVD) industry. Together, these acquisitions have transformed the company into the market leader in clinical chemistry and hematology as well as a major provider of immunoassay systems.

At the helm of the company throughout this journey has been John P. Wareham. While serving as president and chief operating officer, he engineered the Coulter acquisition and presided over the integration and restructuring that was necessary in the wake of this deal. In the process, he helped create one of the most profitable corporate entities in the IVD industry.

But according to Wareham, this process is far from complete. Beckman Coulter is still evolving, still reaching outward. In this interview with MX, Wareham—now chairman, president, and CEO of Beckman Coulter—discusses the opportunities that are still ahead, the challenges that must be met, and how the company, under his tutelage, will meet them.

Wareham: The first is what we call automated solutions. What drives that is the high labor required of testing in both life sciences research laboratories and clinical laboratories. Automating those processes increases efficiency as well as safety—and, in some cases, the quality of the answer. So the area of automated solutions is one driver we see for almost all our businesses and it's one of the major opportunities.

In terms of strategy, do you want to diversify or to strengthen core areas?

Since the mid-1990s, our key strategy in diagnostics has been to strengthen our participation in the central lab. Our customers were consolidating and there was price competition. Clearly, then, we had to have a strategy to consolidate in the central lab area and we've done that.

So I wouldn't say that is any longer a strategy. We now have the product breadth we need, we have the automation enablers, and we have pretty good market shares.

Now you're moving on to other things. What are these?

One is to enhance our life sciences position using an automated solutions platform. It's a brand-new product, called Biomek FX, introduced in the second quarter of 2000 and a great platform for the life sciences research market. It's a liquid-handling robot. Our basic strategy is to apply that platform in the life sciences markets and become a major participant in testing segments in that market. That's the mechanism by which we will go forward and where we have some of our alliances. We also have internal programs to add testing in that area, such as for cytokines. It is going to be the basis by which we expand our life sciences research into more of an applications focus.

Do you see specific opportunities in automation?

On the clinical laboratory side, the opportunity exists in managing the samples so that you are able to perform more tests with a single sample, because sample processing is a big cost driver. On the life sciences research side, it's more volume oriented, where the pharmaceutical and biotech companies are doing more and more testing. That's growing exponentially. The more we know, the more we have to test for.

Are there other opportunities?

Life sciences research is addressing the discovery processes for new therapeutics. The amount of testing conducted in this field is increasing very rapidly, as are the kinds of testing. We think more protein analysis and even cell analysis in those discovery processes will become major opportunities for our company. And last but not least, we have a new technology called major histocompatibility complex (MHC) tetramer that is enabling us to move into immune system testing. We think this will be a major area of testing for the discovery, clinical trials, and patient care processes.

What is so special about immune system testing?

When immune diseases are involved, it is very difficult to know whether therapy is working, so the monitoring business is a major opportunity. The first place we're taking the MHC tetramer technology is into clinical trials, where we're monitoring the response to new vaccines. It's already being used in more than 20 clinical trials, but eventually that monitoring will move into the patient care environment. We hope this technology will become the standard for vaccine monitoring.

The hottest area in vaccine development now is HIV. Are you currently involved in any HIV testing?

We are involved in both HIV and melanoma testing. Our next step is to introduce some standard product into the marketplace, because most products today are custom-made. They are specific to the peptides of the vaccine developers. But there are certain peptides for which everybody tests in HIV and melanoma. So we are trying to create some standard marketplaces even in the research environment.

Partnership Strategies

How much of your development is collaborative—meaning that you work with other companies or customers to develop your technology—and how much do you depend on academic versus corporate collaborations?

With respect to our tetramer products, many of our customers are actually pharmaceutical and biotechnology companies, not academic customers, although there is a big academic piece to this technology in terms of vaccine development. Certainly we would hope that this would lead to some collaboration—if and when the vaccines are fully developed into the marketplace—to measure immune response. So the answer is that we depend on both academic and corporate collaboration, but that's not the limit of our partnerships.

Is there a broad strategy according to which you fit these various components into a master plan?

It varies by area of focus. If you look at the diagnostics business itself, one of the things we've done is to broaden our product line through alliances. We have a fairly major alliance with Instrumentation Laboratory (Lexington, MA) and several alliances with people in data management and other areas that make our product line broader and more effective. The other area of alliances is in life sciences research, where there are a lot of small companies with specific capabilities that don't have access to automated platforms. So we have alliances with companies like Promega (Madison, WI) for their plasma purification product and Third Wave Technologies (Madison, WI) for genotyping and gene expression. We automate their processes so they can reach further into the marketplace.

Do you have marketing alliances for distribution in diagnostics?

In the diagnostics field, we have the scale and the breadth to be the marketer for other companies' products. I'm not sure we need alliances to distribute our own products.

How do you identify potential allies or partners?

We have teams that focus on doing that. They explore and try to establish relationships and eventually make that an opportunity. In many cases, however, it results from something happening to the partner. For instance, a company might recognize that they have a need and come to us to fill it. So we're very busy with people coming to us. But we do have some specific initiatives to make sure that we're participating in certain segments of the market.

Where are your teams looking right now?

I hesitate to say specifically some of the market segments that we're looking at, but it's probably no surprise that point-of-care diagnostics is one of them. There are a lot of small start-up companies in that area. We would like to get some kind of foothold in some segments of that market.

Additionally, in automated solutions for life sciences research, there's a plethora of small companies with expertise in certain chemistry areas, so we have a team that does nothing but look at those companies to see if there's a market for us to automate their processes and handle the distribution for those companies.

Where do mergers and acquisitions figure in?

They always figure in because they're part of the business strategy. It's easier to talk about history, because it's hard to speculate on the future in this area. If you go back to the mid-1990s, Beckman needed to decide whether to broaden its product line or add to the depth of its product line in chemistry. We initially looked for opportunities to broaden the product line into the chemistry of the immunodiagnostics area. And that's how we came to acquire the Access immunoassay system from Sanofi Diagnostics Pasteur, although we also looked at a lot of other opportunities. And then, of course, the hematology and flow cytometry instruments that came with Coulter ultimately broadened our product line.

For the most part, mergers and acquisitions are driven by an overall strategy. But on occasion companies end up with market dynamics that create an opportunity they hadn't thought about. And if the opportunity looks pretty good, they can take advantage of it.

Can you give me an example of such a dynamic?

Coulter, to some extent, was like that. We always said we would never go into hematology unless we could buy one of the leaders. So when Coulter was put up for sale we said, okay, there's a market leader. But for the most part, our acquisitions have been driven more by strategy.

One of the ways of qualifying an acquisition is to first have an alliance and find out how that company operates and what its strengths and weaknesses are. Is that part of your strategy?

It is. In fact, we've ended up buying several companies that we had alliances with. That happens particularly when they're small companies—then there's some degree of freedom. So it is clearly a way to get to know one another. I hesitate to emphasize it too much, because I wouldn't want our current partners to think that we're really just out to buy them.

Megamerger and Beyond

In this context, what were the key considerations in crafting the megamerger between Beckman and Coulter?

I think the biggest consideration was that we had an identical customer base with no product overlap. It was pure breadth—a product breadth expansion—with a clear market leader in a small segment. So that was one of the drivers—it's unique, and you don't find that too often in this business.

Scale was a second consideration. Scale was becoming important in the diagnostics marketplace, particularly in the central lab, so it added to the scope of the company.

A third consideration was the ability to provide integrated automated solutions. This acquisition provided the basis for the company to change from being just a chemistry supplier, immunochemistry supplier, or hematology supplier to being the laboratory supplier. Automated solutions provide the way to do that, and we thought this acquisition enabled automated solutions.

The process of integration is always laborious. It's difficult when you have two companies about the same size, which is basically what Beckman and Coulter were. Integrating the businesses to take advantage of opportunities was a major process and took over a year to complete.

Even in the most amicable situations, there are usually two different company cultures and those cultures can clash. Was that the case for Beckman and Coulter?

It's a major change, but I think we did a pretty good job. We spent a lot of time planning before actual implementation. Because Beckman was the acquirer, we made sure that we gave consideration to the Coulter people and processes. Also, the cultures of Beckman and Coulter were not that dissimilar. We were both founder companies, and we had both been in the marketplace for a relatively long period of time. So our cultural fit was pretty good.

How has the merger affected your approach to the market?

It made our vision of automated solutions implementable. Before the merger, we were envisioning the automation of chemistry, which is by far the most complex thing to automate. As a result of the merger, however, we can now automate almost the entire laboratory.

The other strategy that developed was the opportunity to move cell analysis into the research and development environment, which Coulter never really did because it didn't have the necessary distribution system. We were already a major participant there, so it allowed us an opportunity to do things that we couldn't do before. The initial entry of the MHC tetramer technology into vaccine clinical trials is a good example.

How are mergers and acquisitions funded?

We have historically funded them with cash. With Coulter specifically, we took on a considerable amount of debt. I think we've been doing well with the restructuring of that debt, so we have fairly low cost capital and we're reducing debt load very rapidly. At that time, funding the acquisition by taking on debt was a very efficient way of doing the deal. It doesn't mean that all our future acquisitions will be funded in the same way, but that's what we have done historically.

Why did you go with cash in the Coulter acquisition?

It was their desire to have cash. When you go another way—with stock—you have to consider whether you can do a pooling of interest, and that gets very complex. The advantage is that cash is very simple.

When a large company such as Beckman Coulter acquires a much smaller company, perhaps because it is an innovator in key areas, what are the pros and cons of running it as a freestanding company as opposed to integrating it into your corporate structure?

I think it depends on the strategic purpose of the deal. If the purpose is to enhance our core business, integration may be appropriate. If it's a venture into another area, then I think you want to have it separate but network it into your infrastructure. We've done both.

Are there differences determined by the kind of technology the company has?

Only as it relates to the customer. On the diagnostics side, where you want to sell the customer the entire lab diagnostic testing continuum, integration is more likely. In life sciences research, which is more technology driven, integration is less likely.

The Customer Base

By what means do you approach customers—as collaborators refining concepts and products, as individual clients, as single-sale opportunities, or as groups represented by group purchasing organizations?

We approach customers more as collaborators, particularly on the diagnostics side, where our approach is to sell process redesign, not just products. Twenty years ago, people wanted to know what the horsepower was, and that's all they thought they needed. Today we know that doesn't really matter much. It's the process, the test mix, the cost structure, the turnaround time—it's all these things. So our approach tends to be very process- and redesign-oriented, which lends itself to a collaborative selling approach.

So your goal is to understand your customer and what he or she really needs, versus what they might want.

The need is much more complex than horsepower now and it requires us to be much more interdependent with our customers. They're all under pressure themselves. And that's why it's a more collaborative environment.

With competition as tough as it is now, how do you convince customers to go with you instead of with a competitor?

Our instruments perform 100% of the routine tests conducted in hospital laboratories. We also perform in-lab analyses for our customers. We map their processes and show them how it would all fit together. This is a different approach than we would have taken 10 or 15 years ago. Some of our competitors do what we do, and some do not.

It gets back to understanding the customer, but also showing the customer how he's going to benefit from buying your products.

Absolutely. In the end, it all has to benefit the customer.

How do you evaluate the markets for your products?

The process varies by market segment. It's difficult to simplify without oversimplifying, but if we're talking about clinical diagnostics, we tend to target a market segment—acute-care hospitals of certain sizes or private laboratories—in certain testing fields, and then design to that market. That has been our approach on the clinical diagnostics side for many years—at least from a Beckman point of view. Since I oversaw the diagnostics business for several years, I'm most familiar with that.

On the life sciences research side, the process tends to be a little different—it is more focused on the early adopter. Here, we tend to focus more on the technology and the enabling of that technology.

Within specific markets, how can you be sure that what you are developing will be popular? Where do you get your intelligence?

We have two strategic centralized marketing organizations—one for clinical diagnostics and one for life sciences research. Within those organizations are embedded marketing research activities. We use those internal infrastructures to organize our market assessments. And, of course, market assessments depend upon what you're trying to assess, but we tend to use that as our mechanism.

R&D Challenges

What are the challenges that go with managing a diverse product portfolio?

When we get everything running on all eight cylinders, it's wonderful. But more often than not, there's some kind of dislocation in one of our portfolio items. There's a positive side in having a large portfolio, however, because it means that you're buffered. Also, diversification in our product portfolio allows us an opportunity to combine things that aren't intuitive. One of our ventures is to combine hematology and flow cytometry into integrated workstations. We end up with opportunities to do things that we couldn't do otherwise.

Often, there is a very strong link between managing a product portfolio and managing a patent portfolio. If your development pipeline starts to dry up, do you have problems in the future?

In the clinical diagnostics area, patents don't always protect you. People usually find ways around them, although there are a few exceptions.

Where do you see R&D taking you in the next 5 to 10 years?

We think there are going to be opportunities in two areas. One is in bringing some of the newer technologies into patient care, including products that allow the stratification of patients for optimized therapy, and new techniques for determining whether the therapy is working, much like the MHC tetramers. Bringing some of these technologies into patient care is something that our R&D will be addressing on the horizon. The second area of our R&D focus is in miniaturization of some of the testing and making testing more applicable in different sites.

What do you believe are the keys to future growth? Vigorous R&D obviously is one of them, but are there others?

A lot of our future depends upon reimbursement activities. Governments around the world manage healthcare, and sometimes this is not for the benefit of the patients but in deference to their budgets. So technology is held in abeyance.

Another issue is the adoption rate—meaning how fast new technologies are adopted in clinical practice. At the testing level, at least, it takes a little while.

Then there is globalization, where we have a lot of underdeveloped countries with people who are underserved by medical care. As globalization boosts their economies, those countries begin to spend more on healthcare. That's a huge opportunity for future growth.

How do you strategize the activities of your several business units? Are they organized to complement each other?

They are. We have a strategic planning process that glues everything together. We try to match the pieces that fit our vision of the future. We're not always right, but at least we have a process to benchmark against. And the proces is run at the corporate level.

Do you find yourself making midcourse corrections, and if so, what are they driven by?

Absolutely. They are dependent on and driven by the market dynamics and, to a large extent, by competitive dynamics.

Funding Strategies

Different business units inevitably compete for funding to be used in R&D, sales, marketing, and other activities. How do you work out the complexities that naturally result from competitive forces among them?

We have processes to try and resolve those issues. We tend to be a fairly large reinvestor in R&D. Historically, both Beckman and Coulter have been. That was one of those common-culture traits.

Right now we invest about 9 1/2% of sales in R&D, which is actually very high and certainly above industry standards. And that's part of the strategy. But there's always adjudication and you have to make sure that you understand your priorities.

Have you ever looked into ways of generating extra cash? I see companies doing private stock placement and issuing tracking stocks to generate cash they say will be channeled into R&D.

Yes, we have looked at those options. We believe we could trigger those kinds of mechanisms if we thought it was the right thing to do.

Is it important to satisfy investors?

It's really important to have the confidence of your investors, although not all investors fit through the same keyhole. We all want to have more strategic investors than transactional ones, but to do that you must retain their confidence. We believe investors have confidence in our management, which is important because you can't move forward without that. The way you continue to have that is to perform. Ultimately, the best way to satisfy investors is to meet the needs of your customer.

Do you make any special efforts to reach out to your investors?

I personally spend a lot of time in the investment community. We have a staff dedicated to working with investors. And we participate rather extensively with the investment firms that follow us to ensure that they understand our strategies, our implementation, and our performance. That's the best way of doing it.

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