Medical Device Link.

Originally Published MX September/October 2001

COVER STORY

Timothy C. Mickelson, CEO of Philips Medical Systems ATL, prepares to guide the world's first billion-dollar ultrasound company into the marketplace.

Interview by Greg Freiherr

It has been the hardest-fought, most-bitterly battled ground in the medical device arena—the corporate equivalent of trench warfare. The prize was bragging rights to world leadership in diagnostic ultrasound. For a long time, Toshiba (Tokyo) held claim to the title, while the lucrative U.S. marketplace was ruled by midsize specialty companies.

In the mid-1990s, GE Medical Systems (Waukesha, WI) changed the game, announcing its goal to become the world leader in ultrasound before the turn of the decade. GE soon went on a buying spree, acquiring Diasonics Vingmed (Santa Clara, CA) and several other smaller ultrasound companies. Its competitors quickly followed suit. Royal Philips Electronics (Amsterdam, The Netherlands) bought ATL (Bothell, WA) in 1998, adding the company to its Philips Medical Systems subsidiary. Siemens Medical Systems (Malvern, PA) bought Acuson (Mountain View, CA) in 2000. Then on August 2, 2001, Agilent Healthcare Solutions Group (HSG; Andover, MA)—the last of the ultrasound pioneers—was absorbed by Philips Medical Systems.

In the leapfrog race to be the biggest ultrasound company in the world, Philips has taken the lead. The combined installed base of ATL and Agilent HSG is bigger than that of any other player in the market. The combined annual sales of ATL and Agilent ultrasound products—about $1 billion—is greater than that of any company in the world. Philips Medical Systems ATL had done it. But there were—and still are—mammoth challenges.

U.S. regulators held up the Agilent deal, locking the companies in limbo for nearly nine months. As such, the two companies were sitting ducks for competitors that harped on the uncertainty created by the deal, then pitched their systems to prospective buyers as better bets. Both ATL, which served mostly radiologists, and Agilent, which catered to cardiologists, lost ground. If the erosion continues, the coveted title of global ultrasound leader will be in jeopardy.

But the greatest challenge of all may be Philips's seemingly insatiable hunger. Weeks before bidding on Agilent, Royal Philips purchased ADAC Laboratories (Milpitas, CA), one of the world's leading manufacturers of nuclear medicine equipment. In addition, nearly a month before the Agilent deal would be final, Philips proposed a billion-dollar cash deal to buy Marconi Medical Systems (Cleveland), a world-class vendor of magnetic resonance imaging (MRI), computed tomography (CT), and nuclear medicine equipment. And while ultrasound was the primary interest of the deal makers, Agilent HSG included two other types of products—defibrillators and patient monitors. These products must also be integrated into the parent pipeline. ADAC has yet to be assimilated completely, and the Marconi deal is still in the works.

Timothy C. Mickelson, CEO of Philips Medical Systems ATL, must navigate his newly expanded company through this corporate chaos. Having engineered the integration of ATL into Philips Medical Systems some three years ago, he has the knowledge and experience to do so. He was also Philips's go-to guy in the ADAC deal, negotiating and guiding this acquisition to completion last year. Finally, he ushered Agilent through the regulatory mine field that led to its merger in early August.

In an interview with MX conducted shortly after the close of the Agilent deal, Mickelson describes the travails of closing the Philips-Agilent merger and the challenges lying ahead for the newly combined company. He also maps out his short- and long-term plans for what he describes as "the largest ultrasound company in the world."

MX: Paint a picture of where the merger with Agilent stands right now.

Mickelson: We're only about five hours into it [as of press time], so there isn't much we've been able to do yet. We've done some preparation since receiving approval from the U.S. Department of Justice the last week of May, and in that time our major focus has been to extract the medical business from Agilent so that it could run on a stand-alone basis. We call it "carve out, hand over."

You're changing from one backbone to another?

That's a fair assessment. A lot of Agilent's infrastructure was grounded in centralized systems shared throughout the company. We transferred many of these to service agreements to be provided over certain time periods going into the future, and in other cases we recreated some of the systems so that the HSG could support itself locally.

Are there specific things that demonstrate the kind of complexity involved in this process?

The best example that comes to mind is the information technology [IT] systems. The IT systems run everything from order processing to factory scheduling to product delivery to financials and inventory controls—everything you need to run a business. Agilent was on a centralized IT structure, so all of its IT systems, hardware, and support people resided outside the local business. From that standpoint, the HSG headquarters didn't have any internal IT equipment or IT people to run the business. When we carved HSG out of Agilent, it didn't have any of these IT systems. We have to wean ourselves off Agilent's centralized system and onto Philips's systems over a short period of time.

Why is the changeover so difficult?

We have to run a global business with one infrastructure, but Philips's IT system is not identical to that of Agilent. If the two were identical, it would have been a marriage made in heaven. But they aren't, and we have to take the time to make sure that the changeover doesn't affect our employees or our customers.

What are the challenges in switching over?

Philips is like a lot of big companies in that we are organized regionally. There are Asia Pacific, Europe and the Middle East, and the Americas regions. So our approach in going from one system to another has to address these regions. And while you are moving from one system to another, you need oversight so that the process does not take place in a piecemeal fashion.

How does the current status of Philips Medical Systems and its other acquisitions affect this process?

ATL has been a part of Philips now for about three years. We recently also acquired ADAC Laboratories. So the integration is not just HSG—it's ATL, ADAC, and HSG. The challenge is coordinating the integration of all these organizations. It's a large task to basically ensure that you don't interrupt the customer focus you need as far as delivering products and services. The challenge is moving onto an integrated infrastructure that will support the different product lines and the different businesses. So it's not just about the one piece; it's about pulling together all the new pieces of Philips Medical Systems on a global basis. It's a big challenge because obviously you have to train people to get them up to speed on new systems. It takes a lot of careful planning to ensure that for the customers we service and support, the infrastructure is transparent and that it's better than it was before.

The Process of Integration

You've been involved in more than just ultrasound. You played a significant role in the ADAC acquisition as well.

Philips likes to leverage the talent they have around the world and use the people that are in the right spots. Basically, they asked and I raised my hand.

People will say that just absorbing and integrating one organization properly is a challenge. Two can be very challenging. And three runs some serious risks of taking on more than any company can possibly absorb. Is there a risk—now that Philips wants to acquire Marconi Medical Systems—that the company is biting off more than it can chew?

We don't feel that way, but it's a fair question. As I said, Philips likes to leverage its people, and we have the staff to handle these jobs. I was very involved in final negotiations and integration of the Agilent HSG. And I realized early on that there would be no time for me to plan the ultrasound integration. So Greg Petras, vice president and general manager for cardiac ultrasound at Philips HSG, was given the responsibility for planning and orchestrating the integration of our ultrasound groups (see sidebar).

That has been and will be the approach—to pick the right people and divide the tasks among them. With ADAC's nuclear medicine business, we've done a lot of work in certain areas of the world where we've integrated with the Philips sales organization and its service organization. We will be dealing with a lot of the same issues with the HSG acquisition as well and, if it happens, with Marconi. And we'll deal with those the same way.

Where do you stand on the Marconi deal?

It is still at the Department of Justice, so it's not something that we can talk about. Quite frankly, neither Greg nor I have raised our hands for that one. We are excited about the tasks ahead of us in the ultrasound world.

It took a long time to get the Agilent deal to this point.

It was a slow, arduous process that came to a successful conclusion. It obviously took longer than we wanted. The negotiations actually started on July 27, 2000. And up until November, Agilent was still talking to other companies and looking at other opportunities. From November on, it was a matter of going through the regulatory process. European approval came fairly quickly, but U.S. approval took from late November through the end of May 2001. It obviously affected both of us in the marketplace, because it made some of our customers unsure of what was going to happen, and our competitors liked to highlight that.

What were the problems concerning the U.S. Department of Justice?

There was an overlap in the ultrasound businesses between Agilent and ATL. But we eventually got through that.

A Better Half?

You and Greg Petras have very similar job responsibilities. You will be responsible for the general imaging side of the business, and Greg will be the general manager of cardiac ultrasound. Why not have a general manager for the general imaging side?

We are trying to make sure that we have a lean and focused organization that doesn't have high-level people who are not needed. We have half our business and half our employees in Andover, MA, which requires someone senior overseeing that location. And we need someone in Bothell, WA [headquarters for Philips ATL], looking after the other half. Greg could just as well have the position and title that I have, and I could be the general manager for general imaging in Bothell.

But you're also involved with ADAC, aren't you?

ADAC reports to me within the Philips Medical Systems structure. Philips has a management committee that is made up of a number of senior people. One oversees MRI and CT; one is in charge of x-ray and cardiovascular imaging. I oversee the ultrasound and the nuclear medicine businesses.

What happens to the defibrillator and patient-monitoring operations that were part of Agilent HSG?

That is a separate business line being headed up by the person who was in charge of Agilent HSG, Steve Busckowski. He reports to Hans Barella, CEO of Philips Medical Systems.

Piecing Together the Future

When the deal with ADAC was just completed and the Agilent deal was in the works, you spoke publicly about the advantages of having all these different technologies under one roof. Now that it's happened, can you elaborate on those advantages?

As people are looking to improve the productivity within hospitals, tying these pieces together and integrating them to become more-effective clinical tools is going to be very important. You will see more integration of these tools in the information flow that helps solve customers' problems.

The other thing that we are very excited about is the whole home-care approach. We have made some investments in an Israeli company that has a home-care presence, and Agilent HSG has a home-care group focused on providing at-home monitoring for patients with congestive heart failure. So we see this as an area that has a lot of potential for the future, along with automatic external defibrillators, which are starting to become available to individual users to have at home in case of a life-threatening emergency. Whether at the home or in the hospital, we see the integration of these technologies as an important factor going forward.

How do the acquisitions of ATL, ADAC, and now Agilent HSG make Philips Medical Systems a better company?

The key thing has been coming up with a broader and deeper product line. We are trying to provide the product and services that our customers want and meet our development goals for the long term. We are also trying to steer our product lines in order to provide the solutions and the innovation that will be important in the coming years. We have seen the sharing of information among our ultrasound engineers. That is something we try to foster across the other modalities—CT, MRI, nuclear medicine, x-ray—as well.

The challenge is in making sure that we maintain good, consistent communication in regard to the vision that we have, where we are heading, and what we are going to do throughout our organization. We have more than 3000 people in ultrasound, and it is important that we all have a clear direction and know where we want to go, because if people don't know the answer, they start speculating on what it could be. Our task is to make sure that we get the answers to them, and if we don't know the answers, we work with the right people to come up with them. Multiply that across the other businesses that we have acquired and the existing Philips businesses and you have a major task, with major challenges.

One Company, One Goal

How do you get the word out to 3000 people in diverse organizations, half of them coming from Agilent HSG, where they were in a different culture than the one they are coming into?

It's meeting with people, whether individually or in groups. Secondary to that, it's through the use of the media, mail, and Web tools. It's fostering good communication within your management or leadership ranks, making sure there is continuity within the leadership so that the message is consistent and people have an understanding of what you want to accomplish. The in-person approach really lends credibility to these efforts. It's tough in the field, quite frankly, because sales and service people are scattered. But certainly in the factory, spending the time and making the effort to get personally involved makes the electronic media that you use—whether it's viewing data on a Web site or reading an e-mail—a lot more effective, because they know who is behind the information and are therefore more inclined to believe it.

Aside from these other distractions, putting together a company that sells a billion dollars of any one type of equipment is tough, especially since Philips has not traditionally had a strong reputation in this area.

In October, it will be three years since Philips purchased ATL. Before then, Philips had not done well in ultrasound, and management wanted to make sure that they were buying one of the top companies in the marketplace. They wanted to make sure that Philips's entry into ultrasound this time was a success. And we worked very hard to ensure that we maintained the market approach, the customer contact, the innovative and can-do spirit that ATL had. If you polled the people here today, which we do, they'll tell you that they feel the company is better today than it was three years ago, even though they are part of a big company. It takes some work to do that. Now, as we get even bigger, we want to make sure that we don't lose sight of the things that got us where we are—being two of the best companies in the business.

That's a tall order.

Quite frankly, a lot of people expect some of the wheels to fall off. Our goal is to make sure that doesn't happen—that we actually do a better job combined than either one of us was doing individually during the last five years.

Making a Smooth Transition

Some of the people making those dire predictions are your competitors. They're hoping to win some customers away from you as you go through this transition. How do you keep that from happening? We know that our competitors are going to take that approach because they've already been doing it. During the time that the Department of Justice took to review our case, our competitors were certainly trying to take advantage of our situation. Now that is behind us, and we are moving very actively to work together as one company and make sure that our customers as well as our people get the message. We have implemented a plan with the sales force to let our staff and our customers know what is happening—letting them know that we have an integrated approach and a consistent message about the company and our products. The faster we get this message across and answer the questions that come up, the better the chance we have of making sure competitors don't take advantage of us.

Are there lessons learned from integrating ATL and ADAC into Philips that can be applied to the Agilent acquisition?

You always learn something from past experiences: infrastructure needs, approaches to solving certain problems. We have tried to make sure that we retain the people we need to run the business, define the product lines, ensure our distribution plans, and communicate our plans to customers and staff.

How do you take advantage of this merger? Do you combine R&D?

Customers have asked us already if we're going to share information. The answer is definitely yes. There are features that we can move from one platform to another in a reasonable period of time to help improve the product's performance and solve our customers' problems. And we are going to do that.

Is there an opportunity to benefit from the engineering capabilities in Royal Philips, such as its development of components used in ultrasound equipment?

The key thing that we've found since ATL was merged into Philips is what it has done for us in terms of having input and gaining insight into the research that is happening in the many areas of Philips, whether it is semiconductors or components or speech recognition. We've also found that Philips helps our division fund a certain number of research projects in the medtech area, so we have been able to look at technologies that might come out in five or so years from now. It's allowed us to look ahead in ways that a smaller ATL without such resources could not do.

Also, now that we have a larger base of products and interest, we will try to leverage that. Our job now is to make sure that the other product divisions within Philips know what we want to accomplish with our acquisition of Agilent HSG and to educate them on our needs and leverage their thoughts and ideas.

The Ultimate Combination For much of the last two decades, R&D teams at companies specializing in diagnostic ultrasound barely completed one new advance before leaping headlong into work aimed at creating the next. The frenetic pace of innovation followed the drumbeat of a lean and hungry industry that battled for a few percentage points of market share. Among them were two especially accomplished companies. ATL (Bothell, WA) excelled in radiology and general imaging. Hewlett-Packard, later reorganized as Agilent Healthcare Solutions Group (Andover, MA), was the undisputed champion of cardiac ultrasound. Each dabbled in the other's area of expertise, but neither achieved much success outside their specialty areas. The two companies now are one. Greg Petras, vice president and general manager for cardiac ultrasound at Philips Medical Systems's ultrasound division. Their combination opens extraordinary opportunities for R&D cross-fertilization and product hybridization, according to Greg Petras, vice president and general manager for cardiac ultrasound at Philips's newly expanded ultrasound division. In the immediate future, Petras foresees the mixing and matching of features that will boost the power and appeal of ATL products in general ultrasound imaging and of Agilent products optimized for cardiology. Over the long haul, engineers will develop a new platform unifying the premium-performance product lines of these two companies, the ATL HDI 5000 and Agilent Sonos 5500. "We've started these groups talking together, and they have come up with some unique and ingenious ways of sharing information and technology to improve our products' performance," says Petras. "Right now we can provide customers with the product—either the HDI 5000 or the Sonos 5500—that they think best suits their needs. In the long run, we will be able to provide customers that have either of these systems with the ability to migrate to a common platform." Ultimately, the two companies will create a new superpremium ultrasound system that combines the expertise and innovation of both companies. The R&D groups are already sketching the broad outlines of such a new platform in hopes of producing a commercial product within five years. One configuration would replace the HDI 5000, which has been ATL's flagship for nearly a decade. Another would succeed the Sonos 5500, which has been Agilent's top-of-the-line product for nearly as long. These products will still be optimized for general imaging and for cardiology, but much of their architecture will be shared. Perhaps as much as 70% of the technology will be the same, providing economy of scale in production as well as creating best-of-breed product lines. "In a three- to five-year time frame, we will architect a whole new platform that takes the best of both worlds and integrates them," Petras says. Such integration is possible because Royal Philips Electronics (Amsterdam, The Netherlands) acquired the Healthcare Solutions Group of Agilent Technologies for $1.7 billion in early August 2001. Petras, who has been assigned the weighty task of integrating the two companies, seeks to accentuate the strengths inherent in a large company while keeping the personable nature of a midsize firm. His highest priority is the integration and smooth transition of these two companies into a provider of products and services that exceed those offered individually by Philips ATL and Agilent in the past. The success of Agilent and ATL in their separate market segments was based largely on industry's competitive nature, which forged more-powerful and more-effective systems and forced companies to be sensitive to their customers' needs. Remarkably, the ultrasound industry, which only a few years ago included more than 30 vendors of end-user products, achieved the requisite ease of use, quality imaging, and increased productivity in similar yet proprietary ways. Each company pressed its own character into its machines. Each product line had some features that were just a little bit better or were just a bit more appealing to the end-user. Whether they were the consequence of the other company's R&D groups poring over competitors' products looking for a better way or the result of serendipitous findings no longer matters, at least not for the R&D groups behind Agilent and ATL products. The two once-separate groups are now collaborating under Petras's watchful eye. "Right now the first order of business is to see what we can beg, borrow, and steal from each other to make our products better in the short term," he says. "We will then look to the future when we can construct something that will really wow the marketplace." The future is an especially exciting time for Petras and his colleagues. For the first time ever, they have the opportunity to mine the knowledge base that has been created by these two leading vendors of ultrasound equipment. "A lot of benefits will come to both the cardiology and general-imaging customers because we are a big company," Petras says. "They will come from sharing information across ultrasound capabilities to produce very value-driven and customer-associated results."

Copyright ©2001 MX