Medical Device Link.

Originally Published MX July/August 2005

COVER STORY

Interview by Steve Halasey

In the medical technology marketplace, a company doesn't typically stay around very long if it isn't competitive. And keeping a company among the market leaders in even one sector can be a monumental undertaking for company executives.

But somehow, those challenges don't seem so difficult for company leaders at Abbott (Abbott Park, IL), a 117-year-old healthcare company with leadership positions in a number of the industry's major sectors. Although most consumers recognize Abbott's name because of its strong presence as a manufacturer of pharmaceuticals, the company describes itself as a "broad-based healthcare company that discovers, develops, manufactures, and markets products and services that span the continuum of care—from prevention and diagnosis to treatment and cure."

Richard A. Gonzalez, medical products president and COO, on portfolio reshaping and growth at Abbott. Photo courtesy Abbott

Abbott's principal businesses are pharmaceuticals, nutritionals, and medical products, including diagnostics and cardiovascular devices. But in recent years, the company has increasingly turned its attention to building opportunities in the last of these groups. In 1999, Abbott began a process of strategic self-evaluation that led to the 2004 spin-off of its hospital products group—now known as Hospira (Lake Forest, IL)—and greater emphasis on opportunities in innovative, high-growth areas of medical product development. In 2004, the company posted medical product revenues of more than $8.8 billion, an increase of nearly 14% over its 2003 revenues.

Leading Abbott's advances in the medical device arena is Richard A. Gonzalez, who has served as president and chief operating officer of the company's medical products group since 2001. An Abbott veteran, Gonzalez previously served as divisional vice president and general manager of Abbott's diagnostic operations in the United States and Canada, vice president of the company's health systems division, and senior vice president for hospital products.

In this interview with MX editor-in-chief Steve Halasey, Gonzalez describes the progress of Abbott's transformation over the past five years, and how it has positioned the company for continued growth.

MX: Let's talk about Abbott's portfolio reshaping over the past five years or so, including the big Hospira spin-off. What is the importance of that transformation so far as the medical products group is concerned?

Rick Gonzalez: Abbott has been a diversified company for a long time. One of the things that we have done over the last five or six years is to validate that a diversified healthcare model is the model we want going forward. We made the determination that a broad-based diversified model is what serves our mission best from the standpoint of what investors expect of the performance of Abbott—a top-tier-performing company that can deliver solid results in a consistent and reliable way.

We believe a broad-based platform allows us to perform better by leveraging our pharmaceutical science expertise with our medical products expertise to create uniquely innovative products. By the same token, a diversified model allows us to perform in a very consistent way because it allows us to balance the risk of investments.

How did the reshaping start?

It really started with reconfirming that we wanted to stay with a diversified model. Our process was to examine how we could transform each side of the business in a way that would best take advantage of the synergies across those businesses to create strong-performing units. We have two major groups within Abbott, our pharmaceutical business and our medical products business. We expect both of them to perform at a top-tier level, and we leverage the synergies where they are appropriate and where they can create value—for patients, healthcare providers, and others.

We started the transformation effort by first reshaping our pharmaceutical business. That began in earnest six or seven years ago. When Miles White was named CEO, one of his highest priorities was to strengthen that business. One of his first moves was to bring in Jeff Leiden as president and chief operating officer of our pharmaceuticals business. Jeff and Miles did a fabulous job of reshaping it, and today it is pretty clear we have a very strong performing pharmaceutical business.

After starting the transformation effort with that, we looked very carefully at what we wanted the medical products business to look like in order to complement the performance of our pharmaceutical business. We began that process about five years ago by looking at the markets in which we currently competed. We also evaluated markets that we were not presently competing in that fit the kind of high-growth, high-acuity profile we wanted for the medical products side of the business.

And what was the result of that evaluation?

We have built a portfolio of businesses that compete in large markets where innovation is rewarded. We have the opportunity to be able to drive strong growth either through capturing share or getting into markets that are growing rapidly, and to deliver the kind of margin performance that we expect out of the business. We have reshaped the portfolio around nine businesses that have those characteristics. We built an operating model that allows each one of the businesses to run in a somewhat independent way, to replicate the entrepreneurial structure of independent businesses that are very market-focused and can respond quickly to market changes. Yet we can still use the structure of Abbott to leverage the synergies across those businesses. Currently our medical products business comprises four diagnostic businesses, two high-tech medical device businesses, our U.S. and global nutritional businesses, and animal health.

As part of implementing those changes, we made the decision to spin off our core hospital products business. We made this decision because, when we put it through the test that I just described—that we want to be in innovative, high-growth, high-margin kinds of businesses—it did not fit those criteria. That core hospital products business is one that I ran for several years, and I know firsthand it is a good business, but it's quite different from other businesses in our medical products group. It's a very stable business, but the investment returns in hospital products weren't as attractive as the opportunities we faced in other parts of our medical products portfolio. That led to the decision that it would be better as a separate investment vehicle and run as an independent company, but not as part of the Abbott portfolio.

Medical Product Development

After going through this portfolio reshaping, has Abbott increased its focus on medical product development relative to other efforts that the company used to be involved in?

We are now clearly focused on the nine segments and dedicated to developing innovative products within those segments.

In fact, we implemented this strategy about two years ago, and there are two developments that I am excited about. One is the performance difference since we implemented this model—which is pretty dramatic. Last year we grew 11% on the top and significantly faster on the bottom. We expect to grow in that same range again this year, and have seen a dramatic improvement in performance.

Is that growth due to the company's strong product pipelines?

Yes. Our product pipeline is the other exciting development, and even more important to our future success. We have worked to create a very strong pipeline of new products on the medical products side, many of them large market-opportunity products, similar to what are often called blockbuster pharmaceuticals, with annual sales potential in the $500 million to $1 billion range. On the medical products side, the corollary to that measure of a successful product is a single product that can generate revenues in excess of $300 million annually. We have eight products in our pipeline that fit that criterion, which we will launch starting in 2005 and all the way out to 2009. I would put our medical products pipeline up against anybody's going forward.

Does that mean the company is increasing its R&D spending in medical products?

We continue to increase R&D across Abbott. Our broad-based business model is R&D-driven, so we consistently try to increase resources dedicated to R&D. In general, we have increased R&D significantly over the last five years, and we hope to continue to increase it.

You indicated that one of the purposes of the reshaping is to free up business units to be more entrepreneurial. Are they making their R&D decisions independently, or is that a corporate decision? To what extent are R&D costs shared across the corporation?

Essentially, each of the organizations is a fully integrated business. There is an independent R&D organization within each one of these divisions. As part of our planning process, the businesses stack-rank their R&D programs and make a proposal for which products they would like to invest in R&D.

Collectively, at the medical products group level, we utilize our portfolio management process to help make decisions. Simply put, this process is one in which all the heads of R&D within these units and all the division presidents and I get together and go through the stack-ranking of all those programs. We look at the portfolio of R&D programs across all of the medical products group and try to stack-rank those that offer the greatest opportunity—the greatest level of innovation.

Do you also schedule out projects? You have already alluded to products coming down the pipeline for launch in 2009, so presumably you are looking quite a way forward.

I would say the average development time for a product in our area, although they vary from one unit to another, is probably 24 to 36 months. We have programs in different phases of evolution right now, but we are constantly looking out over a five-year time horizon on the medical product side.

Strategic Synergy

How does all of this leave the medical products group in its relations with the pharma group, particularly in some of the synergies that having a diversified corporation would make available to the medical products group?

As I mentioned before, a major benefit of our broad-based model is that we are better able to examine the intersections between pharmaceuticals and medical products and determine where we can create a unique product. Where those intersections exist, we try to take advantage by creating teams across those units so as to be able to maximize our performance in developing products in those areas.

The classic example is drug-eluting stents. We have two drug-eluting stent programs in development now, a first-generation program and a second-generation program that features two pharmaceuticals on the same stent. Scientists and researchers from our pharmaceutical R&D group and our medical products cardiovascular device group are working together as a team to develop that kind of product.

Are you linked at the marketing end of the process as well as at the product development end?

Today we do conduct comarketing between several units. We make nutritional supplements for diabetics—a product called Glucerna—and we have our diabetes care business that makes glucose-monitoring products. Those two organizations work together to copromote those products to physicians. We also collaborate at the retail level, beginning with direct-to-consumer advertising.

Do the internal corporate synergies make it easier to accomplish those kinds of arrangements than would be the case if you had to work with a separate company as a partner?

Yes. I think it is in many cases much easier to work within your own organization because you have an opportunity, obviously, to spend more time together.

On the structural side, you mentioned that you set up cross-disciplinary teams to work on these projects. How does that work from a strictly business standpoint at Abbott? Who gets the revenue and who gets the credit, and who has the management responsibilities?

The good news at Abbott is that both of these units report to Jeff Leiden and me, and we have a very close working relationship. For example, Jeff and I chair the drug-eluting stent team together. So we can typically break down any kinds of barriers that arise.

With regard to sales responsibility, it is the unit that has developed the product that gets sales responsibility for it. If the product were a therapeutic, for example, then the pharmaceutical group that promotes that product would get credit for the sales. If it is a diagnostic and a therapeutic together, then the diagnostic unit that developed the diagnostic would get credit for the diagnostic piece of it and the pharmaceutical group would get credit for the therapeutic piece of it. Typically, these things are not all that difficult to work out.

Growth through Acquisitions

Strictly with regard to the medical products group, the whole point of the reshaping was to set the company up for growth, and one way it has been growing is by being very active in acquisitions. How are those working out?

We have been very pleased with the companies we have brought in and made part of our medical products group.

As I indicated earlier, we have spent a lot of time developing a business strategy across the corporation and at the medical products group level. We require each of the units to have a long-range strategic plan. We tend to look at acquisitions against the backdrop of that strategic plan. They have to fit into the plan in a way that complements the strategy and helps the performance of the business.

What do you look for?

There are certain technologies that we will acquire that supplement our internal R&D efforts. A technology might get us to market faster or might be a unique technology that we believe we could not develop internally—or would take too long to develop internally—which means we might decide to license or acquire the technology. Some of our acquisitions fit that profile.

Other acquisitions we've made fit a different profile. Those decisions were made in areas where we needed to build more mass in a certain segment of the market. The TheraSense acquisition provides a good example.

We've also made other acquisitions designed to get us into new segments, either complementary segments within a business or brand-new segments. Our 2003 acquisition of Spinal Concepts is an example.

We were not in the spinal implant business before this acquisition and we decided to enter because of the technology that company had and the fit that it had in a high-tech hospital-based business that was of interest to us. Longer term, we believe that biologics will play an increasingly important role in the treatment of the spine, and we have some very good expertise on the pharmaceutical side of our business in biologics that we want to leverage for the future.

When these acquisitions come on board, are they fully integrated into Abbott or expected to have some kind of independence in terms of product development?

That is the beauty of our model. The model is designed to allow these businesses to operate in an environment where R&D and innovation can flourish; where they can be very, very focused on their market; and can understand what their customer base needs, or their patients need, in order to take advantage of the competitive trends in that market.

Our approach is to allow our medical products businesses to operate independently, yet they have the advantage of the corporation's scientific, regulatory, clinical development, quality control, operations management, strategic planning resources, and financial capabilities available to drive their strategy forward faster than they could as fully independent companies.

Are there particular areas where you have very strong units that are looking out for add-ons that will be complementary to them?

In every one of our units the management teams evaluate how to accomplish their strategic plan in the most effective way. But we've also created a business development function at the medical products level that reports directly to me. It has the responsibility of working directly with each of the divisions to support their strategies.

Do you have partnerships in any particular areas right now that you think are going to be big producers?

A very good example of that is our molecular diagnostics unit, which we believe will play an increasingly important role at Abbott as the field of predictive medicine moves from the concept stage into mainstream medicine, and there is clear evidence this shift is well under way. When we built our molecular diagnostics business, we began by acquiring Vysis, which was the leader in oncology molecular testing. We had our own molecular unit that we had built at Abbott quite some time ago, so we combined those two to create the first part of our molecular diagnostics division.

Our next step was to identify a significant partner that could provide the basic discovery capabilities in genomics. The result of this effort is our partnership with Celera Genomics (Rockville, MD), a world-class player. Our partnership is an extremely positive one. Celera has the responsibility for discovering exciting new genomic assays. We have the responsibility for developing those assays, commercializing them, and developing any instrument platforms that are necessary to be able to run those assays in a more automated way.

Reimbursement

Do the issues surrounding the payment and reimbursement structures for diagnostic testing worry you? To what extent do you think they are obstacles to the growth of the market?

The reimbursement systems in diagnostics have been pretty well established now for a number of years. Obviously, there are still constraints that various payers have placed around healthcare spending in general, and diagnostics are a part of that process. The area where it is more leading-edge is molecular diagnostics, or new technologies like continuous glucose monitoring. It is now much more important during clinical trials to demonstrate not only a clinical benefit, but also the economic benefit that the technology provides, in order to establish the appropriate level of reimbursement in those environments.

Increasingly, we are seeing clinical programs that are designed that way, much like in some of our high-tech device businesses. For example, we are conducting a landmark study of carotid stenting with embolic protection to demonstrate that, with an asymptomatic patient, the technology offers safety and efficacy equivalent to the surgical procedure—and maybe the potential of greater safety along with equivalent efficacy. In order to get that technology adopted, we are going to have to establish reimbursement on that type of product. Our study involves collecting the appropriate data that the Centers for Medicare and Medicaid Services (CMS) would want to see for Medicare reimbursement. Reimbursement does play an important role in adopting new technology.

Medicare traditionally has not reimbursed for preventive care, but the carotid stenting trial points in that direction. Is that an area where the government needs to rethink its reimbursement policies?

Our groundbreaking clinical trial involving asymptomatic patients is designed to demonstrate that a less-invasive procedure like carotid stenting with embolic protection is, in effect, equivalent to surgery in patients with risk sufficient to justify a need to undergo the existing surgical procedure.

From the interactions I have had with CMS, I think that if you demonstrate a clinical performance that is appropriate and you demonstrate that there is reasonable economic value in a procedure, CMS will provide reimbursement. I think they have demonstrated that with the reimbursement they provided to J&J when that company launched the first drug-eluting stent.

Product Pipeline

Several products in your pipeline seem to be coming to fruition pretty quickly, notably the ZoMaxx stent, the StarClose device, and some of the Abbott Spine nonfusion products. Which are the most important? Which have something developing in the near term?

In the middle of this year, we will launch our Xact carotid stent with EmboShield protection in the United States. We think that is a very exciting opportunity. We believe the filter that we have has some ease-of-use and deployment advantages as well as, potentially, some advantages in particulate capture.

StarClose is next in the lineup. We have launched that product in Europe. It is doing very well. It is a clip-based vascular-closure system that marries the best of suture-mediated closure technology and collagen technology. Suture-mediated devices are known for security of closure, particularly to anticoagulated patients like those that have been stented. We combine that gold standard for security of closure and the ability to ambulate patients quickly with the ease of use of a collagen-based product in a very rapid three-step deployment process.

We will launch StarClose in the United States in the third quarter of this year. The premarket approval (PMA) application has been submitted and we expect approval in that time frame. We are excited about what StarClose will do. Vascular closure is a big market, still growing fairly rapidly, and we believe, based on our European experience, that StarClose will do well in it.

Next would be the Freestyle Navigator continuous blood glucose monitoring system. We hope to launch that in the first half of 2006. This year we are finishing up a clinical trial that will enable us to gain approval on a “reportable results” (change in glucose level) claim for that product. It will be the first product of its kind in the marketplace, so we are excited about this opportunity.

ZoMaxx, our drug-eluting stent program, has been in clinical trials. It is more than halfway through the trial in Europe, and we expect to launch the product there in 2006. We are just starting up our U.S. clinical trial and expect the product to launch in the United States in late 2007.

And we're excited about our carotid asymptomatic product with embolic protection. We have already started our U.S. clinical trial for this product, called ACT, for asymptomatic patients. We expect to launch that product in early 2008.

And how do the company's spine products fit in?

Three nonfusion products are coming along in our spinal business. We have a product called the Wallis Dynamic Stabilization Device that I am very excited about. I think it could change the treatment of younger patients as it relates to fusion in that patient population. We will provide physicians an alternative that will be less invasive and easier for the patient to recover from; that will provide those patients with some level of motion preservation; and—I think this is the most exciting part—will still allow the physician to perform a fusion procedure later in the patient's life, should it become necessary. Its trial will start up here in the United States very soon.

We also have two artificial-disk programs in development, a cervical and a lumbar disk. We expect these products will be out in the 2009 time frame.

What do you think the key obstacles to any of those products might be? Is the competition especially stiff? Could any of those be blockbuster products?

Actually, I think if you go down that complete lineup, every one of those products has the potential to be what we would describe as a blockbuster medical device or medical product. In every one of those areas there are competitors, obviously, and very competent competitors. I clearly recognize and respect the competition, as they do us, in each of these markets. But I am confident across the board that what we have done is to find opportunities to provide a true innovation where there is an unmet need, a clinical need in many cases. Every one of those products is designed to address one of those unmet needs.

Whenever you do a clinical trial, obviously you have to see what the results are at the end of that trial. But I would say that, if we meet the end points of these trials, these will be very successful products in the marketplace.

Copyright ©2005 MX