Constructing Medtech's Coming Age 4217

COVER STORY

As the lines between what were once considered distinct medical technology sectors continue to blur, medical device executives are challenged to continually reassess—and, when necessary, reinvent—their companies' strategies for growth. Thus, many of medtech's leading companies today scarcely resemble their businesses as they existed only several years ago. GE Healthcare (Chalfont St. Giles, UK) is no exception.

In January, seeking to establish a competitive position in the $32 billion global market for in vitro diagnostics (IVDs), the company announced an agreement to buy two of the three diagnostic business units belonging to Abbott Laboratories (Abbott Park, IL). In the $8.13 billion, all-cash transaction, GE Healthcare will pick up Abbott's highly regarded IVD unit as well as the company's point-of-care diagnostics business. Combined, the businesses generated about $2.7 billion in sales during 2006.

Joseph M. Hogan, president and CEO of GE Healthcare, says the acquisition is another step in an ambitious strategic plan that his company set in motion in 2001. At the time of the plan's conception, GE Healthcare operated almost exclusively in the imaging sector, generating about $7 billion in annual revenues. Now, scarcely five years later, the company has grown into a broad-based diagnostics and information technologies (IT) company, generating more than $16 billion in annual revenues. In this excerpted interview with MX editor-in-chief Steve Halasey, Hogan elaborates on the motivations behind the Abbott acquisition and some of GE Healthcare's other recent moves to broaden its presence in the medical technology market.

MX: In January, GE announced an agreement to buy Abbott's IVD unit as well as the company's point-of-care diagnostics business. How do these acquisitions further GE Healthcare's vision for the future?

Joseph M. Hogan: GE Healthcare's vision is centered on early health, which refers to the goal of identifying disease or the potential for disease as early as possible. When disease is identified early, physicians and patients have increased treatment options. And further, we know that for many conditions, including cancer and cardiovascular disease, treating earlier is better medicine and often less expensive.

In vitro diagnostics are an essential part of the concept of early health. Regular blood tests, urine tests, and other similar diagnostics can identify diseases much earlier. What I love about Abbott—and what I've loved about Abbott for years—is the company's strong position in immunoassays and its robust point-of-care business. GE Healthcare picked up both those assets.

In announcing the acquisitions, GE Healthcare indicated that it had been evaluating the deal for about five years. Was the company specifically evaluating the Abbott acquisition, or was it generally evaluating an acquisition in the IVD area?

We were looking for an acquisition in the IVD area. Sometime around 2001, we formulated a solid strategy for shaping GE Healthcare—which was primarily an imaging company—into a broader diagnostic, information technology, and life sciences company.

One issue we had to consider was whether to achieve this vision organically or inorganically. And considering how well developed the IVD marketplace is, it would have been naïve for us to think we could develop our own division in this sector organically. The IVD sector has progressed too much for a new player to come in and compete effectively with the established sector leaders. So we knew GE Healthcare had to make an inorganic play to enter the IVD realm.

Incorporating Acquisitions

How will the Abbott divisions be incorporated into GE Healthcare in terms of logistics, management, and rebranding?

John Chiminski, who used to run GE Healthcare's global magnetic resonance business, will be the leader of the new diagnostics business following the close of the deal. In addition, Dan Tereau will be the integration leader for the newly acquired assets. Dan is part of GE Healthcare's business development department, and he knows the IVD sector well.

On the Abbott side, Joe Nemmers, executive vice president of Abbott's diagnostic and animal health divisions, is a terrific leader who will be helping out during the transition. So right now, we're putting teams in place that will enable a smooth transition from a number of standpoints.

As far as branding, the healthcare market seems to identify with product brands, not necessarily corporate brands or institutional brands. I'm sure the market identifies as much with Prism, Abbott's immunoassay blood system brand, as much as it does with Abbott itself. So we'll certainly keep product brands in place. We just have to figure out how to deal with the institutional brand over time.

Abbott's molecular diagnostics and diabetes care businesses were not included in the acquisition. Did GE Healthcare initially hope to acquire these businesses? If not, why not?

Obviously Abbott has a strong molecular diagnostics business. Going into the deal, GE Healthcare knew that unit wasn't going to be for sale. However, I did have a casual interest in the unit because GE Healthcare's existing life sciences business includes a molecular diagnostics segment.

We entered the molecular diagnostics marketplace through the existing platform that we acquired through our 2004 purchase of Amersham's life sciences business, and we think we can further build on this in the future.

How do the Amersham acquisition and the Abbott acquisitions fit together in GE Healthcare's overall vision for the future of diagnostics, particularly in the molecular imaging field?

The development of our strategy goes back to that point about five years ago when the executives at GE Healthcare sat down to develop a roadmap for the future. At that point in time, we envisioned purchasing a contrast agent company, which would become GE Healthcare's in vivo molecular diagnostics component. We planned to follow that with the purchase of an IVD company.

The in vivo company acquisition was given priority because it was a little closer in line with GE Healthcare's existing imaging business at that time. Our company and in vivo companies called on the same customers, namely radiologists. Modalities such as positron emission tomography (PET) and magnetic resonance imaging (MRI), which we had identified as being key to the future of molecular imaging, presented synergistic fits. By acquiring Amersham three years ago, GE Healthcare built a biological capability into its business that didn't previously exist. Prior to the purchase of Amersham, GE Healthcare consisted of primarily electrical engineers and software engineers.

Molecular Opportunities

The future of molecular imaging technology rests largely on the pace of discoveries in the biotechnology and molecular reagent fields. Are you satisfied with the pace of discoveries and growth in those fields? What do you envision as a realistic timeline for developing a workable molecular imaging business?

There's no lack of technology development within GE Healthcare and other outside companies in areas such as molecular and functional imaging. All the pieces are there. The real constraint is the time it takes to prove clinical efficacy according to FDA guidelines.

A key point to managing this process is to make sure the company is choosing the right compounds to move to later-stage evaluation. After all, the initial innovation part in developing compounds is not the difficult part—the difficult part is picking the winning compounds and moving them forward through the regulatory process. I'm satisfied with the technical innovation we're seeing in this field, but I'm not necessarily satisfied with the speed at which such innovations are being commercialized.

A good example in the molecular imaging field is GE Healthcare's DaTSCAN. DaTSCAN, a radiopharmaceutical used in the diagnosis of Parkinson's disease, was recently commercialized in Europe.

Datscan will be moving into the U.S. market within the next couple of years. We also have several products based on angiogenesis compounds that can identify cancer, and have started work on one for targeting breast cancer at the molecular level. All of these are in the stage at which we must demonstrate clinical efficacy, and that process can take a while. But the efficacy we're already seeing in the trials is exciting.

As we move forward with the whole concept of molecular imaging and gain a better sense of in vivo imaging, we're going to increasingly be able to identify in real time inside the body what disease a patient has, and how effective a particular therapy is in treating that disease.

You mentioned the need to demonstrate clinical efficacy. Traditionally, the IVD sector seems to have operated in a slightly different way. Researchers often discover a biomarker that they believe reflects a certain disease or medical condition. Even before they determine the clinical importance of that biomarker, they want to go to market with it so that physicians and laboratorians can begin working with it. And while FDA might permit the biomarker to enter the market, the company is not allowed to make any medical claims. Therefore, there's no reimbursement attached to the biomarker. How is your view different from this strategy?

Companies today need to consider both pieces: FDA approval and reimbursement. The reimbursement piece is tied to the economics of a product, and the market is going to increasingly scrutinize manufacturers on this side of the equation. As participants in the device and diagnostics industry, manufacturers must prove not just safety, but efficacy as well.

There's tremendous pressure on IVD companies to keep the cost per test low. That's often been cited by companies as the reason they haven't been able to invest in the kind of clinical testing that they might have wanted to do. But it sounds like you're saying that companies are going to need to find that money due to the importance of proving clinical efficacy.

Yes. Depending on the year, GE Healthcare invests about 7–10% of its annual revenues in research and development (R&D). That's about how much Abbott has invested in its in vitro diagnostics business over the years too. The additional R&D needs that I'm describing are not a dramatic increase in that investment in any way. It's about how a company applies its R&D funds. The funds spent on the identification of biomarkers and the investment made in the clinical efficacy piece need to be more carefully balanced in the future.

GE Healthcare's announcement of its intent to acquire Abbott's diagnostics division came shortly after Siemens' acquisitions of Diagnostic Products Corp. and Bayer Diagnostics. Once the dust settles from all these acquisitions, what will the competitive field of the diagnostics sector look like?

People talk about the rivalry between Siemens and GE Healthcare as broader-based diagnostics companies. But in reality, we both respect one another. Our companies have competed well over the years. And together, our companies can expand the understanding and appreciation of what diagnostics can do in the future. In the future, diagnostics will be elevated to a position much closer to that of therapeutics than they have been in the past.

IT Connections

When companies discuss an integrated future for healthcare that will be focused on earlier diagnosis, one need that must be considered is that of a robust information technologies (IT) infrastructure. How does GE Healthcare's current position in this market contribute to such a broader vision?

This year, GE Healthcare's IT business will pull in revenues of nearly $2 billion, depending on how you define the sector. So we're one of the world's largest—if not the largest—players in healthcare IT.

When considering IT and healthcare, I think about it in two dimensions. One dimension is clinical software applications. Clinical software applications are those that would be embedded in radiology and cardiology departments, as well as in laboratories. The other dimension is systems software, such as revenue management applications and electronic medical records. These systems pull a wide variety of information together into one place. GE Healthcare has offerings in both dimensions.

In the IVD sector, there is a lot of number crunching required to determine the significance of various biomarkers. Does GE Healthcare have applications on that side of the business?

Yes, we do. Our life sciences business focuses on that area, and GE Healthcare's life sciences business is divided into two pieces. We have a discovery piece focused on the laboratory side, and we also have a manufacturing piece, which is our protein separations business. So, as a pharmaceutical or large molecule comes into production, we also have a means of ensuring that the proteins or antibodies that are being developed as therapeutic agents are captured efficiently out of that manufacturing process.

Last year, GE Healthcare acquired information technology provider IDX Systems Corp. for about $1.2 billion. What new capabilities and offerings did IDX bring to GE Healthcare? And how is the integration going?

IDX Systems added an enterprise software capacity—meaning an electronic medical record (EMR)—to GE Healthcare's portfolio. IDX also added to GE Healthcare's portfolio a revenue cycle management offering with a good installed base.

In addition, IDX brought a radiology information system (RIS) into GE Healthcare's portfolio. Prior to the acquisition, GE Healthcare had worked for years to develop a decent RIS. We already had the largest picture archiving and communications systems (PACS) business in the world. That segment constitutes the clinical IT side of a radiology department. But we didn't yet have the scheduling and payer piece of the IT picture, which is the RIS. So the acquisition of IDX helped GE Healthcare round out its offerings for the radiology department.

When MX started tracking the healthcare IT sector a few years back, the medical device industry as a whole didn't seem to be doing much in that space. That's beginning to change, and the movement has been led by the imaging and IVD sectors. It sounds as though GE Healthcare is looking to take a lead in EMR development, which is a critical step in achieving the national—and possibly even international—interoperable electronic health record vision that President Bush is supporting.

Yes. In the end, it's not the data that are important—it's the information. For example, if a physician has a patient come in for an IVD test and determines that the patient's enzyme levels are high, the physician may then order a volumetric CT scan. Based on that, the physician may determine the patient has a stenosis. But then the physician is faced with the question of how best to treat the patient.

In an effort to help answer that question, GE Healthcare is working to develop its EMR in partnership with Intermountain Healthcare (Salt Lake City), an independent delivery network with clinics and hospitals in Utah and Idaho. Based on its experience, Intermountain has produced some of the best decision-support algorithms in the world. The company can take all the data it's gathered over the years and roll it up into performance algorithms that can be applied across the institution. The company has proven itself to be one of the best institutions in the world in terms of being able to develop algorithms like that.

GE Healthcare is excited about the clinical algorithms that can be derived from experience. Such algorithms can be laid over the top of electronic patient records to enable physicians to more quickly make clinical decisions related to patient treatment. The systems that we're developing with Intermountain Healthcare will offer capabilities like that within the next 18 months to two years.

Converging Information

Last year a consortium of IT companies, medical equipment manufacturers, and healthcare providers brought IT and medical devices a step closer to convergence with the formation of the Continua Health Alliance. GE Healthcare is a member of this new consortium. Tell me a little bit about the group and its mission.

One goal of GE Healthcare is to promote the importance of IT in healthcare. Bringing device companies together through an organization like Continua gives the industry a louder, more uniform voice with which to support legislation and other needed initiatives. One example of a legislative issue of interest to such organizations is the need to modify sections of the Stark law and other regulations that prohibit hospitals from outsourcing some of their IT to outpatient and ambulatory centers. Industry organizations are also playing a role in setting standards of interoperability.

There are other kinds of software of interest to device companies. For example, Medtronic, St. Jude Medical, and Guidant-now part of Boston Scientific-use certain software to communicate with devices such as implantable cardioverter-defibrillators. Those are examples of application software. I don't see industry organizations playing a central role in developing those applications. They are more focused on systems software capabilities and electronic medical records.

GE Healthcare's product and service offerings extend beyond the imaging and healthcare IT sectors. Tell me a little bit more about the other healthcare sectors in which GE Healthcare participates and how these rank in prominence in relation to the company's overall portfolio.

GE Healthcare's legacy business is basically its diagnostic imaging offerings: x-ray systems, CT systems, MRI systems, and PET systems. We also have a business focused on clinical systems, which is part of the diagnostics field. That business, which consists primarily of ultrasound and monitoring devices and anesthesia devices, produces revenues of more than $3 billion. Of that, GE Healthcare's ultrasound business brings in more than $1.5 billion, meaning we have the world's largest ultrasound business.

The miniaturization of ultrasound products is putting devices in more and more hands. GE Healthcare now has portable units that weigh less than 10 lb, and they can do what a 300-lb device could do only five years ago.

The use of ultrasound at the point of care is growing dramatically. GE Healthcare has several clinical trials under way that are exploring additional uses for ultrasound equipment. For example, we're exploring ultrasound's ability to identify abdominal aortic aneurysms and plaque in carotid arteries, which may be an indication that a patient has some form of arterial sclerosis.

GE Healthcare's existing clinical systems business—and in particular, its strong ultrasound segment—merges well with the point-of-care offerings that GE Healthcare will be acquiring through Abbott. One exciting part of the acquisition is Abbott's laboratory on a chip, which is a handheld medical device that's used at the bedside to obtain readings from blood and other clinical specimens. More and more, the kinds of tests that required a full-scale laboratory can be done on these handheld devices. So we're increasingly bringing powerful diagnostics out of the hospitals, laboratories, and radiology departments and delivering them right at the point of care.

In addition to the point-of-care synergies between GE Healthcare's ultrasound business and Abbott's offering, our company also has a strong monitoring business. And that business is going through the same miniaturization and portablization—which is a relatively newly coined term—that is occurring in ultrasound. Patient-monitoring devices are becoming more remote, meaning that information can be tracked, recorded, and fed back to a central system as patients and their devices move throughout the hospital or other care settings.

In addition, GE Healthcare has a large interventional business, which includes products for cardiology, cardiac surgery, and interventional radiology. That side of the business accounts for about $2 billion in annual revenues for GE Healthcare.

Although it's a wide-ranging portfolio, the thread that unites all the offerings is the concept of early health. Life sciences is a diagnostic business.

The Bigger Picture

Tell me a little bit about how GE Healthcare fits into the overall corporate structure of General Electric Co., which also includes subsidiaries in the entertainment and jet engines industries.

Everybody at GE loves the healthcare business. When I assumed this role, I took over for Jeff Immelt, who is currently chairman and CEO of GE. It's great to have Jeff running the entirety of GE because he loves and knows healthcare.

I've worked for three other divisions of GE, and the great thing about the company is that we all understand enough of each other's businesses to make ourselves dangerous. That's helpful in two dimensions. First, it enables us to identify talent throughout GE that can be harnessed by a certain division to support its platforms and drive its growth.

The second advantage comes in the form of GE's corporate research development center. That's where the company brings together core technologies that can be applied across different businesses, be it aircraft engines, or power systems, or plastics. And that includes healthcare too. For example, consider nanotechnology. GE has a huge initiative focused on nanotechnology that is under way at the global research center. And there are certain nanoparticles that enable jet engines and power system turbines to run at temperatures that would be higher than the melting points of metal. It sounds crazy, but nanotechnology can be used to do that. And in the same vein, GE Healthcare is looking closely at nanoparticles as an agent in healthcare.

What percentage of GE Healthcare's growth has been driven by acquisitions and how much was generated through internal efforts?

Over the past five to seven years, about 60% of our growth has been organic, and the other 40% has been through acquisitions.

You mentioned about 7-10% of GE Healthcare's annual revenues go toward R&D. How are these funds prioritized?

Companies need to evaluate their technology according to three phases: breakthroughs, platforms, and derivatives. When investing in breakthroughs, a company is taking a long shot that might take five to seven years to bear fruit. A lot of the breakthrough technology that GE Healthcare identifies goes to our global research center. That's where the leading-edge technologies are developed. On the other hand, platform technologies are translations of existing technology, such as adding portability to ultrasound devices. Finally, derivatives are upgrades that provide existing technology with additional capabilities.

In which areas-particularly among those in which GE Healthcare competes-do you think the medical device industry's next major breakthroughs are likely to develop?

GE Healthcare certainly expects to see advances in molecular imaging, biomarker discovery, and in vitro diagnostics. Developing these technologies is essential.

That becomes even more obvious when you look at what the cost of therapeutics will be in the future. There are some exciting drugs on the horizon, but it will be important to determine whether those therapeutics are being applied to the right patients at the right time. Confirming effectiveness is going to be really important, and diagnostic technology is what will enable that. We're at a phase-change point in healthcare at which we're beginning to see an explosion in understanding as to what is underlying disease processes. And this phase-change point-the underlying information, the dynamics of that information-is going to be driven by diagnostics. Diagnostics are going to dictate where the therapeutics go. In the future, the most exciting discussions in healthcare are going to be focused on advanced diagnostics.

Copyright ©2007 MX